Afternoon Links 1-20

Jan 20, 2010 21:25 UTC

Must Read – Short sale fraud + follow-up (Olick, CNBC) Great sleuthing from Diana Olick. Sounds like outright fraud being committed by big banks. One follow up question: In many cases, the second-lien holder is also the first lien holder. How is that impacting short-sales?

Buffett opposes bank fee (CNBC) See 2/3rds down the page. Obfuscation worthy of a banker. This should come as no surprise as Buffett is Wells’ top shareholder. He previously opposed the bank stress tests because it diluted his shareholdings. Nevermind that the stress test forced the bank to raise desperately needed capital. It’s a shame, really. As his career winds down, he’s sacrificed his reputation as a financial straight-shooter to protect his wealth.

In other Buffett news: He’s opposed to Kraft’s bid for Cadbury (he’s a big Kraft shareholder) and he split his shares, something he never wanted to do. So not a great day for the Oracle.

FT as shameless Fed booster (NakedCapitalism) Yves takes down the FT piece that said the Fed has made a killing on its AIG holdings.

CRE prices up 1.0% in November, not expected to continue (CR) Moody’s released its data for CRE prices for November today. They showed a month over month uptick for the first time in a while. That said, this is not a super reliable index due to the few number of data points available. And Moody’s says to expect prices to head back down.

Scott Brown successfully capitalized on bank bailout blues (Bottari, CMD) Walker Todd sent a missive over this morning noting, too, that while the healthcare bill’s unpopularity certainly played a role in Brown’s surprise win, anger over Obama’s kowtowing to banks may have pushed him over the edge. Unfortunately, Republicans are equally captured by the bank/homeowner lobby.

Foreclosure efforts failing b/c don’t reduce principal (Nasiripour, HuffPo) Helpful confirmation of a fact that is well-known.

Obama/Dems reach deal on debt, pay-go, fiscal commission (Alarkon, The Hill) A good start, but doesn’t sound like the kind of fiscal commission we really want….i.e. something like the base-closing commission that made recommendations that Congress was forced to vote on without amending.

China asks some banks to limit lending on insufficient capital (Jun/Dingmin, Bloomberg)

NY governor adds soda tax, raises cigarette tax, sanctions cage fighting in proposed budget (Kramer, WCBS)

Multitasking (imgur)

ht CSQT….


Burlington…not so Buffett-like

Nov 3, 2009 16:55 UTC

So I thought I’d do a little number crunching on Buffett’s Burlington deal. What does that tell us? That Buffett is paying a full price for a business with mediocre returns on capital, that he’s betting on growth, not value.

Valuation (based on share prices of $100 for Burlington, $59 for Union Pacific, and $48 for Norfolk Southern):

  • Return on capital employed (based on 2010 operating income and year-end ’10 balance sheet estimates.
    • BNI = 11%
    • UNP = 10%
    • NSC = 10%

(I’m using Stifel Nicolaus estimates for 2010)

The cash flow characteristics of the business aren’t very good. From 1999 to 2009, BNI poured 68% of operating cash flow back into capital expenditures. That’s cash flow that doesn’t go to shareholders.

Nor are the returns fantastic. Because operating a railroad requires so capital, the return on capital employed is only mediocre.

And the business is not without risk. High fixed costs mean railroads generate increasing returns during upswings, but decreasing returns during downturns.

As an asset, railroads do seem well-positioned. And Burlington Northern particulary so.

1. Increasing fuel costs hit truckers harder than railroads, so that works in their favor.

2. As my Reuters colleague John Kemp points out: “Burlington’s track and rights of way are perfectly positioned to benefit from a massive expansion of the country‚Äôs coal-fired output in the next 20 years, coupled with ‘carbon capture and store’ technology to curb the carbon-dioxide emissions.”

He’s talking about Burlington’s track near the Powder-River Basin in Wyoming and Montana. PRB coal has lower sulfur content than Appalachian coal. To the extent we increase coal-fired power generation in the U.S., we’re likely to do it on a “clean” basis, giving PRB coal (and those who ship it) a competitive advantage.

3. Most important: Pricing. As volumes have increased the last few years, railroads have been able to increase their prices. Buffett is betting this will continue.

But again, given the high price he’s paying, Buffett needs a lot of things to go right for this deal to generate meaningful returns for shareholders.

More than anything, I bet he’s anxious about sitting on $25 billion worth of cash. Yields on short-term investments are at rock-bottom rates thanks to the Fed, and Buffett has gone on record that he’s worried about inflation.


first, its an asset play; burlington is the largest private landholder in the US; second, with peak oil approaching or past, moving goods by truck will become prohibitively expensive

Huffington Post: Housing still heading south

Reuters Staff
Apr 28, 2008 19:29 UTC

Tell you something you don’t already know, right? Though the conclusion has been stated often enough, it’s nice to see data to back up the story. For that, check out Hale Stewart’s latest article over at Huffington Post (via Patrick).

It includes the Case Shiller chart showing the run-up in house prices over the last few years. The chart is similar to the NAR chart I reproduced in a post last week, though it doesn’t juxtapose prices with median income.

Like I said last week, the path of house prices will definitely have plenty to do with interest rates. Homes remain overvalued relative to income, but with mortgage rates still near historic lows, folks that CAN get financing are still able to pay up for houses.

[Recall the math from last week: With a fixed rate 30-year mortgage of 18%, a $2000 monthly payment will buy $132,000 worth of home. Cut the interest rate to 6% and the same $2000 payment will buy $334,000 worth of home. Low interest rates support higher house prices.]

And since the threat facing the economy may be Japan-style deflation rather than U.S.-style stagflation, interest rates are likely to stay low for some time….