No-Limp Investing

How subprime mortgages were sold

2007-10-30T12:48:00.000-07:00

The Ole Pump and Dump

2007-10-10T07:22:00.000-07:00

First Marblehead for Dummies

2007-09-19T13:39:00.000-07:00

Awesome post copied from the FMD Motley Fool board:

"First Marblehead for Dummies."

Preface
Students are a subset of humans who never have enough money and a big industry grew up to solve this problem. First Marblehead is one of the companies that operates in this business.

Chapter 1, Loans.
Banks have lots of money and students don't so it makes sense for banks to loan the money to the students.

The problem is that banks are too dumb to know how to do it so they call First Marblehead to help them out. First Marblehead has a lot of very smart people who know how to make lots and lots of money from helping banks make the loans to students.

The smart people at First Marblehead know they will be making out like bandits so they help banks make loans to students for free, just for what it costs them to do it.

Chapter 2, Banks are Fickle.
Banks are fickle. First they get rid of the money they have by lending it to students. But after making the loans banks decide that they prefer to have money instead of loans but, of course, students have 20 years or so to pay back the money. Banks are up the creek without a paddle so they call First Marblehead, where the smart people work, to help them solve the problem.

Chapter 3, Wholesale Loan.
Banks are not the only people who have money to lend. Big institutions like pension funds and others also have too much money that they want to lend but they don't want to do it retail like banks do with students. They want to do the lending wholesale. Since these people are as dumb as bankers they too call on First Marblehead to solve their problem. Being smart really pays off big for First Marblehead, that's why we invest in First Marblehead.

Chapter 4, Loan Sausage Factory.
This is where it gets interesting. The banks give First Marblehead all their student loans and First Marblehead makes a HUGE loan sausage out of them. This sausage is so big that no big institution is big enough to buy a whole loan sausage so First Marblehead slices up the sausage. The people at First Marblehead are so sophisticated that they don't call the slices slices. They use a big French word for slices: "Tranches." This gives First Marblehead at least two big advantages, for one, dummies who don't read this book don't know what tranches are so they stay out of the business. Apparently big institutions are so fascinated by the name tranches that they are more likely to buy them than ordinary slices but that is just speculation on my part.

Chapter 5, Loan Sausage Tranch Ratings.
Big institutions really like the tranches, but the people working there have to protect their jobs so they look for someone to blame should the business go south. This is where the rating agencies come in. They rate the tranches pretty much according to what the smart people at First Marblehead tell them to but they fill the ratings with lots of small print to make sure that, should the business go south, they can pass the blame to someone else.

Chapter 6, Loan Sausage Tranch Handling.
The smart people at First Marblehead know they don't want to get their hand dirty handling tranches so they have this other company called a Trust to do it for them. This is really smart, should the business go south, it's the trust that is going to take the heat.

Chapter 7, Loan Sausage Tranch Guarantees.
Since everyone knows that students are a bunch of deadbeats, the smart people at First Marblehead get yet another company to guarantee the student loans that went into making the huge loan sausage that was sliced into tranches. The people at First Marblehead are double smart at this. For one, TERI, the company doing the guaranteeing, is a non-profit organization leaving more profit for First Marblehead. The double smart comes in because First Marblehead does not pay TERI, the students themselves do with an additional fee. Man, talk about a free ride! This has got to be the Original Free Lunch!

Chapter 8, The Deal Is Done.
Finally we come to the deal itself. Well, not quite. Since the smart people at First Marblehead don't handle the tranches and since the Trust is just a paper company, the smart people at First Marblehead call in yet another group of people to do the actual selling of the tranches. These people are called "underwriters." You probably want to know where they got that funny name. These people, who most likely are bankers but a different kind of banker than the ones who made loans that started this story, write a big document and they sign it at the bottom. Since their name appears under the meat of the document they are underwriters. I suppose if they were to sign at the top of the document they would be called "overwriters" or "topwriters." Maybe "abovewriters" would be better. Anyway, these guys do the actual selling of the tranches.

Chapter 9, The Money Flow.
The big institutions write big checks to get the tranches. The checks go to the Trust and they spread the wealth. The very smart people at First Marblehead make sure they get a very big chunk of it.

Chapter 10, The Denouement.
This is a fancy word that means (I looked it up in the dictionary): "the final part of a play, movie, or narrative in which the strands of the plot are drawn together and matters are explained or resolved."

Who knows? Maybe the students all took off for Katmandu.

Denny (Chief Dummy) Schlesinger

FMD Lowers Concentration Risk

2007-09-11T12:05:00.000-07:00

I'm really impressed with this latest securitization, 2007-3. The huge size, Ambac insurance, auction rate structure and lower concentration all speak to strong growth and excellent management.

One confusing thing in the prospectus is that they don't list the lenders that are 10% or below. When you factor in the smaller lenders, you get the true picture of concentration which shows that BofA and JPM are at about 35%-36% of the total. For a detailed explanation, see here.

I'm ready for the oil bubble to burst

2007-09-11T08:26:00.000-07:00

From Mike:

*OPEC's meeting is underway and at the center of debate is a Saudi-led proposal to formally raise the current output ceiling of 25.8 mm b/d by somewhere between 0.5 and 1.0 mm b/d

*With the cartel already producing more than 900,000 b/d above the current ceiling, it might seem pretty simple to just formalize existing quota cheating - all but one member are, in fact, above allocation.

*As we wrote yesterday, we think the bigger story behind the scenes here is the concern about high oil prices doing further damage to the global oil balance.

*Some countries (Iran, Nigeria and Venezuela) opposing a ceiling hike have been more than happy to watch Saudi Arabia cut back production by over a million b/d this past year as increased non-OPEC supply and weaker than expected world demand growth eroded the "call on OPEC crude."

*Based on our oil balance work, it seems the Saudis will be under further pressure next year to make room for non-OPEC capacity and the gains in non-OPEC. This seems eerily similar to what we saw in the mid '80s which led to the '85-'86 price crash.

Just imagine for a minute that you are Saudi. You are the low cost producer in the world, prices are near record-highs and yet you've had to voluntarily cut back production to allow other countries to sell their higher cost crude oil. How would you feel? Why would you allow that? Why not say, "Fuck you Venezuela and fuck you Iran and fuck Nigeria!! We are the most efficient producer in the world with the biggest reserves and we should be selling more crude, not you." This whole OPEC structure is mightly flawed on several levels. All of the countries are cheating and producing more than their quotas while Saudi gets the shaft. This has to be enraging the Saudi Kingdom and creating severe tension within OPEC. Yet, Saudi knows that the price of oil is being held up on nothing more than misconceptions about supply (it's not really tight and the world is not running out of oil), thus they have to be careful what they say. They don't really want the world to know that they are only producing from 25 of 75 huge oil fields. I would love to see the system and price totally collapse.

Matt Snowling was dead wrong on FMD securitization

2007-09-10T13:08:00.000-07:00

Matt Snowling estimated FMD’s first-quarter securitization at $1.25 billion. Well, the company announced this morning that it’s going to be $2.8 billion, so he was only off by a mere $1.55 billion. It is highly likely in my opinion that Snowling has been overly pessimistic on FMD because his hedge fund client(s) are short the stock. Matt Snowling is the one who should be investigated by NY Attorney General Andrew Cuomo, not FMD. Not only was his volume assumption not even in the park, but his prepayment and default assumptions have been pulled from thin air. Yet, since there is so little analyst coverage of the stock, it’s his opinion that is often reported in Barron’s, Forbes, the New York Times, thestreet.com and other media sources.

FMD

2007-09-07T13:04:00.000-07:00

Tom Brown destroys the long-term bear case for the stock in his Sept 7, 2007 article:

A Bear's View of First Marblehead

One of the great things about running a site like this is the negative feedback we occasionally get. It can be a wonderful reality check. Take, for instance, the following, which arrived on Wednesday:

Tom,

While I don’t pretend to know First Marblehead as well as you, I do know it very well. I think their “output” is an awesome thing--helping kids go to college.

However, how do you not address the current land mines?

1. The securitization market is currently closed.

2. Thus, gain-on-sale margins have totally peaked out.

3. There’s the potential for a writedown, as Marblehead’s discount assumption on its residuals seems aggressive if the company can’t sell the BBBs. (Also, how about the company’s shadiness in avoiding the question of how many buyers there are of the BBBs? There’s just 1, Dillon Read, and it’s gone.)

4. While not expensive on a P/E basis, the stock trades at 3 times book value, including residuals. Nobody in his right mind should pay that.

5. There are no buyers that could take the company private, because it can’t lever up, and is losing its two largest clients in J.P. Morgan Chase and Bank of America.

6. And then there’s the slimy factor: the company only disclosed the N.Y. A.G. subpoena because of the NYT article. They purposely omitted it from their 10K a few days before because they didn’t think it was a big deal. But because the NYT was going to break it, they disclosed it on a Friday before a long weekend the last day of August? Come on. . . .

I am not sure where this thing is going, but to give the bull case on Marblehead without highlighting these very material risks seems unfair.

The sender of the above is a fellow I’ll call “Bubba;” he covers financials for a large, well-known hedge fund here in New York that is said to be short First Marblehead. (I’ve cleaned up the message to fix the grammar and typos.)

I was pleased that Bubba was forthright enough to e-mail me, but was struck by how weak his objections to the company are. If this is what the Marblehead bears are left with by now, they're on shakier ground than I thought. Let’s go through Bubba’s points one at a time, and you’ll see what I mean:

1. The securitization market is currently closed.

Actually, the securitization markets aren’t closed. Just last week, NelNet completed a $1.5 billion deal. And Phoenix-based NextStudent is set to come to market next week with a $1.4 billion offering. Yes, the market has been disrupted and is challenging. That happens from time to time. But the disruption won’t last forever. It never does. In fact, I expect Marblehead will come to market with a deal of its own any day.

But even if the market were frozen solid, as Bubba seems to think, I still wouldn’t be too concerned. Granted, Bubba’s and my investment time horizons are different. I am a long-term investor and can wait these things out, while Bubba’s fund has a demonstrated record of being quite short-term oriented. A frozen market could be a disaster for Bubba. But unless the freeze lasts for years, Marblehead won’t have to change its business model an iota. As long as the company keeps facilitating loan volume at its current rapid (like, 40%-plus) rate at attractive spread to Treasuries, the company is creating a huge amount of economic value.

2. Gain-on-sale margins have totally peaked out.

Good Lord. Bears on Marblehead have been calling for margins to collapse since at least 2003—during which time margins have risen to 18% from 12%. Eventually, though, the bears will be right: margins will peak. They have to. So what? This fixation on margins to the exclusion of all other metrics (like, say, earnings per share growth) is idiotically myopic. It’s especially myopic, in my view, since the bears seem to refuse to take into account the margin expectation likely built into the stock’s valuation. With Marblehead lately trading at 7 times current-year earnings, the market apparently isn’t just looking for margins to decline a little bit; it’s looking for them to collapse. I don’t buy it.

