(Bloomberg) — The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an outside adviser to President Barack Obama.

The current plan “will have a positive effect, but the real economy is a sicker patient,” Tyson said in a speech in Singapore today. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.

This idiot should be removed to Japan immediately so she can understand how great that country fared after their bubble and ensuing (and seemingly perpetual) balance sheet recession. Japan tried to prop their economy by increasing debt to GDP but that didn’t help at all. Oh, and Wikipedia says this adviser was a Morgan Stanley director since 1997. Where is MS now? Oh wait, isn’t MS one of those FORMER investment banks (now a traditional bank holding company)? Why anyone would listen to a person associated with an organization that was a party to the global financial crisis is beyond me.

The real reason behind this so-called advice is to make the American people totally dependent on the government. This means politicians and bureaucrats will have more power to hand out political favors and so they can get re-voted into office and to continue collecting special favors and money from lobbyists and business interests. If you like the idea of going to the government for your every need, or you simply insist that the government can spend your money better than you can, please continue to support the petty politicians like Obama, Pelosi, Reid, or really 98% of the people in Congress.

I am becoming more and more convinced that the best solution to our problem of a short-sighted and power-hungry Congress is their ability to run for an unlimited amount of terms. Couple that ability with the power to spend money with abandon (thanks to a complicit Federal Reserve and Treasury Department) and you have a powerful and dangerous organization. I.e., a gangster government to which businesses and individuals must go for special favors or simply to conduct business or simply to protect the rights guaranteed to them by the Constitution.

Thus, in tandem with term limits for Congress persons, I am beginning to believe the Federal Reserve must be abolished. The idea that a collection of academics and economists can shape the economy, set interest rates, prevent booms and busts, makes no sense. Isn’t government control over the economy, government control of the marketplace, of the very place and concept upon which each citizen depends in order to provide for themselves and others, isn’t this just pure socialist communist crap? Isn’t government control of a person’s life and livelihood the ideological enemy against which we continually fought ever since World War II?

For now, I’ve said all that I can say. I think a new goal for me will be to continue to organize my thoughts into a sort of party platform. No, I’m not running for office, but I feel like I’m “partying” by myself and would simply like to see if there are more people out there who agree with me.

P.S.: I’m already thinking back on this post. Consider everything I said to be representative of an idealistic Doug, not so much a pragmatic or realistic Doug.

With this back drop, Alleghany’s thoughts were a real curve-ball. This is how they begin their “thoughts on the big picture” (as contained in their 2008 annual report):

The imbalances that are evident today in the global economy trace their origins to August of 1994, when China embarked upon a course of a managed, nominal currency peg of the renminbi (RMB) against the U.S. dollar. Few remember today that as recently as 1981, the RMB/USD exchange rate was as strong as 1.53 yuan per dollar; by 1994 it had weakened to as low as 8.76 yuan per dollar, and was pegged at 8.28 until 2005. Over the following decade and a half, this currency policy contributed to stagnant U.S. household incomes (real median U.S. household income is lower today than it was in 1998), as U.S. labor could not compete with a massive, artificially priced Chinese labor pool due to the currency devaluation. The mechanism with which China (and other countries with pegged currencies) kept its currency artificially depressed was to recycle dollars into U.S. treasury securities and agency securities, thereby keeping U.S. interest rates artificially low, exporting deflation, and importing inflation. The prime beneficiary of this policy in the United States and other OECD (Organization for Economic Cooperation and Development) countries was the financial services industry, which took advantage of excessively easy money and low interest rates to fund credit expansion to middle class households, who sought to improve their standard of living despite stagnant incomes by borrowing to fund consumption.

So rather than blaming something that was particular to America, Alleghany pinpoints China’s currency peg as a large reason for the worldwide financial crisis. Very interesting.

Well, I can stop worrying about the job part as I recently accepted an offer from Banyan Capital Management in Atlanta, a small investment management firm that invests based upon value investing principles. I will begin work as Portfolio Manager sometime this October. I am very excited about this opportunity. This is exactly what I want to do and Banyan is the exact type of place where I want to be.

Part of my duties at Banyan will include becoming intimately familiar with each of the stocks owned in the portfolio. I will have to rank each stock from best to worst and I will also have to make the case for a new stock to replace the worst of the currently-owned stocks. I already have a bunch of ideas that have been rattling around in my head and that I have mentioned previously on Yes and Not Yes. I intend to continue to do some cursory research on my ideas and hopefully will get some of them posted on the blog.

So, despite my intention of not practicing law, I will still be sitting for the Bar, so this blog will be updated infrequently at best until after the Bar.

