Monday, October 12, 2009

More Random Thoughts

These pieces could have really been three separate posts but I chose to have one bigger, disconnected, less-readable chunk: looking at informational asymmetries (again), taxation and financial news/analysis sourcing via blogs.

Informational Asymmetries

These are almost omnipresent in any transaction: stock sales, used cars, dating, you name it. I wrote about them a couple of times earlier this year, one, looking at GE's attempt to unload a portion of their CRE portfolio by targeting 1031 money, and, second, looking at insider sales to insider buys as early as May of this year (the ratio sells/buys is still very unfavorable for stock buyers, if viewed as an indicator). My view is that you should be paranoid about them: like the old saying that if you've played on the poker table for a while, and you still can't figure out who is the tuna...

So, on to today's news from PE-land: Blackstone (NYSE: BX) is up a cool 7.50% today as Schwartzman announced that the company is in the process of selling 5 holdings and IPOing another 8. "Trader Mark" has a nice summary of the news from the FT and the WSJ.

What does this imply for Schwartzman's/BX's views on where the markets are headed? While PE shops are natural sellers because they have to return the money to the LPs eventually, this also makes them expert sellers.

Kenny Rogers sings "if you're gonna play the game, boy, you gotta learn to play it right. You gotta know when to hold 'em, know when to fold 'em, know then to walk away, know when to run."

Swartzman clearly knows how to "play it right." BX itself was IPOed at the top of the market in '07, and went on to tank 90% within 1.5 years or so. We're not talking canned tuna here, we're talking tuna tartare.

So, without knowing what the companies in question are, I would be careful. Buying an asset after the locusts have had their way with it may mean very, very slim pickings. Or, as Dasan says, "I'd stick with quality."

Update 1 10/14/2009: PE HUB has a good overview of recent PE IPO exits, titled "RailAmerica Crashes on First Day of Trading." In part, "A number of private-equity backed IPOs this year have raised less money than expected and fallen in their debuts in what could be a warning for big-name IPOs waiting on deck not to overprice their deals even as they seek to take advantage of the market rally to unload portfolio companies." AlphaNinja has a good analysis on why RA was not hot: "Because you can't even BACK INTO numbers that justify the share price. This company looks like they could earn 16million, or 39cents per share, if they were lucky. How about we pretend we're in fantasyland and DOUBLE that earnings number, getting to 77cents. A PE of 15 on that fantasyland number gets to 11.50 per share, or 16% below where the stock closed. And remember that's in fantasyland. Last time they did 80cents a share in earnings, interest expense was $20million versus the current $70million, and they had a GAIN from taxes. Over $700million in debt, versus the current stock market value of $590million. Their interest coverage ratio is at about 1.8. And keep in mind that Fortress wouldn't be peddling this IPO without pulling every last cent they can out of the company's cost structure -->> meaning operational improvements aren't going to materialize. All they can hope for is carloads returning to higher levels, but even then I can't back into this stock price." Just like I wrote above, "buying an asset after the locusts..."

Update 2 10/15/2009: Now the FT is reporting that Permira has promised to "return a wall of cash" to their shareholders. Are they thinking of a cash wall Weimar-style? Otherwise, guess where that cash would be coming from... And pay no attention to the 140 P/E behind the curtain.


There has been some noise about the introduction of a VAT tax in the US. I would be all for it, if it replaces income and payroll taxes. Unfortunately, it will not, it will be just another tax on top of all other taxes that we have. So that got me thinking about the number of "instances" of taxation in the modern world. The list is by no means exclusive, of course:

Direct/visible instances:
(1) Income taxes: federal, state, local
(2) Other payroll: FICA, Medicare
(3) Sales tax
(4) Real estate taxes (direct or via renting)
(5) Taxes collected via utilities (electrical, phone, cell phone, water, etc.)
(6) Taxation on investment activities: capital gains, dividends, interest income

(1) Corporate income (federal, state, local) built into any purchased product or service, at every step of the way, "from farm to store"
(2) Excise taxes (federal, state, local) for certain products (gasoline, diesel, alcohol, cigarettes)
(3) Transportation-related: (this is in addition to state taxes, somehow they need more money): tolls, registration, insurance surcharges for the state on top of the premium, driver's license fees, higher parking sales tax, street parking permits
(4) Recreation-related: additional fees and sales tax on car rentals, hotels, airplane travel, state parks, "facility fees" even for public arenas, and the like
(5) Permits and licensing: anything from burn permits to "cosmetologist" licenses
(6) Import duties
(7) More subtle compliance taxation: lawn mowing, building height restrictions and other similar regulations
(8) Educational taxation: tuition (outpacing inflation) charged by tax-exempt institutions operating on public property, receiving huge support from the federal and state governments

And, yet, somehow nearly all states are out of money, and the federal government is likely to hit a 40% deficit this year.

