Jul 30, 2009 3
Charlie Munger often talks about his hero, Benjamin Franklin and sometimes offers his perspective on what Franklin would do in certain situations. I found the following series by Maira Kalman at the New York Times to be pretty interesting:
I also liked this bit at the end:
Be sure to view the whole thing:
Jul 27, 2009 0
I managed to catch a panel featuring First Eagle’s Jean-Marie Eveillard on Bloomberg today. Here is what he had to say:
The American consumer is tapped out. Modest recovery that levels out. Then you get 2 more stimulus because its an election year for Congress.
Pay attention to HK and Singapore rather than just China. Accounting is taken more seriously there than mainland China. East is rising, west is declining from a long term standpoint. As an investor be in asia outside of Japan. We would rather by HK or Singapore listed stocks than mainland China listed stocks.
There may be bumps along the road.
The Banks in Japan are better shape than Europe. Consumer is in better shape than in the US. Problems in Japan but problems in Europe and America too. Japanese companies sit on a ton of cash, so the return on equities aren’t great but it’s a good thing to have at on of cash.
Early this year investors were selling and pushing the market down because of forced selling or deleveraging would result in deflation and a return to the Great Depression. I never believed that deflation would lead to the Great Depression because politicians want to be re-elected. So they chose to stimulate. There may come a time when the Fed wont have ammunition but not for now.
Eveillard talked about 3 companies which he thought were undervalued: Paragesa – a European holding company with a number of non-controlling interests in companies. Essilor – a maker of eyeglasses from Spain. Berkshire Hathaway – the only really attractive company he sees in the United States. Eveillard is much more of a global value investor than most, which probably accounts for his limited US exposure, besides his own pessimistic view about the future.
Bloomberg has a brief article about the panel as well:
“The east is rising and the west is declining,” said Eveillard, a senior investment advisor to the $7.42 billion First Eagle Global Fund that he managed from 1979 through March. “One wants to be in Asia outside of Japan.”
Eveillard said he favors stocks traded in Singapore, where accounting is “taken more seriously,” or those in Hong Kong over Chinese equities.
Japan’s Topix index traded at an average 41.2 times estimated earnings last month, the highest level among the 40 largest markets, data compiled by Bloomberg show. The nation’s economy is forecast to contract twice as much as the U.S. this year.
Eveillard’s fund, which beat the Standard & Poor’s 500 Index every year this decade, topped 99 percent of competitors last year by hoarding cash instead of borrowing it. He seeks shares trading at discounts to measures such as assets and cash flow and follows the principles of value investing espoused by billionaire Warren Buffett, chief executive officer of Berkshire Hathaway Inc.
Jul 24, 2009 0
Looks like a great tool to teach children basic personal finance:
Jul 23, 2009 6
Whenever a shareholder hears of a big deal being done by a company they own, they usually get worried. Acquisitions often end up fizzling. The expected synergies never materialize and the company suffers from a drag in performance as they try to integrate acquisitions. With that in mind, how well priced is Amazon’s (NASDAQ:) acquisition of Zappos? It depends. Zappos is a private company, so it’s impossible to say with certainty what their margins and sales figures are but we can take some guesses:
The consensus appears to be that Zappos did $1.1B in sales for 2008. Now the trick is to peg an approximation of their earnings is to figure out what their margins are. This is difficult. I’ve read online that Zappos has margins of 50%, something I do not believe is true. For one thing, such margins as a retailer in the online space seem like an impossibility. Secondly, it would mean that Amazon purchased Zappos at approximately 2X earnings, which I doubt its VC-backers would stand for.
So a more sensible number that I’ve seen thrown around is $40M pre-tax earnings. Doing $40M on $1.1B of sales probably looks really bad. It means that Amazon would have bought Zappos at something like 23X earnings. A huge and unlikely valuation.
We know though, that Amazon has a pretty efficient shipping change and is a much bigger company than Zappos. It’s possible that by plugging Zappos into their shipping chain, they may be able to reduce costs. I’ve seen a figure thrown around that the average Zappos order costs $25 in shipping (due to overnight shipping plus returns). Let’s say that hypothetically, out of those $1.1 billion sales, the average order is $50. You end up with 22 million. 22 million orders at $25 an order comes out to a huge aggregate shipping cost of $550M.
Imagine taking just 10% of that $550M off, via cost savings. You end up with $55M that can be added to earnings. Earnings now becomes $95M. That means the valuation for Zappos comes out to about 10X earnings, which would be a good deal for Amazon.
