In Search of the Perfect Investment

Europe is reeling again. Spanish bond yields are through the roof. Governments in trouble — Greece, Spain, Italy  — are cutting their departments, their programs and hence their expenses, putting their economies into deeper recession. Very painful. Will increasingly hurt the sales and earnings of big U.S. firms with foreign presence. You see McDonalds?

The Euro is down to $1.21 and will undoubtedly hit par with the U.S. dollar before long. That will make BMW cars and European vacations mercifully cheaper. I’m not shorting the euro though I’ve been tempted since it was above $1.30. I’m afraid of forex. Too many alligators in that pit.

Apple reports Tuesday evening. There are estimates and estimates. Some analysts believe Wall Street earnings estimates are far too low. Brad Kenagy estimates $12.73 in EPS versus $10.38 for Zacks and $11.04 for Wall Street’s whisper number. I hope he’s right. I’m long Apple. Read his piece here. The iPhone 5 will be out in October. I will undoubtedly upgrade my iPhone 4.

Stock investors play defense, says a piece in today’s Wall Street Journal. Investors are buying dividend paying stocks, like telecommunications, utilities, healthcare and consumer staples. I think this mini-booom has run its course. For the Journal’s piece , click here. I still prefer mortgage REITs , like NLY, AGNC, MITT, and ARR.

Most people haven’t saved enough for retirement, says a professor of economics. It’s pretty depressing. Click here.

I’m still short Arch Coal.

The bear case omes from a web site called Debris Publshing.

BEAR CASE AGAINST ARCH COAL

+ Three-year average earnings are much weaker than five-year average earnings;

+ The company’s excess depletion tax benefit is much larger than its peers. Currently, ACI’s reported net income is improved by income tax benefits;

+ Issuing shares above book value boosted bm EPS in 2011, but in years prior, bm EPS exceeded reported EPS due primarily to hedging activities and pension benefits;

+ TTM interest coverage was only 1.14. Three-year average interest coverage is only around 1.5;

+ Three-year average simple FCF was a meager $181M despite 10-year peak realized coal prices per ton;

+ $515M of indebtedness under credit facilities, and $451M of senior notes coming due in 2013;

+ Five-year average gross margin, net margin, and ROSTCE are significantly weaker than peers;

+ The ICG acquisition may not have an immediate impact on net income and cash-flow. Worse, it may hurt such metrics on a per share basis;

+ Coal prices may remain depressed given the negative outlook of certain economies around the world (e.g. China and Europe); and

+ If three-year average earnings on a per share basis remain flat for the next few years, then shares do not appear cheap.

CONCLUSION

Should coal prices return to 2011 levels sooner rather than later, investors should expect a huge swing in the market price of the highly-leveraged ACI. However, we think it prudent not to assume such a bounce. Instead, investors should determine if the company is capable of withstanding an extended period of depressed coal prices.

Given the level of ACI’s debt coming due over the next three years and its incredibly weak interest coverage, we do not believe ACI is stable enough, financially, to warrant an investment. It is possible that the acquisition of ICG will improve ACI’s recent lackluster operating performance, but we are not willing to bet on it.

New technology tested. This thing works. Background: I’m obsessed with backing up. This thing is called a SATA hard drive duplicator. Open your PC, pull out its hard drive (spinning or solid state). Pop it into this thing. Pop in a an identical or larger drive (it can’t be smaller). Hit the start button. Twenty minutes later you have an exact, bootable clone of the drive from your PC. Bingo a full backup, which you can drop into your PC if something goes wrong with your main drive, or you install new software that screws up and you want to go back to something that worked..

This weekend I tested this gadget on both Windows XP and Windows 7 drives. It worked flawlessly. I’m sure it will work on Apple computer drives also. It works on both 2.5 and 3.5 inch drives. It’s $90 a Cyberguys. Worth every penny for your peace of mind.

I only clone my drive perhaps once a month (or before I add new software), since it’s a pain to remove the hard drive, load it up, etc.

