Grupo Prisa: Why the Sudden Rise?

Today, I'd like to revisit Grupo Prisa (PRIS), a Spanish media stock I recommended in the past and then got out of, citing concerns about Europe's inability to solve its fiscal problems.  Getting out proved to be a good idea because the stock lost roughly 75% of its value, after I sold it at $4.40.  The decline was apparently due to fear that Spain's debt crisis would affect Prisa's ability to refinance debt and/or secure additional credit.  It is heavily indebted, although it has some valuable media assets.  I never really believed that the company would be forced into bankruptcy -- its cash flow and market position seemed too solid for banks to pull the plug on it.  Nevertheless, the company has coasted along for much of the year, valued near zero, on the theory (presumably) that it was on the edge of bankruptcy.  Then, last month, it suddenly went on a run. It has doubled since late August.  The renewed interest has some basis.  PRIS has made progress in restructuring its debt and has made provision to pay dividends to Class B shareholders. 

Here is a link to the announcements:

http://www.prisa.com/en/accionistas/

Whitney Tilson, whose fund has a large position in PRIS, has long maintained that PRIS would rise again. 

http://seekingalpha.com/article/639121-grupo-prisas-important-deal

The ultimate point here is that PRIS' assets are worth a lot more than its current price, even after the recent run up.  It's still risky but appears undervalued even accounting for the risk.

Twitter, Fat Finger Mistakes, Oil, and Yet Another Nail in the Efficient Market Hypthothesis,

I promise that I really had intended to drop this theme of fat finger trading mistakes and their implications for efficient market theory but the news just won't let me.  How about this article from today about oil traders who mistakenly believed that a tweet about the 1973 Arab-Israeli war, discussing Israel's bombing of Egyptian airfields, was current and reacted accordingly by driving oil prices up today.  How are people this careless allowed to make trades?  What does this say about the need to act quickly in markets and the corresponding mistakes?

http://money.msn.com/business-news/article.aspx?feed=OBR&date=20131010&id=16987010

Follow Up on Twitter, Tweeter, and the Efficient Market Hypothesis

So I got curious after my previous post on all the folks mistakenly buying near-dead stock Tweeter, apparently thinking it was Twitter (which hasn't even had an IPO yet).  Are people really that careless (a diplomatic way of putting it)?  Or is there something else at work here, such that what appears to be a mistake is actually the work of highly refined minds?  Minds who understand that, over time, there may be enough mistaken purchases of Tweeter to justify an investment. 
   I did some quick research on how often a stock spikes when it is apparently mistaken for another stock.  I did not find much but the phenomenon is certainly not unheard of.  It is sometimes referred to as a "fat finger error."  Here is a link to an article discussing a spike in a Chinese stock when an investor apparently confused very similar ticker numbers:

 http://www.information-age.com/technology/information-management/1648323/fat-finger-error-sends-wrong-companys-shares-soaring


    But it is likely more than just a clumsy mistake in many instances.  I noticed that sometimes the press gets a ticker symbol wrong in an article.  One can imagine that some readers would be impressed by the company discussed and then cut and paste the mistaken ticker into their online broker's "buy" form.
    At the end of the day, we do not know what the real cause of the Tweeter spike was but it does raise some interesting questions.   

The Final Nail in the Efficient Market Hypothesis' Coffin

If you don't know what the Efficient Market Hypothesis is, you're probably not reading this.  If you believe in it, then I submit for your consideration the strange ride of the shares of Tweeter Home Electronics today.  The nearly illiquid, OTC shares of this recently bankrupt home electronics retailer soared about %1500 at one point today.  Why?  Because the smart money realized that Tweeter is back from the dead to take over retailing?  No, because apparently many folks believed that they were buying shares in Twitter, which announced it is filing for an IPO.  I've never really believed in the "smart money" but we now know there is some not so smart money.  Here is a link to an article on Tweeter's journey:

http://money.msn.com/business-news/article.aspx?feed=OBR&date=20131004&id=16968494

Of course, maybe there really is smart money behind this.  Maybe some research indicating that in the run-up to an IPO a lot of careless people buy stocks with similar names or ticker symbols to the new company.  Or maybe even after the IPO, careless folks buy similar stocks.  Maybe Tweeter really is a smart play.  And maybe, just maybe, this phenomenon could be duplicated with the next hot tech IPO, i.e. find a stock with a similar name in the run up to the IPO.

