Just saw a news article that Mitsubishi UFJ Financial Group - Japan’s biggest bank - needs to raise over $10 billion of new capital. This is just a couple of weeks after they invested over $9 billion of their own capital for a fifth of Morgan Stanley. This must be a new definition of incompetence. No wonder Japan has been a basket case for over 20 years.
Hard to understand how some $600-800 billion of potentially bad mortgages brought the global financial system to its knees. Looking at all of the government interventions around the world, in hindsight, I think we may find that it would have been better for the U.S. government to simply buy all the distressed housing stock in this country and use it for a massive program to turn lower income people into homeowners (or keep them in the homes they already have but can’t now afford). At least this would be more transparent than the current funding for ACORN type outfits, mandates to banks to lend more (lower their credit underwriting standards) to lower income segments, and Congress pushing Fan and Fred to buy up the loans so originated. Set an arbitrary income threshhold so that people of means who upgraded beyond such means suffer the consequences (like the CFO in the recent WSJ article who bought a $2.5MM home on a $250K salary and then lost his job, the house and everything else - idiot).
Anyway, the root causes are government policies that try to defy economic law, and a securitization system that separated risk from reward. Kill Fan and Fred and any such GSE - replace it with an explicit welfare program such as I outline above if you like and simply must have government involvement in the mortgage business as a matter of social policy (and if the taxpayers will still agree to this) - and get back to some form of portfolio lending, which would maintain some prudence in loan underwriting standards.
Good article in yesterday’s WSJ by Geoffrey Rogow and Joseph Checkler on how hedge funds - desperate for cash to meet investor redemptions - are selling into whatever rallies the markets can muster.
This will probably continue throughout the end of this year. Until it’s over, it will be hard to filter out how much of the market’s decline is due to this phenomenon and how much to recession expectations, but I think the volatility is entirely due to the former. I have no idea where fundamental values are, but I have a gut feeling stocks are very cheap right now, and I want to be buying on these big downdrafts.
With MDF now trading well above our target price set a year ago, we are closing out the position with a pre-tax return of over 50%.
Company Profile: Metropolitan Health Networks, Inc. (“Metropolitan�, MDF) provides health care services to Medicare Advantage program participants in South and Central Florida via two separate businesses. The first - Metcare of Florida, Inc. (“Metcare�) - provides health care services to approximately 27,000 people covered by Humana, Inc. (NYSE: HUM), Florida’s largest Medicare Advantage insurer with more than a 50% share of the market. Metcare currently provides care for approximately 10% of Humana’s Florida Medicare Advantage members under an annually renewable capitated fee contract. The second business - AdvantageCare - is Metropolitan’s own Medicare Advantage HMO launched in July, 2005 to operate in certain Florida markets not served under its Humana contract.
Investment Thesis: The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MMA�) signed into law in December, 2003 significantly increased funding for the Medicare Advantage program beginning in 2004. Managed care organizations now receive higher premiums for providing more and better services, and membership in the Medicare Advantage program is increasing after many years of decline. The prescription drug benefit of the MMA, which begins in 2006, will further drive participation in Medicare. Also, Florida has a Medicare-eligible population of some 3 million people (second only to California’s 4.3 million) which is expected to grow to roughly 4 million by 2015. California’s Medicare Advantage penetration is about 31%, however, while Florida’s is only 18%. This combination of a large and growing yet underdeveloped market, and improved economics, provide strong fundamental support for Metropolitan’s business model.
Metropolitan is well managed with a highly-leveraged operating model and is capable of growing market share relative to its competitors. Stockhound believes the Metcare unit alone can produce $0.28 per share pre-tax in 2006. Management is investing $5-7 million in developing its AdvantageCare business, which we expect to lose about $0.04 per share pre-tax next year. Assuming a 38% tax rate we see $0.15 of GAAP after-tax net income per share in 2006. Our earnings discount model indicates that MDF is currently trading at about a 30% discount to its intrinsic value, rating it a buy.
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