Listen to this commentary

It has never occurred to me until now that I would ever say that a billion dollars was not a lot of money.  Well, in the context of the current U.S. economic problems, and for the reasons I set out in this commentary, I am saying that this morning.

As I am sure you know, last Friday the U.S. Federal Housing Finance Agency (‘FHFA’) sued a number of the major U.S. Banks.  For an overview you can read ‘Federal government sues major banks over Fannie and Freddie losses’ – reading time 4 minutes.  For more, and I think very interesting detail, you can read an article titled ‘Your Guide To The MASSIVE Bank Lawsuits’ published Sunday on the Business Insider website – reading time 5 minutes.  That article links to a 13 slide PowerPoint Presentation that lists the total exposure of each of 17 U.S. Banks before consideration of any punitive damages that might arise.  Bank of America is #1 on the ‘exposure list’ according to the data presented, with a ‘total exposure before punitive damages’ of U.S.$57.4 billion.  This amount is reported as including exposures of Countrywide Financial Corporation and Franklin Financial Corp. which Bank of America acquired.  The charts set out:

• a list of individual defendants;

• a response to the lawsuits by Deutsche Bank that suggests Fannie Mae and Freddie Mac “are the epitome of a sophisticated investor” – which if that is ultimately put forward as a ‘principal defense’ by the Banks I (not a lawyer) wouldn’t ‘bank’ on ast being very compelling in an objective and independent Court;

• links to some of the evidence that apparently has been gathered to date;

• the ten ‘Causes of Action’ set out in the FHFA’s lawsuits; and,

• a brief statement of ‘Next Steps’ which suggests that one ought not to expect a quick resolution to this, and ultimately perhaps ‘out of Court’ settlements.  It seems to me ‘out of Court’ settlements might be very tricky, both because of the number of Parties involved, and because if they do occur there is left behind an inherent implication of guilt.  No doubt the Banks will take the position if settlements occur is that they were guilty of nothing, and settled simply to get an expedient resolution to the lawsuits against them based on an ‘opportunity cost of their time’ argument.  Even if all that happens, it seems to me there will be a ‘difficult to eradicate’ taint on the U.S. Investment Banking community.  If I am right in this, this may negatively impact ‘investor’ (but not necessarily ‘trader’) confidence in the U.S. equity markets, and perhaps equity markets generally.

Turning to Berkshire Hathaway’s now 12 day old U.S.$5 billion Preferred Share investment in Bank of America, I suggest the lawsuit against Bank of America takes my thoughts on how Berkshire may have structured its deal to a ‘whole new level’ – see ‘Warren Buffett – Standing In A Good Place’ (August 26).  If you haven’t as yet read what I said in my ‘Buffett Commentary’ you might consider doing that.  I am sure Mr. Buffett ‘slept like a baby’ on Friday night after the U.S. Government lawsuits had been filed, and will continue to do that going forward.

Are you sensing an increase in the ‘speed of new economic related announcements, in particular in the U.S. and the Eurozone.  I am, and I remember clearly the time-lag between the ‘U.S. car’ swerving in March, 2008 when ‘Bear Stearns’ was announced, and that ‘car’ jumping over the guardrail and crashing six months later in September, 2008 when Lehman Bros. was forced into bankruptcy.  Something to think about, and then discuss with your Investment Advisor.

You also might want to read ‘Mind-Blowing News from the FHFA’ – reading time 4 minutes – written by Addison Wiggin, well-known author of ‘The Demise of the Dollar’ among other books, and editorial director of The Daily Reckoning.  Mr. Wiggin, while expressing his views somewhat differently, seems to agree with me.  The article includes what I found to be a very confusing 8 minute video showing a series of undated clips of Democratic and Republican Senators debating Fannie Mae and Freddie Mac.  Frankly (no pun intended, but Barney Frank (Democrat, Massachusetts) appears more than once in the video) I think not worth watching.  What the video does convey for me the impression of what I increasingly think of as a current ineffective and inefficient U.S. Federal Government. ‘Ineffective’ and ‘Inefficient’ have to ‘rank right up there’ among the words one might not want to apply to a country’s leadership in the best of times, let alone in seriously difficult economic times.  Imagine a battered two-seat Lamborghini with bad tires careening through traffic on a crowded six-lane highway at 180 miles per hour where five people are stuffed into the car, where only two of them know how to drive in serious traffic, and where they all want to have their hands on the steering wheel.

