Espey Manufacturing and Garan

I have not recommended stocks before because the firm I work with trades a lot and it is hard to know all of the positions at the exact moment I write the article. Tonight I will mention a stock though. At the moment I have no position in it and I know that the firm I consult for does not either.

The symbol is ESP and the company is called Espey Manufacturing. The stock is a microcap with the market cap at $52 million. If you read the profile about me you will see that years ago I went through an entire S and P stock guide looking for value stocks. I would do rough calculations in my head moving from one stock to the next. There were possibly 8,000 stocks in the guide but definitely at least 5,000. Any way I gathered a list of names and came up with maybe 30 - 50 names form the initial 5,000. What was strange about these stocks is that many were microcaps that never traded. And often the stocks would just sit there for days and never really do anything. Two of the names that were on the list were Garan (Old symbol - GAN) and Espey Manufacturing symbol ESP. This may have been around 1993 or so. Well I did my due diligence and liked both of these companies but only bought Garan. Garan was an interesting company and easy to understand as they made stuff for little kids. I think like clothes that kids would wear and these animals would be on the clothing. Kids loved them and the animals were called Garanimals. So I bought it. I then held the stock and I waited and waited and there were days that the stock did not even trade. After about 4 months I had enough as the stock just sat there. So I sold the stock and maybe wound up making a little money on it. Any way maybe about 18 months later or maybe even 5 years or so later Berkshire came in and bought the company at a huge premium. Had I held the stock I think I would have at least tripled my money.

Fast forward to today and I was watching CNBC the other day and actually saw ESP go by on the tape. I remembered ESP it was one of those value stocks I picked from that S and P guide back in 1993. Immediately I remembered the Garanimals story and that Berkshire wound up buying the company out. I am not saying to buy ESP. I have not done any work on it but I was just amazed to see the stock on the tape and to see the market cap at $50 million, amazing. I can tell you that in 1993 when I found it, it was a bargain. Is it still a bargain today? I have not done my due diligence on it yet to know but I am interested in finding more about it.

Disclosure: I do not own ESP, nor does the firm I consult for. However at some point I may buy the stock if after doing my research I decide to step in.

Wheat (ECBOT) Today Swung 25%

Electronic Trading at the CBOT for Wheat today swung from 1065.25 to 1334.50, a 269.25 point move or a 25.28% move in one day. To put this into perspective this is like the Dow starting at 10,000 and then hitting an intra-day high of 12,500. Can you imagine the Dow moving 25% in a day? Only in 1987 did a move like that happen in the US equity markets. The daily limits on Wheat were just lifted on Feb 25th so it is logical that the high - low band would increase but to increase to a 25% swing. Maybe the authorities that be will rethink the change to the daily limits in the Wheat market because it doesn't seem to be dampening the volatility in the market place and may even be contributing to an increase in volatility.

I am an equities guy, but for me there has to be some blood out there. To see commodities swinging like this must mean that there have to be some traders on the wrong side of this. Some of the wheat shorts have got to be getting carried out. I imagine that we will hear about some commodity fund 'blowing up' due to the swings in Wheat. Maybe even due to the swings in Wheat this week. Geesh 25% in a day! The leverage involved has to be thought about as well commodities can be bought with a 10% down payment, unlike in equities when you need to put down 50%. Maybe the commodities regulators will eventually look at that - the margin needed to put down. Amazing 25% swing in Wheat today, I can' get over that.

The Wheat information about the ECBOT came from:

http://futures.tradingcharts.com/intraday/ZW/38

US Indexes Year To Date

As of the close of trading for Friday February 22nd:

Dow = 12,381.02, -883.80, -6.66%

S and P 500 = 1,353.11, -115.25, -7.85%

Nasdaq = 2303.35, -348.93, -13.16%

The stats are from Yahoo Finance (http://finance.yahoo.com/), I calculated the point changes and the %age changes.

How Worried Is the Fed?

