A Smaller Version Of Berkshire Hathaway: Markel Corporation

Markel Corporation markets and underwrites specialty insurance and have been doing business since 1930. They are not a big well known company except in the value investing community. This might be due to them being in a rather boring industry- insurance. Wall Street seems to push everything in vogue and the retail investor seems to follow along. Berkshire Hathaway was not well known either 25-30 years ago, and Warren Buffett had already been involved with Berkshire for nearly 20 years. I must admit when I first heard of Berkshire back in the mid 1980’s it was trading around 1500 a share. The only reason I noticed it, was that it had a high price tag or so I thought at the time. Hear it is almost twenty-five years later and another high priced insurance stock has got my attention. Well actually I’ve known about this one for a few years now. Did I say high priced at $342.00 dollars a share. Well for some of you new folks the stock price does not have anything to do with true value of the company. The reason why you see Berkshire Hathaway ((BRK-A: 106040.00 +1240.00 +1.18%),(BRK-B: 3499.00 +47.00 +1.36%)) and Markel (MKL: 346.83 -16.17 -4.45%) trading so high is because they don’t split the stock, like most companies often do.

As stated in the title Markel Corporation is a smaller version of a Berkshire Hathaway. It operates in the same fashion as well. That is it’s primary business is insurance. Most insurance companies have whats called float. Float is the money taken in (insurance premium) less the claims paid out. The difference or “float” is reinvested in fixed income and equities. Of course we all know that Buffett has been a master of this…taking the float and buying well known financially strong companies such as Coca Cola (KO: 49.37 +0.20 +0.41%), Johnson & Johnson (JNJ: 60.18 -0.27 -0.45%), Proctor & Gamble (PG: 53.44 -0.47 -0.87%), Wells Fargo (WFC: 28.46 +0.44 +1.57%) and Kraft Foods (KFT: 28.58 +0.25 +0.88%). Markel has also done quite well over the last twenty years by doing the same thing. Since August of 1990 Markel has risen over 2100% while Berkshire has risen over 1500%. Currently Markel is trading at (MKL: 346.83 -16.17 -4.45%) a share. They have over 132 million per share in cash and a debt/equity ratio .34. Markel has over 70 companies in its portfolio with Berkshire Hathaway, United Parcel Service (UPS: 53.28 -0.40 -0.75%), Diageo (DEO: 62.25 -0.14 -0.22%), and Carmax (KMX: 16.51 +0.21 +1.29%) being some of the larger holdings.

India Stock Market: Sensex Down 389.80 Points On Thursday

Sensex down 389.80 points on Thursday (August 6, 2009)
-Heavy profit booking in frontline stocks

Sensex (^BSESN: 15514.03 -389.80 -2.45%) fell 389.80 points or 2.5% to 15514.03.
Nifty (^NSEI: 4585.50 -108.65 -2.31%) fell 108.65 points or 2.3% to 4585.50.
Mid Cap index fell 2.5%. Small Cap fell 1.3%.
BSE 500 was down 2.3%. Sensex losers: 28

All 13 BSE Sectoral indices posted losses.
Advancers: 1080, Decliners: 1614, Unchanged: 73
Advance/Decline ratio: 5:8

Sensex Day’s Range: 15969.81 - 15443.22
Nifty Days Range: 4718.15 - 4559.20
52-Week Range: 15973.10 - 7697.39
52-Week Change: -2.8%
All Time High: 21206.77 (10 Jan 2008)

Sensex losers included Tata Motors -6.9%, Hindalco -6.5%, JP Associates -5.5%, Maruti Suzuki -5.3%, Hero Honda -5.3%, ACC -4.9% and Sterlite Ind -4.8%.

Sensex gainers were: Sun Pharma +1.5% and Wipro +0.04%.

Auto index fell 4.4% led by Escorts -7.8%, Tata Motors -6.9%, Ashok Leyland -6.3%, Maruti Suzuki -5.3%, Hero Honda -5.3%, Amtek Auto -4.4% and Mah & Mah -4.1%.

Realty index plunged 3.7% helped by Indiabulls Realty -8%, Anant Raj Ind -7.6%, Sobha Developers -3.6%, HDIL -3.5%, Omaxe -3.4% and Phoenix Mills -3.3%.

FMCG tanked 3.3% supported by United Breweries -5.6%, ITC -4%, HUL -3.8%, Dabur India -3.7% and Colgate -3.4%.

Metal index tumbled 3.1% aided by Hindalco -6.5%, Ispat Ind -5%, Jai Corp -4.8%, Sterlite Ind -4.8%, Jindal Saw -3.9% and Tata Steel -3.9%.