A Perfect Storm: The Shutdown and the Debt Ceiling

When will the U.S. government re-open for business?  Apparently, Congress is working on it.  But while they are working on it, we're not sure how hard they are working on a possibly bigger problem:  the onset of another "debt ceiling."  A debt ceiling occurs when Congress fails to authorize the government to borrow more money to meet its obligations.  U.S. Treasury Secretary Jack Lew has told Speaker of the House, John Boehner, that the U.S. will hit its debt ceiling on October 17, 2013.  Meaning that, on that date, the U.S. Treasury will no longer have authority to borrow money to meet obligations, including payments on U.S. Treasury bonds.  I'm not sure anybody really believes it's likely that the U.S. will default on payments to bondholders but, given the chaos in Washington right now, we might go a little longer before the debt ceiling issue is resolved. Markets may have to price in the risk that doomsday will occur.  This could have a severe impact on bond pricing and the value of the dollar (a negative impact) over the next week or weeks.  Here is a nice article on Slate discussing the current situation:

http://www.slate.com/articles/business/moneybox/2013/09/government_shutdown_versus_the_debt_ceiling_why_hitting_the_debt_limit_is.html

Goldman and Bank of America Exiting China Bank Investments

I found it interesting to learn that Goldman Sachs has completely divested its investment in Industrial and Commercial Bank of China, the largest bank in China.  The divestment occurred earlier this year and was one of a series of stock sales by Goldman which now no longer holds any stock in the Bank, according to publicly available information.

Bank of America has also now exited its large position in another major Chinese bank, China Construction Bank.

The following article posits that this shows the lack of confidence large U.S. financial institutions have in the quality of Chinese banks and their loans.  This conclusion is among the factors cited in the article for a predicted major financial meltdown in China, which will affect the rest of the world. 

http://money.msn.com/top-stocks/7-signs-of-the-next-financial-crisis

I need to do a bit more digging on this one.  I could think of some regulatory reasons for the divestments (capital requirements, for one) but I suspect the cause is the obvious one:  a belief that the investments had run their course and a further run-up in Chinese banks was unlikely or, worse, a run-down was likely.

But let's walk one step further here.  The stocks sales by Goldman and BoA generated fairly large gains for the banks.  Unless the banks feared a run-down in the Chinese banks, why would you want to generate large gains in 2013?  Possibly because profits will not be as high this year as last year or next year.  Unfortunately, this is just food for thought because we don't know what Goldman and BoA really think about the likelihood of a Chinese bank disaster. 

Facebook and the Future of Privacy

Wired magazine did a good piece on how a large portion of Facebook's earnings are coming from mobile ads and that the company apparently plans on increasingly moving toward "impression"-based advertising for revenue.  Translation:  charging advertisers every time you simply look at an ad (rather than click).  For this type of advertising to be tracked, however, Facebook has to know what you, yes you, are doing.  That has obvious privacy concerns.  Link to the article below:


http://www.wired.com/business/2013/05/facebook-is-growing-through-risky-business/

Follow-Up on FXCM, Forex, and Japan Stimulus

Modesty is a nice quality but it's not generally rewarded in the financial world.  So, I'll give myself a short, gentle tap on the back for my prediction that the the forex broker FXCM would rise in the wake of the Japan stimulus announcement.  I made that call on April 4 and FXCM has risen 6% since then (the stock was trading at $13.10 when I posted but ended the day at $13.44).   

