Monday, February 27, 2012

Bank of America - Legal Victory

Bank of America's settlement with Bank of New York Mellon is moving back to New York state court, a legal win for BAC.'ANV'

To quote, "We are gratified that the matter has been resolved on appeal. We believe the trustee acted reasonably in entering into the settlement agreement and we look forward to completing judicial proceedings to approve the decision." BofA counsel Mirvis of Wachtell sent an email statement: "Yippee."

I will add a second "Yippee!"  The sooner the bank can get this legal wrangling behind it the sooner it will increase the dividend.


Saturday, February 25, 2012

Buffett's 2011 Letter to Shareholders

Warren Buffet has just release his 2011 Letter to Shareholders along with the 2011 Annual report. 

2011 Letter to Shareholders:

2011 Annual Report:

2011 Highlights
Year End Book Value = $66.57 per B Share. They will buy back stock at 110% of book value or $73.23/B Share. Considering the shares have traded at between $76-80/B share in 2012, you are not paying a huge premium (4-9%) to where Mr. Buffett believes the shares to be significantly undervalued.

On the Banking Industry

The banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels. At Bank of America, some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire.

On Buying Bonds

Under today’s conditions, therefore, I do not like currency-based investments.

Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”

I have a few ideas on how to short medium to long term treasury bonds that I may post in the near future.  The only problem with going short on treasury bonds is you are effectively fighting the FED, who are currently implementing "operation twist".  This drives up long dated bond prices which moves drives down yields.  Buffett isn't the only bear on longer duration bonds.

Secondly, I highly recommend reading Buffett's essay on inflation, bonds, gold and income producing assets. 

On Gold as an Asset Class

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

Buffett's comments once again will incite anger among the gold bugs.  I have commented on gold before and will only add this comment.  Why does gold as a currency require any less "faith" than fiat currency?  As Buffett noted in his essay, does it matter if we use gold, shark teeth, seashells, or fiat money (as today) for exchanging a unit of our labor? 

It is interesting to note that Buffett believes gold is in a bubble.  He also noted that the world must continually absorb $160 billion of gold per year at current production rates.  Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices. 

If you own gold, you better start convincing your friends to keep your pyramid scheme going. 

Best Regards,


Disclosure: Long BRK.B

Friday, February 17, 2012

Wells Fargo & See's Candy

We'll it's been a while since I have posted so I thought I would share a few thoughts. 

Wells Fargo

Below in an interesting promotional video on Wells Fargo.  Some people ask if Wells Fargo, or any bank, can have a competitive advantage in a commodity type industry like banking?  I would have to say from the financials statements and the video the answer is YES, but the advantage wasn't built in a day. 

See's Candy

I just got back earlier this week from an enjoyable vacation in sunny southern California.  The weather was hot for February and definitely a reprieve from the frigid cold temperatures here in Canada. 

For those who know me I am not a shopper but I do enjoy going shopping with my wife when we travel.  While away she usually does her normal thing, like waste money on clothes and items we do not need, while it gives me time to investigate investment opportunities.  While on this trip I was happy to find a See's Candy Store and spend some time chatting with a nice lady who worked there.  I had been to a store before but found the prices ridiculously high, but now going back as an owner I couldn't help but smile at the prices. 

I must say the lady was very kind and gave me an overview of the products, including the popular items.  Eventually I settled on the overpriced peanut brittle (to bolster Berkshires profits).  Continuing our discussion, I asked how she liked her job and how long she had been with the company.  I must say I was stunned by her answers.  She had been with the company for over 17 years and just loved her job.  She said they treat you really well, good benefits and the pay is good.  She also said she gets to live in southern California, a place she just loves.  Stunned by the endorsement of the company I then asked if she was an anomaly or if the company had other happy employees who had work there that long.  She said definitely and that many have been with the company for years just like herself.  I must say I was pleasantly surprised to hear such an endorsement. 

Well upon paying for my peanut brittle, she caught on to my line of questioning and I told her I was a Berkshire shareholder.  With a big smile on her face she said how the peanut brittle is Warren's (Buffett) favorite.  He always has boxes of it around at the annual meeting.  Hopefully smart minds think alike...