That might be a risky jump to conclusions to make, but it seems like the people at Amazon would have really analyzed the potential savings that could be made on the supply chain end. I think though that there are a number of intangibles to look at here too, which add value to the deal. First, Amazon tried to move in on the footwear market with their brand Endless, it didn’t work out too well. The brand really didn’t get the kind of awareness or following that Zappos has, it simply was not very visible in the marketplace. Zappos would give Amazon a great arm in the retail-footwear market. Moreover, the Zappos brand could be leveraged to move into new areas like clothing. They have a good reputation among customers and retail clothing is an area where that would help.
Keeping Zappos as a standalone company would probably allow its management to remain entrepreneurial. This is probably a good move. A lot has been made of the management by Tony Hsieh, who many people recognize as one of the main drivers for Zappos’ success because of his continuous focus on improving customer service experiences.
He cultivates an openness with employees and the public which I really like. Take some time to read about the acquisition:
We plan to continue to run Zappos the way we have always run Zappos — continuing to do what we believe is best for our brand, our culture, and our business. From a practical point of view, it will be as if we are switching out our current shareholders and board of directors for a new one, even though the technical legal structure may be different…
We are excited about doing this for 3 main reasons:
1) We think that there is a huge opportunity for us to really accelerate the growth of the Zappos brand and culture, and we believe that Amazon is the best partner to help us get there faster.
2) Amazon supports us in continuing to grow our vision as an independent entity, under the Zappos brand and with our unique culture.
3) We want to align ourselves with a shareholder and partner that thinks really long term (like we do at Zappos), as well as do what’s in the best interest of our existing shareholders and investors.
If the above is true, I think there’s potential for this working out really well. Amazon is acquiring a company is run by entrepreneurs who really love their business and are willing to pour their heart into it. That’s basically the blueprint to many of Berkshire Hathaway’s most successful acquisitions. If you wanted to learn even more about Tony Hsieh, I’d direct you to this cool presentation at SXSW 2009:
Also, the letter also includes this great video with Jeff Bezos:
Both Bezos and Hsieh appear to be really sharp operators in the retail industry. Investors often shy away from retail because it’s so cutthroat and your customer can walk in and steal your business model. So whenever I come across people in that business, who appear to be executing really well I take notice and study how they run their businesses. Bezos and Hsieh are both two businessmen worthy of such attention.
Further reading:
The Zappos Way of Managing (Inc.com)
Jul 22, 2009 0
While many investors are questioning whether the current rally in equity markets is sustainable, one area I’m seeing a lot of activity by noted value investors is in the distressed debt market. In general, the best deals here are being made on terms that are simply unavailable to the ordinary investor. Still, I think these are worth studying, they might be useful lessons for future investments.
The CIT deal is particularly interesting because the funds doing the deal are led by some of the best people in the investment business. Bill Gross – PIMCO, Seth Klarman – the Baupost Group, Howard Marks – Oaktree Capital, and Jeff Aronson – Centebridge Partners. In special situations like these, investors are sometimes able to create extremely preferential terms that limit their downside, creating a wide margin of safety.
Here’s a look at CIT’s 8-K:
The Credit Facility has a two and a half year maturity and bears interest at LIBOR plus 10%, with a 3% LIBOR floor, payable monthly. It provides for (i) a commitment fee of 5% of the total advances made thereunder, payable upon the funding of each advance, (ii) an unused line fee with respect to undrawn commitments at the rate of 1% per annum and (iii) a 2% exit fee on amounts prepaid or repaid and the unused portion of any commitment.
The Credit Facility will be secured by a perfected first priority lien on substantially all unencumbered assets of the Guarantors, which shall include 100% of the stock of CIT Aerospace International, and 65% of the voting and 100% of the non-voting stock of other first-tier foreign subsidiaries (other than direct subsidiaries of the Company), in each case owned by a Guarantor.
Borrowings under the Credit Facility will be used for general corporate purposes and working capital needs and to purchase notes accepted for payment in the Offer (as defined below); provided that, except with the consent of a committee of lenders under the Credit Facility (the “Steering Committee”), no portion of the proceeds of the Credit Facility or collateral securing the Credit Facility may be used to pay principal or interest on the August 17 Notes (as defined below), other than pursuant to the Offer (as defined below), or, following the consummation of the Offer, on the maturity date of the August 17 Notes.
The Credit Facility includes a minimum collateral coverage covenant. The covenant requires the ratio of the book value of the collateral securing the Credit Facility to the loans outstanding thereunder to exceed 5:1 as of the end of each fiscal quarter commencing as of the fiscal quarter ending September 30, 2009, and the ratio of the fair value of the collateral securing the Credit Facility to the loans outstanding thereunder to exceed 3:1 as of the end of each fiscal year commencing with the fiscal year ending December 31, 2009. The Credit Facility also contains customary affirmative and negative covenants, including, among other things and subject to certain exceptions, limitations on the ability of Borrowers and subsidiaries to incur additional indebtedness, incur liens, make material non-ordinary course asset sales, make certain restricted payments (including paying any dividends on any of the Company’s preferred or common stock without the consent of a majority in number of the members of the Steering Committee), make investments, engage in certain fundamental changes, engage in sale and leaseback transactions, engage in transactions with affiliates, and prepay certain indebtedness.
