That is what a wise man once said…

Today I saw on CNBC that Perma Bull Jim Cramer did his Doug Kass impersonation and made his low of the year market call.  I’ve seen some clips of the recent interviews on Bloomberg and CNBC featuring Meredith Whitney, Nouriel Roubini, Gene Munster, Dick Bove, etc. and if you’ve read my CNBC cheat sheet you too can be a psychic and guess what they had to say.  These days I’m inclined to just put my TV on mute whenever someone from the CNBC cheat sheet appears because I can already tell what they will have to say.

The problem here is that we are all biased with an opinion.  Just about every market prognosticator brought on air has some sort of position in the market.  Whether it’s called “talking your book” or “reflexivity” or simply stating an opinion because it’s their job to, we can never truly be neutral making market predictions if we have a vested stake.

Remember Cramer also said to buy Bear Stearns and Kass also said to buy Lehman Brothers before both companies wound up in bankruptcy.  It just goes to show you that you really have to do your homework and you can’t rely on the flip flop positions of the CNBC commentators.

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As it turns out, you can speculate on LeBron James’ decision as to which basketball team he will join.  Rumors are out today that LeBron is leaning towards signing with the Heat where he will join fellow NBA All Starts Dwayne Wade and Chris Bosh.  I don’t see that happening.  Sure such a lineup will likely equate to an NBA title next season, but playing alongside Wade and Bosh will diminish LeBron James’ brand.  I think that LeBron either resigns a 2-3 year deal with the Cavaliers or signs a longer term contract with the Knicks.  If you’re looking for a quick trade to bet on LeBron signing with the Knicks then Madison Square Garden [MSG] is a stock that will pop should he sign with the Knicks.  The stock is down today because of the rumors that James is leaning towards inking a deal with the Heat.

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Image from www.treehugger.com

Tesla [TSLA] is scheduled to go public this week and the current headlines are pointing to a $17/share IPO.  Tesla is a high performance electric car manufacturer.  It made headlines in 2008 with the introduction of the Tesla Roadster, a sleek 2-seater electric sport car.  Reports indicate that approximately 1100 Roadsters have sold at an average price of $109,000 to date.  In 2009, the Tesla Roadster Sports was introduced at $129,000.  I could not find any figures about how many Roadster Sports units were sold.

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Yesterday I read that the bid for the annual charity lunch with Warren Buffett drew a record price of $2.63M.  What’s equally impressive is how much of a jump the winning bid amount of $2.63M is compared to the 2000 winning bid of $25,000 when the annual tradition first began.  So far the winning bidder for 2010 has chosen to remain anonymous.  A listing of winning bids and the winning bidder may be found here.  The stratospheric rise of the bids may be seen from the chart below.  At this rate maybe we’ll see $3M next year assuming Buffett is still around and willing to dine with people eager enough to shell out millions to have lunch with him.

Image from Google Docs

So is the price of the meal a good investment?  It appears that a good number of the winning bidders from the previous years were came from people who ran hedge funds.  The indulgence would appear to be a reflection of some spectacular performance in the fund as well as the PR that comes with being mentioned for being the winning bidder.

In 2008 it was Zhao Danyang from Pure Heart Capital who won with a $2.1M bid.  The fund had an eye-popping 141.75% return in 2006 followed by a modest 10.7% return in 2007.  The year after the Buffett lunch, the firm returned 74.10% in 2009.  As of April 30th this year the fund was up 7.8%.  I’m not sure how well they fared given the recent volatility that started in May though.  Here’s a link to Pure Heart Capital’s numbers.

In 2009 it was a group from Salida Capital that won the right to dine with the Oracle of Omaha.  Salida ran 2 funds in 2008 that lost 66.5% and 48.5% respectively.  In 2009 they probably bet heavily on a market rebound and the same 2 funds posted spectacular gains of 181.55% and 226.33% respectively.  This was probably the reason why they could afford to spend $1.63M to win the lunch bid.  However, at the end of May 30th, 2010 the same two funds were down 9.85% and 9.81% respectively.

So while it’s difficult to tell for certain whether these funds were able to glean any information from Buffett, it’s clear that both funds got some sort of PR from all this that may have allowed them to attract more investors.

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Since the BP oil spill started eight weeks ago, the stock has lost roughly 50% of its value. Buying the stock now at these prices has been a topic that has come up frequently the past few weeks. Even some value hedge fund managers like Whitney Tilson have announced recent stakes in BP. I thought about comparing the oil spill to the Three Mile Island tragedy in 1979. Back then General Public Utilities, the owner of Three Mile Island, also saw its stock crater to below $4/share (it eventually recovered many years later and reached a high of $32 and change in 1988).  I think it’s still too early though to make a call with BP.  There are just too many unknowns and I think BP has done a terrible PR job.  The oil disaster also appears much worse than expected with initial spill estimates going from 5000 barrels a day to possibly 40,000 barrels a day.  We know from the Exxon Valdez spill that approximately  257,000 barrels were spilled at a cost of roughly $2.5B in litigation.  That comes out to about $9727/barrel, but if we take inflation into account (20 years ago) we’re probably looking at $16,600/barrel today for litigation costs or a total of $4.27B according to the inflation calculator.  So lets say BP is spilling 40,000 barrels a day:

40,000 x 120 (4 months to stop) = 4.8M barrels or almost 18.6 times the amount of oil from the Exxon Valdez spill

18.6 x $4.27B = $79.7B

Now BP earns a ton of money- approximately $20B year.  There are currently 3.1B or so shares outstanding so we get about $6.45 earnings/share annually.  So if BP were to pay out the total $79.7B in damages over the course of 10 years then we’re looking at a hit of approximately $2.5/share over the next decade.  At roughly $4.55 earnings a share ($6.45-$2.5) you get anywhere from $36-$45/share with a 8-10 PE multiple range.  So your upside is limited while the total liabilities are still unknown.  Who knows?  Maybe it takes longer than 4 months to finally stop the oil spill.  Worse yet, the total exposure to the economies along the gulf and the health problems caused could easily bring the total liability to exceed $100B.  Also, what if BP is forced to reduce its other operations elsewhere to retrofit the rigs with more safety measures?  This will further depress their earnings.  You can almost bet that the dividend will be suspended.  The larger issue now appears to be whether or not BP is like AIG and too big to fail because of all the pension and mutual funds that have a stake in its equity and bonds.