In the meantime, lower gain-on-sale margins will not prevent First Marblehead from reporting earnings per share growth of 15% or more in fiscal (June) 2008, after a 59% E.P.S. rise in fiscal 2007. With Marblehead trading at a single-digit P/E as it is, it’s hard to see why the prospect of lower margins should be a compelling reason to be short the stock.

3. There’s the potential for a writedown, as Marblehead’s discount assumption on its residuals seems aggressive.

Bubba apparently doesn’t understand the difference between actual cash flow and the present-value accounting for future cash flows. Either that, or the details of the accounting arcana are more important to him than actual cash is.

First Marblehead assumes a discount rate of Libor plus 175 basis points in valuing the cash flows related to the BBB tranche of the student loans it securitizes. Given risk-phobia prevalent in the credit markets today, the company clearly can’t sell a BBB tranche at Libor plus 175. Who cares? The company doesn’t need the cash from the sale to run its business. (One of the biggest “problems” at Marblehead is figuring out how to deploy huge vats of free cash it’s generating as it is.) Besides, the market’s illiquidity won’t last forever. In the meantime, Marblehead can (and should) retain the BBB tranche. But changing the discount rate, up or down, doesn’t change the underlying excess cash flow the loans will eventually throw off.

4. While not expensive on a P/E basis, the stock trades at 3 times book value, including residuals. Nobody in his right mind should pay that.

Bubba, it’s hard for me to imagine how you could be more wrong. The people who’ve known the company longest and know it the best, like founder and former CEO Dan Meyers and board member and longtime fixed-income whiz Dort Cameron, would gladly purchase the First Marblehead’s residuals at the value the company holds them on its balance sheet.

Remember, these are very long-term assets (25 years), with the BBB residuals discounted at Libor plus 175. The other residuals, meanwhile, are being discounted at 13%! Bubba and the other short sellers, who believe that the residuals are either overvalued or outright worthless, will be scrambling when these supposedly overblown assets start throwing off rising levels of excess cash beginning in fiscal 2009.

More generally, book value just isn’t relevant to this company. Marblehead’s business model simply isn’t capital intensive. The company could even operate with a negative book value—which, come to think about it, J.C. Flowers plans to do with Sallie Mae should its deal ever close.

5. There are no buyers that could take the company private, because it can’t lever up and is losing its two largest clients in J.P. Morgan Chase and Bank of America.

First Marblehead can’t lever up? Why not? The company has $842 million in shareholders equity, and essentially nothing in the way of capital spending needs. (Capex will run just $27 million or so in fiscal 2008.) Marblehead is certainly not constrained by any capital requirement related to overcollateralization levels of its securitizations, since the rating agencies don’t require that Marblehead’s securitizations be overcollateralized in the first place.

The eventual departure of BofA and Chase, meanwhile, is a non-issue. The two companies have been of diminishing importance at Marblehead for years. Three years ago, they accounted for 65% of the company’s revenue. Last year, that had fallen to 41%; we estimate their share of revenues will fall again, to between 31% and 36% this fiscal year. Why, BofA isn’t even one of Marblehead’s “Big Two” anymore. The company’s in-house Astrive brand, which is considerably more profitable to Marblehead than BofA is, took that spot as of the fourth quarter of fiscal 2007. Astrive's revenues grew by 364% last fiscal year.

In addition to the growing importance of Marblehead’s internal brands, its non-top 2 clients are growing loan volumes at four times the pace of BofA and Chase.

Don’t forget, too, that the bears have been looking for the imminent departure of Chase and BofA for the past three years. (During which time, recall, Chase renewed its deal with the company through 2010.) Yes, the two will likely eventually leave at some point. But by the time that happens, Marblehead’s own brands and its other partners will more than make up for any lost business.

As for a sale of the company, First Marblehead’s board is just not interested given stock’s depressed price, the company’s record-setting performance, and the wave of excess cash that will begin to flow to the company in 2009. I don’t blame them.

I continue to believe First Marblehead has a great business model. (Notably, recent federal student loan legislation that had the bears so concerned has turned out to be a positive for Marblehead. First, student loan pricing should go up because federal lenders can no longer offer schools cut-rate private loans in return for their federal loan volume. In addition, the legislation didn't raise federal loan limits.) Macro demand for private student loans is strong and growing fast. The company has a durable competitive advantage in its ability to underwrite loans and tailor loan products for individual schools. What’s more, the company has done a great job of signing up new partners and developing its internal brands. Its earnings outlook is bright.

I also believe First Marblehead at today’s $32 stock price is exceptionally attractive. As noted, the stock trades at just 7 times current-year earnings. And the negative case on the company, if Bubba’s e-mail is an accurate and complete summary, just isn’t that strong.

Peter Lynch has two great quotes that summarizes some of my feelings about First Marblehead:

“Perhaps there’s some poetic justice in the fact that the stock you take the furthest in the long run gives you the most bumps and bruises along the way.”

and

“You need to find only a few good stocks to make a lifetime of investing worthwhile.”

Both those thoughts are relevant to First Marblehead. Yes, there have been some bumps and bruises. But by the time we’re done, I expect that this is one company that will have taken us a long, long way.

Still Trimming

2007-09-06T08:45:00.000-07:00

Jeff's comments:

"Volume expanded fractionally over Tuesday's reading, as the % of issues above their own 20 day moving average came very close to the 80% threshold. This market is challenging the natural resistance level of 1500, and with libor at a 7-yr high and 2yr swap spreads widening, there appears to be a disconnect between equities and fixed income. We continue to stress that we have seen little evidence supporting a new bull phase in recent price data, and our latest sentiment work shows bullishness seeping back into this market as investors seem to believe the worst is over. To us, this all looks distributive, and if that scenario is right, and credit markets are a more accurate reflection than equities, stocks become a more natural sale at this juncture."

I also just read about some legislating being drafted by Chris Dodd and Barney Frank that will be very bad for lenders and investment banks. The legislation goes well beyond fee caps and requiring more paperwork. It will impose FIDUCIARY duty on mortgage lenders and allow borrowers that got foreclosed on to SUE the investment bank that securitized their mortgage if it included predatory features such as a prepayment penalty. Yes, I'm serious. The easy money is going away and a tougher credit chapter is beginning.

Head Fake

2007-08-30T06:28:00.000-07:00

Jeffrey deGraaf's ISI Technical Analysis Research:

"The breadth and volume flows yesterday (8/29/07) produced one of the lowest TRIN readings on record. The problem with any of the market's action over the last week has been in terms of volume. Light volume readings are notorious for giving false signals, and with it, we are relying on the weight of the evidence from a more extended time period. Credit spreads continue to widen, and as they do bulls around gold continue to grow. We find the gold bulls interesting, in that they are not being driven by the performance of gold (which has been unspectacular), but clearly by ancillary concerns within the world of finance. To see bulls or bears swell within a commodity without the commensurate move in the underlying basis is truly unusual.

We remain in the camp that this is a tactical bounce off of the lows in mid-August and we believe that initiating shorts into yesterday's strength is an appropriate strategy. Resistance of 1480 - 1500 on the SPX is an appropriate stop depending on one's tolerance for pain on the short-side up to those levels."

Fight the Fed, not credit spreads

2007-08-20T14:33:00.000-07:00

You must read these two articles:

Doug Cass - Fight The Fed

Jeremy Granthom - Widening Spreads Hurt Margins and Valuations

Use market strength to reduce equity and add to your favorite shorts.

A new credit chapter begins

2007-08-17T22:06:00.000-07:00

I can't believe that I'm thinking about the economy and markets at midnight on a Friday night, but I just shared an exchange with someone who I respect a great deal. We both follow the markets extensively and we've concluded (I think) that the Fed is not going to be able to save this market despite the rally today.

First, read this:

From Bloomberg on CP Market

The asset-backed commercial paper market is in semi-disruption. Companies that rely on this for funding like NCT, NLY, RWT and TMA are in big trouble, yet all those stocks were up big today.

Here is a key point. The problem is not illiquidity in the bond/CP market (something that lowering the discount rate will help). The problem is the bubble in consumber debt (especially mortgage) where defaults are now rising which resulted from years of easy monetary policy, leverage and poor underwriting. Credit issues were masked due to the refi machine and huge mortgage equity withdrawl rate, and now those two mechanisms for getting money in consumers' pockets has shut down. The job market is weakening, asset prices are falling and politicians want to raise income, dividend and capital gains taxes. Where is the consumer going to get money??? Credit is tightening across the board (because of rising defaults and the re-pricing of risk) and major excesses will have to be worked off for years. The ramifications will be significant from the home builders, suppliers, brokers, agents, lenders, appraisers, roofers, land scapers, contractors, retailers, foreign exporters of consumer products, etc.

The easy money and excess consumer spending chapter, long as a trilogy, is now likely over. The new chapter will be "The return of responsible lending"

Goldman Sachs on FMD

2007-08-16T13:23:00.000-07:00

4Q2007: Richer mix offsets the impact of an uncertain environment
August 10, 2007

What's changed

First Marblehead reported 4Q2007 diluted EPS of $0.83, higher than consensus of $0.81 but lower than our forecast of $0.87. 1. Management signaled concern about triple-B market receptivity for the transaction anticipated this September; we believe that their concerns may be warranted, and we assume (as we have done since our April 18th note entitled “Potential implications of the proposed Sallie Mae transaction”) an earnings model for upcoming securitizations similar to those reported in FY2006 (pre triple-B tranches). Such a structure should be characterized by lower upfront cash, higher residual fees, and lower blended yields (relative to most recent transactions). 2. Given the current (and anticipated) widening spread environment, we raise our discount rate assumption (forecast for residuals) to 12%, up from 11.59% which the company currently uses. 3. We were surprised by a stark mix shift demonstrated this quarter towards the more-profitable direct-to-consumer (DTC) channel.

Implications

We raise estimates by 2% in FY2008 to $4.03 and FY2009 to $4.57; the benefit of a (presumably tenable) mix shift towards the more-profitable DTC channel more than offsets the impact of a higher discount rate assumption. We introduce our FY2010 EPS forecast of $5.02.

Valuation

We maintain our $41 DCF-derived 3-month price target, implying 29% upside; however, given ongoing uncertainty regarding top line sustainability, we retain our Neutral rating.

Key risks

New legislation and loss of business from customers involved in the SLM transaction pose the biggest threat to our forecasts and price target.

Massive tightening of mortgage credit

2007-08-14T06:16:00.000-07:00

All of the big players have severely tightened subprime, Alt-A and even some prime mortgages over the last two weeks. As bad as the housing market looked in late July, it just got a lot worse. The subprime market is all but gone now. This will easily be the worst housing recession ever and like the tech bubble, it will take years to work of the excesses.

Delayed rally in FMD

2007-08-12T10:59:00.000-07:00

The press seemed to put a negative spin on the FMD report in the morning. Forbes online even said something to the effect that FMD "warned" that credit spread widening would hurt their business. Umm, yeah, spread widening hurts margins but that doesn't mean that they can't grow earnings significantly in the coming quarters. Margins are certainly a very important part of the earnings equation, but so is volume which absolutely surging.