Here is a 10 year monthly chart (click for larger image).

So what does CSWC do? From their website:

Capital Southwest is a publicly–owned business development company with total assets of $486 million as of December 31, 2008. We provide patient capital to exceptional businesses with significant growth potential. As a public company, we have the flexibility to hold investments indefinitely, which has provided the management teams of our holdings a stable ownership platform since we were founded in 1961.

You can see their investment/business portfolio here. It looks like a diverse portfolio with investments in small banks, medical device companies, software companies, and drilling equipment among other things.

Right now CSWC has a net asset value of about $111 per share, so the stock is trading roughly 0.63 of net asset value (or at a 37% discount of net asset value). This looks like a bargain to me if you missed a chance to pick this up in March.

“What do you mean, so?” You can’t go around wantonly killing people, Frazier,” Butcher complained, dropping to what he assumed was the irreducible minimum of agreement.

“Ancona’s not a person,” the intelligence operative replied coldly.

“Come on, Bat,” Butcher retorted. “He’s a human being!”

“That’s not the same thing,” Masterson intoned even more icily, slowly shaking his head from side to side in disbelief at Butcher’s naivete.

“Who says there’s a difference?” Butcher challenged him.

“The Supreme Court—Harry Blackmun—Roe versus Wade,” Masterson responded with the confidence of a grand master announcing a checkmate.

Just as Masterson had anticipated, invocation of Roe intimidated Butcher into silence. Why not? All of American society genuflected in awe, or cursed in frustration, at the mention of that momentous decision. Nevertheless, any three-hundred-dollar-an-hour Establishment attorney could have explained to the Treasury Secretary how Masterson was extrapolating the sound premise that an unborn child was not a legal “person” to the so-far-unprecedented conclusion that other biologically human beings could also be denied personhood. Not that legal logic was unable to travel from Blackmun’s starting point to Masterson’s terminus. Only that, for practical political reasons, the Establishment was not yet ready to expand Roe’s holding so far.

Nonetheless, being slightly ahead of his time did not make Masterson wrong—and he knew it. “Roe versus Wade stripped mere biological human beings of all rights,” he explained triumphantly to  Butcher, “because if an individual can be killed for someone else’s convenience, he can’t assert any rights. To have rights, an individual has to be more than scientifically a human being. His factual human nature isn’t good enough any longer. He has to have a special political status, too. He has to be a person—whatever that means, or can be made to mean. So, in Roe, Harry Blackmun overruled the Declaration of Independence: All human beings aren’t naturally equal; and none have unalienable rights!” Masterson exulted. He had always despised natural law.

“What’s the difference between a human being and a person?” Stillwell asked, a mixture of perplexity and anxiety creeping onto his countenance, as if his subconscious mind had some peculiarly personal and troubling need to know.

“Basically, the faculty of choice and reason,” Masterson responded immediately, having thought through that question beforehand. “If an individual can’t choose or can’t think, he may still be biologically human, but he’s no legal person, and therefore has no rights. At the opposite ends of the spectrum of life are self-evident non-persons: unborn children, brainless geriatric patients. Within the spectrum are individuals in a persistent vegetative state: you, for instance, Reginald,” Masterson laughed cynically. Butcher was not amused.

“An even more sophisticated approach,” Masterson continued, “is to gauge personhood by the mental quality of an individual’s life. A human being proves, or disproves, that he exercises good choices and right reason by the nature of what he chooses and how he thinks. It’s not the mere faculty of choice and ability to think that makes someone a person, but his actually making correct choices and thinking proper thoughts.”

“That’s a long leap from Roe,” Butcher suggested.

“Not at all,” Masterson sneered. “Roe held that all human beings aren’t entitled to a right to life; only persons, as the courts—an enforcement arm of the government—define them. Then society decided that even some persons are better off dead, and have a right to suicide or voluntary euthanasia. Then society decided that some people can choose death for others who can’t decide for themselves. Now, society’s in the process of deciding to prescribe death for individuals who ought to die, but who stubbornly, stupidly, and antisocially cling to lives not worth living. Well, ought to die covers a wide area, doesn’t it? Those who ought to die can be injured or diseased in body—but also in mind, in personality, in patterns of thought, in persistent attitudes. If the government can empower a mother to kill her child, a sick man to kill himself, a doctor to kill a patient who can’t speak for himself—and even one who can—if society can rid itself of some worthless superannuated senile Negress who’s eating up too much in costly medical care, why can’t the body politic eliminate troublemakers like Ancona who are even more expensive to keep in line? Why squander scarce resources refuting his lunatic ideas again and again, when one cartridge can shut his trap permanently? The New World Order has no place for too many of the very young, or for any of the very old, the very sick, the very stupid—and especially the incorrigibly rebellious. Too many lives not worth living are the problem. Death’s the answer. Today we have to finesse the public’s squeamishness with euphemisms such as women’s choice and death with dignity. In a few years …”

“That’s all nonsense,” Butcher interjected, his voice betraying his unease, as he tried to attack Masterson’s premise. “The government isn’t empowering women to kill children through abortion—it’s only protecting their choice and their privacy.”

