Genworth and subsidiary unit

Genworth (NYSE: GNW) shares have risen by about 25% over the past month:

gnw

This is presumably due to their reduction of exposure to US mortgage insurance liability. They also recently hired a new CEO. I tried analyzing them earlier when doing my purchase of Genworth MI Canada (TSX: MIC) without coming to any conclusions that made me feel warm and fuzzy, but MIC is also has been a somewhat more muted recipient of positive price action:

mic.to

Despite all the doom and gloom concerning the Canadian real estate market, at this time I do not believe that this is going to affect mortgage insurance. Increases in unemployment and subsequent employment instability will likely be the precursor to mortgage-related claims. Indeed, delinquency rates at present are considerably lower.

MIC should be trading closer to tangible book value (roughly $28-29/share) which I believe is a more accurate reflection of its market value. At a certain point if Genworth manages to stabilize its financial picture, its options with respect to MIC start to increase. While the market continues to figure out this picture, investors can continue to clip dividends ($1.28/year annualized) from the shares while the company is likely to report earnings around the $3/share range. This recovery in MIC’s market value will likely continue to accelerate if the recovery in the US housing market continues.

Not a heck of a lot happening

I’ve been relatively happy with my portfolio, although the market performance has been less than thrilling. About two-thirds of the portfolio is trading well less than tangible book value, while the speculative components are fairly well positioned and I am just patiently waiting for the market to come to the conclusion that there is some serious undervaluation. Just eyeballing it, these companies are roughly at 55-70% of book value with strongly positive earnings.

Such suppression of market value can continue for some time but inevitably I will get paid – either through a dividend payment or a boost of market value. Buying back shares under tangible book value is also one of the rare times that I like to see share buybacks.

As prices have gone down, I have nibbled more of a position. This is probably the deepest value position that I have taken for my portfolio in quite some time.

Throughout the year it is always good to keep in the back of the mind if unrealized losses in the portfolio should be taken, and over the past couple months I have liquidated the losers and what is remaining in the portfolio is a substantial sum of deferred capital gains for 2013 and beyond.

I expect to see these unrealized capital gains get larger with the current portfolio. It is just a matter of being patient and hence, the general lack of observations here lately.

The end of Microsoft

Anybody using Windows 8 should realize it is a disaster for Microsoft. Possibly even worse than Windows Vista. Just ask the question of whether you will be seeing corporate clients (the major money-makers for Microsoft) upgrading to the new operating system.

The whole corporate strategy of Microsoft after they crushed IBM’s competitor, OS/2, has been to put a ringed gate around all software users and make it as difficult as possible to port outside of Microsoft DOS/Windows as possible. This worked for the most part for about 20 years before mobile and internet platforms started to become prevalent and relevant. Now, Microsoft’s strategy is simply about salvaging what is left inside the ringed gate with their Office and Exchange Server suites, where they still have a decent amount of entrenchment.

A chart is fairly instructive in terms of what the market is sensing is the reception to the Windows 8 launch:

Realize that institutional investors have much more powerful access to various data (e.g. channel sales data) than the everyday joe retail investor and you can easily see they have been betting significantly against Windows 8 being a material impact on Microsoft’s bottom line.

In terms of valuation, while Microsoft is more attractive than purchasing long term government debt, all of the growth should be discounted from the company’s valuation and instead a financial salvaging model should be applied to the company’s equity – eventually their domination of the office and exchange server market is going to erode to the point where they will completely lose pricing power.

I am not even going to get into the topic of their totally failed mobile phone market strategy, which has been even more of a disaster than Windows 8.

It is also not surprising as well to see the associated corporations, Dell and Intel being equivalent hammered by the marketplace.

All three companies will survive, but they are going to be shadows of the titans they used to be. I will give a bit of an exception for Intel, whom seem to somewhat still have their competitive act still together.

Canadian currency

For the first time since August, the Canadian dollar is worth less than a US dollar.

The 1:1 ratio is a psychological benchmark used by most people with respect to the dollar. This is actually arbitrary in light of the fact that the currency could be scaled 1:100 and be called the “Canadian Wazoo” which trades at 572 to 1 US dollar and then such comparisons would no longer be used. Both are equally invalid.

Nibbling

The presidential election outcome was the following: status quo.

I nibbled on some very boring, deep value US insurance companies in today’s trading. Also look out for low-liquidity issues – they are more likely to have their prices brought down by forced margin selling.