Now, I must also admit the peanut brittle was absolutely fabulous.  I highly recommend you try some next time you see a store.  I will definitely pick some up again next time I'm near a store and since Warren raises the prices at See's every year at boxing day I won't hold out for lower prices.  Hopefully at the price I paid for for my Berkshire shares I will be able to enjoy several more boxes in the years ahead. 

Best Regards,

Disclosure: Long WFC & BRK.b

Saturday, February 4, 2012

Why I don't Read Zero Hedge

It appears that Rick Santelli and Zero Hedge have something in common.  They both don't have their facts straight.  You can read the details here:

Best Regards,

Thursday, February 2, 2012

Lululemon - Not a Yoga Company

John Hempton over at Bronto Capital Blog recently posted on Lululemon (Click here).  After some discussion he asks the following questions.

So I want to play the valuation guessing game.

* What is the value of the end market for yoga and running clothes. Is it $5 billion per year at which point lulu will be priced like Nike or is it larger or smaller?
* Can you explain the stock price in any terms other than a play on female vanity? Is Kid Dynamite's explanation of the brand appeal and the stock right?
* Even as a play on female vanity is it overpriced?
* What if anything keeps the competition out of yoga clothes?

I thought I would take a few minutes to comment on the error that both John and many people make when trying to make sense Lululemon and the valuation.

First to call the company a retailer of yoga and running clothing would be the understatement of the year.  I personally do not know one person who buys their clothing for yoga.  Their products are top quality and most women live and die by the stuff (at least the ones that I know). 

My wife has a few items from the company, but I try to steer her away because I hate paying the ridiculous prices.  She does wear the Lululemon running shorts for working out, but that's it for athletic clothing.  The rest of the clothes she owns, pants and tops, she wears for the brand, comfort and quality (in that order).  And I must admit their clothes do look really good. 

Among teenagers and young women the brand has a cult following here in Canada.  Just go to any high school or university and you will see the product everywhere.  If you want further proof just go to a store, especially at Christmas, it's a zoo. 

Last year, when I was in Hawaii I went to the Lululemon store in Honolulu and the sales associates said the brand hasn't caught on over there yet.  That said, I'm sure if you give it some time the brand will slowly grow and then explode in the USA just as it has in Canada. 

So let me be clear, Lululemon is not a yoga clothing company.  They are a turning into an iconic brand that has very large appeal among women.

For my American readers it is best to compare Lululemon to Under Armour.  Both have around a billion dollars a year in sales, but Lululemon is superior in many ways.  Under Armour sells mainly to men who will not pay any price for athletic clothing.  Lululemon sells almost exclusively to women and who will pay up to be seen in the brand.  Lululemon is also not just an athletic company, but predominately a fashion clothing line. 

Looking back I really should have seen this company earlier as it is a classic Peter Lynch play. 

As for competition, some companies have tried.  You can imitate the clothing but you can't imitate to imitate the brand.  The competition can only compete on price, but competing on price is really hard in this category.  First it will force the company to compete with a lower quality product or accept razor thin margins.  Secondly, competing on price is very difficult because of perceived value.  Women in general believe that price equals value, especially when it comes to fashion.  I mean, how many women want to be seen in a second class product unless they have very high self esteem.  

This is the same reason why See's Candies (a subsidiary of Berkshire Hathaway) can sell more and more candy at higher and higher prices each year.  Warren Buffett has said, they really guilt men into the higher priced product because they don't want to be perceived by their wives as being cheap.  Imagine walking up to your wife and saying, "Here Honey, Happy Valentines Day!  I settled for second best for you this year."  That just isn't going to happen and it demonstrates the pricing power of the product.  Lululemon has the same pricing power. 

So what is the primary value in Lululemon?  It really is a play on the vanity of women and the customer's desire to wear it and be seen in it.  Basically it's for women who are fighting their battle with low self esteem, which includes almost every women in North American.  So I see Lululemon as a play on human nature, which is really driving the brand appeal.

So what about valuation?  I really don't understand it and can't make sense of it either, so it goes in the too hard pile.  Simple as that.  Obviously the female fashion market is much larger than yoga and athletic clothing, but guessing the ultimate market size isn't easy.  On the other hand, I would be on the lookout for any negative stigma that may reverse the popularity of the brand.  What is popular today can quickly change tomorrow. 

Best Regards,
Kevin Graham

Disclosure: Long BRK.B