On Fridays I like to watch the Nightly Business Report. It is a business program on PBS that is on daily at 6:30 PM ET. One of the main reporters is Paul Kangas. He has been reporting for NBR since I was a young fellow and really knows the markets. I remember when I was growing up he used to say, "And on Wall Street, the bulls and the bears went at it again." On Fridays Kangas has a segment with a guest that is called the market monitor. Last weeks market monitor was Jim Stack. Stack is another 'solid fellow' as he has all sorts of stats at his fingertips. The one quote that Stack said that stuck with me after the interview went something like this, "The last time the Fed has cut the discount rate twice in a ten day period was in 1914... This goes to show how worried the Fed is. "

Thanks Paul for that interview and Jim for that stat. Wow the last time the Fed reacted by cutting the discount rate twice in a 10 day period was almost a hundred years ago!

A Hidden Problem - The Credit Markets and New York City Coops

What I write here is just a hypothesis. I do not have access to coop data to support this hypothesis nor have I gotten around to doing the research. So it may be completely off base as it is just a hunch. Also for disclosure purposes I do not own shares of a coop. The purpose of the essay is to notify coop boards and share holders of the possible difficulties faced when a coop tries to refinance its mortgage, and the ramifications of those difficulties including the possibility that coop sales prices decline.

**********************************************************************************

New York City apartments are classified as rentals, condos or coops. Rentals are easy to understand and condominiums are fairly common across the country so I won't discuss them except to say that it is my understanding that condominium associations are not allowed to have debt. Cooperatives on the other hand are corporations that can issue debt. Often when a building converts from a rental to a coop, the coop will take on mortgage debt to buy the physical assets such as the building and the land. When someone buys a cooperative apartment the individual is buying shares of a corporation. The coop corporation then leases the apartment to the share holder. However the individual who becomes a share holder assumes a liability for his portion of the coop mortgage debt. This mortgage debt is part of the coop monthly maintenance payment that the share holder makes to the coop corporation.

Usually the coop sets up mortgage payments that only pay off the interest and not the principal, so the mortgage never gets paid down but rather is rolled over into a new mortgage. It is possible that many coop share holders are unaware of this mortgage since it is a part of the maintenance payment nor are they aware that the principal does not get paid down. This is not supposed to be problematic though as the coop corporation usually will just refinance the mortgage when it comes due. However in recent weeks when the debt markets have given fits to borrowers such as the Port Authority and the state of Michigan, cooperative associations may be facing larger hurdles to refinance their mortgage debt. I am curious to see if the past relationship in which coop corporations borrowed money fairly easily still holds. Maybe coop corporations will not have any trouble refinancing their mortgage debt. Maybe they will face modestly higher interest rates. Perhaps they will be facing much higher interest rates. Could coops be paying the 20% interest rates that the Port Authority recently paid in the debt markets? In this debt environment anything is possible. I was stunned to see that the Port Authority had to pay 20% to borrow money.

So the question remains, how easy will it be for New York City Coops to refinance their mortgages in the debt markets when they have to roll over their old mortgage from a maturing one into a new one? If a new mortgage can't be issued, will shareholders be forced to immediately come up with the money to pay off the old mortgage? Usually these mortgages are in the millions of dollars so if coop share owners were immediately responsible for their portion of the mortgage, could this add thousands of dollars in bills to each share holder? If each share holder were then burdened with a large one time payment could this cause a flood of coop owners to sell their apartments before hit with this charge? Could this adversely affect New York City coop prices? Since there are thousands of coop buildings in New York City, how many residents could this adversely effect? I heard a stat that excluding rentals 70% of individual apartments in Manhattan are coops. I am not sure coop share owners are aware of the current problems that are occurring in the debt markets and the problems that coop corporations may face when refinancing their mortgages. It is possible that the New York City real estate and particularly New York City cooperatives may not be so insulated from the credit crunch or the housing decline after all.

St. Valentine

I read a short bio on Saint Valentine the other day and found it interesting as I did not know his story. So here is a rather simplified note on the famous Saint.