Forex Trading in Wake of Japan Stimulus: FXCM

I've been thinking about a position in FXCM, a retail foreign exchange trading retail broker.  Now, I've jumped in after a recent pull back in the stock and today's announcement of a massive stimulus by the Bank of Japan, partly aimed at devaluing the Yen.  It would seem that this move could spur a wave of forex trading, as traders assess the effect of the Japan stimulus on currency markets.  We'll see.

Follow Up on My Post on Japanese Elections

In December 2012, I suggested you might want to think about some investments in Japan if Shinzo Abe was elected PM of Japan, because he could well push the country into a US-like central bank stimulus, in an effort to reduce the value of the Yen and boost Japanese exports.  This has now happened, as the Bank of Japan today announced a massive stimulus campaign:

http://money.msn.com/top-stocks/post.aspx?post=452506bc-5f54-43a3-b415-ab99a8de70b2

EWJ, an ETF I recommended at the time of my last post in December 2012, is up more than 10% since then and may now climb higher.

Can You Afford to Be on Facebook? Part II

Jon Evans at TechCrunch agrees with me on the possible dangers of being deeply involved in social media sites like Facebook.  Since he's a novelist, he paints an even scarier picture of your possible future than I did.  Here's a link to his article:


http://techcrunch.com/2013/03/30/big-data-could-cripple-facebook/

Can You Afford to Be on Facebook?

How would you like a potential employer to look at your Facebook "Likes" and conclude that you are not smart enough for the job?  Or, equally bad, that your sexuality is incompatible with the employer's views?  But, you say, nothing in your Likes speaks to these issues.  So you might think, but a joint study between Cambridge University and Microsoft Research predicted a large group of Facebook users' IQ's, sexual orientation, and other traits to a high degree of accuracy using their Facebook Likes.  Here is a link to an article on the study:

http://www.wired.com/gadgetlab/2013/03/facebook-like-research/

Not convinced of the method?  It really doesn't matter.  These studies are being done, they will be found on the internet (or otherwise) by employers, and quite probably incorporated into hiring decisions whether they are accurate or not. 

As this type of use is made of Facebook data, more people will have to ask themselves whether they can afford to be on Facebook.  And that is not a question that will be good for Facebook's business. 

Google's Other Search Engine

I like to try out the following statement on people to gauge their reaction:  "Youtube is the most valuable media property ever created."  Some people laugh, others pause for a moment before starting to argue with me.  I do not think the statement is far wrong.  According to some measures, Youtube captures 20% of all web traffic daily.  And all of those eyeballs get served with a large helping of ads.  What do you think most young people find more exciting, Youtube or network television?

To my point, NPR ran a story today in which a teenage girl was interviewed.  Youtube is her main source for discovering new music.  She did not refer to Youtube as a "video website" but rather as a "search engine" for finding music.  Oh, and she never, ever pays for music.  Youtube is probably more valuable than the entire music industry right now for this reason, among others.  Anecdotal evidence, to be sure, but this isn't the first time I thought this about Youtube.  Why?  Because it is also my number one source for discovering and listening to music.

Compare this with Pandora and Spotify, darlings of internet radio, both of whom are struggling to make a profit because no one wants to pay for their services. 

And Youtube is not just music, of course.  Want to see an interview with Dean Martin from 1969?  A clip from the 1975 World Series?  Footage of an A-10 in combat over Afghanistan?  Where are you going to go?  And each day, the density of videos on Youtube increases.  Microsoft and other companies are trying to nibble into Google's main search product.  But is there any competitor for Youtube?  No, because the barrier to entry is growing with each video posted.  And it will keep growing...