Management said on the call that there would be "60 bp of revenue impairment for each 10 bp of spread impairment." In other words, for every 17 bp of spread impairment, securitazation margins fall by 1%. Here are the yields on the tranches from the last securatization:

Class A-1 Notes (AAA): one month LIBOR plus .04%
Class A-2 Notes (AAA): one month LIBOR plus .13%
Class A-3 Notes (AAA): one month LIBOR plus .23%
Class A-4 Notes (AAA): one month LIBOR plus .29%
Class A-IO (AAA): 6.7%
Class B (AA) : one month LIBOR plus .39%
Class C (A) : one month LIBOR plus .65%
Class D (BBB): one month LIBOR plus 1.35%

As far as I can tell, it's only the BBB tranche that has significantly widened, but it's only about 5% of volume and I'm convinced that at worst this credit scare just pushes those cash earnings out into future quarters.

FMD Conference Call (take #2)

2007-08-10T06:25:00.000-07:00

The call was fantastic and management gave a lot of excellent information. Here are the key points:

1) Four new clients were signed up in the quarter, including ING Direct!

2) Astrive is up to 12% of overall volume and is performing great

3) They are rolling out two additional brands to compliment Astrive

4) 4th quarter securitization was $864 million with $91.6 million in up-front cash

5) They received a favorable tax ruling and will receive a $56 million tax refund in the first half of 2008. Taxes are now paid when cash is received on residuals.

6) The application and loan pipeline heading into Q1 is “very strong”

7) Management is improving transparency and disclosures on all trusts!

8) 1.3 millions shares were repurchased in the quarter! Over 8 million shares left on repurchase plan

9) The BBB sector is in disruption (because of the subprime mortgage crunch) but accounts for only 5% of transaction structure. If management can’t get an attractive price on the BBB securitization, then they will look at alternatives which could include placing the loans of the balance sheet of Union Federal (S&L subsidiary) or Citizens. Banks don’t mind holding these loans on the balance sheet b/c the coupons are good. Then, when credit market conditions improve, they could securitize.

10) Sallie Mae has not been increasing their direct to consumer channel marketing

11) They are looking to get customer concentration down to 35%-40% in 2008.

12) Non big 3 customers grew at 80% in fiscal 2007

What’s not to like? You are getting very strong growth and a 3% dividend yield for 8 times earnings!

FMD Conference Call

2007-08-09T15:07:00.002-07:00

Blogger just ate my post!!!

FMD Earnings

2007-08-09T13:24:00.000-07:00

They look really good...$0.83 vs estimates of $0.81. Revenues and earnings up 55% and 57% respectively for the fiscal year. Loan volume continues to surge, up 39% yoy in the 4th quarter. I'll be listening to the conference call for color on the quarter and the credit markets.

No need to panic on FMD

2007-08-01T13:24:00.000-07:00

JPM downgraded FMD today on worries about the company's ability to keep high margins on its BBB student loan asset backed securities (SLABS). Credit spreads are widening a lot because of the subprime mortgage mess and re-pricing of risk, so I wouldn't be surprised to see a little pressure, but these SLABS are still performing well to the best of my knowledge. The downgrade seems short-sighted because there is still incredible value in this name compared to the earnings and cash flow. Maybe growth will slow a little because of the margin compression, but I don't think it will be much, and perhaps it will be made up by higher margins from Astrive.

Refining margins pummeled

2007-07-30T06:25:00.000-07:00

From ISI:

"*Our model for average US gross refining profit margins dropped sharply in the recent week taking the figure about 40% below the corresponding year-ago level and 55% below the peak number posted in mid-May.

*The most recent week's decline in US refining margins stemmed almost entirely from gasoline - cash crude prices were actually up about 30 cents/bbl on the week while gasoline was down $3.55/bbl.

*We expect US refining margins will see further erosion as we move towards September owing primarily to the seasonal switchover refiners make to "winter grade" gasoline and a normal sharp drop-off in gasoline demand after August.

*Foreign refining margins are still showing a pattern suggesting soft demand trends. Both the European and Far East gas cracks have nose-dived.

*Tanker rates for barrels moving from the Persian Gulf posted multi-year lows in the recent week reflecting the impact of displaced OPEC oil owing to higher non-OPEC supply and weaker than expected global oil demand."

SLM deal in big trouble

2007-07-27T08:24:00.000-07:00

The subsidy cuts were larger than expected, the debt markets are tightening up and now a director has sold a lot of shares at $51. That's obviously not a strong vote of confidence for a deal getting done at $60, or even $55.

Weak Oil Demand

2007-07-16T11:43:00.000-07:00

From ISI:

"* Based on our estimate for end-June OECD storage and figures for world oil supply, we estimate 2Q global demand averaged 84.2 million b/d which is virtually the same as the corresponding year-ago figure. Our working forecast had been for 1.4 mm b/d of growth.

* Having again lowered our 1Q 2007 global demand figure, the estimated 2Q figure left us having to reduce our full-year 2007 world oil demand forecast by 0.5 million b/d.

* While there seems to be an over-abundance of market focus on supply, it seems to us that there has been virtually no attention paid to the demand side of the ledger. What's even more notable is that since 2004, the biggest adjustments we've made to the oil balance have all been downward demand revisions."

So we have an oil glut, rising non-OPEC production, rising OPEC spare capacity and now evidence of weak demand. Why are prices so high again???

Welcome Readers

2007-07-12T11:22:00.000-07:00

I'm getting a ton of traffic from the Yahoo FMD message board after somebody found my blog and linked to it. So, welcome new readers. FMD is by far my largest position and I'll be writing more about it in the future. I'm extremely open to comments and making friends so don't hesitate to post.

The Great Crude Oil Glut

2007-07-09T08:32:00.000-07:00

From ISI:

"There had been indications that Saudi Arabia's Khursananiyah project (which adds 800,000 b/d of capacity) would start this month, or 6 months ahead of schedule. Indications are that the project will stay on the original schedule and ramp up in December.

We think the issue about not bringing on Khursananiyah earlier than planned relates to a decline in the demand for Saudi oil over the past year owing to weaker than expected demand growth and higher non-OPEC supply. This is evident in tanker rates."

Yet the price of crude keeps going up....ARGH!!! At least the futures curve is flattening which suggests investors are becomming less bullish on the long-term price outlook for crude....about time! This swindle has persisted for long enough!

CDO Nightmare

2007-07-05T14:29:00.000-07:00

I recently found this article about the CDO market that's worth your time if you own any stocks that securitize or are involved in subprime issues. It's important to understand the conflict of interest between the credit rating agencies and the issuers, and the subjective (stale!) pricing that delays the crash. There is still a lot of subprime mortgage crap out there that hasn't been marked down and liquidity is drying up.

First Marblehead (FMD) - More Misleading Research

2007-07-05T08:24:00.000-07:00

From Bankstocks.com:

By: Zach Maxfield

"SELL-SIDE RESEARCH CAN BE PRETTY DARN AWFUL—PART 3,724: Thomas Weisel’s Mark Sproule put out a note on Tuesday (sorry, no link) that says that four of First Marblehead’s nine trusts are running well north of the 8% consolidated payment rate that the company assumes. That would be worrying—except that Sproule’s methodology is all messed up. Apparently he arrived at his CPR number by looking at the change in number of loans in the trusts last month and annualizing it, and calling it the result prepayment speed. There’s tiny little problem with this technique: something like 60% of the change in the loan count in a trust is due to defaults, not prepayments. Sproule’s numbers are meaningless.

Anyway, here’s what he did (using the 2004-2 trust as an example):

Beginning loan count: 60,995
Monthly change in loans: -490
Times 12 months: 5,880
Divided by beginning loan amount: an “implied CPR” of 9.64%

Here’s how the numbers really work:

Other Adjustments (cancellations, consolidations and other): $1.47 million

Coincident Losses (change in cumulative claim payments made): $2.38 million ($21.6 million less $19.3 million)

Accordingly, the total loan count decline would be split between Other Adjustments (38%) and Coincident Losses (62%).

Are prepays and defaults something that investors ought to be vigilant about? Of course! But this particular piece of analysis simply doesn’t provide much help on that score. At all."

Quite the contrary. It looks like prepayments are running lower than expected. There was also this little gem by Matrix on June 26:

"First Marblehead’s profit margins could contract going forward due to the probable reduction in subsidies to student loan providers, Matrix Research adds."

It's clear that Matrix doesn't even understand FMD's business model because the company only deals in private loans, not government loans!

With all of these misconceptions still hanging around it's no wonder the stock is still ridiculously cheap.

The Refiners Broke

2007-06-27T07:49:00.000-07:00

Citigroup downgraded the refiners today on concerns about falling margins. It's a good call IMO. These stock have had parabolic moves and are now rolling over. I think that they are excellent shorts.

It's important to remember that these are not growth stocks, they are deep cyclicals that trade on margins.

SLM Deal Threatened?

2007-06-22T08:27:00.000-07:00

The Senate Health, Education and Labor Committee passed legislation on Wednesday 17-3 cutting the government lenders by $18 billion over 5 years. Cuts in excess of about $16 billion threaten the buyout of SLM by J.C. Flowers/BofA and JPM. If the deal falls through, SLM will tank and FMD surge.

Link to full article

SMH

2007-06-22T07:17:00.000-07:00

The semi's are breaking out with sentiment very low. It looks like a very good long play. Note from DeGraaf:

"We have maintained that technology is currently in the late stages of a secular bottom. There is some historical context in this, as post parabolic moves, and lost leadership generally take the better part of a decade to consolidate and reemerge into a viable money making sector. To this point, the SMH broke out yesterday, and several semi and related names had impressive positive volatility alerts. Such conditions, when they are broad across a sector, suggest legitimate money entering the space. Risks look minimal and other than the summer seasonals, we can not think of much to stand in the way of a bullish technical call."

Energy Tidbits

2007-06-20T09:08:00.000-07:00

Oil inventories rose 6.9 million barrels compared with expectations for a 100k increase. Non-OPEC production is surging, displacing OPEC barrels. The world is awash in oil. There are even tankers (approximately 10) sitting idle in the gulf because storage tanks are maxed out. Tanker rates are below their 5-year average, reflecting slower demand. Worldwide oil demand is running about 80% below expectations this quarter and yet the price recently broke out above $68 and is only down about $1 today. Madness, pure madness. Prices could drop to $40 and we would still be swimming in oil.

US refining run rates are about 500,000 b/d below the 5 year avg, but gasoline output is running 400,000 above its 5 year avg reflecting higher yields thanks to the impact of increased fuel ethanol blending. There is absolutely no shortage of gasoline either.

More good news for First Marblehead (FMD)

2007-06-07T12:56:00.000-07:00

After the close yesterday, FMD reported an increase in the quarterly dividend from 15 to 25 cents per share and disclosed that from April 1, 2007 through June 6, 2007, they repurchased 1,319,100 shares of common stock under authorized repurchase programs. In April 2007, the Board authorized the Company to repurchase up to 10,000,000 shares from time to time.

