Street Capitalist: Event Driven Value Investments

Today a rumor circulated that Bear Stearns is attempting to sell as much as a 20% stake in the company to private investors. Such a move would be beneficial as Bear navigates through some tough waters while facing mounting criticism by its investors.

So who are the possible investors?

One number being circulated is Warren Buffett. I’m not buying it. The reason being, Buffett already had a walk down Wall Street when he worked on fixing Salomon Brothers and I just don’t know if he’d want to do that again. Granted, the problems at Bear Stearns pale in comparison those of Salomon’s. An investment on Buffett’s part would signify a vote of confidence for James Cayne. Buffett has mentioned that Berkshire has its wallets open and is eagerly looking for some businesses to acquire.

Bank of America and Wachovia are also names being circulated. These banks could definitely benefit from some synergies they would gain from Bear’s fixed income groups, and many people have thought that Bear might be a possible takeover target at the moment. A small 20% stake could be the start of something larger.

Lastly there’s talk of Citic Group or China Construction Bank. This kind of talk has circulated for a while as Bear sought to sell a stake in itself in order to gain access to China and market its investment banking services. Since the Chinese investment talk lead no where in the past, I don’t see why it should now now, especially when the firm’s business is in trouble.

So who is it?

One group that I haven’t seen mentioned are Gulf-state sovereign wealth funds. The reason I bring this up is because Dubai has talked about its wish to create an international investment bank, a stake in Bear Stearns could be the ticket to that. Petrodollars are pouring into these countries and they’ve already waged wars over foreign stock exchanges. They seem intent on raising their profile through acquisitions in the financial services industry, and Bear could be their ticket.

Overall though, these could just be rumors. James Cayne’s friend, billionaire Joseph Lewis already purchased a sizable stake not too long ago. Cayne himself holds a large stake in the company, solidifying his power within the company and allowing him to make whatever changes he needs to make in order to fix Bear Stears. The stock is up 7.71%, trading at $123.05, down from a 52-week-high of $172.61. Any kind of acqusition would certainly make Bear Stearns worth studying as a long term investment.

Brazil halted its 2 year long interest rate cutting program recently amongst concern of inflation.

Consumer spending rose 5.7 percent in the second quarter from the same period a year earlier, the 15th straight quarterly increase and investment rose 14 percent compared with the second quarter of 2006, while industry rose 6.8 percent, services 4.8 percent and agriculture rose 0.2 percent.

Excessive rate cuts have contributed to this accelerated rate of consumer spending as Brazilians borrow more.

Brazil’s inflation rate in the 12 months through August rose to 4.18 percent, compared with 3.74 percent in the 12 months through July, pushed up by higher food costs, according to the national statistics agency

Due to these new inflation concerns, forecasters are expecting the Selic-rate to remain unchanged for at least till the end of the year or even into 2008.

Since most forecasters are not foreseeing a rate increase, spending in Brazil should at least continue on its current trend which will be favorable for the nation’s economy.

Fundamentally Brazil’s economy is strong and was bolstered recently with the Fed’s 50bps rate cute assuaging fears that demand for Brazilian exports (orange juice, steel, coffee and soybeans) may decline in the US. Additionally, Brazil’s largely diversified export base makes it defensive against any excessive declines in the US economy, especially when compared to other Latin American export countries such as Mexico.
(more…)

Lately I’ve become interested in studying some of Martin Whitman’s past investments. Here’s something I found particularly interesting from their 1998 annual letter to shareholders. I believe that these rules are important for all successful investors.
1. The quality of resources in a business, i.e., the financial strength to be able to either expand, acquire, or refinance, businesses; or to withstand future adversities

2. The quantity of resources in a business relative to the price paid to acquire equity interests. This is akin to Graham and Dodd’s net asset value, or book value, but the accounting figures are almost always adjusted to reflect a more realistic value for assets - e.g., real estate appraisals for income producing properties, or equities in loss reserves for certain properties and casualty insurance companies.

The quality of resources and the quantity of resources are then translated into another factor.

3. The prospects for long-term wealth creation.

The best investors on Wall Street: - Warren Buffett, Carl Icahn, Richard Rainwater, et al - all seem to use the three-pronged balanced approach described above in their investment activities. All are control, or elements of control, investors who do not try to predict market prices but rather take advantage of stock market prices whatever they may happen to be at a moment of time. The goal of these control investors seems to be to determine what a business is worth and what the internal dynamics of the business might be. Then they stop.

Today the Financial Times has a great Q&A with Simon Derrick, head of currency research at Bank of New York Mellon. He’s one of the most listened to commentators on the foreign exchange market.

Currency Markets Q&A

I the following question to Mr. Derrick which was answered during the Q&A.

Some people are making projections that the US will fall into a recession, or at least find itself not being spend as much due to a de-leveraging effect the credit turmoil may have on US consumer spending. Because of this, are you bullish on the Yen and expecting the carry to unwind?
Tariq Ali, Texas

Simon Derrick: Given that the carry trade has been one of the defining trades for the currency markets in the past few years, this is possibly the key question at present. As the carry trade is, inherently, a high risk strategy, one of the basic conditions needed to make it work is that the markets need to be calm if investors are to feel comfortable chasing yield differentials.

A 610 basis point interest rate pick up for holding the Australian dollar and borrowing in yen for twelve months looks considerably less attractive when it is remembered that the Australian unit lost substantially more than this on just one day alone last month. When confidence in this type of trade is lost, it typically takes a number of years to recover. After the collapse of a very similar trend in October 1998 it took over two years for a sustained recovery to emerge.

Given that we are currently in the process of winding up a currency market bubble of substantially greater magnitude than that seen in 1998, it seems reasonable to suppose that the yen still has some way to appreciate.

A recent Wall Street Journal article it was mentioned that Alan Greenspan believes that as a result of globalization we’ll encounter inflation in the US. With China experiencing major inflation problems, this is a definite possibility.

Greenspan’s view is grim with Ten-year Treasury yields, currently below 5%, projected to rise to “at least 8%” with the potential to go “significantly higher for brief periods.” Such movements would hurt the returns of stocks and bonds, making for a tough investing environment.

Is Chinese inflation a real concern? Yes.

Many seem to focus on the Chinese CPI numbers, but these measures are extremely misleading. One of the main components of the CPI is energy, but energy prices are set by the government, so price increases are not accurately reported. Other inputs are simply not given enough weight.
(more…)