What Is Bank Capital, Anyway?

Below is a good primer on bank capital from the NYT. The article dates from 2013 but is still relevant. American banks are about to find out if the Feds approve their plan to return capital to shareholders. It’s good to review what is bank capital and why it is important.

What Is Bank Capital, Anyway?
By William Alden

New-York Times

Regulators are butting heads with banks this week over capital, with new rules on the table that could force banks to hold more of it. But what exactly is capital, and why is it so important?

The question gets at the heart of finance today. In the crisis, a lack of capital brought some banks to the brink. Now, by requiring banks to bolster their capital, the government is trying to eliminate the need for taxpayer bailouts in the future.

Though capital is a centerpiece of Wall Street regulation, it resists a simple definition.

Capital is often described as a cushion that banks hold against losses. That’s true, but the implications are not always clear. One unfortunate misconception that can arise is that capital is a “rainy day fund.”

Related Links
Regulators Seek Stiffer Bank Rules on Capital (June 9, 2013)
To understand capital, think about how a financial firm does business. In a typical transaction, a firm pays for an investment with a combination of debt and equity. The more debt, or leverage, that finances the transaction, the more money the firm can make (or lose).

Say a firm pays for its investments with nine parts borrowing and one part equity. By using debt, the firm can magnify the return it makes on its equity. This is a principle banks use when determining how to finance their operations.

A bank’s capital is analogous to equity in the above example. More capital (so, less debt) means banks are more able to withstand losses. But it also means they can’t make as much money. This dynamic – more capital leading to lower returns – helps explain why banks tend to argue that holding more capital is “expensive.”

But even banks won’t deny that capital is essential. Without it, the tiniest loss would put a bank out of business.

Think about capital this way: It designates the percentage of assets that a bank can stand to lose without becoming insolvent.

If a bank’s assets decline in value, it has to account for that by adjusting the source of financing that it used. Liabilities like debt and deposits can’t be reduced, as they represent money that the bank has promised to pay to bondholders or depositors.

But what’s useful about capital is that it can be reduced, or written down. That’s the whole point. Shareholders, who contribute to capital, agree to absorb losses if the bank falls on hard times. So, rather than a “rainy day fund,” capital is a measure of a bank’s potential to absorb losses.

How does a bank increase its capital? There are few ways to do this, none of which banks particularly love. One is for banks to retain more of their profit, and not pay it out as dividends or spend it on share buybacks.

Another is to sell more shares in the market. That’s generally unappealing to banks because the shares would very likely be sold at a discount, and the slug of new shares could dilute the stakes of other shareholders.

A third method is reducing assets. This doesn’t actually increase the nominal level of capital. But it does increase ratio of capital to assets, which is one way that regulators measure the adequacy of a bank’s capital. If banks sell some of the things they own, that can have the effect of bolstering capital ratios.

When banks threaten to reduce lending or sell assets if they are forced to raise capital, this is the dynamic they are referring to.

The issue is complicated enough as it is, without the political posturing that is taking place. As regulators tinker with the rules, an understanding of capital will help reveal what’s at stake.


Elon’s Email to SpaceX Employees Regarding Taking The Company Public

Elon’s email to SpaceX employees regarding taking the company public (excerpted from Ashlee Vance’s biography)

From: Elon Musk
Date: June 7, 2013, 12:43:06 AM PDT
To: All <All@spacex.com>
Subject: Going Public

Per my recent comments, I am increasingly concerned about SpaceX going public before the Mars transport system is in place. Creating the technology needed to establish life on Mars is and always has been the fundamental goal of SpaceX. If being a public company diminishes that likelihood, then we should not do so until Mars is secure. This is something that I am open to reconsidering, but, given my experiences with Tesla and SolarCity, I am hesitant to foist being public on SpaceX, especially given the long term nature of our mission.

Continue reading “Elon’s Email to SpaceX Employees Regarding Taking The Company Public”

Good Blockchain Primer

Barron’s featured story this week is Beyond Bitcoin: How Blockchain Is Changing Banking. It can be a little complicated but you don’t need to be a tech nerd to get it. The article does a good job explaining how the whole thing works to the average Joe. By now most of us have heard about the Bitcoin mania but have a little understanding on how the whole thing works. Blockchain, the technology behind Bitcoins, is not a fad. It’s the real deal and many industries outside finance, such as medical and insurance are testing.