So far, the consensus is that Baupost and others got a steal of a deal.
Caroline Salas and Pierre Paulden of Bloomberg have a great article that stresses the limited downside of the deal:
Pacific Investment Management Co., Centerbridge Partners LP and the four other bondholders that put up $2 billion in financing for CIT Group Inc. made an instant $100 million on an investment analysts say is almost risk free…
Bondholders made $2 billion available immediately and promised another $1 billion by the end of the month. The group received a 5 percent commitment fee on the 2 ½ year loan, amounting to $100 million on the $2 billion already provided. They will receive a 1 percent annual payment on the amount that’s not drawn upon, the company said.
And some choice words by Sean Egan:
The book value of the collateral must be more than five times the amount of the loan and the so-called fair value must be more than triple the debt, the filing said. If CIT wants to retire the loan early, it must pay a 2 percent exit fee in addition to a prepayment premium of 6.5 percent on the amount it wants to reduce, the filing said. The 6.5 percent will decline to zero over 18 months.
Interest will be set at 10 percentage points more than the London interbank offered rate, which will have a floor of 3 percent. Three-month Libor was set at 0.502 percent today.
Even if CIT fails, the bondholder group will probably make money because of the collateral, according to Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. The lenders have “virtually 100 percent assurance” they’d be able to recoup all their money in a bankruptcy, said Sameer Gokhale, an analyst with Keefe Bruyette & Woods Inc. in New York.
‘Don Corleone Financing’
“This is called Don Corleone financing,” Egan said, referring to the patriarch in the organized-crime family depicted in the 1972 film, “The Godfather.” “You can’t lose money on this deal.”
Outside of the “urban underworld,” Egan, 52, said he couldn’t recall seeing a loan backed by as much collateral that paid interest rates so high. “These terms would make a pawn- shop operator blush.”
Deals like this, while unavailable to ordinary investors will likely serve as lessons for what happens when an over leveraged company faces problems with financing. Liquidity crunches seem to be creating a number of great opportunities for investors who are willing to remain rational. Often, as management is threatened by bankruptcy, they’re more than willing to bend over backwards to cede terms in order to secure the capital that they desperately need.
Jul 8, 2009 0
The identity of the Glide Foundation’s lunch auction with Warren Buffett is revealed! It’s of Canada.
“It is something we have been thinking about doing for a while,” said Courtenay Wolfe, Salida’s chief executive, in an interview. “Warren’s success has transcended decades and all types of market conditions, and his wisdom and experience is of great value to us, at such a sensitive time in history.”
…Wolfe said Salida began investing in 2000 and now oversees about C$300 million (US$256 million) of assets, focusing on “alternative investments” and macroeconomic themes, and employing leverage and short-selling strategies.
According to its website, the Salida Multi Strategy Fund has returned an average 22.3 percent since its 2004 inception. The fund is volatile: it fell 66.5 percent last year, but returned 83.4 percent from January to June, the website shows.
Unlike Buffett, the Salida Fund seems to take a bit of a different approach to investing. For one, it pretty much utilizes all strategies that are available.
The fund’s chief investors seem to be and . Both of which have experience running the merger arbitrage and long/short equity operations at Banfield Capital. Danny Guy’s bio also mentions that he looks at global macro trends when investing.
An calls Guy one of the “Top 30″ traders in Canada:
DANIEL GUY
Chief investment officer and director, Salida Capital Corp.
Claim to fame One of the hottest hedge funds in Canada. Heavily invested in resources. Gained some notoriety in 2004 when the fund forced Penn West Petroleum Ltd. to convert to an income trust and more recently, pressuring Western Oil Sands to put itself on the block. Style is long and short, with a bias toward long.
Assets under management US$1.1-billion. Bio Founded Salida Capital in 2001 after seven years with Richardson Greenshields (now RBC Dominion Securities Inc.). Was a member of the merger arbitrage group at First Marathon (now National Bank Financial).
After hours Publicity shy. Corporate donations to Make-A-Wish Foundation, Princess Margaret Hospital Foundation, Bloorview Kids Rehab Foundation.
It looks like they also release global macro reports on a regular basis (), and you can find an about some of their activities in November.
All in all, they seem like an interesting firm. Their fund’s strategy isn’t my cup of tea, it seems like they rely much more on global macro trend spotting than I do — but their views may be insightful.
Recent Comments