Posts Tagged ‘Warren Buffett’

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Gartman fund needs less talk, more action

Sunday, January 24th, 2010
VOX / INVESTING
Report on Business: Globe Investor Column
Gartman fund needs less talk, more action
FABRICE TAYLOR
822 words
30 November 2009
GLOB
B8
English
2009 CTVglobemedia Publishing Inc. All Rights Reserved.

Fabrice Taylor is a chartered financial analyst

Dennis Gartman never shies away from declaring a bubble when he sees one, or thinks he does.

Today the bubble is in gold. Mind you, the bubble was in gold several months ago, too. If it was a bubble at $700 (U.S.), I suppose, it’s an even bigger bubble today. But that doesn’t prevent Mr. Gartman from owning gold. The man works in mysterious ways.

Vox rarely declares a bubble, but we make an exception today: The bubble is in Dennis Gartman. When you start calling Warren Buffett an “idiot” while you lose money for your own investors, you’re way too big for your britches.

Mr. Gartman is, of course, author of the eponymous newsletter on all things investable.

The author is very opinionated and speaks with great conviction, which is a rare and attractive quality. Most money managers are guarded, circumspect bores on the record. Mr. Gartman is fun to read and listen to. That’s probably why he gets so much media attention and, in turn, is able to raise money.

Mr. Gartman is also famous for his trading rules, of which there are 17, ranging from the sensible (“mental capital trumps real capital”) to the ambiguous (“trade like a mercenary soldier”). By and large, though, his philosophy can be summed up as “Go with Big Mo” – meaning be a momentum trader (or as he puts it, “We’re not a business of buying low and selling high; we’re a business of buying high and selling higher”).

Whether you’re just vaguely acquainted with his work or an avid reader, you must have asked yourself at one point if Mr. Gartman actually makes any money for himself or for his readers by trading. Until recently, there’s never been a reliable way to gauge. Now there is, and it’s not particularly impressive.

Launched last March, the Horizons AlphaPro Gartman ETF is managed by the man himself using the wisdom he dispenses in his newsletter.

The fund launch was well-timed, coming as it did just as stocks were about to start one of the greatest runs of all time. Mr. Gartman’s investors, though, are down. The units, sold to investors for $10 a few months ago, closed at $9.12 on Friday, giving the ETF a market cap of about $52.5-million.

Now, we have to be fair: For starters, about 50 cents of the purchase price was eaten up in underwriting fees. We can’t blame Mr. Gartman for that.

And the net asset value of the fund is, as of the most recent calculation, $9.35. So while investors are down about 9 per cent, Mr. Gartman’s picks have only cost them 3 per cent.

But the market is up 30 per cent since the fund launched. What’s up with that? Mr. Gartman didn’t get back to me, but the people at Horizons AlphaPro tell me the fund is intended to be market neutral, meaning it won’t move with the market. Why? Because it’s long and short, and supposedly constructed in such a way that the market’s performance has no net effect on the returns. The only thing that does have an effect, in theory, is the manager’s skill. It may be early days, but Mr. Gartman’s performance has been found wanting.

He’s expected to return between 6 and 12 per cent regardless of the market. Eight months in, he’s nowhere near that. And by the way, I don’t see any mention of market neutral in the prospectus, and I don’t recall Mr. Gartman being a market-neutral enthusiast, although he hedges many of his trades.

What’s troubling about Mr. Gartman as a money manager is that while he gives good quotes and speaks with conviction, he doesn’t invest with quite the same resolve. If gold is a bubble, why buy gold? And if it’s because gold is going up, even if you don’t think it should, why am I paying you for your management skill? I don’t need help buying whatever is going up.

Maybe the most telling anecdote is this: In the early days of launching his fund, Mr. Gartman had the brilliant idea to short Berkshire Hathaway, and short it hard: almost 10 per cent of the fund’s value. By the end of October, he had closed off that trade (Mr. Gartman’s rule No. 1: Never, ever, ever, under any circumstance, add to a losing position … ever!).

Berkshire, run by that “idiot” Warren Buffett, is up 17 per cent since the Gartman fund launched.

Perhaps Mr. Gartman should add another rule: People who live in glass houses shouldn’t throw stones. Never, ever, ever.

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Potash Corp. now paying for past profits

Sunday, January 24th, 2010
VOX / RESOURCES
Report on Business: Globe Investor Column
Potash Corp. now paying for past profits
FABRICE TAYLOR
774 words
22 October 2009
GLOB
B16
English
2009 CTVglobemedia Publishing Inc. All Rights Reserved.

Fabrice Taylor is a chartered financial analyst.

ftaylor@globeandmail.com

At roughly 30 times this year’s earnings, Potash Corp. of Saskatchewan Inc. shares aren’t going up because they’re cheap. They’re rising – 15 points in the past 10 days – because investors are pricing in the possibility of a takeover, most likely by an international resource giant such as BHP Billiton, Rio Tinto or some such.