Power index declined 2.3% assisted by Suzlon Energy -4.4%, Torrent Power -3.9%, Crompton Greaves -3.4%, Siemens -3.4%, GMR Infra -3.2% and Rel Infra -3%.

Other sectoral losers were: Consumer Durables -2.1%, Capital Goods -2.1%, IT -2.1%, Teck -1.9%, PSU -1.9%, Bankex 1.7%, Oil & Gas -1.6% and Healthcare -0.7%.

Volume shockers on the BSE:
Ispat Ind 25.30 million shares, FirstSource 20.25 mln shares, Mahindra Satyam 16.70 mln shares and Suzlon Energy 11.59 mln shares

Turnover:
Volumes crossed the Rs 1 lakh crore mark; total traded turnover was at Rs 1,02,020.54 crore as against Rs 87,766.43 crore on Wednesday. This included Rs 21,045.46 crore from the NSE cash segment, Rs 73,819.40 crore from the NSE F&O and the balance Rs 7,155.68 crore from the BSE cash segment.

Buzzers:
Roman Tarmat +20% at Rs 49.20, TTK Healthcare +20% at Rs 152.80, Jindal Photo +15.6% at Rs 139.20, TVS Electronics +14.8% at Rs 25.95, Hind Oil Exploration +14.4% at Rs 187.15, India Gelatine +12.5% at Rs 49 and Archies +11.6% at Rs 89.

Heavy Losers:
Saint Gobain -16.5% at Rs 20.45, REI Six Ten -13.1% at Rs 827.65, Arvind Chemical -11.6% at Rs 39, Pritish Nandy -11% at Rs 25, Subros -10.4% at Rs 34.95, Delton Cables -9.2% at Rs 69 and Galaxy Multimedia -9.1% at Rs 34.30.

Mid Caps gainer/losers:
In the midcap space, Hindustan Oil Exploration surged 14%. Sun Pharma Advanced, Shriram Transport, ING Vysya Bank and J&K Bank were up 5-7.5%.

However, REI Six Ten, Indiabulls Real, Anant Raj Industries, Sterling Biotech and IBN18 Broadcast were down 7-13%.

Small Caps gainer/losers
In the smallcap space, DCB, Shriram EPC, Vishal Info, Selan Exploration and VIP Industries went up 7.7-11%.

However, Escorts, Aegis Logistics, Kirloskar Ferro, Eveready Industries and ABG Shipyard were down over 7%.

Bharti Airtel fractionally steady:
Bharti Airtel, which is in exclusive talks with South Africa’s MTN aimed at a merger to create the world’s third-biggest telecoms firm, dropped 0.5 percent to Rs 399.30.

Tata Power in for Capex of $4.9 billion:
Tata Power Co plans to spend 236 billion rupees ($4.9 billion) in capital expenditure over the next three years, Chairman Ratan Tata said on Thursday at the annual shareholders meet. The stock ended lower 2 per cent to Rs 1286.85.

Government to release Rs 2546 crore under TUFS:
The government has released Rs 25.46 billion of subsidies to textile firms to upgrade their technology, the textile minister said on Thursday.
Minister said the fund under the technology upgradation fund scheme would reach beneficiaries in three working days. Maran also said a committee to formulate a national fibre policy has been set up and would submit its recommendations in three months.

Asian Markets:
Asian markets ended mixed. Shanghai Composite fell 2.11% and Straits Times was down 0.2%. However, Hang Seng gained 2% and Nikkei rose 1.3%. Jakarta Composite gained 1.85%. Kospi and Taiwan Weighted gained 0.3% each.

BOE extends bond purchases after recession deepened:
The Bank of England increased its bond purchase program by 50 billion pounds ($84 billion), saying the U.K.’s economic recession is deeper than policy makers expected.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the key interest rate at 0.5 percent and said it will increase its assets purchase program to 175 billion pounds.

European Markets:
European markets were quoting: FTSE 100 was +1.2%. The CAC 40: +0.7% and the DAX was +1%.

Crude:
Oil for August delivery was $71.70 a barrel on the NYME.

Concern:
Today’s fall worry analysts about the sustainability of the bull run in the near future.