The Other Social Network: Google+

I've made no secret about my like of Google as a company on this site.  Who else is at the cutting edge of search, driverless cars, and server technology?  And Youtube is a rather valuable property, given that 15-20% of daily internet traffic resides there.  And this isn't all the company is doing -- not by a long shot.  As an example, Google+, the company's relatively young effort to get back into social networking is gaining traction rapidly.  An article this morning in Wired notes that Google+'s growth rate mirrors that of Facebook in its early days. 

http://www.wired.com/business/2012/12/google-grows-like-facebook/

Yes, Google has had some missteps and may not have the respect for privacy that we would like (although, they are not alone among internet companies in this).  When all is said and done, a long-term investment in Google seems like a really good idea to me.  I've already put my money where my mouth is on this one.

An Opportunity in the Japanese Elections?

In recent years, many investors have argued that things can't get much worse for Japan and it might be time to invest in the country's stocks.  Then things have gotten worse.  I sense a new cycle of analysis on Japan over the last month or so and, with it, a potential short-term driver for an upswing in Japanese stocks.  Here are the key points in my analysis:

1.  Japan is likely to hold elections on December 16, 2012, which may usher in a new government, including a new Prime Minister.  Shinzo Abe, who may win election as Japan's Prime Minister, has been calling for the Bank of Japan to take steps to weaken the Yen. A weaker Yen would help some of the large Japanese exporters, such as the Toyota, Honda, Panasonic, etc.  Perhaps under pressure, he has backed off these statements.  Markets, however, are likely to regard Abe as a driver of a weaker Yen.

2.  James Hunt of Tocqueville Value Fund points out the dismal returns on Japanese equities over the last 12 years and possibly correctly identifies this as a contrarian signal (the other alternative is that the returns already price in bumps due to undervaluation and contrarian buying and Japanese stocks are precisely where they should be).  According to Hunt:

"During the last 12 years – not a magic timeframe, but one which roughly corresponds with my stewardship of Tocqueville’s International strategy – the total return for the Nikkei 225 Index in US$ terms has been approximately zero. At the same time, the consolidated EBIT margin for the companies that comprise the index has gone from roughly 9.5% to 11.4% , aggregate earnings for profitable companies have gone from Yen 438 billion to Yen 608 billion and, importantly, the return on equity has increased from around 6% to around 10%. Correspondingly, the price to earnings ratio for profitable Nikkei 225 companies has gone from 24x to 15x, while the price/book value has compressed from 1.7x to 1.1x and the dividend yield has increased from 0.8% to 2.3%."

http://www.tocqueville.com/insights/sun-also-rises


3.  The Press has been focused on the upcoming Japanese election and on gloom and doom.  The ultimate disrespect:  a recent story noting that adult diapers outsold infant diapers in Japan last year for the first time (a result of Japan's aging population and low birth rate):


http://www.businessweek.com/articles/2012-11-23/japanese-stocks-yes-they-really-think-so

So what's the trade here?  It's a risky one but you could wait to see if Shinzo Abe is elected Prime Minister and then invest in select Japanese exporters, an index fund tied to the Nikkei, or more deviously an ETF that is inversely correlated with the value of the Yen (see here for some ideas:  http://www.indexuniverse.com/sections/blog/15184-japan-etfs-for-a-yen-rout-.html).  A last point.  This is probably not a party to be late to if you're looking for quick returns.  The election is on December 16, 2012 in Japan, which is 14 hours ahead of US Eastern Time.  In searching Google, I found no analysis of when we might expect to learn of the results.  One might guess early morning Eastern time, Sunday, with markets closed.  Probably a good idea to set up a Google alert to tell you when the results have come in.  A neat algorithm would start queuing trades immediatley upon news of Abe's victory and do nothing if he's defeated.  Beyond my current technical expertise but some of you might be capable.  Good luck.

