Aug. 4th, 2008

peterbirks: (Default)
I don't like to write about my work topic in this here journal, but the following related so closely to my post last week on accounting methods, that I thought it merited a brief mention:

Old Republic International, a US insurer, has re-stated its earnings only a week after reporting its figures for the second quarter. It re-classifed what it called “other-than-temporary” impairments on equity investment securities as "losses". Well, yes. Although you do have to like the phrase "other than temporary". Kind of on a par with "non-decaffeinated coffee". So, what is the impact of this minor accounting change? Old Republic's losses for Q2 are now $364.7m, rather than the $45.4m loss that it claimed last week. Whoops.

Now, Old Republic is a fairly small fish in this pool. But, at the stroke of a pen, it can add $300m , 800%, to its losses, simply by saying "well, perhaps things won't get better after all".

The irony is, it's probably the best thing to do. Because there is now a possibility that for the next eight quarters Old Republic will be able to feed those numbers back into the system as things don't turn out to be as bad as this worst-case scenario. Nothing has changed in the underlying reality. All that has changed is Old Republic's definition of the reality.


At the beginning of the year there were a number of posts from analysts and "shrewd" commentators in the press that perhaps the banks had been oversold. They fell for (and I like this phrase) "the value trap". In the US the best example of this was Washington Mutual, seen by several as oversold. Bradford and Bingley was mentioned by some in the UK as a company that had been unfairly battered

Except that WaMu wasn't oversold, and B&B wasn't unfairly battered. WaMu's share price has fallen another 85% since then and B&B's share price isn't down by an awful lot less. "Value Traps" are the easiest holes for contrarian and yield investors to fall into. A favourite line is "Look, it's yielding 14%. Even if they halve the dividend, that's still 7%". So you buy the company, and they do halve the dividend, and the price drops another 50%. The share is still yielding 14%, and you have done half your money. Meanwhile, mug number 2 comes along and says "it's yielding 14% ... ".

As a player who thinks that some parts of the market HAVE been oversold, this is the trap that I have to avoid.

The consensus investment in times such as this is to look for companies with "price control" that don't fail too much in a recession.

Unfortunately, even fund managers can spot these, and so the bargains there are non-existent. Where might be bargains that the fund managers have missed?

Contrarily, I'm quite a fan of companies in competitive markets that are being hit by rising costs. The logic here is somewhat tortuous, but bear with me. Let's see why I rule out the other categories:

1) Companies with steady costs, non-competitive market.
Counter-argument. Overbought. Subject to government windfall taxes, intervention, negative press.

2) Companies with steady/reducing costs, competitive market:
E.G., the computer industry, Flat-Screen TV industry. Counterpoint: Prices fall faster than costs.

3) Comanies with rising costs, non-competitive market:
E.G: Utilities: Negative press, government conerns.

So, that brings us to (4), rising costs in a competitive market. A good example here is the distributive industry. Brakes Brothers, for example, is now privately owned, but it has been hammered by rising fuel costs. And so it is putting on a levy to its customers. These are business customers, so the chance of governmental sympathy is approximate to zero (there's no business vote any more). What this does is instill a concept of rising prices. If Dell came out with the line that it was going to charge £200 more for the same type of computer, buyers would disappear in droves and Hewlett-Packard would clean up. Except that it ain't gonna happen. The concept of ever-reducing prices (or constant prices and improving specs) is too ingrained in the retail-technology sector. But once you get a concept of a price increase through, even if it does not mean any added profit for you in this instance then the entire industry gets into a virtuous circle (for the industry) where customers sigh with resigned acceptance when a price increase comes along. This can last for several years and, if barriers to entry are high, a small number of companies can benefit from an unconscious cartel for many years. Look how long the old insurance system laster before Direct Line blasted highly profitable pricing to smithereens.

If we look at that distributor sector, that makes Headlam -- mainly a carpet distributor -- look quite attractive. Its share price has been battered for two main reasons -- increases in fuel costs and falls in planned house moves. But the former might get them (and their customers) into the price increase mind-set, while the house-move liquidity is just a time-shift in when those house moves will take place. In other words, much of the fall in house-move volume today will be caught up by increased house-move volume a few years down the line.

Any other companies you can think of that benefit from this set of parameters, I'd be delighted if you could let me know.


I lost about $150 yesterday, thus bringing to an end a 15-day winning streak (with no "protect my profit" days either), one of my best ever. I also played a couple of hands badly yesterday, thus bringing to an end a period when I felt that I was playing my best poker ever.

There's a downside to good runs. You have to protect against two dangerous tendencies. One is that you fail to maximise your winnings. Because you are getting good cards, you assume that other people are as well. So, just as TPTK can look like golddust when you are running bad (and you end up doing your bollocks as a result when opponent flops two pair) so, when you are running very well, two pair looks less good than it should, because you have been seeing so many sets that you assume that your opponent might well have one in this instance and be trapping you.

The second tendency slightly contradicts the former. You just become a little TOO confident in your reads. I totally misplayed a 99 last night (for a cost of only $20, phew) when I failed to follow the cardinal rule of folding a middle pair if you only came in with the intention of playing if you hit a set.

Flop came down 772 and I checked from the big blind into a $12 pot. Opponent one bet $2 of his remaining $20. Second opponent (full stacked but v loose) called, and I decided that this was a good position to represent a 7 and raised to $20. Opponent 1 promptly called (it was Aces, of course -- I should have guess that from his betting) and opponent 2 promptly raised all-in for $110. My fold took a nano second and opponent 2 promptly turned over 77 for four sevens.

LOL, as they say, but my mistake was changing my plan half-way through the hand. Very very occasionally this can be the right thing to do, but nothing had occurred in this hand to make it so. As Harrington says in Vol 1 of cash games, you can call the raise, but only with the intention of playing a set. If you flop an overpair with a middle pair, it's still, esepcially in multiwayers, a weak hand if there's any betting from the opposition.

And these short-stack tight players usually only raise with pairs anyway. If they have AK, they play differently. How could I have forgotten that?


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