"You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity . . . . What one person receives without working for, another person must work for without receiving . .. . . The government cannot give to anybody anything that the government does not first take from somebody else . . . .. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is the beginning of the end of any nation . . . .You cannot multiply wealth by dividing it." * Adrian Rogers, 1931*

Blogs/Newsfeeds Thoughts

One of the nicest web 2.0 advancements for me has been newsfeeds and blogfeeds: I subscribe to a good number of them via Google Reader: the aggregation in one place makes it very easy to keep up with numerous sources without having to go out and visit those individually (unless their newsfeed is not "full-article", one of the annoying approaches to get traffic. Just put ads in your feeds as well, people.

Here are my top business reads, ranked by Reader by # of read articles. I am skipping over the news feeds (like Reuters, CNBC, Y! Finance, PE Hub, Robert Amsterdam and others):

(1) Clusterstock: this is Henry Blodget's production. Yes, that Henry Blodget. They are a news-focused site, with little to no analytical content. Every once in a while there is something more thought-provoking or "breaking news."
(2) Seeking Alpha: an aggregator site with low-to-no quality control. A number of contributors regurgitate news/basic analysis. Per Reader, I have read only 10% of the articles there. In fact, it is less because SA does not have a full article feed, which, as I mentioned above, is rather annoying. On occasion, SA does have great things and I have found and subscribed to a good number of authors via SA.
(3) Zero Hedge: ZH has a large number of quality contributors and is rather well plugged-in. Whether or not every bombastic conspiracy theory presented there resonates with you, it is well-worth the reads.
(4) The Pragmatic Capitalist: quality insights
(5) Dealbreaker: the Wall Street gossip site; they are often the first ones to break substantial news
(6) Market ticker/Denninger: great analysis, often
(7) Slope of Hope/Knight: technical analysis/patterns focused; he seems to have a great following.
(8) The Big Picture/Ritholz: some hits, some misses there
(9) AlphaNinja: good fundamental analysis
(10) Fund My Mutual Fund: investing is pure technicals but he also has some pretty insightful fundamental analyses there
(11) Calculated Risk: this is a well-known, heavy-weight RE blog
(12) Davian Letter/Dasan: I read mostly the Dasan daily blog, which focuses on tech and gaming. Rare find to see an independent thinking, experienced buy-side guy sharing his thoughts, no-holds-barred. There is a more in-depth newsletter which, unfortunately, is bundled with the other paid subscriptions they've got, and is not available as a stand-alone.
(13) Felix Salmon: a financial journalist/blogger. He has some fairly unique themes, like the business of arts, third-world sovereign debt defaults and others.
(14) Credit Writedowns/Harrison: great both for analysis and good international links collections via
(15) The Reformed Broker: again good analysis
(16) The Daily Reckoning: independent views on the markets
(17) Trader Feed: probably the best site on trading psychology; a real treasure-trove
(18) Mish: excellent analysis, not afraid of throwing punches around; probably the best-supported deflationary viewpoint
(19) Simolean Sense: he finds great information around the web, not only on finance; if you view yourself as a polymath even to a small extent, he's for you
(20) Naked Capitalism: has been a bit irregular recently with the author working on her book (is everyone writing a book nowadays?); otherwise thoughtful analysis; her excellent pensions contributor moved over to ZH
(21) Coyote Blog: great writings on various topics from a former Princeton/HBS/McKinsey guy, now a business owner
(22) Skeptical CPA: digs around for good quotes with some commentary; not PC at all
(23) Across the Curve: frequent updates from a "true" fixed income guy
(24) The ETF Corner: technical analysis of ETFs; have not followed him long enough to have an opinion
(25) Rolfe Winkler: seems less insightful than before, now that he's with Reuters

Reader ranks them based on number read so there are a quite a few quality blogs that post less often so the brute read article count is substantially lower, even though the % read is much higher than some of these.

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