Not sure of the dates he lived but he was a priest who married Christians even though he was forbidden to do so by the Roman authorities. He defied the authorities and still performed the Christian marriages. So he was executed. Talk about conviction, you could see why the church made him a saint.

Freedom to pursue religion is such a basic right in this country that it is almost second nature. You want to go to a house of worship, go right ahead. You want to be an atheist or a Druid go right ahead. Freedom of religion does not exist in all countries in the world though so it is something to be cherished here. Saint Valentine unfortunately did not have that freedom.

About 3/4 Of Hedge Funds Lost Money In January

The stat above came from today's NY Times. It was a quote from an article titled, "Bad Bets and Accounting Flaws Bring Staggering Losses" and is about losses in the financial industry but particularly hedge funds. The article points out that all types of hedge funds are struggling this year. Whether the fund is Long/Short, Long only, Short only, overseas, or other, the fund is likely to be under water. I am not sure of the historical precedence of a stat like that, but I do know that the US equity markets have had one of the worst starts ever. What I find particularly interesting is that even the equity short funds are suffering. It seems that the market's violent turns are wreaking havoc even if you happened to be short the market. Even the great Goldman Sachs has not come out unscathed. According to the article the approximate $7 billion Goldman Sachs Partner Fund was down 6% in January. If the risk managers that Goldman's Partners hire to run their money are down 6% in a month, then you know that things are really tough out there.

OPEC Can Expect Some Backlash

OPEC recently announced that it may cut production if the price of oil approached $80 / barrel. If oil approached $80 / barrel and OPEC followed through on the cut back, OPEC could expect European backlash. Recently because of the cheap dollar, as oil has soared European countries have not experienced the full brunt of the price increase. But the recent rebound in the dollar changes that and if the dollar were to continue to increase European consumers would experience more of the pain caused by the high oil price. If oil prices recede to the $80 range and OPEC moves to counter balance the price decrease with a production cut, and a recession in Europe ensued, OPEC could expect some strong condemnation from the European countries. Note to OPEC, it would be wise to reconsider this.

US Equity Indexes, Year To Date Stats

Here are the year to date stats for US equity indexes as of Friday February 8th.

Dow = 12,182.13, YTD = -1,082.69, YTD % = - 8.16%

Dow 50 DMA = 12,913.73

Dow 200 DMA = 13,346.73

S & P 500 = 1,331.29, YTD = -137.07, YTD % = - 9.33%

S & P 500 50 DMA = 1,421.32

S & P 500 200 DMA = 1,480.73

Nasdaq = 2,304.85, YTD = -347.43, YTD% = -13.10%

Nasdaq 50 DMA = 2,519.71

Nasdaq 200 DMA = 2,602.95

As the above shows all of the averages are deep in the red for the year to date. The Nasdaq has taken the lead as the year's worst performing index. Also of note is that all of the indexes are deep below their 50 DMA and 200 DMA.

The stats are from Yahoo Finance: http://finance.yahoo.com/

The percentage calculations and the Moving average calculations were calculated by me.

The Movie 'The Train' and This Bear Market

There is a classic World War Two movie called 'The Train.' It is loosely based on the French Resistance during World War Two and the means it used to stop the Germans from looting French art at the end of the war. The great American actor Burt Lancaster plays the French antagonist Labiche and the German officer is played by Paul Scofield. Turner classics puts it on every once in a while and it is well worth watching if you get the time.

(Sorry for spoiling the movie if you haven't seen it but to get my point across I have to reveal the main plot. So if you want to watch the movie some day and have not seen it, please don't read on.)

In the movie there is a train loaded with French paintings that is headed for Germany. Along the route though it gets sabotaged by the French resistance so it keeps getting delayed. The main leader of the sabotage is Labiche. What I found especially memorable is the will Labiche had to try to stop the train. He was injured and barely could walk and yet he would somehow find a way to sabotage the tracks miles ahead of the train. He would single handedly vandalize the rails. To the German officer he was like a pest with magical powers that kept popping up and that would never go away. The German officer was always muttering to himself, "Labiche!" So as Labiche became obsessed with stopping this train during its journey the German officer becomes obsessed with trying to stop Labiche. It became a matter of wills.

