Update on Yellow Pages

After more than 4 years I'm out of the Yellow Pages (FKA Yellow Media). I had originally bought the preferred shares pre-bankruptcy protection and restructuring. On the actual conversion shares alone I lost about 6%.  (I bought some more along the way that more than offset the losses, but didn't buy any right after the restructuring--lacked the conviction and the cash). Doh.

Update: Lululemon (LULU)

I was going through some old posts and came across my buy for Lululemon back in September 2014. The update is that I chickened out and sold within a couple of months (made just over 2%) and missed out on gains of about 60% over the last year and half. Doh. 

The CBC on Home Capital Group

Yet another example of problems with a financial story.  In, Home Capital scandal may presage a slowdown (July 31, 2015), Don Pittis asks, "could the scandal at Home Capital just be the beginning?" His analysis states that, "as markets get into trouble, more and more accounts get shuffled off to the riskier end of the business. Pressure to succeed intensifies."  Then, suddenly, Pittis invokes the name of Bernie Madoff as an example of what can happen under pressure.

Pittis tries to couch this sensationalist firecracker by saying, "of course the Home Capital scandal is of a completely different magnitude".  The problem with this piece is that "there is no suggestion of a possible Madoff-like Ponzi scheme here,"  so why link the story to Madoff at all? It's not a "different magnitude", it's a different solar system than a Madoff style ponzi scheme.  Pittis is borrowing the emotional hype of the Madoff name for what purpose?  Is it to suggest or accuse management at Home Capital Group of masterminding a fraud?  Does he have evidence of this?  The Globe should hold itself to a higher standard.

Some context (includes my own editorializing)
At this point in time, it looks like Home is caught in a PR mushroom cloud for bungling the disclosure of some fraudulent mortgage applications.  The Twitter vigilantes (mostly U.S based hedge fund types who are keen to short Canada), have been out in force insinuating, if not outright making accusations of, offences as extreme as fraud on the part of management.  The media has been more than happy to give them a platform to voice their opinions as the looming Canadian housing market crash is a national obsession.  But essentially, based on the facts to date, Home is under attack for discovering and disclosing fraud.  You would think that this would be taken as a positive sign that the system works: usually a lender would go on merrily not disclosing fraudulent files because they would never even know about it!

The Globe on MDC accounting

David Milstead writes, Accounting for the legacy of Miles Nadal at MDC, in today's Globe and Mail. The piece focuses on SEC questions "about the way it presented its earnings and accounted for its profitability".  Milstead takes "a close look at MDC's presentation of its financial results [and] reveals unusual accounting methods that call into question the company's financial health".   While there appears to be legitimate concerns about management and governance issues at MDC, Milstead glosses over these and the piece delves into the company's (arguable) over emphasis on EBITDA and its calculation.  (To be fair, I'm looking at this in isolation and the Globe may have already covered issues around expenses and compensation elsewhere during the ongoing MDC news cycle).

The tone of the piece implies a nefarious accounting scheme whereby the company reported inflated EBITDA to mislead investors while posting negative Net Income.  For example: "it was only on page five that investors might have found that the company's 2013 bottom line [under GAAP] was a net loss"!!!  Milstead even invokes the "1990s tech bubble" and the "2001 Enron scandal" to add a little oomph to the story.   A whistle blower was mentioned but not the substance of what the whistle was blown on.

Milstead asks "what, exactly, did Mr. Nadal build in all these years of running MDC?"  One should ask what, exactly, is Mr. Milstead trying to suggest to his readers?   The Globe gave this piece half a page of space plus a lead in from the front page of the Report on Business section. Nothing in this piece appears to be inaccurate, but there is an issue with the tone.

Problems with the tone of this article:

1. EBITDA is a common measure to disclose in a press release or MD&A.  It is not some convoluted trickery of accounting.  In fact, it's not even accounting--it is a non-GAAP measure. It is misleading to invoke invoke the name of Enron, which was engaged in fraud, in a comparison to MDC's use of EBITDA.
2. The calculation of EBITDA was not hidden from investors as the company notes, "EBITDA is a non-GAAP measure, but as shown above it represents operating income (loss) plus depreciation and amortization, stock-based compensation, acquisition deal costs, deferred acquisition consideration adjustments, one time incentive and profit distributions from affiliates."
3. Any reasonably competent user of financial disclosures should understand the difference between EBITDA and Net Income.  They should also read past page five of the press release and read the actual 10-K filing.
4. It is important for management to make disclosures based on the measures it feels is important in running the business.  If management feels that EBITDA is a useful metric, then that in itself is a useful piece of information for investors and analysts.  

The actual substantive accounting issue related to treatment of deferred acquisition costs was given short shrift at the end of the piece.  The entire piece could have been an in-depth look at the complexity of this debate (MDC's perspective vs the SEC's).  Granted, this would have been more work and made for a much more technical and boring piece.  But the goal of journalism should be to provide context and insight for readers rather than tabloidizing the latest story.

Lazy Greeks

First Rebuttal posted some interesting charts and posits that "what you think you know about the Greek situation is likely not the real issue".