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Foreign Operations Risk

Two weeks ago a contributor to our Stock Research Portal Q&A Forums asked, with specific reference to a company operating in Cote d’Ivoire, “How would you estimate the value of Perseus’ Ivory Coast exploration project? The market seems oblivious to Perseus’ exposure there.”  I provided my own answer to that question today as follows:

A fundamental principal of value is that it is specific to the ‘point in time’ at which it is determined.  That is to say, all factors relevant to the valuation of a particular asset known or believed prospective at a particular point in time need to be brought to bear on that assets value at that particular point in time.  Since those relevant factual and perceived prospective factors change with each passing day, so too is value re-determined each day as new information is assimilated by the market.

That said, the recent political disruption in Cote d’Ivoire, which I think fairly can be presumed to be well known by market participants, ought to be priced into the market each day as new developments and related news comes available.  While there can be little doubt that political disruption in Cote d’Ivorie changes the near-term risk profile of any company with important operations there, the value of the shares of each such company is ‘the present value of all future expectations’ – a long term view, not a short term view.  For the market for Perseus shares not to be materially affected in recent weeks in a material way says to me that ‘market consensus’ at least in part is saying that it believes Cote d’Ivorie’s current political unrest will be resolved in a way that will not by itself be either terribly positive or terribly negative to Perseus’ future prospects.  Whether that current market consensus is right or not of course remains to be seen.

In the end, answering your question is a little bit like ‘pushing on a string’.  Each individual investor has an ‘individual risk tolerance’ and an ‘individual risk assessment mechanism’.  Market consensus sometimes is right, and sometimes it is wrong.  I think the best advice one can give you (which likely is far broader than you had hoped) is ‘think about your own individual risk tolerance for the Cote d’Ivoire situation, monitor it closely, and reach your own conclusion each day as things unfold there – remembering the mantra that if you are a shareholder in Perseus or any other company who operates in Cote d-Ivoire (or for that matter any other country) “every day you hold a stock and don’t sell it is a day you theoretically re-purchase it”.

I long have considered foreign operating risk a big deal in my own research and analysis of the mining exploration stocks. In the Valuation of Mining Companies E-learning book you can find under the E-learning tab of Stock Research Portal, I comment on this issue as follows (paraphrased):

The geographic location of the Company’s project(s) is of significant importance.  At both the exploration and producer levels mining companies are subject to the political and economic risks of the country(ies) in which they principally operate, and (are subject) to substantive government regulation. Understanding a company’s property(ies) and project(s) means understanding:

·        their physical location and comparative geo-political risk;

·        how the laws in the jurisdiction in which the company may influence both the company’s and shareholders’ rights;

·        that many mining explorers have one or a small number of geographically scattered projects. On one hand it can be argued the latter mitigates geographic risk through diversification. On the other hand it can make a company’s prospects more difficult to assess, and leads to questions related to whether company management is capable of maximizing opportunity as a result of time and effort dilution; and,

·        of particular importance, current and prospective government stability, political risks, and political attitudes with respect to labour and safety laws, the environment, mining, mine permitting, mine infrastructure, and income tax law and rates all bear on project risk. Hence all are things that require careful consideration by investors in their respective risk assessments.

In the next few weeks we plan to add significant country specific location and ‘country political and economic data’ to the ‘Company Overview Page’ of each company in Stock Research Portal’s Company Universe.  This is something we believe our Subscribers will find to be of great value going forward – both from the point of view of content, and importantly from the point of view of ‘stock research efficiency’ (read ‘depth of research capability’, and ‘time savings’).

Giffords Shooting

A USA Today article titled ‘Gabrielle Giffords shooting fuels debate over rhetoric’ written only hours after the Congressman and others were shot in Tucson, Arizona this past Saturday morning questions whether the hard and sometimes offensive rhetoric currently adopted by partisan American politicians is at least a partial cause for this type of occurrence – and whether U.S. politicians ought to ‘rein things in’, or risk a greater likelihood of further such events than might otherwise take place.