That makes sense. Potash demand is depressed – down at least 50 per cent this year – and so are prices. Inevitably, however, both have to rise. The stuff is crucial to plant nutrition, and the more you take out of the soil by raising crops, the more you have to replace it. As for speculation on who the buyer might be, these multinationals are snapping up anything involved in extractive industry and they can get big money.

It would be a sad day for Canada, of course, and especially so in this case. Potash is a world leader, with roughly a quarter of the market, dwarfing its biggest rivals. It has enormous, high-quality reserves and low costs in a stable country. More tragically, I would argue, is that Potash may have blown its chance all on its own.

Flashback to three years ago, when everything was coming together for potash prices. The ethanol bubble was swelling nicely (ethanol is made with corn which needs a lot of fertilizer), global demand was starting to grow at a faster than average rate and a major mine, Uralkali’s Mine 1 in Russia flooded, creating a massive sinkhole and immediately cutting off about 3 per cent of global supply. That might not sound like a lot but remember that in commodities the last unit of supply has a huge influence on prices.

So 2007 was shaping up to be a great year price wise. And it was. As Potash said in that year’s annual report: “In the past – yesterday – we were able to report that some factors of this global development affected our business favourably, but never did the drivers of our business line up as we believed they could. Never, that is, until today.”

The company would earn $3.40 per share (U.S.), or 72 per cent more than the year before, and almost two thirds of the increase in earnings was because of higher potash production and prices (the company also sells nitrogen and phosphate, but potash is its key product).

The following year was even better, despite the onset of the financial crisis. Potash earned $11 per share on the back of dramatically higher prices for everything it produces, but especially potash. This year won’t be so kind. Potash just cut earnings estimates, pegging them between $3.25 and $3.75.

Now, here’s the question: Potash is the Saudi Arabia of the industry, the low-cost swing producer. Would it have better served its shareholders had it tempered prices by increasing production in even if that meant earning less? It certainly had the capacity to do so.

There are many reasons, including big crops, for plummeting demand. Might one be that buyers were taking huge writedowns on their potash inventories which they paid $1,000 per tonne for? They have less money and less inclination to buy more today because of what it cost them?

Those high prices did more than cut demand. They attracted a lot of capital to the sector. There are eight advanced greenfield projects under way and about 20 early stage greenfield projects (greenfield meaning from scratch), according to CIBC World Markets. And that’s not counting expansion plans at existing facilities. That means more competition down the road.

The Chinese, the biggest buyers, are reportedly looking to build their own potash mine in Saskatchewan. Greenfield takes five to seven years, but in the meantime they have the upper hand in price negotiations and they’re not wasting it.

To restate the question: did Potash get greedy in the short-term? CEO William Doyle’s stock options were worth $730-million at their peak and he’s no spring chicken. Was he thinking about distant horizons? Would any of us?

As Warren Buffett says, be greedy in the long-term, not the short-term. I’m not sure that Potash was or wasn’t. It’s worth asking though. I’m sure it’s a potential takeover candidate. I’m also sure that the economics would be better if it had been long-term greedy, were such a thing possible.

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Berkshire without Buffett; Still a buy, even if the Oracle of Omaha departs soon

Sunday, January 24th, 2010
INVESTING
Report on Business Magazine
Berkshire without Buffett; Still a buy, even if the Oracle of Omaha departs soon
Fabrice Taylor
604 words
28 August 2009
GLOB
24
English
2009 CTVglobemedia Publishing Inc. All Rights Reserved.

Few things are guaranteed in the investment universe, but here’s one: Whoever takes over from 79-year-old Warren Buffett as the head of Berkshire Hathaway will have a hard time filling his shoes.

That worry might explain why Berkshire’s stock has struggled lately. As I write this, the company’s class A shares–which Buffett has not allowed to split, no matter how high the price–are trading at about $91,000 apiece (all currency in U.S. dollars). The high over the past year was $147,000.

Succession worries are partly to blame: Does anyone have Buffett’s knack for putting money to work? The Oracle of Omaha has said he plans to stay on the job until five years after his death. More seriously, and without naming them, Buffett has said there are four candidates ready to take over his investment role. The current scuttlebutt is that David Sokol, chairman of Berkshire’s MidAmerican Energy, is the front-runner.

Many of Berkshire’s short-term problems are due to last year’s market meltdown, which clobbered its vast investment portfolio. Mistakes don’t help, however, particularly selling $35 billion worth of put options on stock indexes when share prices were much higher than they are now. Those options are a form of market insurance–if the holders exercise the options, the seller (Berkshire) has to pay them higher prices guaranteed in the options contracts. According to a Berkshire financial report, its paper losses were about $5 billion.

But you also have to consider Berkshire’s long-term success. The company’s share price was about $20 when Buffett took over in the 1960s. One big reason for the astonishing growth since then is that Buffett and his lieutenants often take advantage of other investors’ impatience. Most of us want a quick buck, so we ignore out-of-favour stocks that will take a while to recover. Once they do, even if Buffett didn’t buy them at the bottom, those stocks perform well.