The Recession Is Over: Bloomberg U.S. Financial Conditions Index Reaches 21-Month High

(WFMI: 28.33 -0.37 -1.29%) - Whole Foods Market, Inc. - Shares of the natural and organic foods retailer exploded higher by more than 20% to $29.95 after reporting better-than-expected third-quarter profits and raising its full-year earnings forecast. The upward revision for full-year profits to about 80 cents per share from a previous estimate of 65 cents, sent the stock soaring right through the old 52-week high of $25.14, attained on July 30, 2009. Option bulls, hoping for the rally to continue, looked to the August 30 strike price to purchase approximately 1,900 calls for an average premium of 93 cents apiece. Shares of WFMI would need to climb just 3% higher in order for these call-buying investors to break even at a price of $30.93 by expiration. Other investors were seen picking up put options, perhaps in an attempt to lock in gains enjoyed during the rally. The August 29 strike had about 1,100 puts purchased for 95 cents each while the in-the-money August 30 strike had 1,200 puts coveted for 1.40 apiece. Finally, bullish traders with an appetite for call options scooped up 1,400 calls at the September 30 strike for an average premium of 1.67 per contract. Profits will begin to amass by expiration if shares climb at least 6% to $31.67. Implied volatility imploded following earnings, contracting nearly 33% from yesterday's reading to 44% this morning.

(PG: 53.52 -0.39 -0.72%) - The Proctor & Gamble Company - The world's largest household-products maker has experienced a share price decline of 3% to $53.84 today after its fourth-quarter earnings slipped 18%. The Cincinnati, OH-based firm blames shrinking profits for the quarter on declines in consumer spending on higher-priced detergents and skin care products in the current recessionary environment. PG reported that sales fell 11% to $18.7 billion as cash-strapped consumers make the switch to less-expensive generic goods to save money. Looking ahead a few months, it looks as though some option traders are gearing up for a recovery in PG by expiration in October. The sale of approximately 5,000 puts at the October 47.5 strike price for an average premium of 52 cents apiece, and the purchase of some 5,000 calls at the October 60 strike price for 33 cents per contract, suggests optimism. We note that not all of the contracts were spread against one another. However, the pattern for the most part mimics the bullish reversal strategy. Investors who have shed puts to buy calls on PG are perhaps hoping to see the stock recover in the next few months.

(FXI: 42.23 +0.44 +1.05%) - iShares FTSE/Xinhua China 25 Index Fund - The Chinese exchange-traded fund jumped onto our 'most active by options volume' market scanner this morning after one bearish investor was observed binging on put options. Shares of FXI have surrendered approximately 3% to arrive at the current price of $41.39. The September 38 strike price had 28,000 puts purchased for an average premium of 1.21 per contract. Maybe the investor responsible for the transaction holds a long position in the stock, and has gobbled up the protective puts in case shares continue to head south by expiration. Downside protection would kick in given an 11% decline in the stock to the breakeven price of $36.79. Otherwise, the trader is short the stock and has simply engaged in plain-vanilla put buying in an attempt to profit from bearish movement in the price of the underlying shares.

(UNG: 13.99 -0.05 -0.36%) - U.S. Natural Gas Fund - Natural gas prices have been a sad underperformer despite the fervor displayed in other energy markets. Unlike the resurrection for crude oil or heating oil prices so far this year, natural gas has missed out on a price gain. Despite a 2.1% gain to $14.04 today for the fund prices are still pretty close to the $11.91 low achieved three weeks ago. It would appear that one option trader expects this pattern to be maintained and today used the rally in the underlying to trade in more expensive calls for cheaper premium puts. The investor sold around 3,000 October expiration calls at the 15 strike to buy the same amount of puts at the lower 13 strike. Of course the investors could be long the underlying shares in the gas fund and is taking a 10 cent credit to establish protection on the view that the rally doesn't hold.

(DVA: 50.49 -0.72 -1.41%) - DaVita Inc. - The U.S. provider of dialysis services for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD), reported that profits jumped 11% in the second-quarter on higher treatment volume. The bullish earnings news pushed shares of DVA higher by 1.5% to $51.80 during today's trading session. Option traders looking to lock in gains targeted the August 50 strike price where some 5,100 puts were picked up for 93 cents per contract. Investors holding the put options are now protected in case the stock slips beneath the breakeven point to the downside at $49.07 by expiration this month. We note that the 7,547 option contracts exchanged on DVA today represent 45% of the existing open interest on the stock of 16,759 lots.

Home Affordable Mortgage Program HAMPered…

According to The New York Times, the Home Affordable Mortgage Program (HAMP) is pretty much a failure. HAMP is the Treasury plan to get banks to modify mortgages of people who cannot afford their current mortgages and are in danger of being foreclosed upon.

