Let the record show that I was talking about AOC before today. Stock is up nicely on earnings. Will take a look and see. Of course in this market up 7% is peanuts, and it could be down a bunch before end of day.
Key point of interest is if they echo comments from insurers on maket conditions, and update on Benfield acquisition.
Update: reading transcript of AJG call, management did not point to any price increases apart from marine. So that is a bit of damper on the hard market hypothesis.
Friday, October 31, 2008
Thursday, October 30, 2008
LM
LM is up almost a 100% since it bottomed at $11 probably a few days ago. I had not been following the stock closely but reading the transcript, valuation metrics were eye popping cheap. 0.25% AUM for example.
Concerns are around capital to absorb SIV issues, but this is a stock that bears watching as a market rally will provide jet fuel to this one given valuation.
One to watch. I will try to look more deeply into this one. I should be getting laptop tomorrow and then access to bloomberg. I may have to shop around for Excel but will be up and running next week. Hopefully will also have my files etc.
Concerns are around capital to absorb SIV issues, but this is a stock that bears watching as a market rally will provide jet fuel to this one given valuation.
One to watch. I will try to look more deeply into this one. I should be getting laptop tomorrow and then access to bloomberg. I may have to shop around for Excel but will be up and running next week. Hopefully will also have my files etc.
Investing in financials
Clearly the financials landscape still has many pitfalls, just look at HIG today. Have not heard the earnings call, but clearly concerns must center around either further significant dilutive capital raises and/or liquidity/ratings agency actions. Down 33% wow!.
So, my focus at present is not to be a hero and avoid the riskier names. Clearly if you bought a basket of those some will have stupendous upside, but it does seem casino like at present.
With that said, one still either has to take some balance sheet risk with most likely relatively stable earnings (ACE, CB, TRV), or avoid balance sheet risk but accept greater EPS volatility (TROW,BEN, MA). A group that I believe has neither balance sheet nor much EPS volatility are the insurance brokers (AOC, MMC). Both also have cost cutting opportunities and will be beneficiaries if insurance rates stop declining. Of course, valuation is not super cheap. I will be doing more work on those names.
Another stock that i like is IAP.LN, the largest interdealer broker. Clearly the OTC market is in disrepute and there is no visibility at all at present, but this is one to watch as well. As an aside Deutsche Borse has had a huge rally from way low numbers. I wonder if this is due to the VW action. That stock is also interesting.
I would like to start thinking of banks at some stage, but the regulatory and capital uncertainty is so high that picking winners at present seems quite foolhardy.
I had GPN as a short vs. MA (MA very solid franchise, with too much priced in, and GPN only gts paid when MA gets paid
Of course, my resources are limited, access to street and management curtailed, and I have to search for a job, so this blog could end up being overly ambitious.
So, my focus at present is not to be a hero and avoid the riskier names. Clearly if you bought a basket of those some will have stupendous upside, but it does seem casino like at present.
With that said, one still either has to take some balance sheet risk with most likely relatively stable earnings (ACE, CB, TRV), or avoid balance sheet risk but accept greater EPS volatility (TROW,BEN, MA). A group that I believe has neither balance sheet nor much EPS volatility are the insurance brokers (AOC, MMC). Both also have cost cutting opportunities and will be beneficiaries if insurance rates stop declining. Of course, valuation is not super cheap. I will be doing more work on those names.
Another stock that i like is IAP.LN, the largest interdealer broker. Clearly the OTC market is in disrepute and there is no visibility at all at present, but this is one to watch as well. As an aside Deutsche Borse has had a huge rally from way low numbers. I wonder if this is due to the VW action. That stock is also interesting.
I would like to start thinking of banks at some stage, but the regulatory and capital uncertainty is so high that picking winners at present seems quite foolhardy.
I had GPN as a short vs. MA (MA very solid franchise, with too much priced in, and GPN only gts paid when MA gets paid
Of course, my resources are limited, access to street and management curtailed, and I have to search for a job, so this blog could end up being overly ambitious.
SLM
This stock has been one of my bete noirs so to speak. I recommended it in the teens and clearly it has not done well. Various parties have come at around $20 for a runoff scenario on the stock. However this analysis assumes no dilutive capital raise, loss estimates on private student loans that are inline with the past, and clearly a more normal spread between LIBOR and CP.