To simply put it, a blockchain is a digital ledger that is kept and validated simultaneously by a network of computers. Think of a shared Excel document that no one person can change without the agreement of the others. Importantly, it allows deals to be made without the blessing of a “trusted intermediary,” such as a clearinghouse. It has many advantages.

Blockchain will gain wider acceptance soon. Why? Well lots of money can be save. But also it has been proven to be secure, reliable, and operates at a lower cost than traditional mechanism. Why is it more secure? True record is kept by all participants and doesn’t depend on one person but by all participants. There’s not a single point of failure. For example, your notary can make a mistake that wouldn’t normally happen.  Executives know they need to understand blockchain, but not everyone is clear yet on how exactly it will help their business. I’m in the same boat. I don’t want to buy or invest in bitcoins, but I understand that blockchain is the way forward.

Here’s a copy of the article:

Beyond Bitcoin: How Blockchain Is Changing Banking
by By Avi Salzman from Barron’s

The hottest investment of the first half of the year wasn’t Amazon.com, Netflix, or even Tesla. In fact, your broker probably isn’t pitching it, and it is barely even recognized by the Securities and Exchange Commission. Yet cryptocurrencies—the most famous of which is Bitcoin—are shooting out the lights.

Investors who bought Bitcoin for $5 or less just five years ago are millionaires today, as its price has soared above $2,500. Unlucky ones have lost small fortunes simply by misplacing a password, much like leaving a suitcase full of cash at the train station. Bitcoin, which has nearly tripled in price this year alone, is blamed for fueling drug sales and for helping hackers wreak havoc on businesses and governments. On some days, its price swings 20% up or down, often on a whim or a rumor. (See related story: “How to Invest in Bitcoin.”
Continue reading “Good Blockchain Primer”

Henry Singleton Forbes 1979 Article

“[Warren Buffett] considers that Henry Singleton of Teledyne has the best operating and capital deployment record in American business.” – John Train’s The Money Masters

“He understood how to move between real assets and financial assets in a way you don’t see today…He was the most brilliant industrialist that I’ve ever met, and I’ve met many”Leon G. Cooperman speaking about Henry Singleton

Dr. Henry E. Singleton (1916-1999) was a business genius. He’s the founder of Teledyne, at the time one of the US’s largest conglomerates. Created in 1960, Teledyne was formed to capitalize on the coming revolution in which digital technology would replace analog devices and systems in everything we could touch and imagine. Loosely translated, Teledyne means Power Through Communication.

Henry Singleton was the idea behind the outstanding book The Outsiders by William N. Thorndike. Singleton is a master capital allocator and absolutely crushed the market. He could read a book a day and play chess blindfolded. He kept a low key profile and rarely gave interviews. This explains in part why most people aren’t familiar with him. Little is known today of Singleton’s achievements as a capital deployer and there’s a lot to learn.

Here’s the 6 pages Forbes article.

Henry Singleton Forbes 1979 article

Something to listen to in the car:


I Ran the C.I.A. Now I’m Endorsing Hillary Clinton

Below I reposted a solid article by the former deputy director of the Central Intelligence Agency, Michael Morell. The article is clear, rational, and straight to the point.  What you would exactly expect from a CIA guy. With so much nosense floating around, this article is refreshing.

Repost from the New-York Times
I Ran the C.I.A. Now I’m Endorsing Hillary Clinton.
By Michael J. Morell

During a 33-year career at the Central Intelligence Agency, I served presidents of both parties — three Republicans and three Democrats. I was at President George W. Bush’s side when we were attacked on Sept. 11; as deputy director of the agency, I was with President Obama when we killed Osama bin Laden in 2011.

I am neither a registered Democrat nor a registered Republican. In my 40 years of voting, I have pulled the lever for candidates of both parties. As a government official, I have always been silent about my preference for president.

No longer. On Nov. 8, I will vote for Hillary Clinton. Between now and then, I will do everything I can to ensure that she is elected as our 45th president.