Word to Investors (and Sleepy Citizens): The FIRE Economy Is Alive and Well

Slate ran an article on November 26, 2012, claiming that 88% of the earnings growth in the S&P 500 companies came from just 10 companies, with nearly 60% of that growth coming from 4 among this 10:  Bank of America, Apple, AIG, and Goldman Sachs.  And keep in mind that Citi and Wells Fargo were also among these top 10.  Here is the article:

http://www.slate.com/blogs/moneybox/2012/11/26/apple_aig_goldman_sachs_and_bank_of_america_provided_most_of_2012_s_earnings.html

What conclusions can we draw from this:

 1.  Apple, which was the biggest single contributor to earnings growth, is one heck of a company to be able to generate these kinds of earnings in a world where the only other folks who can make money are banks and insurers.

2.  These figures may be skewed because large banks and insurers had their earnings sharply depressed in recent years.

3.  The financial collapse has done little to stop the inordinate flow of profits to the FIRE (Finance, insurance, real estate) sector of the economy. 

Mortgage Insurance Part 4: The Dangers of Number Blindness

Since I already purchased both RDN and MTG based on some of the analysis I've written about in previous posts on mortgage insurance, I'm soon going to turn my attention to other opportunities.  Before I do, however, I wanted to write a final piece on mortgage insurance because it illustrates the divide between two approaches to investing.  Namely, the tension between a numbers-based approach and an approach based on a realpolitick assessment of the state of the world and a particular industry.

Oliver Davies has done some nice analysis on Seeking Alpha, which concludes that RDN is at risk of insolvency and is certainly a much riskier investment than MTG, due to slow-paying claims and inadequate reserving (among other factors).  See here for Mr. Davies' summary of his thoughtful research:

http://seekingalpha.com/article/1003411-radian-responds-to-barron-s

A comment to this article illustrates the divide of perspectives that I mentioned, however:

"So right. Radian has made it through the housing crisis and out the other side. Now that real estate and all tangential markets are improving, the Fed will definitely question their reserve assumptions and try to close them down. What better way to usher in the housing recovery everyone is waiting for than taking down one of the premier MI issuers. Sheer genius.

P.S. I'm sure Fannie Mae almost hired S.A. Ibrahim a couple of months ago because they detested his MI practice. You are definitely onto something here. Have you proposed this to Fox News yet?"

This comment's tone is unfortunately typical of  many comments on Seeking Alpha but, I must say, despite its tone and lack of deep numerical analysis, I side with the commenter and not Mr. Davies.  The federal government wants to keep private mortgage insurers in business and the fact that Radian has survived this long suggests to me that they are going to survive longer.  Mr. Ibrahim's apparently cordial relationship with the Fed is just icing here.

Thus, an investor must be careful about being blinded by the numbers, particularly in certain industries.  Let me put it another way:  if you've lived through the last 4 years in this country, do you still believe that a company's reported numbers can reliably determine that company's chances of survival -- particularly when that company is a financial institution or insurer?    

Mortgage Insurance: Part 3

One issue I did not mention in my prior pieces on mortgage insurance was that MGIC had sued Freddie Mac over capital requirements that Freddie had imposed on MGIC which, if implemented, would have precluded MGIC from writing policies.  That suit is apparently in the process of being settled:  

http://www.rttnews.com/1995110/mgic-in-preliminary-deal-with-freddie-mac-to-settle-pool-insurance-dispute.aspx

There are some possible stumbling blocks to this resolution, however.  Namely, Freddie (and the Wisconsin insurance commissioner, which oversees Milwaukee-based MGIC), want assurance that MGIC is sufficiently capitalized to cover its risks in certain states.  As a result, MGIC's holding company will have to make a capital infusion into the MGIC unit -- although a significantly lower one than originally required by Freddie. 

In the type of shell game we have come to expect in the financial and insurance sectors of our economy, MGIC has gotten Freddie's approval for an end-run around its overly high risk ratio in other states:  it will simply have a new unit, MIC, which has a lower risk ratio than MGIC, write policies in these other states.