Do I think SLM will need to raise capital, no. Are there scenarios where they would have to, yes.
The scenario that the market has focused on is the linked to the renewal of the ABCP facility. This facility is due in February and though it is non-recourse, it is over-collaterized. Moreover loans in the portfolio are marked to market, so the need for additional collateral increased in this wild environment. As of last month, according to the company, SLM had 2% of capital against FFELP loans in the facility and 10% vs. private loans. Capital targets for the company as a whole are 50bps vs. FFELP and 8% vs. private loans. Thus if those loans were put back to the banks, it would create a significant capital drain for SLM. Is this likely, no but can it be ruled out completely? In these times nothing is impossible. There is talk of the DOE expanding their CP+50 program to include eligible loans back to the 2003 time period. Such action will allow SLM to refinance loans and shrink the ABCP facility significantly. This would be a positive both from a balance sheet risk perspective as well as from a net interest margin perspective, as the cost of the facility is significant.
SLM also has this purchased paper business (buying distressed paper both mortgage and other), that is in runoff but has led to charges the past two quarters. This should just be an incremental negative, but it does add additional capital strain. On the plus side, capital requirements for this business is high and as the portfolio runs off, capital should be released.
If loss expectations on private student loans deteriorated significantly, a large provision could deplete capital. I think this is the biggest unknown at present. Q3 numbers did see a pick up in delinquencies, and a long recession will certainly cause strain on the portfolio. Private loans are a relatively new product, and there is no historical stress scenario.
There are other issues affecting the company but are more growth oriented ( can the company fund private student loans effectively, what is the future of the FFELP program in a democratic administration, will SLM retain servicing if it puts loans back to the govt). However, these are not really relevant at present given that the stock trades at 50% of a run-off scenario.
Is this stock a buy? Wow, the whole wholesale funded model is in disrepute right now, and I guess having been burned before, I would wait for some tangible progress; namely either a renewal of the ABCP facility or at least an execution of a FFELP ABS transaction. This may mean buying the stock in the mid teens, but that would still leave decent upside, while hopefully providing a clearer understanding of the downside.
Do I think SLM will need to raise capital, no. Are there scenarios where they would have to, yes.
The scenario that the market has focused on is the linked to the renewal of the ABCP facility. This facility is due in February and though it is non-recourse, it is over-collaterized. Moreover loans in the portfolio are marked to market, so the need for additional collateral increased in this wild environment. As of last month, according to the company, SLM had 2% of capital against FFELP loans in the facility and 10% vs. private loans. Capital targets for the company as a whole are 50bps vs. FFELP and 8% vs. private loans. Thus if those loans were put back to the banks, it would create a significant capital drain for SLM. Is this likely, no but can it be ruled out completely? In these times nothing is impossible. There is talk of the DOE expanding their CP+50 program to include eligible loans back to the 2003 time period. Such action will allow SLM to refinance loans and shrink the ABCP facility significantly. This would be a positive both from a balance sheet risk perspective as well as from a net interest margin perspective, as the cost of the facility is significant.
SLM also has this purchased paper business (buying distressed paper both mortgage and other), that is in runoff but has led to charges the past two quarters. This should just be an incremental negative, but it does add additional capital strain. On the plus side, capital requirements for this business is high and as the portfolio runs off, capital should be released.
If loss expectations on private student loans deteriorated significantly, a large provision could deplete capital. I think this is the biggest unknown at present. Q3 numbers did see a pick up in delinquencies, and a long recession will certainly cause strain on the portfolio. Private loans are a relatively new product, and there is no historical stress scenario.
There are other issues affecting the company but are more growth oriented ( can the company fund private student loans effectively, what is the future of the FFELP program in a democratic administration, will SLM retain servicing if it puts loans back to the govt). However, these are not really relevant at present given that the stock trades at 50% of a run-off scenario.
Is this stock a buy? Wow, the whole wholesale funded model is in disrepute right now, and I guess having been burned before, I would wait for some tangible progress; namely either a renewal of the ABCP facility or at least an execution of a FFELP ABS transaction. This may mean buying the stock in the mid teens, but that would still leave decent upside, while hopefully providing a clearer understanding of the downside.