A couple other positive data points are that concentration levels from JPM and BofA came down in the latest securitization, and the yield curve is steepening.

According to the prospectus, JPM loan volume was 29%, down from 37%, and BofA was under 10%. Lower concentration means reduced revenue and earnings risk (through greater customer diversification) which should help expand the earnings multiple (investors pay up for less risk). As an aside, FMD's smaller, higher margin partners (along with the in-house brand) are growing much, much faster than JPM and BofA.

Secondly, the yield curve continues to steepen (leading economic prospects are accelerating) which, all other things being equal, helps slow prepayment activity. Management proactively increased the prepayment assumption last quarter due to the persistent inverted yield curve but that issue is starting to resolve as it should.

FMD surge in weak market

2007-06-06T11:26:00.000-07:00

Unicredito Italiano has disclosed a 5.1% stake in FMD according to 13D filings. This bank has been pretty active with M&A in the past. As I've mentioned many times now, FMD is significantly undervalued at these levels.

Pru shuts stock research and trading arm

2007-06-06T09:25:00.000-07:00

Article here.

This is a sad day because some of my friends and people that I have worked with have lost their jobs. Good luck to all of them with their future endeavors.

On the positive side, Ed Keon and his quant team will remain in place. Ed and ISI's Francois Trahan (formerly of Bear Stearn's) are my two favorite strategists.

Stocks still attractive in aggregate

2007-06-04T06:38:00.000-07:00

From Pru:

"- As we showed in a 2005 note, “Buy Low, Sell High,” the current valuation of stocks and bonds has been a sensible and reliable indicator of future returns over the past 6 decades.

- In this piece, we update those findings and find that the higher returns obtained from buying low have not required investors to take higher risks, as measured by the standard deviations of returns.

- Said another way, investors have been able to use valuation to identify assets with an attractive risk/return trade off.

- At today’s valuations for stocks (a trailing earnings yield of about 6%, a forward yield of about 6.5%) and 10-year Treasury bonds (yield under 5%), stocks have offered a far superior risk/return combination.

- At these valuations, the downside risk of stocks has been about the same as bonds, with much higher maximum historical upside.

- Of course, past performance is no guarantee of future results, and the note contains several important caveats.

- But we suspect that investors who buy on autopilot, adding bonds and selling stocks as they age regardless of valuation might actually be adding to their risk of falling short of financial goals."

I agree with all of this although there are some sectors that I don't like such as energy, utilities and housing/mortgage related equities. I also don't like Chinese stocks in general.

Have refining margins peaked?!

2007-06-01T06:37:00.000-07:00

From Mike Rothman:

"*The DOE released its revised monthly figure for March gasoline demand. Like the revised figures for January and February, the revisions came in significantly lower than the initial estimates.

*The weaker than previously estimated gasoline demand numbers make sense to us given the separate data we analyze for vehicle miles traveled which were distinctly soft for the same period. It seems that the oil market still believes US gasoline demand is robust.

*Gasoline imports surged almost 25% week-over-week. The elevated levels are likely to persist over the near term given the still wide "import arb" with Europe.

*US refinery production continues to ramp higher. We think output levels will climb at least 300,000 b/d from current levels by early July. Between refinery operations ramping up and imports being elevated, we expect continued downward pressure on the "gas crack" and refining margins.

*We've had a number of questions about the petroleum balance accounting employed by the DOE for ethanol. The short story is ethanol stocks aren't counted as part of gasoline inventories as yet, but gasoline output does include ethanol that's being blended."

Motley Fool on FMD

2007-05-31T14:13:00.001-07:00

Motley Fool has a very good and accurate article out today on First Marblehead (FMD). As I've said here before, the risk/reward characteristics of this stock are extremely compelling right now. It is my largest stock position at this time and I anticipate being a very long-term holder. Here is the link:

Motley Fool article on FMD

Peak Oil, Price?!

2007-05-30T14:01:00.000-07:00

Jeff deGraaf had some interesting and insightful comments this morning:

"Energy weakened Tuesday, and none too soon. We've maintained a bearish stance on the commodity, and drew a line in the sand at $67 (see last week's daily), believing that a multi-year top may be in the making. We cynically believe that governments buy assets at peaks and sell them at lows (part of their social and moral duty), and as such we believe that Venezuela's expropriation of oil fields is a classic example of yet another government "buying" near the peak. The stocks look more vulnerable to consolidations than bear markets, but we expect underperformance at a minimum through most of the summer."

What do crude oil prices and Chinese stocks have in common?

2007-05-24T06:39:00.000-07:00

Massive amounts of speculation are driving prices higher!

Global OTC commodity derivative exposure figures were released last night by the Bank of International Settlements. Open positions hit a new record as of December 2006.

Assuming just half the OTC exposure is in oil and that the average transaction price was $60/bbl, the size of the outstanding position equates to 53 billion barrels of crude which is about 21 months of what the world actually consumes and more than 20-times the size of current open interest for NYMEX oil. Guess what happens when this position eventually unwinds! Personally, I can't wait for that to happen.

Yield Curve Steepening a Positive for FMD

2007-05-22T14:50:00.000-07:00

The 10-year Treasury minus the 3-month T-Bill is now a positive 3 bps. This is good news for FMD as management was worried on the last conference call about the inverted yield curve causing increasing prepayments (borrowers consolidating short-term variable loans for long-term fixed). At the time, management thought that the inverted yield curve would persist for some time so they increased the prepayment assumption which lowered earnings marginally and caused analysts to cut estimates somewhat.

I continue to believe that all of the worries about FMD - potentially increasing defaults and prepayments, potentially lower loan volume with BofA and JPM because of a pending minority private equity stack in SLM, and potentially lower profitability from new legislation - are way overblown creating one of the best risk/reward opportunities that I've seen in years.

Refiners and Utilities Suck

2007-05-22T12:47:00.000-07:00

I'm a free market guy and not a big conspiracy theorist, but damn it, it's time for the Feds to investigate the refiners for price collusion! These gasoline prices are beyond ridiculous and costing consumers billions. There is no shortage!! It's also time to ease regulations. There is additional international capacity coming on-line next year, but something needs to be done now.

My local utilities need to be investigated too. For example, my gas company raised my usage fee by 100%! How can a regulated utility get away with what amounts to a big rate hike! Slimy bastards!

FMD

2007-05-21T07:27:00.000-07:00

The stock is up today on takeover rumors in the mid 50's. Don't be surprised if it happens as FMD is a splendid company with tremendous value at these levels. I would buy this whole company if I could.

I'm out

2007-05-10T10:36:00.000-07:00

After sleeping on it, I sold CCRT this morning and bought more FMD. The earnings miss and a couple other things (fee rebates and lower return acquisitions) really bothered me. At this point I think management will have to execute perfectly to make over $4 in managed earnings and this is a very tough business with lots of uncertainty. I might own the stock again at some point but I like the risk/reward of FMD much better here.

CCRT reports weak first quarter

2007-05-09T11:18:00.000-07:00

How ironic....CCRT basically misses earnings estimates because credit quality was better than expected resulting in lower late and over-limit fees....so the shorts who thought credit quality was a major issue get rewarded anyway. And to really piss me off, a stock that I sold to buy CCRT....FWLT, is up at 18% today. These are the days that I wish I just had all of my money in funds. It's just not worth the aggravation!!

VLO and HANS

2007-05-08T12:37:00.000-07:00

The refining cycle is very close to its peak and margins will likely fall significantly. Get ready to short VLO....it's over-extended and fundamentals are deteriorating. The bulls have a blind eye to this one.

HANS looks like a super growth stock and trades at a reasonable 19 times forward earnings. The Monster drinks are a huge hit and the company has other potential home run products like "Java Monster," a coffee/energy hybrid drink that could explode.

Good news for global growth

2007-05-07T12:52:00.000-07:00

Nicolas Sarkozy has won the election in France, beating his socialist rival. Some things on his agenda are cutting taxes, opening up markets, reforming the welfare system, rolling back the 35-hour work week and making over-time pay tax free.

FMD = Super Value Stock

2007-05-07T11:48:00.000-07:00

I ran a dividend discount model on FMD today and its shocking how undervalued this stock is on that valuation basis, and FMD doesn’t even pay a large dividend. Here were the assumptions that I used:

Growth rate = 20% for 5 years (this is much lower than their historical growth rate and in line with the 20%+ industry rate)

Growth rate at maturity = 8% (tuition increases + enrollment gains will probably always grow faster than GDP)

Transition years to growth rate at maturity = 15 (basically assumes about a 1% decline in growth per year)

Risk Premium = 7% (means that investors will demand a 7% return over the risk-free rate in order to compensate them for owning the equity)

Payout during growth years = 13% (current payout rate)

Payout at maturity = 45% (slower growth means a higher payout rate)

The theoretical price was $115 per share or 210% higher than the current $37 share price. I actually made these numbers more conservative than what Bloomberg suggested. Go ahead, find a Bloomberg terminal and plug these numbers in to see for yourself!

More on First Marblehead (FMD)

2007-05-04T11:07:00.000-07:00

Tom Brown at Bankstocks.com once again wrote a fantastic piece on FMD. One thing that I was not aware of was how quickly First Marblehead is growing their highly profitable in-house Astrive brand. This is absolutely amazing! Here is what Brown had to say:

"As I mentioned earlier, Marblehead’s in-house test Astrive brand has gained considerable momentum. So far in fiscal 2007, Astrive has accounted for roughly 10% of facilitations; that implies it’s done roughly $300 million year-to-date, and will finish the year at around $375 million. By my reckoning, that would make Astrive bigger than Bank of America for Marblehead in the direct-to-consumer channel. Recall, too, that this is extremely profitable business, since Marblehead doesn’t have to pay out a whole loan premium to a lending partner.

The emergence of Marblehead’s Astrive business in the past few years is highly significant, in my view. Ever since we started talking about this company, the skeptics have worried that Marblehead would be toast if BofA and Chase ever severed their relationships with it. In fact, that hasn’t happened; both BofA and Chase have continued to grow their business with Marblehead very rapidly. And yet at the same time, Marblehead has been able to build up its in-house Astrive brand, from basically zero three years ago, into a business that now generates earnings that rival the earnings Marblehead gets from those same worrisome Big Two. Tell me again how reliant the company is on them?"

This is a much more significant data point than the minimal prepayment assumption increase. The more FMD can reduce customer concentration, the lower the risk premium (and higher the P/E) should be on the shares since investors typically pay up for less risk.

Here is a recap of why I like I love the stock:

FMD has declined from $57 into the $30's based on a number of misperceptions, including 1) that new legislation will significantly hurt profitability 2) that BofA and Chase will move their business to Sallie Mae and 3) that increasing prepayments, defaults and competition will materially harm profitability.