My take:  state and federal regulators, Fannie, and Freddie all want MGIC to survive -- although it is possible that MGIC will be unable to meet even the reduced requirements set forth by these entities.  So MGIC undeniably presents some investment risk.  Putting aside the moral implications of yet another example of rules being changed to allow failed institutions to survive -- this blog is about investing, not philosophy -- MGIC looks like a pretty good junk bond equivalent.  

Follow Up on Mortgage Insurer Stocks As Junk Bonds

I've done some further reading on the mortgage insurance situation and it is interesting enough to merit a second post.  The below article is a good overview of the competing interests trying to stake claims in the mortgage insurance arena after 3 of the main players were shut down by regulators in the last few years (one of them, PMI).

http://www.bloomberg.com/news/2012-08-22/arizona-regulator-sues-nmi-showing-watchdog-influence-mortgages.html

Let me give you what I believe are the most salient points:

• The Arizona Department of Insurance, acting as the receiver of the defunct PMI, has sued upstart would-be mortgage insurer NMI Holdings from improperly appropriating PMI assets. The suit could hinder NMI from selling mortgage insurance;

My thought:  former PMI employees are anxious to get back in the business

• Private mortgage insurers, which have lost more than $18 billion since mid-2007, wrote $40.1 billion of coverage last quarter, or almost 10 percent of the $405 billion of new loans.

My thought:  I'm absolutely astounded that the industry wrote more coverage last quarter than the amount of losses suffered during the housing crash

• MGIC’s preliminary ratio of risk relative to capital breached the level some regulators require to write new policies as of June 30, the insurer said Aug. 2.

My thoughts:  MGIC should probably be shut down but is being allowed to continue to operate

• Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co (JPM), private-equity firm Pine Brook and reinsurer PartnerRe Ltd. are among backers of the industry’s other startup, Essent Guaranty Inc. The Radnor, Pennsylvania-based firm raised $600 million in 2009 and 2010 and began writing policies last year, providing 5.3 percent of coverage in the first half of this year.

My thoughts:  Goldman and JP Morgan see an opportunity in mortgage insurance.  The management team at Essent looks like it's been poached from other major mortgage insurers. 

One more thought, not from the article.  There was significant insider buying of shares in August of this year.  See http://seekingalpha.com/article/789171-why-i-bought-mgic-investment-corp-for-a-trade.
 
This is starting to look even more interesting.  I will continue to follow this industry.

Mortgage Insurer Stocks: Like Junk Bonds?

I recently ran across an article which mentioned the private mortgage insurer, MGIC.  I hadn't thought about the company in years.  Not since shorting it in the wake of the financial crisis and watching it pleasantly sink from about $38 to $24 before bailing out.  Only to regret my impatience later when it went nearly to zero.  At the time, although I was a major doomsayer, I did not foresee the complete collapse of the housing market.

Later, when the full scale of the disaster became evident, I was given to making pronouncements like:  "There is no way the mortgage insurers can survive.  Their liabilities are insurmountable."  And then just the other day, I was reminded of these thoughts after not thinking about the private mortgage insurance industry for several years.  My first reaction was "how are these mortgage insurers still in business?"  Some quick research revealed that not all of them are.  PMI, one of the major players, was seized and is now apparently a historical note.  But MGIC and Radian, two other big insurers, have survived.  The following article attempts to detail how this miracle could be:

http://seekingalpha.com/article/862831-radian-group-management-is-misleading-investors

I'm still not convinced but, that being said, if MGIC and Radian have survived the last four years, then it seems to me there are two possibilities.  One, they are getting ready to die, as PMI did last year.  Or two, they can survive anything and may very well run up if the housing market recovers to some degree.  In no way shape or form do I believe the housing market will make a significant recovery any time soon (I'll save my reasons supporting this assertion for another day).  However, the mortgage insurers would benefit from even a minor recovery in the housing market.  The article above details how MGIC is in much better position than Radian.  Some of the commenters believe otherwise.  In any event, if these two are still around, they may survive until the sun shines again...