“Choice?! Privacy?!” Masterson guffawed. “What other homicide does the government treat as noncriminal simply because the killers choose to perpetrate them in private? And why do judges deny the father any choice in the matter of the mother’s killing of his own child? What other jointly created property does the government license one of the creators to destroy over the other’s objection? Sorry, Reginald. No theory of the right to life or the right to property—at least as those rights were misunderstood before Harry Blackmun pulled the blinders off the law—ever conceived that one individual could have a natural, unilateral right to kill another, wholly innocent individual on demand. So abortion must be an outright grant of power from the government. And where does the government obtain its authority to grant such a right? From its power to decide who among its biologically human subjects should be sacrificed for society’s greater good—as embodied most instantly in its power to drive its citizens to their deaths in a war.

“Well, we’re in a war now, a war to preserve the environment and our quality of life. We can’t win that war if too many people of the wrong kinds keep being produced. So, the government allows—promotes—abortion to cut the population. And it delegates the authority to kill to the parties whose self-interest works in favor of that policy: mothers for whom pregnancy’s a personal inconvenience, and abortionists for whom terminating pregnancy’s a lucrative business. But if government can delegate the authority to kill, why can’t it assert that authority directly? Why can’t the government order abortions? And, even more to my point, why can’t there be retrospective abortions?”

“How can an abortion be retrospective?” Butcher demanded, his unease with the whole subject becoming ever more apparent.

“Sometimes I wonder whether you have the grey matter to be a policy maker, Reginald,” Masterson groaned. “It’s so obvious: Imagine someone who—because of the poor way his life’s turned out-would’ve been better off being aborted. And society would’ve been better off, too. Why should society suffer for his mother’s negligence? Shouldn’t we simply rid ourselves of individuals whose lives—as measured by their actions or thoughts—prove they shouldn’t have been allowed to live in the first place? That’s retrospective abortion. And it’s even more sensible than aborting unborn children, because prospective abortion winks at the deaths of the occasional gestating Beethoven or Einstein—whereas, with retrospective abortion you know for sure you’re simply disposing of a piece of garbage, not a potential genius.”

Butcher’s eyes betrayed his fear of the self-taught disciple of Nietzsche haranguing him. He could easily imagine Masterson as a Black Crow—a nazi Einzatzgruppe trooper—gunning down Jews, Gypsies, assorted Slavs. Good God!

Most recently, like in the last week or so, Chesapeake and Aubrey McClendon are hitting all these compensation lists for highly paid CEOs. There are two big misconceptions in the current discussion around McClendon being number one on that list. First, the payment of 75 million bucks to him is a lump sum allowance towards drilling that applies to the next five years. In other words, it should be viewed as 15 million per year, not 75 million in one year. While in societal terms, of course that’s absurd compared to what teachers make, but it’s less than all of his peers at similar companies like XTO and Devon. But the second point and the most important is the concept of pay for performance. Many of the people in the highly paid list did poor jobs in 2008 and did nothing to de-risk their companies where things, when things were good. By contrast, McClendon made shareholders about 30 billion dollars on three of his big four shale plays. He had paid 4.6 billion for three shale play land positions and last year he sold less than a third of those for 8.6 billion, which implicitly valued what they kept at 25.9 billion. In addition to highlighting 30 billion dollars of value created, these sales brough in a lot of cash to de-risk the balance sheet. Because gas prices plunged in ‘08, his stock did  poorly, then it did even worse when his big margin call took him out. At no point did he endanger the company with his bad personal decision, and he certainly couldn’t control gas prices. Over the long term, his company has built the most per share value of almost any company in the world. So for this, it’s probably okay to pay him industry average, but his Board has framed this poorly, then they made smaller bad decisions on peripheral compensation that muddied the water. The bottom line is this is a fantastic company, he has done a terrific job, and if you were on that comp committee, you would have leaned towards rewarding him handsomely for his 2008 performance.

With this additional knowledge of McClendon’s accomplishments, its a lot harder to be outraged. A story like this makes for good news, but sometimes when you dig deeper, you realize there’s not much there.

