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.

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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.