Two strongly held beliefs have brought me to this decision. First, Mrs. Clinton is highly qualified to be commander in chief. I trust she will deliver on the most important duty of a president — keeping our nation safe. Second, Donald J. Trump is not only unqualified for the job, but he may well pose a threat to our national security.

I spent four years working with Mrs. Clinton when she was secretary of state, most often in the White House Situation Room. In these critically important meetings, I found her to be prepared, detail-oriented, thoughtful, inquisitive and willing to change her mind if presented with a compelling argument.

I also saw the secretary’s commitment to our nation’s security; her belief that America is an exceptional nation that must lead in the world for the country to remain secure and prosperous; her understanding that diplomacy can be effective only if the country is perceived as willing and able to use force if necessary; and, most important, her capacity to make the most difficult decision of all — whether to put young American women and men in harm’s way.

Mrs. Clinton was an early advocate of the raid that brought Bin Laden to justice, in opposition to some of her most important colleagues on the National Security Council. During the early debates about how we should respond to the Syrian civil war, she was a strong proponent of a more aggressive approach, one that might have prevented the Islamic State from gaining a foothold in Syria.

I never saw her bring politics into the Situation Room. In fact, I saw the opposite. When some wanted to delay the Bin Laden raid by one day because the White House Correspondents Dinner might be disrupted, she said, “Screw the White House Correspondents Dinner.”

In sharp contrast to Mrs. Clinton, Mr. Trump has no experience on national security. Even more important, the character traits he has exhibited during the primary season suggest he would be a poor, even dangerous, commander in chief.

These traits include his obvious need for self-aggrandizement, his overreaction to perceived slights, his tendency to make decisions based on intuition, his refusal to change his views based on new information, his routine carelessness with the facts, his unwillingness to listen to others and his lack of respect for the rule of law.

The dangers that flow from Mr. Trump’s character are not just risks that would emerge if he became president. It is already damaging our national security.

President Vladimir V. Putin of Russia was a career intelligence officer, trained to identify vulnerabilities in an individual and to exploit them. That is exactly what he did early in the primaries. Mr. Putin played upon Mr. Trump’s vulnerabilities by complimenting him. He responded just as Mr. Putin had calculated.

Mr. Putin is a great leader, Mr. Trump says, ignoring that he has killed and jailed journalists and political opponents, has invaded two of his neighbors and is driving his economy to ruin. Mr. Trump has also taken policy positions consistent with Russian, not American, interests — endorsing Russian espionage against the United States, supporting Russia’s annexation of Crimea and giving a green light to a possible Russian invasion of the Baltic States.

In the intelligence business, we would say that Mr. Putin had recruited Mr. Trump as an unwitting agent of the Russian Federation.

Mr. Trump has also undermined security with his call for barring Muslims from entering the country. This position, which so clearly contradicts the foundational values of our nation, plays into the hands of the jihadist narrative that our fight against terrorism is a war between religions.

In fact, many Muslim Americans play critical roles in protecting our country, including the man, whom I cannot identify, who ran the C.I.A.’s Counterterrorism Center for nearly a decade and who I believe is most responsible for keeping America safe since the Sept. 11 attacks.

My training as an intelligence officer taught me to call it as I see it. This is what I did for the C.I.A. This is what I am doing now. Our nation will be much safer with Hillary Clinton as president.

Michael J. Morell was the acting director and deputy director of the Central Intelligence Agency from 2010 to 2013.

Financial panic or slow burn?

I reposted an excellent article by Niall Ferguson. He’s a professor of history at Harvard and a senior fellow of the Hoover Institution at Stanford. While most financial news headlines focus on the current market noise, Niall takes the time to explain why it’s happening with some history.

Reposted from The Boston Globe
By Niall Ferguson

In the best-known scene of “The Revenant,’’ Leonardo DiCaprio is hideously mauled by a bear. The world’s investors now know exactly how that feels.

As I write, nearly every major equity index is down since the beginning of the year, with Italy as the worst performer (-23 percent) and Canada the best (-5 percent). The S&P500 is down 9 percent. With the exceptions of precious metals and safe haven sovereign bonds, it has been a rout.

The question now being asked on all sides is whether we are in for a repeat of the great crisis of 2008.
Continue reading “Financial panic or slow burn?”