These misperceptions have generated a ton of fear and caused a fire sale. Right now, you can buy the shares at about 9 times earnings or a PEG ratio of about 0.45 based on their 20%+ growth rate that could last for many years given 20% to 30% industry growth and FMD's extremely strong competitive position. To put the icing on the cake, FMD generates high returns and a boat load of cash to give back to shareholders in the form of dividends and repurchases. The stock should probably trade in the 13 to 14 times earnings range, maybe higher.

First Marblehead (FMD)

2007-05-02T19:49:00.000-07:00

FMD missed Q3 earnings estimates the other day, but their results were actually very strong. The reason the company missed was because management proactively increased the prepayment assumption to 8% from 7%, thus reducing earnings by $16 million. The initial reaction by investors, of course, was to panic once again. Forget that the company still increased earnings by 21% and revenue by 20% while the stock sold for a ridiculously cheap 9 times earnings!

After listening to the replay of the conference 3 times, I continue to be highly bullish on the name. Management actually states on the call that prepayments have gone down and stabilized, but they are worried that if the inverted yield curve persists, the prepayments will go up based on history. While I appauld the proactive and conservative approach, the other side of me thinks that they are being overly cautious. I don't think that it's necessarily the inverted yield curve that causes prepayment activity, but rather very low long-term rates, and the latest inversion was caused by short-term rates spiking higher not long-term rates falling.

I have a lot more to say about FMD and other things but I'm very pressed for time so good-bye for now.

Sallie Mae LBO Bullish For Financial Sector

2007-04-19T09:03:00.000-07:00

This LBO is a breakthrough for the financial sector and should help boost valuations. Until now, the theory was that the debt typically taken on in an LBO would be a deal breaker for many financial companies, which often have high debt levels to begin with and credit ratings to maintain. Additional debt from the leveraged buyout could bring downgrades of the credit rating and hurt a company’s ability to borrow.

However, the dealmakers in the Sallie Mae transaction came up with a solution...an alternative source of funding and the heavy backing of two big banks.

Under the plan, Sallie Mae could rely on the securitization of its student loans for most of its funding, and it also has a commitment of up to $200 billion from JP Morgan and Bank of America. That means any downgrade in the company's credit rating would not matter much.

A report from CreditSights analysts said the major lesson from the Sallie Mae deal was that LBO deals are now possible for financial companies that can rely on securitization, the selling of loans to investors. Firms can forgo investment grade ratings and rely mostly on securitization while having a large liquidity facility from banks as a backup plan.

Oil Update

2007-04-18T14:32:00.000-07:00

I continue to be amazed at $60+ oil while supply/demand fundamentals continue to deteriorate for the dinosaur juice.

There are now indications that Nigeria's oil production will rebound following this weekend's Presidential elections. Production from two Nigerian fields would be slated to return 320,000 b/d from Forcados and 145,000 b/d from the offshore EA field. These two oil streams have been off-line since January 2006. If these Nigerian barrels return as planned, they would displace other OPEC oil and free up additional spare capacity, a bearish event. Meanwhile, non-OPEC production is running well above expectations and demand is moderating across the globe. How much longer can the market ignore the fundamentals and continue trading on irrational fear???

EBAY

2007-04-18T14:20:00.000-07:00

EBAY reported a fantastic quarter and raised guidance. It's not too late to buy this stock IMO. It's undervalued at 22 times forward earnings, business is hitting on all cylindars and the stock is gaining upward momentum.

FMD - The Key Point

2007-04-16T09:08:00.000-07:00

Jack Kopnisky, First Marblehead chief executive, said on Monday that he had spoken with Bank of America and JPMorgan Chase, and both had told him they intended to run their student lending businesses separately from Sallie Mae.

Link here:

http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20070416:MTFH28662_2007-04-16_15-48-58_N16162068&type=comktNews&rpc=44

Fire Sale on FMD

2007-04-16T07:44:00.000-07:00

FMD is down about 25% on fear that they will lose loan volume from BankAmerica and Chase (50% of revenue), since the private equity groups of those two banks are in on the Sallie Mae (SLM) buyout. However, BankAmerica and Chase are going to continue operating their independent student loan operations, so all of this looks like a massive overreaction. The private equity groups do their own thing and will be looking to sell/IPO SLM in a few years anyway. I doubt that all of this has a big impact on FMD's revenue and earnings, but we'll see. In the meantime, I'm buying more.

Student Lenders and FMD

2007-04-13T14:20:00.000-07:00

I’ve spent hours pondering the student lending stocks over the past couple weeks. The bears are all over them, but I think that they are wrong….way wrong. As a matter of fact, I think the negative Barron’s piece on First Marblehead (FMD) may be one of the worst articles I’ve ever read, and that’s saying something! The thing is, the consensus seems to side with Barron’s. Everywhere you look, somebody is worried about unethical activity (paying to get onto the school’s preferred lenders list) and new legislation hurting the profitability of the student lenders.

First, the lawsuits in the industry from unethical kickbacks are peanuts. Two million dollars (what a competitor of FMD settled at) for a company with a market cap of $4 billion is nothing. It’s a non-event, and FMD is not even a target (at least so far). Presumably, the big threat is new legislation that could hurt profitability. How come the bears don’t specifically discuss the legislation??? Do they even know what’s on the table? It’s The Sunshine Act. It would require private lenders to fully disclose federal alternatives to prospective borrowers. Here’s the key point....over 80% of FMD’s borrowers already take out government-guaranteed loans, likely to the max. The ones that don’t take out a government loan probably don’t qualify. Bears, please tell me how this act will change the industry fundamentals and make the private student lenders less profitable!

All of this irrational fear is creating a huge buying opportunity in an attractive industry IMO. College enrollments have risen by 3% annually, on average, over the past 10 years and show no signs of weakness, while the average 4-year private college tuition has risen by 5.5% annually over that same period and 7% for 4-year state universities (much higher than CPI inflation). At the same time, the resources available to a typical family to fund that tuition haven’t increased much. Federally guaranteed student loans tend to stay capped for years at a time. Incomes are up modestly (roughly in-line with CPI inflation) but the weakness in housing means that home equity loans are becoming less of an option (plus they are more expensive). It sure looks like private loans will continue to get a bigger and bigger slice of the tuition funding pie. They accounted for 11% of tuition funding in 2005, up from 2% in 1995.

So yeah, I’m bullish and FMD is now one of my largest positions. At 10 times earnings, I think it’s a steal. Either future earnings will drive the stock higher or they will get bought out. I actually prefer the former because I think that the stock could run for a number of years.

Shorts

2007-04-11T13:06:00.000-07:00

The market looks very weak to me. This rebound has been unimpressive to say the least (volume, new highs, etc.), so I'm getting very interested in some shorts, especially those with exposure to housing which is in massive oversupply. Here is my short list:

MTG
NDE
CFC
AF
CTX
CHB
TOL
LEN

First Marblehead (FMD) Gets No Respect

2007-04-06T17:28:00.000-07:00

Financial publications seems to love to hate FMD. Barron's ran a piece this week with a decidedly bearish view which prompted a firm and quick response from Tom Brown. Here is the first couple paragraphs:

Jonathan Laing’s hit piece on First Marblehead in Barron’s this weekend isn’t simply another broadside attack on the company. It’s riddled with factual inaccuracies. Let me count the ways: No, losses on loans the company has facilitated are not spiraling out of control, despite what Laing says. No, the rating agencies are not losing confidence in Marblehead’s underwriting ability (just the reverse: the company got great terms on its last deal). And no, despite years of concerns of "crippling competition," Marblehead’s profitability is not under pressure. In fact, the company has profitably gained market share and improved its profit margins.

So Laing is wrong on all his key points. A reverse trifecta! This is just another example of an opinion—I can’t call it analysis—that we have been dealing with for the past two years. Jon Laing simply doesn’t know what he’s talking about.

The full report can be found here:

http://www.bankstocks.com/article.asp?type=1&id=9881345

More CCRT Thoughts

2007-04-06T12:41:00.000-07:00

Some of the bears point to John Devaney's partial sale of CCRT shares as a ominous signal, but knowing that he was facing a margin call and that he still owns a significant amount of shares makes me think the opposite. I mean, here is a guy that is an expert in buying and selling distressed securities and he's so impressed with CCRT's management that he became one of the largest shareholders in the company. As far as I know, everybody holds management in high regard, and for good reason...they have made nine deals in the past and all of them have earned nice returns.

CCRT Estimates Raised by Bear Stearn's

2007-04-05T06:29:00.000-07:00

BSC raised EPS estimates by about 10% to $4.71 and $5.70 for 07 and 08. With the stock at $32, CCRT trades at an incredible 7 times this year and 5.6 times next year's estimates. The stock typically trades at 11 to 12 times earnings. Yeah, it's very cheap. If you just put a 10 multiple on the stock and they earn $4.70, you have a $47 stock within 12 months or 47% upside from current levels. Tom Brown looks to be absolutely right in his analysis several months ago....this company has the power to increase earnings significantly throughout the credit cycle because of excess liquidity and superior management.

It's also worth mentioning that CCRT gained valuable infrastructure with the Monument deal....Barclaycard's collections and customer service capabilities. This diversifies their operations and will allow them to take advantage of additional opportunities in the U.K.

CCRT Buys Big Chunk of Monument

2007-04-04T07:42:00.000-07:00

credit card receivables at a 20% discount to face value. I continue to be impressed with how management is using its capital. Earnings estimates should be on the rise, as should the stock price.

Press release:
http://biz.yahoo.com/iw/070404/0235055.html

EBAY

2007-04-03T07:19:00.000-07:00

I bought some shares of EBAY yesterday at $33. I think the stock is highly attractive at ~21 times earnings with a 20% growth rate. This stock is trading like a consumer staple but with much stronger growth! Indications are that business is tracking very strong which could lead to an upside earnings surprise and higher consensus estimates.

The AFLAC Scam

2007-03-29T11:14:00.000-07:00

Credit Worries???

2007-03-27T09:29:00.000-07:00

Today, Merrill Lynch upgraded shares of JPM "primarily reflecting a better consumer credit outlook" than they had previously expected.

I'll say again, there does not appear to be any fallout from the subprime mortgage mess on other areas of consumer credit. This is yet another positive, albeit indirect data point for CCRT.

Ugly Housing Data

2007-03-26T08:45:00.000-07:00

Wow, the Feb 2006 data is even worse than the lowest estimates.

New house sales declined at a -3.9% in Feb to an 848,000 pace. This is the slowest rate since June 2000. The drop-off for sales and increasing starts has boosted inventories. At these levels, it would take more than one year to unwind the excessive stock of homes. Completed unsold homes are up 43.2% y/y and the median price is down -1.3%.

Non-Mortgage Consumer Debt Looks Alright

2007-03-23T12:12:00.000-07:00

Company survey reports point to slightly stronger credit card balances over the past few weeks without an increase in delinquencies. There still does not appear to be any spillover from the subprime mortgage problems into other areas of consumer credit because the job market is strong. This is obviously good news for CCRT and other industry participants like COF.

GOOG

2007-03-22T13:19:00.000-07:00

I've been picking up shares of GOOG in the 440's and there was a very nice short-term technical buy signal two days ago. I like it over the intermediate term as well.