I wanted to confirm this data for myself and presented it slightly differently.  Below is the not seasonally adjusted annual Production of Total Industry numbers scaled to 100=January 1, 1999.

The chart outlines the growth of the various regions before and after the Euro (look at Greece go!).  It also highlights the outsized benefits to Germany under the Euro scheme and the difficulties of surviving a severe downturn without control over your currency. 

Total OECD and the UK are in there, as well, for reference.

Source: FRED

Leaving the labor force stats

Marginal Revolution asks who is moving out of the U.S. labor force?

I'm filing this under Good News Bad News because while it's bad that young people are out of work, it's good that many of these are not necessarily the most vulnerable.

Do nothing, sit still

Sometimes it's best to do nothing and sit still.

Rise of the 0.1%

The 1% are earning all the income but the wealth is accumulating at the 0.1% level.

From the work of "some of Thomas Piketty's favorite academic bandmates".

The collapse of the Canadian housing market

More Americans predicting the collapse of the Canadian housing market.

I've encountered many blog posts, newspaper articles, and sell-side reports of this vein and would like to comment on their main points.

Foreign buyers

• not the bogeyman
• usually putting down significant down payments
• if renting the space, then the issue should be the appropriate rental financing/regulatory regime, not a foreign buyer issue per se
• else if they are using the space for their kids/family who are living in Canada and may be Canadians themselves, then what's the problem here?
• else if not renting the space, and not using for family, then they're likely quite wealthy and see real estate as a place to store a lot of CAD (what other asset class would you have them invest in? and if the predicted stampede of capital occurs, which currency is going to act as safe haven vs CAD... (keeping in mind that the wealthy investor probably already holds lots of USD, HKD, JPY, EUR, GBP)?)

Household debt-to-income: Canada vs U.S.

• the shape of the chart is accurate but Canadian and U.S. stats are not directly comparable
• Canadians pay higher taxes so, all else being equal, you'd expect the Canadian ratio to be higher
• households are less sensitive to health related shocks due to universal insurance
• a corporate obligor with a 1.6X debt/EBITDA ratio would probably be investment grade rated

Valuations

• I'm very sympathetic to the view that we're in bubble territory
• but the market is the market
• there are explanations for the very extreme cases such as Toronto and Vancouver especially taking into account international comps

Frequency of defaults on mortgages

• don't panic until employment is a problem

Loss given default on mortgages

• overall LTVs are about 54% for CMHC as at 2014 Q3 (should be about similar for the big 5 banks)
• high ratio mortgages, and any conventional mortgages securitized through the NHA MBS program are insured by CMHC or the two private insurers
• and no, CMHC insurance is not a bail-out of banks, they have made billions of dollars for their shareholder (the Government of Canada) and if some black swan event wipes out a year or two of profits and a portion of the capital base (which is over 150% of regulatory minimums) then I think we call that a success

Looking ahead to 2015

Time to position for the year ahead.  2014 was marketed by ever higher highs in the stock market, continuation of crisis-time monetary stimulus, and geopolitical tensions--particularly of the Russian variety.  Six and a half years after Lehman's collapse, pundits, bloggers, and academics are still arguing about whether or not we are in a correction (or the right kind of correction).

In 2014 I moved a material portion of my stock portfolio into cash and gold ETFs.  Even after missing out on gains, and suffering meaningful losses on the gold, I'm comfortable with my cash position and look to increase it opportunistically.

Even if it's not in 2015, I have a grave sense--of the Tolkienesque variety--that a severe correction is coming that will shock and awe market participants of all ages  By the mysterious processes of the market, the sins of cheap money and price manipulation, or the fundamental problems that they intend to mask, will be fully discounted; perhaps quite suddenly.

On potential indicators of fundamental problems that are 'poking out', I note that the collapse in oil prices towards the end of 2014 has a demand component in addition to the much discussed supply side (Saudis, shale, tar sands).

Beer moats

Quartz has an infographic showing the family tress of the six largest beer companies that sell 50% of the world's beer. Consolidation has been huge factor in the beer as an investment story.  As anecdotal evidence of the industry's progress, AB Inbev was running ads against itself during the last World Cup.

One could spin a negative story that the industry has been growing by acquisition rather than organic growth and that tastes in major markets have been steadily shifting to wine and spirits.

The positive story is that the industry has recognized changing tastes and that consolidation is a sign of market discipline to keep margins high.  Size also creates strong moats around the firms.  It would be very difficult for any new entrant to take on the large incumbents in terms of: (1) brewing large volumes of beer of consistent quality; (2) mass marketing; (3) distribution to stores, bars, restaurants, stadiums, festivals, etc; and (4) entering emerging markets where beer can still be a growth story (due to some combination of rising incomes, weak local competitors, and beer as a relatively novel category).

In regards to craft beer:  Often delicious.  But the trend is not new, and for every successful independent, there are a host of competitors hoping to be bought out by a large multinational.


Disclosures
I hold a material part of my personal portfolio in beer stocks.  This is primarily through Ambev, SABMiller, MolsonCoors.

Rodent funds

Can rats out-trade your hedge fund?