For day-to-day working file backup, I’m playing with something call FreeFileSync. So far, not as painless as I’d hoped. But, after you’ve done your first backup, it works fine Reason: external and internal Windows drives use different file writing schemes (don’t ask me why, ask Microsoft) and hence confuse each on the dates of the files. FreeFileSync fixes this after its first backup.

Depressing weekend reading:

+ A Fancy Financial Adviser Title Does Not Ensure High Standards. Click here.

+ Not all investors are equal. Click here.

+ The spreading scourge of corporate corruption. Click here.

+ Into the Bailout Buzz Saw. by Gretchen Morgenson

IT might seem remarkable that there’s more to say about our late Bailout Age. But there is more – a lot more.

Nearly four years after Washington began its huge rescues of banks with taxpayer dollars, an important player in this, one of the great financial dramas of all time, is offering a damning account of how the Bush and Obama administrations handled the whole episode.

He is Neil Barofsky. Remember him – the man whose job it was to police the $700 billion Troubled Asset Relief Program? And his new account, a book titled “Bailout” (Free Press), to be published on Tuesday, is a must-read.

His story is illuminating, if deeply depressing. We tag along with Mr. Barofsky, a former federal prosecutor, as he walks into a political buzz saw as the special inspector general for TARP. Government officials, he says, eagerly served Wall Street interests at the public’s expense, and regulators were captured by the very industry they were supposed to be regulating. He says he was warned about being too aggressive in his work, lest he jeopardize his future career.

And so Mr. Barofsky, who formerly prosecuted Colombian drug lords as an assistant United States attorney in New York City, is schooled in the ways of Washington. One telling vignette comes early on in his book, when he is advised by inspectors general in other agencies about how to do his job.

As Mr. Barofsky writes, he had assumed that his assignment to oversee TARP meant that he should be fiercely independent from the Treasury Department, and vigilant against waste, fraud and abuse. But after canvassing other inspector generals for guidance, he writes, he learned of different priorities: maintaining and possibly increasing budgets, appearing to be active – and not making enemies.

“The common refrain went like this,” Mr. Barofsky writes. “There are three different types of I.G.’s. You can be a lap dog, a watchdog or a junkyard dog.” A lap dog is seen as too timid, he was told. But being a junkyard dog was also ill-advised.

“What you want to be is a watchdog,” he continues. “The agency should perceive you as a constructive but independent partner, helping to make things better for the agency, so everyone is better off.” He also learned, he says, that success as an inspector general meant that investigations come second. Don’t second-guess the Treasury. Instead, “focus on process.”

Thus the collision course was set between Mr. Barofsky and a crew of complacent, bank-friendly Treasury officials. He soon discovered that the department’s natural stance of marching in lock step with the banks meant that he had to question its policies and programs repeatedly to ensure that taxpayers weren’t at risk for fraud and abuse.

“The suspicions that the system is rigged in favor of the largest banks and their elites, so they play by their own set of rules to the disfavor of the taxpayers who funded their bailout, are true,” Mr. Barofsky said in an interview last week. “It really happened. These suspicions are valid.”

…Finally, Mr. Barofsky joins the ranks of those who believe that another crisis is likely because of the failed response to this one. “Incentives are baked into the system to take advantage of it for short-term profit,” he said. “The incentives are to cheat, and cheating is profitable because there are no consequences.”

Despite all of this, Mr. Barofsky ends on something of a positive note. Meaningful changes to our broken system may finally come about, he writes, if enough people get angry. His conclusion is this: “Only with this appropriate and justified rage can we sow the seeds for the types of reform that will one day break our system free from the corrupting grasp of the megabanks.”

That’s not much of a silver lining. But I guess it’s better than none.

Read Gretchen’s full piece here.

Favorite latest New Yorker cartoons:

Harry Newton who spent half the weekend reading the second book in  the 50 Shades Of Grey triology. I am impressed to see it number 1, 2 and 3 on the New York Times trade iction best-seller list. confirms that 30 million others are as obsessed as I am with this engrossing, fun read. We are convincing ourselves we are all learning something.