Wednesday, October 29, 2008
ACE call
I am still waiting for files and models to be sent to me from my prior firm.
In any case, I am going to wait to get my model before doing any valuation work but key issue on the ACE call was Evan calling the end of the soft market. This has been echoed by PRE, and Munich Re as well as Berkely. The thesis is that investment losses, the difficulties at AIG, XL, and other market participants, increased cost of capital and reduced risk tolerance should lead to prices hardening. All of the above is true. In the minus column, a severe recession will lead to reduced exposure, and ACE and others are still releasing reserves. Typically a hard market will be signalled by adverse development. The fact that companies still have favorable reserve releases makes me less enthusiastic about getting on board the hard market train.
In ACE's case the company has begun releasing reserves on casualty lines pre 2004. ACE is one of the last guys to start significant releases in the casualty lines, and the firm probably still has significant excess reserves in those lines. Moreover, a good chunk of the unrealized losses on the investment side will eventually flow back. The duration of the investment portfolio is 4 years so these securities will eventually accrete back to par. All this to say is that the printed Book value per share of $46 is low, and I think $60 is a no brainer on this stock. Now if this signals the beginning of a hard market, well we could go higher, but $60 is there even in this environment.
Still like the stock even after the move today.
One could pair it against WTM if you wanted to be defensive, but that is also pretty cheap.
Off to Costco for buying cheap booze.
In any case, I am going to wait to get my model before doing any valuation work but key issue on the ACE call was Evan calling the end of the soft market. This has been echoed by PRE, and Munich Re as well as Berkely. The thesis is that investment losses, the difficulties at AIG, XL, and other market participants, increased cost of capital and reduced risk tolerance should lead to prices hardening. All of the above is true. In the minus column, a severe recession will lead to reduced exposure, and ACE and others are still releasing reserves. Typically a hard market will be signalled by adverse development. The fact that companies still have favorable reserve releases makes me less enthusiastic about getting on board the hard market train.
In ACE's case the company has begun releasing reserves on casualty lines pre 2004. ACE is one of the last guys to start significant releases in the casualty lines, and the firm probably still has significant excess reserves in those lines. Moreover, a good chunk of the unrealized losses on the investment side will eventually flow back. The duration of the investment portfolio is 4 years so these securities will eventually accrete back to par. All this to say is that the printed Book value per share of $46 is low, and I think $60 is a no brainer on this stock. Now if this signals the beginning of a hard market, well we could go higher, but $60 is there even in this environment.
Still like the stock even after the move today.
One could pair it against WTM if you wanted to be defensive, but that is also pretty cheap.
Off to Costco for buying cheap booze.
Mission statement
Hello, I have just lost my job at a long/short firm, so I have time on my hands. In fact I will probably be unemployed for a very very long time. This blog is a tool for me to stay sharp regarding the investment world, as well as an outlet for thoughts on my job search, geopolitics, and my personal obsession: snow and snowstorms.
One of my favorite companies, ACE reported today. I listened to the call, evan's voice is quite soothing as is their financial strength. I will have more comments after I get my hands on the call transcript. the first adjustment to losing one's job is the sudden cutoff of information. Bloomberg will apparently extend for 2 months access to account holders who have lost their job. That is great news and as soon as I get my super cheap laptop I just purchased, I will have some bloomberg access. In the interim, a shout out to my buddies who will provide me transcripts etc...
On the job search front... Well as this is the first week, we are still in the optimisim camp here. Eventually even your friends will not take your calls, but we are not there yet. I guess all I can do is try and connect to as many people as possible. Nobody is hiring, or at least very few are hiring.
One of my favorite companies, ACE reported today. I listened to the call, evan's voice is quite soothing as is their financial strength. I will have more comments after I get my hands on the call transcript. the first adjustment to losing one's job is the sudden cutoff of information. Bloomberg will apparently extend for 2 months access to account holders who have lost their job. That is great news and as soon as I get my super cheap laptop I just purchased, I will have some bloomberg access. In the interim, a shout out to my buddies who will provide me transcripts etc...
On the job search front... Well as this is the first week, we are still in the optimisim camp here. Eventually even your friends will not take your calls, but we are not there yet. I guess all I can do is try and connect to as many people as possible. Nobody is hiring, or at least very few are hiring.
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