I think this misses what I consider to be the more important point.  I say that while U.S. political rhetoric may be ‘more than edgy’ at times, the fundamental issue is far more likely to be the reduced standard of living and economic concerns currently (and I think prospectively) faced by much of Main Street America.    If American politicians are at increased risk of having violence visited upon them as we go forward, from my perspective that will result not from partisan rhetoric, but rather from partisan behavior behind the scenes in circumstances where that behavior does not result in getting Main Street America ‘back to work’.  I have said in other e-mails that it is not ‘rocket science’ to understand that you can’t take things away from people and leave them happy.  If things in on U.S. Main Street don’t change, and change quickly, it seems to me unhappiness on Main Street inevitably will lead to some minor number of people in the U.S. populace adopting further ‘socially unacceptable’ behavior.  Simply put, you don’t want you or your loved ones to be ‘in the wrong place at the wrong time’ if and when such events occur. I also think other countries whose ‘Main Streets’ suffer the same ‘loss in standard of living’ consequences are, and will not be, immune to the same time of ‘minority activity’.

Notwithstanding we all have been inundated by media coverage of the Tucson tragedy, you can read the referenced article here if you want to do that – reading time 3 minutes.

Additions to Stock Research Portal’s Company Universe

Today we added the following Companies to our Company Universe:

Bowmore Exploration Ltd. (TSXV:BOW).  We currently categorize Bowmore Exploration Ltd. as a gold (and copper) explorer operating principally in Mexico (and Canada (Quebec)). Bowmore Exploration Ltd.’s current market capitalization is approximately Cdn$36 million.  Review research data on Bowmore Exploration Ltd.

Petroamerica Oil Corp. (TSXV:PTA).  We currently categorize Petroamerica Oil Corp. as an explorer & producer (‘E&P) that is focused on Oil operating principally in South America (Colombia). Petroamerica Oil Corp.’s current market capitalization is approximately Cdn$50 million.  Review research data on Petroamerica Oil Corp.

Polo Resources Limited (TSX:POL).  We currently categorize Polo Resources Limited as thermal coal explorer (also metallurgical coal and uranium) operating principally in Asia (Mongolia). Polo Resources Limited’ s current market capitalization is approximately Cdn$195 million.  Review research data on Polo Resources Limited.

Press Release Highlights

The following table summarizes the companies in Stock Research Portal’s Company Universe who last Friday issued Press Releases and whose shares increased in price from the previous day’s close by more than Cdn$0.05, more than 10%, and whose share volumes yesterday exceeded their trailing 3 month average trading volume.  You can research each of these companies by clicking on the company name in the table.

* Yesterday’s data, or latest trading day’s data, as applicable

Insider Trading Highlights

The following table summarizes the companies in Stock Research Portal’s Company Universe for who our system on Friday, January 7 reported insiders who filed reports indicating they had acquired shares through ‘purchase’ transactions.  You can research each of these companies by clicking on the company name in the table.

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I titled this post ‘So, What Really Happened Tuesday?’ I would have liked to title it ‘So, What Really Happened Tuesday?’, but the software wouldn’t allow me to do that. Here’s what happened Tuesday:

• U.S. house prices were reported as falling year/year over 18% in December;

• the U.S. Consumer Confidence Index fell to its lowest level in recorded history – this index was first recorded in 1967;

• Fed Chairman Bernacke told Congress that the current recession ‘might’ end at the end of 2009, subject to qualifications that make his prediction meaningless;

• the U.S. stock markets went up. The DJIA rose over 3% (236 points) to 7,351;

• today, CNN reported that some U.S. politicians waited all day for a seat in order to be in line to shake President Obama’s hand last night as he made his way to or from the podium to make his first speech as President to the Joint Session of Congress; and,

• in his speech President Obama said (as best I could understand it) little he has not said since taking office.

My Comments: (1) those U.S. politicians who waited all day to shake their President’s hand (and hopefully be seen on television) ought to give their heads a shake – and their constituents should disenfranchise them (2) nothing new really happened today except more rhetoric and an increase in the stock market indexes (3) U.S. politicians seem to think it continues to be ‘business as usual’, and U.S. stock market participants are hopeful it is. Stay tuned – as in my view nothing that ‘really changed anything’ happened today. When a month or two go by with no further U.S. Job Losses, no further drops in U.S. house prices, and the U.S. consumer confidence index goes up for three consecutive months, then some economically meaningful things will have occurred. Until then, don’t hold your breath on a U.S. economic turnaround any time soon.

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In the next few months and thereafter we plan to make StockResearchPortal.com an important educational website conveying both valuation and stock market knowledge to users. As a start to this process you can find 5 Valuation E-Books resident in the website. These E-Books address:

• General Valuation Topics, including important summaries of Information Availability and Share Valuation Principles and Concepts;

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