Boring Portfolio

Boring Portfolio Report
Friday, December 19, 1997
by Greg Markus (

ANN ARBOR, Mich. (Dec. 19, 1997) -- Stocks caromed all over the place on this triple-witching Friday. The Dow, which was off 270 points at mid-morning, managed to trim two-thirds of that loss by day's end. The Nasdaq, off nearly 2.5% at one point, actually finished the day with a small gain. The S&P 500 closed down 0.89%.

As for the Boring Portfolio, it closed nominally lower Friday ( 0.08%). For the week, the Borefolio fell 0.51%, as compared with losses of 0.69% and 0.77% for the S&P 500 and Nasdaq, respectively.

Tidewater (NYSE: TDW) announced this morning that it has entered into a definitive agreement to sell its natural gas compression operation to Castle Harlan Partners III, L.P. for $360 million in cash. The deal, which is expected to close in March, will result in an estimated after-tax gain of more than $65 million, or $1.06 per share.

For folks who may not follow Tidewater, this New Orleans based outfit owns and operates the world's largest fleet of vessels serving the international offshore energy industry. With the sale of its gas compression business, Tidewater can pay down debt used to finance the acquisition of approximately 100 vessels from British-owned OIL, Ltd. earlier this year.

Tidewater stock fell a dollar on Friday -- but nearly every other oilpatch issue slipped, as well, so I wouldn't attribute the loss to the news of the sale but rather to ongoing worries about weakening demand for energy in Asia as economies in that region slow down.

Worries or not, this week's Baker Hughes (NYSE: BHI) rig count data show little evidence of a slowdown in offshore operations. Active offshore rigs in the Gulf of Mexico numbered 129 this week, up 7 from the week before. International data are collected on a monthly basis and released on the 15th of each month. The most recent report, for the month of November, had 249 offshore rigs in operation, down 5 from October.

Shares of Green Tree Financial (NYSE: GNT) rose for the fourth straight day Friday, gaining $1/2 to close at $25 1/16. On Monday, GNT lost $2 after Standard & Poor's downgraded its rating on the company to "negative," owing to what it saw as increased competition in the consumer loan market.

A number of industry analysts have been more upbeat following Monday's release to credit rating agencies of the latest information about the performance of Green Tree's portfolio of manufactured home (MH) loans. During the week, the Minneapolis-based investment firm of John G. Kinnard initiated coverage of Green Tree with a "buy," and Morgan Stanley reiterated its "strong buy" on the stock.

Not everyone ascribes to that view. In particular, CIBC Oppenheimer analyst Steven Eisman recently slashed his 1998 earnings estimate for Green Tree by $1.10 to $2.50 per share. Eisman, you may recall, was featured in a story by Gretchen Morgenson in the Dec. 15 issue of Forbes.

In a Dec. 16 research report, Eisman argues that even though Green Tree increased reserves to cover faster than expected prepayments of MH loans issued in 1994 and 1995, prepayment speeds on MH loans issued in 1996 are, at best, barely in line with the assumptions on which they were securitized -- and that this leaves an insufficient cushion in light of equity investors' concerns about "gain on sale" accounting.

Eisman graciously provided me with the data upon which he based his conclusions. After reviewing them, I contacted Green Tree Vice President and Director of Investor Relations John Dolphin to get the company's perspective.

Perhaps not surprisingly, Dolphin disputed Eisman's conclusion. First of all, Dolphin pointed out (as have some analysts) that the data show that prepayments have "plummeted" since Green Tree assigned a team to focus on retaining good customers who inquire about a loan payoff. Moreover, the earlier prepayment data turns out to have been over-stated to some degree, because the accounting department had been assigning new loan numbers to loans that had in fact been refinanced and retained.

Most of all, though, Dolphin asserted that Eisman is focusing on only one of a number of measures of prepayments -- and not the most important one at all. Dolphin said that when one examines the "life-to-date" prepayment information, which is the most relevant datum, they contradict Eisman's claim.

Rather than wade beyond my competencies into the depths of accounting arcania, I asked what seemed to this simple mind a straightforward way to try to get a handle on the situation. Recalling that the biggest prepayment problems occurred with MH loans made in early 1995, when the rates on such loans stood at around 12.0%, I asked what rates on comparable loans were in 1996, and where they stand now.

The answer: the loan rates were in the 10.1% to 10.45% range during 1996, and they're around 10.0% to 10.1%. (The data from Eisman confirm this.)

To this guy (one who recently inquired about refinancing his mortgage, by the way) that's probably not enough of a difference to inspire a inordinate amount of refinancing activity -- or at least not much that Green Tree can't manage and retain the loans in the original pools.

That said, Dolphin emphasized that Green Tree learned a lesson from the unexpected prepayments and monitors the situation very carefully. He insisted that Green Tree would not have to take another charge, and he was confident that the year-end audit would confirm that.

--Greg Markus

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Stock  Change    Bid
CGO   -  3/16  24.25
BGP   +  15/16 31.00
CSL   -  7/8   42.50
CSCO  -  1/8   53.44
FCH   -  3/4   37.00
GNT   +  1/2   25.06
PMSI  -  1/8   13.00
TDW   -1       54.13

                   Day   Month    Year  History
        BORING   -0.08%  -4.56%   7.77%  24.01%
        S&P:     -0.89%  -0.90%  27.82%  52.31%
        NASDAQ:  +0.10%  -4.74%  18.10%  46.47%

    Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     31.00   175.40%
  8/13/96  200 Carlisle C    26.32     42.50    61.44%
  6/26/96  150 Cisco Syst    35.93     53.44    48.71%
   3/8/96  400 Prime Medi    10.07     13.00    29.11%
 12/23/96  100 Tidewater     46.52     54.13    16.34%
   3/5/97  150 Atlas Air     23.06     24.25     5.17%
  11/6/97  200 FelCor Sui    37.59     37.00    -1.57%
   2/2/96  200 Green Tree    30.39     25.06   -17.52%

    Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49  12400.00  $7897.51
  8/13/96  200 Carlisle C  5264.99   8500.00  $3235.01
  6/26/96  150 Cisco Syst  5389.99   8015.63  $2625.64
   3/8/96  400 Prime Medi  4027.49   5200.00  $1172.51
 12/23/96  100 Tidewater   4652.49   5412.50   $760.01
   3/5/97  150 Atlas Air   3458.74   3637.50   $178.76
  11/6/97  200 FelCor Sui  7518.00   7400.00  -$118.00
   2/2/96  200 Green Tree  6077.49   5012.50 -$1064.99

                             CASH   $6427.47
                            TOTAL  $62005.60