So far only 15% of those eligible have been offered help and only 9% have actually been helped. The biggest mortgage servicers are some of the banks that were major TARP recipients. At Bank of America (BAC: 17.05 +0.39 +2.34%) only 4% of eligible mortgages have been modified and at Wells Fargo (WFC: 28.46 +0.44 +1.57%) only 6% have been. Citibank (C: 3.7099 +0.1299 +3.63%) and J.P. Morgan (JPM: 41.27 -0.51 -1.22%) have done a somewhat better job at 15% and 20%, respectively.

The apparent reason for the very slow progress is that the program was all carrot and no stick. The program offered banks $1000 for each mortgage they modified, and paid part of the difference between the old and new payments. Congress made sure that there would be no consequences for banks dragging their feet when it killed the proposal to let bankruptcy judges modify mortgages on primary residencies (they already have the ability to do so for the mortgage on the beach house or the ski chalet, but not on houses people actually live in year-round).

Thus if you are falling behind on your mortgage, and find the bank is not very receptive to a modification, you can blame the 13 democratic senators (almost all “Blue Dogs”) who went along with virtually the entire GOP senate delegation in siding with the banks versus the individual homeowner.

Another reason is the change in the mark-to-market rules, which were a result of FASB caving in to congressional pressure. If a bank modifies a mortgage, it will have to reflect this in their financial statements…but they can extend and pretend that a loan is still good if they don’t.

From the borrower’s perspective, the backlog of pending foreclosures is so large that banks have also been very slow to actually take possession. Thus there have been thousands of cases where people simply stop paying and live rent- and mortgage-free for a year or more. That will certainly free up cash for other uses, and is often the most rational course of action for the homeowner, especially if the bank is not interested in modifying the terms of the mortgage. Of course, the homeowner has to live with the uncertainty of not knowing when the sheriff might show up at the door to evict them.

Fair And Fraudulent Mortgage Lending

To think that fraudulent mortgage lending practices will simply go away because regulators want them to would be the height of naivete. In fact, given the challenging economic times, I think one could make a case that fraudulent mortgage practices may actually increase on a relative basis. How so? Desperate people will always do desperate things, including fraudulent and criminal acts.

Where can one go to receive a fair deal in the process of getting mortgage financing? What parts of the mortgage market may represent the next wave of fraud? Which firms may currently be involved in these frauds?

Major “high five” to KD and our friends at 12th Street Capital for providing tremendous perspectives on these topics this morning. KD writes:

From the Fair Mortgage Collaborative website . . .

The Fair Mortgage Collaborative is a nonprofit membership organization whose members are individually and collectively committed to providing low and moderate income and minority homeowners and homebuyers access to mortgages with the consumers’ best interests at its core, at a fair rate of compensation. Our approaches and standards work for all homeowners and homebuyers.

KD’s comment: While I certainly applaud their effort, I would make the friendly suggestion they should be looking at FHA lenders and Reverse Mortgage lenders in particular..for those are the bastions of future (and current) abuses.”

Sense on Cents will also not unilaterally bless this organization, but it may be a decent place to start in hopes of finding fair lending practices. Speaking of which, an organization you may care to avoid is Taylor, Bean, and Whitaker Mortgage as the following story from Bloomberg highlights. Obviously TBW, as with any individual or organization, is entitled to due process but until this case is adjudicated, consumers may fare better going elsewhere. KD highlights the Bloomberg story as follows:

Aug. 4 (Bloomberg) - Taylor, Bean and Whitaker Mortgage Corp., the Florida home lender that offered $300 million to save Colonial BancGroup Inc., was barred from making new loans guaranteed by the Federal Housing Administration.

The FHA, citing concern about possible fraud, plans to sanction two top officials at Ocala-based Taylor Bean for providing “false” information to the agency, according to an FHA statement today.

Agents bearing federal warrants searched Colonial’s Orlando offices yesterday, and the Ocala, Florida Star-Banner reported a similar search at closely held Taylor Bean. The firm ranked 12th among U.S. mortgage originators (KD’s comment: I think they were 3rd in FHA lending behind B of A and Wells) in the first half of this year with $17 billion of loans, according to industry newsletter Inside Mortgage Finance.

Taylor failed to submit a required annual financial report and “misrepresented that there were no unresolved issues with its independent auditor,” the FHA said. The auditor discovered “irregular transactions that raised concerns of fraud,” according to the FHA statement.”

KD’s comment: Here is the official HUD News Release on this topic. It is probably even more painful that TBW will be losing their $25bln FHA servicing portfolio and the word on the street is that it will be moved to Bank of America.

Thank you KD and 12th St. Capital for providing these awesome insights and helping us collectively navigate the economic landscape.