Cramer Discusses Illegal Stock Manipulation

2007-03-21T11:59:00.000-07:00

I'm very surprised that Jim Cramer would admit to manipulation. This guy has a major god complex. See here:

http://www.youtube.com/watch?v=708wDFX28lc

Bear Stearns Likes CCRT

2007-03-21T07:21:00.000-07:00

CompuCredit announced that it agreed on March 13 to purchased 2.884 million shares in a private transaction. This transaction accounts for just over a quarter of the company’s 10 million share repurchase authorization and will reduce shares outstanding by about 5.7%. Assuming a purchase price of $27 per share, we estimate that the transaction reduces the company's previously disclosed available liquidity by about 11%. As a result of the reduction in the share count and despite some slightly more conservative assumptions regarding provisions and revenue growth we are increasing our EPS estimates for 2007 slightly. We had estimated EPS for 2007 of $4.11 per share, slightly above management’s guidance of over $4.00 per share.

Given management’s guidance that earnings are expected to be significantly higher in the second half of the year than in the first half and the risk that earnings may not increase as currently expected, we are assuming that only a portion of the benefit from repurchasing shares will be reflected in EPS. The company appears to have taken advantage of recent stock weakness and the apparent need of John Devaney (CEO of United Capital Asset Management) or his company to sell CCRT shares they owned. It appears that CCRT may have paid about $27 per share for the stock as CCRT shares traded between $25.98 and $27.87 on March 13th and between $25.52 and $27.12 on March 14th. The company will disclose the actual purchase price when it releases Q1 results in early May or when it files its Q1 10Q. Following the repurchase of the 2.88 million shares, the company still has an authorization in place to repurchase 7,115,837 additional shares. We haven't assumed any additional share repurchases as the company hadn't repurchased any since the initial authorization in May, 2006.

We view the company's decision to use a small portion of its excess liquidity to opportunistically repurchase shares positively. The company has indicated it has been examining potential investments but hasn't announced any so far this quarter. Few investments are likely to match the returns from share repurchases at these depressed levels. We think few investors believed the company would use its excess capital to purchase shares, an action which should be seen demonstrating management’s focus on generating attractive returns for shareholders.

Credit quality could deteriorate as the company’s portfolio seasons, but the current economic environment remains very positive. Low unemployment should continue to provide a benefit. Although investors appear concerned about subprime mortgage weakness, only about one third of CCRT’s customers are homeowners and at this point sub-prime mortgage industry problems are largely attributable to poor underwriting practices in 2006 and a lack of liquidity for some lenders. CompuCredit’s decision in Q3 to no longer accrue interest and fees on accounts 90+ days delinquent should have a diminishing effect on revenues and chargeoffs after Q1 after initially limiting revenue growth while still contributing to chargeoffs.

Earnings are still expected to be depressed during the first half of the year by heavy marketing spending (we estimate $150 million for the year, $90 million in the first half). EPS are expected to rebound sharply during the second half of 2007; management’s guidance is $3.00 per share in Q3 and Q4. The delay in earning growth may limit stock price appreciation, but if the company is able to finally deliver EPS of at least $4.00 per share as promised (and exit 2006 at an annual run rate in excess of $5.00 per share), we believe CCRT shares could rise beyond the P/E multiple of roughly 12x implied by our price target. We are maintaining our year end price target of $48 and our Outperform rating.

More on CCRT Share Repurchase

2007-03-20T09:15:00.000-07:00

It appears that CCRT bought back shares from a large distressed seller. See this link:

http://www.nypost.com/seven/03152007/business/subprime_lender_bet_is_68m_loser_business_roddy_boyd.htm

Here's a link to background information on Devaney:

http://db.riskwaters.com/public/showPage.html?page=195221

and here's the SEC filing link:

http://biz.yahoo.com/e/070319/ccrt8-k.html

Very good move by CCRT management IMO!

FMD Looks Juicy

2007-03-20T07:24:00.000-07:00

FMD is also showing a trading buy. I love the fundamentals and cheap, cheap, cheap valuation too!

CCRT Upgrade

2007-03-20T07:13:00.000-07:00

There is another upgrade of CCRT this morning from Matrix. I'm also seeing comments that CCRT should not be affected by the subprime mortgage contagion. This stock has fallen 10 points on credit/subprime fear alone IMO, but is now acting better. On a technical basis my chart shows a trading buy, and on a valuation basis it still looks dirt cheap to me.

CCRT Share Repurchase

2007-03-19T14:43:00.000-07:00

CCRT repurchased about 2.9 million shares on March 13th in a private transaction. Management continues to slowly but surely use its capital in shareholder friendly ways. I also noticed that Wachovia upgraded the stock the other day based on valuation, and this is the firm that thinks that credit problems will cause the company to only earn EPS of ~$3.00 this year instead of $4.00. Yeah, that's how crazy cheap this stock has gotten based on the "anything that operates in subprime is bad" hysteria. The company still has ~$600 million of excess liquidity to do accretive deals and share repurchases.

CCRT and FMD

2007-03-16T11:57:00.000-07:00

CCRT is now trading like the company is going to earn about $3.00 this year instead of $4.00. Investors are trashing everything that is subprime, period. I can understand the thrashing of subprime mortgage lenders where defaults are soaring, but it's much easier to make a minimum credit card payment than it is a mortgage payment. So far, there is no evidence that the fallout from subprime mortgages is spreading to other areas of consumer credit, but there is a lot of FEAR that it will. I'm sticking with CCRT, but will be more cognizant of the credit cycle in the future because I hate riding stocks down.

I purchased more FMD today. The stock is dirt cheap and in an excellent buying position IMO.

Still Bearish On Oil

2007-03-12T13:15:00.000-07:00

Check out these comments from my favorite analyst:

"*Our analysis of China Customs' data released today suggests year-over-year oil demand growth may be 75% BELOW our forecast for the Jan-Feb period. We're not sure how many market watchers/analysts will come to that same conclusion given most writings center on just monthly import changes.

*One oil trade publication put February's non-OPEC output about 2 mm b/d above year-ago levels. This delta is well above our own forecast. Such reports normally precede the IEA figures - which are due out tomorrow."

Wow, talk about bearish fundamentals! Maybe we will see a big drop in futures prices tomorrow?! Hopefully this report will make it clear to speculators that demand is stagnating and non-OPEC production is extremely healthy, contrary to the peak oil kooks.

Yen Carry Trade

2007-03-12T06:40:00.000-07:00

Navellier has a very good article about the Yen carry trade - how it works (borrow Yen at 0.5% and buy Treasuries at 5%), ramifications (weakens the Yen and helps Japanese exports), etc. The link is here:

http://www.navellier.com/commentary/articles.aspx

John Inch on ITT

2007-03-09T12:06:00.002-08:00

"ITT, which was once a sprawling conglomerate, has been on a dismantlement path since the 1980s. Current CEO Steve Loranger has continued this trend despite his aspiration to build a premier multi-industry company. Loranger has divested ~10% of ITT over the past ~2 years.

We favorably view ITT's leading defense and water/wastewater businesses and believe they could garner premiums to average comparable transactions. In turn, we calculate this could yield up to ~$100 per ITT share or more.

We do not expect Steve Loranger to pursue dismantlement in the next 1-2 years. However, with larger (unrelated) acquisitions likely off the table, the dismantlement writing may already be on the wall. Moreover, considering current elevated defense industry valuation multiples, the dismantlement "window" may not remain open for an extended period. At minimum, Steve Loranger could face increasing pressure to realize ITT's elevated valuation potential at a more rapid pace given the substantial premium he could realize by dismantling ITT."

This sounds very appealing with the stock trading at $60.

January 2007 Oil Demand

2007-03-02T12:56:00.000-08:00

Global oil demand growth was very weak in January of 2007, rising just ~100K million barrels per day. This may shock you, but Non-OPEC supply growth alone rose ~300k million barrels per day in January 2007. Yes, Non-OPEC supply growth alone is growing faster than global demand. That's what eventually happens in the free market when oil prices soar to ridiculous levels and attracts a ton of investment in new oil-finding equipment. OPEC will have to continue cutting production if they want to try and protect the price which will result in them losing more and more market share/power. OPEC may even lose some members who don't want to cut back which will result in even higher production. Do you see how this is bearish for oil prices? You do? Well, the market sure doesn't because oil prices are still at $60 instead of $40.

I will be on vacation through next Wednesday so I won't be updating for at least a few days. Try and have a good week without me.

Intelli-Timer

2007-03-01T08:24:00.000-08:00

Using the market-timing system from Intelli-Timer, my return for the year came in at less than 2%, and I wondered how Intelli-Timer was going to update its Web site, and continue selling its system, after such a dismal performance......Now we have the answer: My year never happened.....With no explanation, the Intelli-Timer Web site has completely revised its historical performance information......For example, the system that I followed called for one trade between June 27 and July 26, 2006, while the new "historical" performance chart on the Intelli-Timer Web site says that I made nine [!] trades during that period (my actual loss for the month was 5.66%, while Intelli-Timer says that I gained 4.5%)......Continuing with this bizarro world, the period from August 27 through September 26 was one of my best months, with zero trades and a gain of 6.35%......But no, says the Intelli-Timer Web site, based on "historical" results someone using their system would have made six trades and lost 0.3% for the month......For the entire year that I used the program, Intelli-Timer says that its system generated a return of 47%, which would be laughable were it not so brazen and infuriating......What's going on here?.....Faced with a system that was failing, it looks like Intelli-Timer has simply backtested a new system that produces dramatically better -- and totally fictitious -- results.....And now those backtested results are presented as the "historical" numbers, while the actual (and dismal) results, like mine, have vanished without a trace.....Can they really do this kind of thing? Is it legal?......The company that runs Intelli-Timer isn't registered with the SEC as an investment adviser, so they aren't subject to federal securities laws......In other words, it's a classic case of caveat emptor....As far as I can tell, there is one acknowledgment that "some information" on the Intelli-Timer Web site "is the results [sic] of back-testing," and no doubt the Intelli-Timer folks would point to that "disclosure" if they were ever challenged about the honesty of their performance presentation.....So what can I do?.....I can warn FundAlarm readers not to use the Intelli-Timer system, although I suspect that such a warning isn't really necessary......If you are considering any other market-timing system, I can suggest that you be keenly aware of the difference between real and back-tested results, and make sure that you base your investment decision on reality rather than fiction......Finally, since this item will soon reside in the FundAlarm archive, and some prospective Intelli-Timer investor may come across it months or years from now while searching for comments about Intelli-Timer, I can provide a future public service:

Source: FundAlarm

Breakdown

2007-02-27T12:00:00.000-08:00

The correction is here. Just about every single chart I look at is flashing a sell signal.

Fear!

2007-02-23T13:46:00.000-08:00

There were lots of stories today about the subprime mortgage sector blowing up, so of course CCRT falls another $2 to $33 even though they don't have any subprime mortgage debt. You should now be completely convinced that markets are not efficient or rational in the short-term. The stock is being treated like a piece of trash and is now trading under 7 times conservative forward estimates. What's that saying, "Be greedy when others are fearful." Yeah, I like that.