The Chairwoman Who Cried Wolf

BoycriedwolfbarlowThe following was written in the context of what happens if that rate rise takes longer — MUCH longer — to materialize than expected? The logical conclusion in that instance would be that emerging markets have been oversold. The segment below was taken from frontura newsletter I occasionally receive. You can find out more about the group at frontura.vc.

Reposted from Frontera
By Kevin Virgil

The Chairwoman Who Cried Wolf

You are undoubtedly familiar with the story of ‘The Boy Who Cried Wolf’. The tale is one of Aesop’s Fables, a group of children’s stories believed to date as far back as ancient Greece and first published in the 15th century. The legend is that of a shepherd’s boy who repeatedly tricks his townsfolk into thinking that a wolf is attacking his flock of sheep. The foolish boy continues to play the trick until the townsfolk, tired of his antics, ignore him. Of course, it’s at that point that a wolf actually appears and treats itself to a lamb smorgasbord, and the boy’s cries are to no avail.

Like many of wise old Aesop’s stories, this one bears an uncanny similarity to contemporary events. Take, for instance, Fed Chairwoman Janet Yellen’s repeated assertions that the Fed is likely to raise rates this year (as she stated in March, July and September). Her central claim is that inflation pressures are gradually going to rise, and thus action must be taken now.

However the point of the story is that many people think she won’t raise rates and that could go on until after the U.S. Presidential elections. It remains to be seen….


Seeds of Division

The following repost is a very detailed analysis of the migrant/refugee crisis in Europe.

Repost From Quinn Diplomacy
By Derek Quinn

Conflict, dictatorships, instability and religious extremism in the Middle East, in the Horn of Africa, and in Central Africa plus the siren call of a better life has resulted in Europe’s worst immigration crisis since the Second World War. Hundreds of thousands of desperate people continue to crowd onto unseaworthy boats in hopes of crossing the Mediterranean, while thousands of Syrian refugees stream along railway tracks in the Balkans in hopes of finding asylum in Europe.

Full article here.

THE EUROPEAN CHESSBOARD: A Map Of The Russia-NATO Confrontation

I just saw this excellent map of the Ukraine/NATO vs Russia conflict on Business Insider. If you feel a little lost and confused with conflict, the map below can help sort things out. Another cease fire agreement was reached today, let’s how long this one last.

Voilà a detailed map with conflict zone, military bases, nukes and troops.

Repost from Business Insider
By Armin Rosen, Mike Nudelman AND Amanda Macias

russia vs nato Europe map

MTY Food Group – One Big Fishy Trade

Reposted from Seeking Alpha
By Brian Langis

MTY Food Group


This article is about two things:

1) A quick overview of the Q3 results.

2) The abnormal trading volume (again) leading up to the results.

For those who are unfamiliar with the company, I suggest you read my research report on MTY to have a feeling of what the company is about. My investment thesis hasn’t changed since then.

MTY is a company that I admire and I am currently long. MTY is managed by Mr. Stanley Ma, nicknamed the “King of Food Court” in Canada.

For the purpose of the article I will be referring to the Canadian symbol traded on the TMX. Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.1177$ Price of 1 USD in CAD.

MTY Food Group has a 52-week low of $27.84 and a 52-week high of $34.54 and its share is currently trading for ~$29 following a 10% drop since the Q3 results were release.

The Business

When you buy MTY, you’re not investing in the restaurants directly. Rather, you’re buying into a royalty stream based on a percentage of the restaurants’ sales and much more. For each plate that is sold MTY earns royalties. MTY simply collects royalties and has very low capital expenditures and financial risk. You eliminate a huge risk when you are not managing the restaurants yourself. The math is simple; more franchises => more sales =>more royalties. Because of this successful recipe, MTY receives recurring revenues and as a result it currently sits on $45 million at the end of last quarter. This growing war chest is looking for targets that will be accretive to MTY.

1- Results

MTY Q3 results wasn’t a homerun but remained respectable. Revenues, system sales, cash flow, number of stores and earnings were up, mostly driven by acquisitions. Q3 EBITDA was flat. On the negative side, MTY is still struggling with Same-Store-Sales (SSS), which are down -1.6% for the quarter. This is the 9th consecutive quarter of negative growth. The SSS needs to be addressed and fixed.