The Good

SUR is a consistently profitable writer of insurance. It’s had a combined ratio of 73.2%, 78.5%, 79.3%, 94.8%, and 92.7%, respectively for 2008, 2007, 2006, 2005, and 2004. SUR also had another record year for net income in 2008, earning $110 million. Some various other ratios to keep in mind is that SUR is now trading below its book value with a P/B ratio of 0.8. It’s also trading at 4.74 times free cash flow (that’s a a big cash flow yield of about 21%) and at 5.8 times earnings (an earnings yield of about 17.2%).  These yields are a LOT better than the current S&P earnings yield (6.15%) and 30-year treasury yields (4.06%). Based on the cursory data above, I think SUR would be a great buy. But one must also consider the risks. The following risks are the most obvious to me.

Some Things To Keep in Mind

One thing to keep in mind is that about 62% of SUR’s common stock is owned by CNA Financial Corp (CNA), which is not really a risk, but just something to keep in mind. The reason why this might be a good thing is that I have heard occasional talk of how CNA would like to acquire the rest of SUR’s shares. It was back in 2000 that CNA, through one of its subsidiaries, made a tender offer to acquire the rest of SUR’s shares. Another thing to keep in mind is that the vast majority of the demand for SUR’s products result from federal, state, and local laws that mandate the use of surety bonds. I see this mainly as a good thing as this guarantees a market. For example, if you are applying to become a mortgage broker in the state of Georgia, the Department of Banking and Finance requires that you submit a bond to them prior to receiving a license. I seriously doubt any government will cease to require surety bonds. And in connection with the stimulus package, SUR will be a beneficiary of any spending on infrastructure. The most serious factor to consider is that a significant portion of SUR’s business is guaranteeing the performance of construction firms, which means they can be affected by any challenges the construction industry faces. In fact, Willis Group has a recent report suggesting that the surety industry is “on the verge of a loss cycle and, possibly, a severe one.” At the very least I think SUR presents a good trading opportunity if you happen to be a trader… And despite an oncoming and possibly severe loss cycle, SUR might very well be a good purchase for the long-term investor at this price level. If you look at the past ten years, SUR has traded at around 1.3 times its book value — if SUR regains that historical average, that would mean a price of about $23.4, an approximate 65% gain from its current price. As always, do your own due diligence.

FFH is a Canadian holding company with subsidiaries involved in P&C insurance, reinsurance, and investment management. Prem Watsa, the founder, chairman, and CEO, has been called the “Canadian Warren Buffett.”

From a technical perspective, I think this pullback is a good buying opportunity. The price is sitting at resistance of a trend line and also a fibonacci line.

(Click image for larger size)

From a fundamental perspective, FFH is also a good buy. I believe Watsa is an excellent investor whose interests are aligned with shareholders. FFH has grown its book value at 6.3% for the past seven years and right now is trading at a 0.9 P/B ratio.

One thing I don’t like about FFH is that for 2008 it had a 110.1% combined ratio (underwriting profitability – below 100 means underwriting is profitable, above 100 means underwriting is unprofitable). However, 2008 was a pretty insane year for any financial company, so I’m willing to overlook 2008 as a once in a lifetime event.

With this most recent quarter, there is evidence of improvement as FFH has shown a combined ratio of 98.7% compared to 99.7% for the first quarter a year ago. I believe FFH and its subsidiaries are committed to profitable underwriting and I believe FFH is both a good long-term holding (or a short-term trade) at this price level, especially if you were too afraid to buy in at the March lows.

If you’re interested in FFH, I reccomend some due diligence. Look through the yearly reports and google for news on Prem Watsa. I guarantee this will be educational even if you don’t invest in FFH.

Here are some preliminary facts to get you acquainted.

• Shimano has about a 70-80% share of the worldwide bicycle component market
• Bicycle components make up about 78% of sales while fishing tackle makes up the rest of sales
• Operating margin has increased nicely for the past seven years: from 9% in 2001 to 14.8% in 2007
• Operating margin has averaged about 14% for the past eight years
• Strong history of sponsoring some of the best athletes and cycling teams in the world (I believe Lance won all seven of his Tours riding on Shimano components)

Here’s a picture of some of Shimano’s end products:

So what about the price of Shimano stock?

I’ve done a basic discounted cash flow analysis (make sure to note that all figures are in Yen) and found that Shimano stock is most likely about 30% beneath its intrinsic value.

If I had some more cash, I might invest a bit in Shimano. I see it as a stable, well-run business with good margins. Bicycles have been around for a long time and people will continue to use them. And especially as fuel prices rise, I think at least a few people will try to use bicycles for short commutes.