Josh Stern

An Unexpected Bright Spot for TV Advertisers in China

XFML is a stock that fits squarely into the category of advertising in China. The company is not very shareholder friendly however and has fallen from over $10 to under 50 cents today. It will probably bounce at that price, but isn't a long term buy until mgmt. focuses on growing shareholder value as the measure of performance instead of focusing only on growing revenue.

When Stocks Go to Zero

I use screens to find stocks that are cheap by many metrics including the ratio of enterprise value (EV) to free cash flow, typically finding companies with EV that is much lower than their market cap due to lots of cash on the balance sheet and little or no debt. And I can tell you from experience that holding such stocks has been an exercise in pure pain over the past few months. From a rational POV, all the stuff mentioned in this article is important and may matter in the future, but so far it hasn't mattered one iota in the Panic/Crash of 2008. There are lots of small companies selling for less than cash, and they just keep going down too.

Why I'm Worried About China

In earnings reported over the last two months, results from domestic focused Chinese companies are holding up a lot better than the overall market while the stocks are doing a lot worse than the overall market - a good percentage are posting huge year on year gains while the stocks are down 50-90% and trading at outrageouly low valuation levels relative to trailing earnings/sales/cash flow/liquid assets. At the same time, many domestic facing Chinese companies reported blowout earnings, though many also cautioned about a sudden demand drop in October that clouded near term forecasts. From everything I've read, the lack of bank lines of credit for importers continues to be a huge problem for international trade and hurts Chinese exporters and manufacturers. At the same time, this factor is presumably temporary and causes indices like the Baltic Dry to severely underestimate even current low cyclical end demand for dry bulk shipping.

Taking all of the above together, I see the category of being a domestic facing Chinese company as currently a big investment plus when looked at purely from a macro POV. Bears counter that they think fraud is much more widespread. I don't see fraud as being plausibly common enough to come anywhere close to making up the huge discount in valuations these companies are getting now. I'd suggest instead that they deserve some discount because the immature investment culture tends to result in mgmt. that sees investors as more of a source of potential/past funding and less like actual owners of the company. As a result, I don't see valuations getting to par until dividend paying, share buybacks, and corporate buyouts become much more common than they are at present. But valuations are so compressed that Chinese companies still represent excellent opportunity for investors with longer time horizons.

Comparing Valuations in China and the U.S.

I use screens as an initial method to find companies with little or no doubt, lots of cash, and trading at multiples of 1x-4x cashflow and 0-1.5x revenue. A very large portion of the companies fitting the description these days are microcap China based ADRs. It's very common over the last month for these companies that are already down 50-90% to report strong earnings and a decent outlook and then turn around and go down some more the next day. The "reason" for that? It's a bear market...almost by definition everyone is skeptical of everything they can imagine to be skeptical about, and then some. And the investors who are not inclined to be so skeptical are out of cash or facing redemptions. Baskets of these stocks will be outstanding long term investments, but the timing of how long that will take is anyone's guess at this point.

Why Stock Market Volatility Is Perfectly Natural

Investing based on rational assessments of valuation suggests forming such estimates on a bottom up basis for each security, but all of the anecdotal evidence I come across suggests that the percentage of investors/traders who attempt to do that and use it to drive their investing decisions is extremely small - maybe 10%. So discussion of how reasonable people can often disagree about valuation seems moot, because most people focus instead on getting ahead of the buy/sell decisions of other traders using whatever heuristic tools they believe will be most effective to do that - e.g. technical analysis at the individual security level, technical analysis at the index or sector level, historical analogy, theories of market cycles, gaming news flow, etc.

Oppose the Treasury's Bailout Plan

I largely agree with the editorial, especially with regard to opposing the unchecked expansion of powers, opposing the insufficient haircuts for the sinners, and skepticism about the govts. ability to avoid getting fleeced. But as an alternative to insisting that the govt. could only buy assets from firms in liquidation, I think it would be worth exploring whether the govt. could use its powers to establish whether the assets in question are really being incorrectly priced by the trading markets, with the idea of buying them at some haircut to the "objective fair price". But how to do that? One idea is that the objective fair price is what a buyer would pay in a private sale if they had enough capital and enough information. So perhaps the govt. could create some kind of a huge private bazaar where adequate info on each security was available and private buyers could bid to establish what they would pay for fractions of the securities. With those prices established, the govt. could then set a final price so that they buy 95% at a haircut to the private buyers price and the private buyer gets their 5%.