Below is a graph of the highlights and results.


On Wednesday, the trading day following the Q3 results, the stock dropped 8.43%. The Q3 results didn’t warrant a drop.

MTY is trading at 18x 2015 EPS and 13X ttm EV/EBITDA. It’s not exactly cheap but it’s not extremely expensive. MTY is a free cash flow generation machine with low capex. Mr. Ma has generally reinvested all the FCF in acquisitions that generates more FCF. It’s a nice business to be in. Based on future cash flow generated, it’s a nice buy and hold company if Mr. Ma keeps his current acquisition plan going.

2- Abnormal Volume

In general, MTY is a pretty sleepy stock. MTY is a ~$555 million market cap company that doesn’t make much noise. MTY is in the news (sort of) when they release their quarterly results four times a year and when they announced the occasional acquisition. That’s pretty much it. Stanley Ma is a quiet under the radar CEO and his personality is the furthest thing away from a media cheerleader. He could actually use the help a PR firm to help promote the company. A typical trading day for MTY has approximately 20,000 shares exchanging hands.

This is not the first time that there’s abnormal volume leading up to a news release. I previously addressed the issue over the summer on my personal blog, MTY Food Group Leak?, right after MTY announced an acquisition. To be brief, at the time volume has exploded right before the news was released and the stock went up right after. Leaks are present in any public companies. A lot of people are involved when it comes to acquisitions and financial reporting. It’s almost impossible eliminate leaks, so it almost expected that there’s higher trading than usual before an acquisition is announced.

However the volume activity on October 7, 2014 caught my attention. The opposite happened then the summer event. Instead of buying before good news, there was major selling before a 10% drop the next day. What’s interesting is that MTY has never disclose the date and time they release financial statements. Except for the insider involved in the preparation of financial statements, nobody knew that there were going to be released on Tuesday October 7 after the market close at 5pm. That was not public information.

Below is a 30 day table of the price history and volume of MTY. As you can see, it seems that somebody or some people found out.


There are a few observations from that table above.

1- Before Q3 results were released, volume has increase 15.2x its 30 day average. We saw 318,314 shares being traded instead of average of 20,935 shares being traded daily. Remember that nobody knew that the Q3 results were released at 5pm. The number of trades is slightly higher than its 30 day average, suggesting that it was big block of shares being traded.

2- The approximate daily trade value was $10.3m. That’s 14.9x the daily trade value we saw over the last 30 days.

3- Before October 7, there wasn’t a trading day were volume exceeded 100,000 shares. The highest trading day of the month had 71k share exchanged. Not a single day came close to the 318k share volume on that October 7 day. Like I said, MTY is a pretty sleepy stock on normal days.

This suggests that somebody with big block of shares knew that the results were coming in and dumped the shares. The last insider trading information I have is a director buying the stock by in June 2014. It doesn’t look like it’s a director or management dumping the share. The other piece of the puzzle is why somebody would sell his block when the results were fine. The dumping of shares created a bloodbath of -8.43% the next day.

I pulled up a Google Finance chart. You can see below that a major block of 293.6k share was traded at noon. Looks like somebody needed some $9.4m of lunch money. Eliminating that trade, there would have been about 24,000 being traded that day, right at its daily average.



Sensitive information leakage has become a daunting problem in today’s world. Leaks are present in any public companies. A lot of people are involved when it comes to acquisitions and financial reporting, making monitoring impossible. You can’t eliminate people having access to privilege information, but there must be a way to curb people taking advantage of it.

Massive trading volume before an unannounced quarterly release is definitely a red flag. The main question is: Was there trading based on privileged information?

It’s important to note here that I’m not making any accusations but simply stating an observation. However it’s an observation that I believe is worth investigating further. I don’t think that it’s a coincidence that there’s fifteen times the average daily volume right before a result announcement.

Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Additional disclosure: As with all of my articles, the opinions are my own. You should do your homework and make your own best judgments about the company. (I know that this resembles the boilerplate disclosure that you see in every email that you get from your broker but I really mean this and I am not saying it to avoid getting sued.)