This movie reminds me so much of the current bear market. As Labiche would hound the train to stop the French art from being looted, the current bear market is stalking investors. Every time the German officer thought the train was free to speed to Germany Labiche would thwart his efforts. The same thing can be said about the bear market. The bear is stalking investors and every time investors think they are in the clear (sounds familiar to the last two weeks of January when the Dow roared 1200 points and investors thought they were in the clear) the bear comes back with a vengeance. The Bear market wreaks havoc and is unrelenting in its pursuit of investors just like Labiche was in pursuit of that train. By the end of the movie the German officer was so frustrated he just gave up. And I believe that until investors do the same this bear market will not rest.

Yahoo and Google

When Google was still private it generated a great deal of interest, so much so that Yahoo offered to buy them out at one point. I don't remember the details exactly so the numbers here are very rough and are just an approximation of the numbers being thrown around at the time:

(The numbers here are rough estimate from my memory. I use the numbers to give a rough estimate of how Google was being valued back then.) Google was a small but growing rapidly search company in the early 2000s. Yahoo came around and liked what they saw and offered to buy them. I don't remember the price but it may have been about $300 million. Whatever the number it was a very large multiple of revs. Google came back and said OK but we want a higher price how about $600 million - $800 million (Again an approximation). Yahoo thought about it and said OK. But then Google changed their minds again and said no we want $1 billion. At this point Yahoo walked away.

What if Yahoo had bought them for $1 billion? All one can say in response to that is wow, especially since Google's market cap is over $150 billion. I do give Yahoo management credit though as they were able to sniff out a real business in its early stages and they came so close to owning them. Yahoo did own Google shares when Google went public in the summer 2004, so maybe Google will return the favor and buy a stake in Yahoo. I don't see them buying Yahoo but I do think they could make a strategic investment in Yahoo though. After all these are all former Stanford guys.

* Disclosure - I do not have any position in either Yahoo or Google. The firm I advise may or may not have positions in either of these two companies.

GIANTS WIN!

What a Win! This was a complete team win as the defense and the offense came through. The defense continuously pressured Brady and sacked him a number of times. How about Manning and Tyree? How did they connect on that 3rd and 5? Late in the game, Manning was in the pocket getting chased down and was about to get sacked when he escaped and threw a pass to Tyree who some how came down with the pass. Amazing on both ends as Tyree had to contort his body to come down with the pass and as Manning had to pull a Houdini to escape the sack. Unbelievable!

Also a great send off for the 90 year old Giants' legendary trainer, 'Doc' Johnson. Doc Johnson was also the Manhattan College trainer years ago. When I was on the Manhattan tennis team and had a recurring shoulder injury 'Doc' Johnson was the man I'd come to see. This was a great way for him to officially retire. Great job 'Doc' Johnson!

Trichet Will Lower Interest Rates

The US recession will cause a slowdown in Europe and will cause the ECB to cut rates. According to the web site, European Commission - External Trade - Trade Issues at

(http://ec.europa.eu/trade/issues/bilateral/countries/usa/index_en.htm)

"The EU and the US are each other's main trading partners... In the year 2005, the total amount of two - way investment was over 1.6 trillion Euros... In the year 2006, exports of EU goods to the US amounted to 269 billion Euros."

Since the US economy is slowing, European economies are likely to feel the pinch. Also with the strength of the Euro vs the dollar and the American consumer pulling back, travel by Americans to Europe will fall off, another head wind. All of this points to an economic slowdown in Europe which will then lead to lower rates by the ECB. Trichet's line on holding rates steady is not likely to continue much longer.

The Employment Picture Is Weak

A brief note here. The January employment report just came out and it is very weak. Unfortunately it is also another sign that the economy has rolled over.