Fund Manager Peter Siris Spots Gold in China

In the case of CPHI, they have the following comment on late payments from their 10Q, also echoed on conference calls:

"As to the peculiarity of the Chinese pharmaceutical environment, defaults in payments to pharmaceutical companies by state owned hospitals are a normal phenomenon. Over 90% of our drugs are sold to state owned hospitals, the greater our business with the hospital, the more payments are defaulted, although in actual fact, all the defaulted payments are eventually paid, it is only a matter of time."

A Closer Look at the Treasury's GSE Preferred Stock Purchase Plan

deadwood, I believe we are "bailing out" the GSEs primarily to keep the spread between 10yr. T-bonds and mortgage backed securities from further widening, possibly by a lot, which would result in higher mortgage rates and even larger declines in home prices than what will otherwise occur, resulting in even more homeowner defaults and bankrupt financial institutions.

What you point to I believe is a risk of doing this, that T-bond yields will rise and the U.S. currency will decline

A Closer Look at the Treasury's GSE Preferred Stock Purchase Plan

Oops, typo. I meant to write above that it always seemed obvious to me that the govt's implicit guarantee for the GSE's would apply to the debt and *not* the shares, or at least the debt in preference to the shares.

A Closer Look at the Treasury's GSE Preferred Stock Purchase Plan

Where I can find estimates of the absolute and relative amounts of GSE preferred, common, and debt that is held by various financial institutions?

I'm a little surprised by Patsy's suggestion above that U.S. banks hold a lot of preferred stock relative to the size of their GSE debt holdings, and I'd like some pointers to research on this topic.

Beyond that, I'll offer that it always seemed obvious to me that the govt's implicit guarantee for the GSE's would apply to the debt and the shares. I'd have a hard time imaging it otherwise no matter who were the holders of each type. But if it was actually true that banks currently hold a lot of preferred relative to their debt offerings that would be worrisome.

Obama Is Bad for the Economy - Barron's

The current issue of Barron's includes a much better article on tax policy by Gene Epstein entitled "When Is a Tax Cut Really a Tax Hike? Usually" which points out that since all Federal expenditures must eventually be matched with revenues from somewhere or else devaluation of the currency, low tax advocates would do better to focus on controlling spending. Epstein says that Democrats and Republicans alike have failed to do that, but the graphs in the article showing the growth of spending as a percentage of GDP over time make it clear that percentage based Federal spending has generally declined under Democratic administrations (going back to the early 1960s) and generally risen under Republican administrations.
s.wsj.net/public/resou...

Why Every Investor Needs To Have a China Investment Strategy

We all know that when an entire index drops by more than 20%, there are often a lot of small fry that get anonymously crushed. Not surprisingly then, there are a whole bunch of Chinese micro-cap ADRs with low to zero debt and trailing or forward PEs (among those with analyst coverage) in the 3X-8X range. For example:

CAGC CHCG CNOA CPHI CYXI FUQI GFRE LTUS QXM SORL SUTR XIN XING

In the case of these companies, the question of when China will slow and by how much is somewhat moot since they are already selling at distressed prices.

Bond Expert: Monday Wrap

Beyond the sanctuary aspect, the dollar is doing better than expected vs. the Euro because Trichet is humming a happy tune while he drives Europe over the cliff.

Is the Equities Party Over?

Congratulations. It really takes some big balls to make a predictions based on a trendline where you show the data that was used to fit the trend and the reader can clearly see from your graph that the fitted slope is much lower than it would be without data from 1800-1850.

Why the E*Trade Shorts Have It Wrong

The ETrade model of combining a fully web-enabled electronic bank and discount brokerage in one entity offers a lot money management time convenience and cost/interest savings. Highly recommended even to traders who place most of their transactions at another brokerage.