The crisis this past year has given Buffett one of the greatest opportunities of his lifetime to put his value investing skills to work. Last October, he wrote an op-ed piece for The New York Times, saying that he was buying U.S. stocks for his personal account. Until then, that account held nothing but government bonds. Berkshire went on a buying spree, too, investing in battered blue-chip companies–including General Electric, Goldman Sachs and Dow Chemical–and others that weren’t hit as hard, like Wrigley.

In total, Berkshire has invested about $22 billion over the past year, and the clever twist is that, by and large, it hasn’t bought straight common shares. Instead, it’s invested in preferred shares that pay fat dividends and can be converted into common stock at a low price. In the case of Goldman, Berkshire bought $5 billion worth of preferreds last September that pay a 10% dividend, and that came with warrants that gave Berkshire a five-year option to buy common shares at $115 apiece. Goldman shares sank to $52 last October, but have climbed steadily to $160 lately. That’s a paper profit of $2 billion, in addition to the dividends.

So, while some investors fret about Buffett’s age, buying Berkshire today will give you at least one more chance to profit from a legend’s investing skills. Don’t count the Oracle out yet, even if he does depart soon.

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It’s the directors that forge a CEO’s golden parachute

Saturday, January 23rd, 2010
VOX / CORPORATE GOVERNANCE / COMPENSATION
Report on Business: Globe Investor Column
It’s the directors that forge a CEO’s golden parachute
FABRICE TAYLOR
808 words
11 May 2009
GLOB
B9
English
2009 CTVglobemedia Publishing Inc. All Rights Reserved.

Fabrice Taylor is a chartered financial analyst.

ftaylor@globeandmail.com

Don’t let anyone tell you corporate governance is enjoying a renaissance. If it were, outgoing CEOs wouldn’t be decamping the corner suite under a cloud with briefcases stuffed with money.

But while it’s the departing company head who gets the blame, it should be aimed at the directors who agreed to his pay, and in some cases who hired him in the first place.

Robert Prichard was crowned Torstar’s TS.B-T CEO in 2002. Seven years later, not to mention an 80-per-cent drop in the stock from its peak, he rode off into the sunset with a severance package worth almost $10-million.

How did that happen? It turns out the board of directors last year renegotiated his contract so that he’d get the same terms if he left voluntarily as if he got sacked (without cause). Mr. Prichard must have haggled that one hard. Imagine that: he gets to save face by leaving “voluntarily” and he gets the gold plated good-riddance gift. If I’m reading the management circular properly, he’ll even get a pro-rated bonus for this year (quote: “In addition, Mr. Prichard will be paid his annual bonus for the year in which he resigns on a pro-rated basis when the bonuses are paid to other senior executives”). If so, that’s another million or so – breath-taking given the value destruction Torstar investors have suffered. The recession is one thing, but what has Torstar done in the past seven years to deal with the Internet threat?

“The CEO has a contractual right to receive severance, and the board honours that contract,” Torstar chairman Frank Iacobucci told peeved shareholders at the annual meeting. “The board unanimously determined that the arrangement was in the best interest of the company.”

Hard to see how shareholders benefit, unless he’s referring to getting rid of Mr. Prichard.

The former CEO, it should be noted, forfeited past stock options (not the ones he’ll earn this year though), but they were massively underwater and unlikely to surface ever again. And he’s bound by a non-compete. If I were a Torstar owner I’d want him to compete with my company.

But to repeat, don’t blame Mr. Prichard. We’d all take the money and run if the only inconvenience was the brief glare of a harsh spotlight. He was the wrong guy for the job – which is the board’s fault – and he was overpaid, also the board’s doing.

The situation at Manulife MFC-T is different. Dominic D’Alessandro was an experienced CEO who made bold moves that created value. But he made one fatal error – selling stock investments that guaranteed an investor’s principal. Manulife had been protecting itself from a downturn in markets but then stopped to improve earnings.

That crushed the company’s stock when markets tumbled, and Mr. D’Alessandro’s personal wealth. At the end of 2007 his Manulife shares and options were worth more than $100-million.

The board apparently took pity on the CEO and tried to give him $12.5-million (U.S.) for a few months work before he retired. Shareholders, needless to say, were not impressed. The move especially rankled because Mr. D’Alessandro was a voice of reason on governance over the years.

He modified the deal to make it more palatable. It still annoys some shareholders. Yes, he did a lot of good. But the earnings he generated were overstated because they didn’t factor in a drastic drop in stock prices. Neither did the board, which either didn’t know of the company’s decision to stop hedging or agreed.

Warren Buffett, who knows a thing or two about insurance, called the products Manulife sold “poison” from the perspective of the insurer. Those who sold them, he said, were “crazy.”

The common denominator is: What are directors thinking? Or are they? If anything, when you consider these failures, it should serve as a reminder that investing is as much about people as it is numbers – maybe more so. People make the decisions behind the numbers – behind the red ink in the case of both Torstar and Manulife. And it’s not just the CEO.

Some will ask why stop at directors? Blame investors, who elect them, or can if they rouse themselves to vote their shares. But I don’t think you need a mandate from investors to understand that Torstar needs a leader who understands new media, or that guaranteeing anything in the volatile stock market is risky. You just need common sense.

Illustration

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