First Marblehead (FMD)

2007-02-23T08:59:00.000-08:00

I purchased some shares of FMD this morning for my Roth IRA. The stock has overreacted on the downside to worries about new legislation impacting their business. Tom Brown discusses the stock here:

http://www.bankstocks.com/article.asp?type=1&id=9881302

Stock Based Acquisition Strategy

2007-02-23T07:32:00.000-08:00

Alcoa (AA)

2007-02-22T13:03:00.000-08:00

Alcoa looks very interesting to me with improving fundamentals (rising aluminum prices + lower costs) and a cheap valuation of ~11 times earnings and 1 times sales. I could also see them getting bought out for $45-$50 from the current $34.80 price.

Motley Fool, Tom Brown and CompuCredit (CCRT)

2007-02-20T11:14:00.000-08:00

This is an interview with Motley Fool's Emil Lee and Tom Brown of Bankstocks.com about CCRT. I got to it from this link:

http://www.fool.com/investing/value/2006/12/27/rounding-the-second-curve-part-2.aspx

Emil Lee: Can you tell us about the bull case for CompuCredit?

Tom Brown: CompuCredit's primary business is the issuance of subprime borrowings. [It has] two main products. One is a fee-based card with a $300 line of credit, where it makes more money off fees than the net interest income. The other is at the upper end of the subprime market, where CompuCredit makes more money off the balance with a $1,000 to $1,500 line of credit. That business has grown nicely as a result of portfolio acquisitions, and primarily on the basis of organic growth.

CompuCredit has emerging businesses -- such as payday lending, subprime auto financing, and debt collection. Those businesses are growing wildly, and they're turning profitable. The real wild card is the $700 million of liquidity -- $100 million of cash and $600 million they could draw down. What are they going to do with that liquidity? If, in the next six months, they don't find anything, my prediction is they'll buy back more stock. Management and the board own 60% [of the company].

Emil Lee: It seems CompuCredit might be underleveraged.

Tom Brown: Tangible equity to assets is at about 33%; 20% is where they feel comfortable.

You can buy this company at eight times 2008 [Second Curve's estimated] earnings -- plus the excess liquidity. CompuCredit has managed earnings and GAAP earnings. This year, the consensus earnings estimate is around 4 bucks; that's the GAAP estimate. The managed [earnings] estimate, which is what Bloomberg uses, is $3.63 per share. My feeling is next year it'll do $4.50 to $5.00 per share. In general, the difference between GAAP and managed earnings is that the managed earnings acts as if securitizations stay on a company's books. This gives a more holistic view of the company.

Emil Lee: It seems as though CompuCredit has a built-in hedge -- when credit is tight, and advance rates on securitization and warehouse facilities dry up, that means favorable pricing for the debt-collection segment. What are your thoughts on this?

Tom Brown: I must be careful what I wish for! [In those circumstances], it'll be the best time for CompuCredit to be making acquisitions, and for the debt-collection segment to be making credit card receivable acquisitions [in other words, buying up bad debt] -- but it'll be the worst time for CompuCredit's stock price.

Emil Lee: Why don't other credit card lenders do this?

Tom Brown: There's reputational risk. With two-year delinquent borrowers, you have to get aggressive. That person may never pay you. Lousy collection practices affect the performing business because of word of mouth and media headlines. Another issue is that large card issuers can book gains [from selling charged-off debt] right up front. It's a way of shoring up weak earnings.

Emil Lee: Why is CompuCredit able to exploit the subprime segment better than its competition? It seems that CompuCredit's 22% net interest margin would attract competition, so is there a long-term competitive advantage?

Tom Brown: Right now, that's one of the thing I like about CompuCredit. To issue Visa and MasterCard cards, you have to be a member of the network. CompuCredit works with three different banks that house new credit card receivables. The banks that are issuers of the cards, such as JPMorgan and Bank of America, are heavily regulated, and the regulators don't like the subprime business -- that walls off competition. It's very difficult [for competitors] to serve CompuCredit's customers.

Emil Lee: CompuCredit says its loans must make sense for the borrower. Is this warranted, given the seemingly heavy fee structure and 22% net interest margins? Do you see CompuCredit's customers climbing the FICO ladder -- and does CompuCredit retain the customers that are able to improve their credit scores?

Tom Brown: CompuCredit is expending an increasing amount of its effort to retain those "moving up" customers. [CompuCredit] would really like to migrate customers from fee-based cards to balance-driven cards. It has specific rewards programs. For example, if a borrower makes timely payments, [CompuCredit] will increase the line of credit. The program works to increase timely payments.

Emil Lee: CompuCredit has only a 10-year operating history. Is that enough credit cycles to judge the company?

Tom Brown: Senior management came from the collections business, so management has a longer history of dealing with collections. When you're lending money to subprime borrowers, underwriting is more important than the economy.

Emil Lee: How do you judge whether a merger will create real synergies or not?

Tom Brown: First, we have to understand the buyer. Does [the merger] make sense? What [is the buyer] trying to do, and does what the seller wants to do make sense? I go in knowing historically that two-thirds to three-fourths [of acquisitions], from the acquirer's standpoint in banking in corporate America, destroy value. The burden of proof is on the acquirer. We know most [acquisitions] fail, so let's figure out why this is going to fail.

Emil Lee: How do you value the residual value a company retains in securitizations?

Tom Brown: We go through the assumptions -- there's enough information in the trust, such as prepayment [assumptions]. Sometimes, we need to know from management what their models are, the lumpiness with prepays -- [such as] right after graduation -- but there is data to track the actual performance of trusts versus the gain on sale calculation.

Emil Lee: CompuCredit is expanding into other subprime segments, such as auto financing and payday lending. How does this build the company's moat?

Tom Brown: Well, that's what we'll see in 2007 -- which could cause CompuCredit to be a home run. It's testing in a Texas storefront location whether it can cross-sell these services.

Emil Lee: It seems CompuCredit has recently had an uptick in charge-offs and delinquency. Is this a cause for concern? Do you think defaults will stay reasonable?

Tom Brown: I think defaults will go up. The fastest-growing part of its portfolio is the fee-based card, which has higher delinquencies but significantly higher revenue. The fee-based card is more profitable. Overall, it's a positive for profitability.

Emil Lee: In the end, it comes down to this: The stock market thinks CompuCredit is vulnerable to a credit crunch when an increasingly debt-laden borrower starts to default, spurred by things such as a possible housing downturn or a weakening economy. What would your rebuttal be?

Tom Brown: I would respond that underwriting is more important than the economy. CompuCredit is going to a higher level of earnings growth and profitability throughout the economic cycle.

Bubbling Crude Oil Update

2007-02-20T07:35:00.000-08:00

It simply amazes me that hoards of people think the futures market reflects some sort of commodity pricing equilibrium. Sure, it's the best system that we have, but it's far from perfect. A flood of hot, speculative money chasing a "story" or returns can easily generate a bubble. This isn't rocket science, it's simply greed. Here's what has happened in the oil market over the past few years.

Strong demand from India and China combined with declining OPEC spare capacity and geopolitical tensions led to higher crude prices (and justifiably so). Stories started to emerge that demand from China would continue at a torrid pace forever and that the world was running out of oil (i.e. peak oil theory). This caused a mania in the energy markets and oil prices soared from $40 to $78. The high prices generated massive investment in non-OPEC oil rigs and related equipment causing supply production to increase contrary to the kooky peak oil theorists. Now, demand is running well below expectations but the oil bugs are either blind or think/hope it's a temporary phenomenon. As a result, the futures price curve is still upward sloping from $58 to about $64 while the traditional inventory/price model says prices should be around $40.

Look at what ISI's Mike Rothman had to say today:

"* Our estimate for end-January oil storage in the OECD countries shows a month-to-month draw of 5 million barrels, which is much smaller than expected given oil supply figures.

*Using our storage estimate, world oil demand for January may have been a million barrels per day BELOW our forecast - put another way, the year-over-year growth rate looks about 70% lower than we expected.

*While we already get a lot of push back on our non-OPEC supply forecast (largest annual gain in 30 years) we think the market is also not focused on prospects for a weak oil demand environment.

*In a related sense to the last point, with crude prices still in a steep contango the data for NYMEX open interest in crude suggests we have yet to see the "capitulation sell-off" in the oil market.

*Energy equities are still trading as if the drop in crude prices is a temporary phenomenon. A look at the XLE shows stocks trading above current oil prices levels on both an absolute and relative basis.

*Weather guidance for the US sees temperatures moderating significantly to a warmer than normal levels. Essentially, a return to unseasonable readings highlights prospects for natural gas storage to end the winter at high levels."

Fundamentals are poor yet prices are still massively inflated. If that's not a bubble I don't know what is.

iShares MSCI Taiwan ETF (EWT)

2007-02-19T06:28:00.000-08:00

The intrinsic value and dividend yields are high and potential political changes and lower commodity prices are positive catalysts. Price momentum is positive too.

ComputCredit (CCRT) 4Q06 Earnings

2007-02-14T12:06:00.000-08:00

CompuCredit (CCRT) reported managed EPS of $0.40, in line with management’s preannouncement. The biggest issues during the quarter were the changes in billing practices which lowered earnings (but makes them higher quality), a focus on lower FICO customers and the $2.3 million pre-tax loss in the auto segment reflecting difficulties with a systems conversion. The conversion took up a lot of management’s time and resources and hurt sales/credit quality. The good news is that the systems issues have been addressed and the new platform is fully functional allowing for greater scale which is important given the recent acquisition of ACC.

Marketing spend is increasing significantly but that’s because management is seeing good returns on their online marketing dollar. They are also more confident in deal making right now than they were 6-12 months ago as prices have come down. I got the sense that management is very disciplined in their deals and use of capital. They are also not opposed to share buy-backs if the stock continues to trade at a low multiple and looks more attractive than acquisitions.

For FY07, management guided to EPS of $4.00 (without acquisitions) which is a bit lower than consensus and reflects the billings issues, higher chargeoffs from lower FICO customers and increased marketing spending. I think the company is well positioned to exceed $4.00 in FY07 and at least $5.00 in FY08 as investments pay off. At $35 per share, the stock trades at a compelling 8.75 and 7.0 times estimates.

The regulatory and subprime mortgage fears appear to be substantially overblown as they relate to CCRT. Management stated that about 30% of their customers have subprime mortgages but they are not seeing any adverse affects from that fallout on credit quality. Furthermore, the weakness in the subprime mortgage space may give the company an opportunity to pick up some distressed assets very, very cheaply.

Subprime Lending

2007-02-13T11:52:00.000-08:00

I noticed that many of the subprime mortgage lending stocks got whacked last week, and I can't help but think CCRT may have gotten lumped in with that mess of stocks even though the company has no mortgage exposure. The stock is discounting a lot of problems while there don't appear to be any.