Bottom line is that BP is still a risky stock here despite the 50% drop.  There are probably better (and safer) opportunities elsewhere.

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I recently wrote to the investor relations department at Agfeed Industries regarding the receivables.  It appears that the recent decision to extend their customer’s receivables has adversely impacted their stock.  Keep in mind the response is from the IR department so obviously there is so bias.

1) Are the durations of extensions now increasing, decreasing or flat from the previous quarter?

The durations are generally for 60-90 days. We are collecting the majority of the recent extensions by the end of June to show how short term the loans are.

2) Are you folks charging any interest rates on the outstanding receivables?

That is not a good practice in China. Secondly, business is conducted in a more supportive manner; particularly if the customers need a few months for the market to turn up. We made a calculated decision for we are also in the hog production business and we see positive prices in the last half of the year.

3) Do you have any estimates about rates of defaults for the receivables (if any)?

We have written off less than $300,000 over 3 years.

Sincerely,

AgFeed Industries, Inc. Investor Relations

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By now most you have probably heard about the record number of foreclosures and how the banks are so backlogged with processing them that some home borrowers have decided it’s better to just stop paying and live rent/mortgage free.

I have to say reading this sorta ticks me off.  It’s not that I want to see people thrown out on the streets and become homeless.  Also I know that the lenders share some blame and that the bankers made so much money off both sides of the real estate collapse.  It’s just that nobody wants to take any accountability it seems for the mess we are in.  Leave it to the government to handle this?  Good luck.  They’re just going to try to get the banks to take the write downs (which they are reluctant to do) and issue yet more unemployment benefits extensions.  The politicians won’t nationalize the banks because their friends are working there and it would be an admission of the failure of free market capitalism.

A lot of people will say that if we don’t help the U.S. citizens who are struggling we’re going to continue to see 10%+ unemployment rates.  My question is what if we keep digging ourselves in more debt and printing more money so that we see 15%+ unemployment 10 years from now?

It’s time to pay the bills, folks.  Few people who are down and out don’t seem to want to accept the reality that 1) their homes will lose over 50% of their value 2) that they need to start taking measures to remain competitive in the workforce instead of blaming others for their problems.

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Okay so I know the whole business models of rating agencies are a joke and their value as a business is being questioned.  But this downgrade by Fitch is big news despite what the CNBC perma bulls may have you believe.  The problem is that some governments and institutions are only allowed to purchase AAA rated debt.  This downgrade leaves Spain in a bind to accelerate their austerity measures.  I would not try to be a hero and catch a falling knife in the upcoming weeks, but the time will come to buy European financials… just not now.  My guess is that Moodys and S&P will try to save face and follow with their own downgrades soon.

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It has been a roller coaster of a ride the past two weeks.  I don’t think the downturn is finished even after today’s 280+ point rise on the Dow Jones.  There’s still some lingering issues about Greece and whether or not their debt will ultimately have to be restructured.    The Spanish banks still have to come clean with their subprime loan losses.  Two stocks I’m keeping an eye on are FEED and ING.

I wrote about FEED awhile back and I have already taken a position at an average of $3.38/share ($3.50 and $3.27 purchases).  FEED is very attractive given its growth rates.  A lot of Chinese stocks have been battered, but what’s good about FEED is that corn prices are starting to drop.  The Chinese government has promised to keep an upper limit on corn prices and has also been exporting record amounts of corn from the United States.  FEED has been battered because of the rising costs of corn (used to feed the pigs).  It’s a business that is tough to emulate because of the complexities of starting pig farms and creating a distribution channel to sell the pork.  Contrast this with another Chinese stock like China Finance Online [JRJC] that has also fallen sharply because of copycat websites that offer similar financial services and advice.  The tangible book and book value of the stock is listed at around $2.87 and $3.43 a share respectively.  When corn prices stabilize and perhaps decline the 2nd half of this year I expect FEED to earn roughly $.09-$.10/share per quarter making it quite attractive at today’s current prices.

Still finding out more about ING, but it would be attractive if there was more distress in the European financial companies and if it drops below $5/share.

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[Not an investment post]

I walked by the nearby Chinese fast food restaurant off 38th and 3rd the other evening on my way back from a four-mile run at the gym.  Sometimes I forget the restaurant even exists as I have only dined there on two occasions.  Nestled between one of those ubiquitous Korean run nail salons and a Mediterranean fast food restaurant that serves a tasty Shwarma lamb wraps, this was the type of joint that puzzled you as to how it remained in business.  Truth be told there is a constant clockwork of activity involving takeout delivery food.  From the time the cashier greeted you with her unmistakable immigrant accent to take your order to the time the chow mein with that red roasted pork showed up at your apartment door, brought to you by the delivery man who didn’t seem like he knew much English but always slightly bow graciously and say thank you while receiving your tip, the whole incident seemed almost like a celebration of technology and supply chain management.  And yet it was so unforgettable the minute you chased the first gulp of food with your beer.

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