Earnings will be out after the close with a conference call at 7:00 am CST.

Payday Lending

2007-02-09T11:31:00.000-08:00

It appears that Tom Brown received my email as he put out a nice report today about the economics of payday lending and how it's getting a bad rap by lawmakers. You can read the report here:

http://www.bankstocks.com/article.asp?type=1&id=9881282

In summary, it's better for consumers with a short-term liquidity problem to do a payday loan than get charged late or overdraft fees.

Payday loans are only about 9% of CCRT's revenues but they are hoping to grow this business.

CompuCredit (CCRT) Update

2007-02-07T13:44:00.000-08:00

Last Friday, CCRT announced the acquisition of ACC Consumer Finance along with $275 million of subprime auto finance receivables and a $195 million auto loan portfolio. Not many details were available, but CS raised EPS estimates by 10 cents to $4.35 and $4.95 for 2007 and 2008 respectively. CS also estimates that this acquisition represents about 10-15% of CCRT’s excess liquidity, so similar deals could be significantly accretive to earnings and yet the stock is still selling at about $36 or just 8.2 times 07 estimates.

One reason the stock has a depressed multiple is because 8.72m of the 20.77m floating shares (42%) have been shorted. This is an extremely high short interest to float ratio. If the company comes through with their projected earnings and provides reasonable guidance after the close of market on Feb 13th, I suspect the stock will have a nice rally, maybe even a huge rally in the event of a short squeeze. I can only speculate as to why the shorts are attacking this company, but my guess is that they see a lot of risk in the regulatory environment. Payday lenders in particular are receiving a lot of scrutiny by lawmakers. Hopefully the politicians will not destroy industry profitability.

Energy Markets Still Frothy

2007-02-07T07:26:00.000-08:00

More good stuff from ISI:

"* Unknown to most all market watchers, Angola's entry into OPEC last month came with a proviso that the African producer's supply projects will be "grandfathered" and not subject to quota restrictions.

*We continue to view Angola's supply as being effectively part of non-OPEC. The country's production growth this year will take output from a wee under 1.5 mm b/d in December to just over 1.9 mm b/d by the end of '07.

*The total non-OPEC growth we see for 2007 should ease market concerns about spare production capacity. A dissipation of these fears is expected by us to eventually help lever down crude prices.

*Even with arctic air, distillate stocks are expected to draw by a smaller than normal volume. We continue to focus on total US demand numbers which turned decidedly weak in December."

So, in other words, fundamentals stink!

Some Attractive International ETF's

2007-02-06T14:30:00.000-08:00

The iShares Taiwan (EWT) and Malaysia (EWM) funds still look very attractive with excellent value and momentum characteristics. It's not too late to buy them IMO.

Japan is looking overvalued and is draining liquidity, so EPP (Pacific ex-Japan) is probably my favorite for broader international exposure. EEM still looks pretty good too but the rally is getting a little long in the tooth.

Natural Gas Prices Too High

2007-02-02T06:37:00.000-08:00

From the good guys at ISI:

"* Our updated analysis of the "carry out" - where natural gas storage will sit come April - suggests inventories will be about 1.73 trillion cubic feet or almost 50% above normal.

* That figure assumes normal withdrawals during February and March. If we look at a scenario where draws are much larger than normal, stocks would still be 25% above normal.

* With inventories high, come spring, storage gas effectively has to compete with wellhead supply - a phenomenon called gas-to-gas competition.

* For prices, we see the storage situation essentially manifesting in a 12 month natural gas strip price of $6.75-$7/MM BTUs as opposed to the current figure of $8/MM BTUs.

* For equities, this means we still favor the idea of being short (or underweight) stocks leveraged to natural gas prices with one vehicle being the American Stock Exchange Natural Gas Index (the XNG).

* The XNG shows a very strong positive correlation to the one year-strip price. As of last night's close, the XNG is trading off a $10 strip price, suggesting there is about 30% downside potential."

The cold weather has caused a short-term rally in energy stocks but they look bad across the board. Oil stocks are trading like crude is at $70 and gas stocks are trading off a $10 price.

FundAlarm.com

2007-02-01T08:18:00.001-08:00

A friend recently turned me on to FundAlarm.com, an excellent site that ranks mutual funds and uncovers/reports the slimy industry's secrects along with various corporate governance issues that invetors need to know about. The commentary is updated on the first day of each month and is worth a read.

Chavez Just Destroyed Venezuela's Economy

2007-01-31T11:22:00.000-08:00

See this link: http://news.yahoo.com/s/nm/20070131/ts_nm/venezuela_chavez_dc_8

Nationalizing an economy is a sure death blow. It will cause shortages, inflation and all other kinds of dislocations. Money is fleeing the country like crazy and I suspect many of its citizens will do the same, if they are able to. I also anticipate that he will, at some point, be assassinated for causing the domestic economic depression which will spark a huge rally in its stock market. It will be similar to a stock rallying when a horrible CEO steps down as investors see better times ahead.

Navellier

2007-01-29T06:34:00.000-08:00

The weekly Navellier Marketmail report is generally worth a read as they hit the main points. Here is a link:

http://www.navellier.com/commentary/weekly_marketmail.aspx

The timing of Bush's announcement to increase the SPR does not seem that strange to me though as in came just before the State of the Union Address where energy was a major topic. Several countries are increasing their oil reserves or have plans to, namely the U.S., China and India. While it's psychologically bullish for oil prices in the short-term, significant inventory building is bearish longer-term. Inventory building is basically artificial demand. It's similar to a technology company stuffing the channel except the inventory doesn't become obsolete.

Exxon (XOM)

2007-01-23T14:40:00.000-08:00

I expect Exxon will run into resistance right here at $75. The fundamentals have deteriorated a lot with oil falling from $78 to $53 and refining margins contracting quite a bit from year-ago levels, yet the stock is only about $4 off its all-time high. One analyst I know makes a good case that, at these levels, Exxon is trading like oil prices are going back to $70. Earnings estimates will have to come down so the stock is not as cheap as it looks on a forward P/E basis. I think it's a value trap and wouldn't be surprised if the stock is flat to down over the next 2 to 3 years.

Richard Young Gets It Right!

2007-01-23T09:13:00.000-08:00

Veteran investor, Richard C. Young, understands risk management. In his latest Intelligence Report he lists some risky areas that are priced like Blue Chip investments. They are: China, India and Russian stocks (high P/E ratios), emerging market and high-yield corporate bonds (very low credit spreads), and oil (inflated futures prices).

You know that I’ve been all over the bubble in the oil futures. Here is what he said about the positively sloped Nymex Oil Futures Curve:

“When a futures curve is positively sloped, investors are willing to accept negative “roll yield” for the privilege of gaining exposure to the commodity. Historically, the oil futures curve has been negatively sloped, providing investors with compensation for taking commodity price risk. Investors have become so complacent with commodity price risk that they are now willing to pay for it.”

That’s well said, investors are paying up for risk and it should be the other way around.

Weakness in Reinsurance Stocks

2007-01-22T11:44:00.000-08:00

The following information does not seem to be well known, so the reinsurance stocks like RNR may have some additional downside even though they look pretty inexpensive. Perhaps the best time to buy them is when this news becomes widely disseminated and everybody freaks out.

Details of Expected Changes To Florida Hurricane Catastrophe Fund -- RNR Appears Most Exposed. Property reinsurance stocks such as RNR (2-EW, $52.81) have been hurt recently in our view based in part on expected changes to the Florida Hurricane Catastrophe Fund that would crowd out private market reinsurers from offering coverage at the low-and-high ends of this facility. We believe this is because Florida's Governor Crist is pushing hard for rate relief for buyers of Florida homeowner's insurance. Also weighing on the reinsurers, in our view, is exposure to European winter storm Kyrill, which catastrophe modeler AIR Worldwide ests could result in insured damage of $5-$10B. Based on pending legislation in Florida, it appears increasingly likely that Florida private market reinsurers (including RNR) will be pushed out from offering residential property catastrophe reinsurance coverage. Based on our conversations with industry lobbyists, our understanding is that this legislation is highly likely to pass. In 2006, the Florida Hurricane Catastrophe Fund (FHCF), a state funded residential insurance facility, provided reinsurance coverage to primary homeowner's insurers for between losses of $6B - $16B with 10% coinsurance. In 2007, the proposed FHCF coverage is substantially increased to cover losses of $3B - $35B with 10% coinsurance. Previously, the increased coverage was provided by the private reinsurance mkt. As a result, the private reinsurance mkt in 2007 will likely write much less reinsurance coverage for residential exposures in Florida. Further, primary homeowner's insurers like Allstate (ALL, 2-EW, $63.00) are likely to be required to pass along savings from reduced reinsurance costs (now estimated at about 2% rate-on-line, a substantial reduction) to their customers. Our view on the reinsurance stocks with substantial Florida exposure like RNR is that the anticipated legislative change in FHCF coverage could hurt its premium volume and underwriting results in years with light Florida hurricane losses. RNR currently trades at 1.5x our 4Q06 book value est of $34.15, which is only slightly below the long term median multiple of 1.6x.

Souce: Lehman

CCI Breaks Out on Big Buyback

2007-01-19T07:36:00.000-08:00

I like the chart and the cell phone capacity growth story.

More on Black Gold and Contrarian Indicators

2007-01-19T07:07:00.000-08:00

I caught another interview of Boone Pickens yesterday and I couldn’t help but laugh. He’s predicting $70 crude by year-end 2007. Yeah, right Boone - keep those blinders on buddy. Demand in the latest week was down -3.5% year-over-year, non-OPEC production is at a 30-year high and growing while OPEC is freeing up spare capacity. There is no sign whatsoever that world oil production is even close to peaking. Heck, Saudi is even canceling projects to bring more capacity on line because inventories are so high. To make matters worse for energy stockholders, the XLE has not yet fully discounted the drop in crude as it’s only off 11% from its high while WTI is off about 35%.

Besides closely and objectively looking at the supply/demand picture for oil and the absurd amount of hot money flowing into commodity derivatives and energy sector funds compared with history, there were a couple excellent contrarian indicators that suggested oil prices were (and still are) in a bubble. First, I was receiving several pieces of junk mail daily regarding “the next great oil/energy play” or similar. Secondly, energy stocks were all the talk at cocktail parties over the last year. It was somewhat reminiscent of tech stocks in 1998 and 1999. Always keep your eyes and ears open for information.

Oil Pain = Tech Gain

2007-01-16T18:21:00.000-08:00

It's going to be very difficult to make money in energy stocks over the next couple years outside of playing a short-term bounce. Not only will the stocks follow the commodity price lower, but now you're going to see a swarm of lowered earnings expectations and in some cases, dividend cuts. I don't think I've ever made money on a stock with declining earnings and dividends. To make matters worse, there is still a few trillion dollars of hot money in the commodity sector. Now that the sector is no longer working, that money will start flowing to other areas. My guess is that it's starting to flow into growth sectors like technology and biotech. That's what the charts are saying anyway. This is a tend that could easily last one or two years.