Tuesday, 09 June 2009 01:00

The Battle of the BoomBustBlog Analysts - DeVry

As is stated on my website, I am an investor that generates his own independent research. I usually use two teams of analysts to generate fundamental analysis reports and pursue macro research. These teams consist of consultants, CFAs and forensic CPAs. They often compete head to head, and they are encouraged to come up with their own independent ideas, openly challenge my thesis and findings, and most importantly to challenge each other's work in combination with a direct challenge to my theses, viewpoints and opinions. This creates a competitive, yet open environment where Hubris simply cannot survive, and where you must out your money where your mouth is in terms of backing up your viewpoints with facts and analysis. This is not the type of environment or analysis you can get from a sell side bank or brokerage firm!

I have just uploaded several internal documents illustrating a bull/bear debate we had over DeVry Inc. If you recall, I released a comparison of various companies in this sector along with a brief summary of DeVry. I never released the analytical and valuation work on DeVry, so the valuation portion of this is new to subscribers. All paying subscribers can download the debate here: The Battle of the BoomBustBlog Analysts - DeVry The Battle of the BoomBustBlog Analysts - DeVry 2009-06-09 16:51:13 771.03 Kb

Last modified on Tuesday, 09 June 2009 01:00

24 comments

  • Comment Link Querque01 Thursday, 11 June 2009 17:25 posted by Querque01

    What was the source of your data for the inflation numbers? Did you by any chance use the Shadow Statistics data as a comparison? I think his numbers are much more realistic than the government data which as a practicioner of some 25 plus years I can tell you have been manipulated for that long.

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  • Comment Link shaunsnoll Thursday, 11 June 2009 11:16 posted by shaunsnoll

    its my feeling that there are easier targets in the education sector, there are others with much higher valuation and also others with much much higher exposure to private student loans that have been funding more of the difference off their own balance sheets.

    interesting to see your analysts debate back and forth though. thanks!

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  • Comment Link Reggie Middleton Thursday, 11 June 2009 02:41 posted by Reggie Middleton

    That is a topic that should be taken to the private forums. At this point, although I am skeptical, I am leaning towards slight growth due to government impetus but I need to learn much more about the market to make a confident comment.

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  • Comment Link Rumi Wednesday, 10 June 2009 17:51 posted by Rumi


    LOL--I like your posts, Reggie, but did you have any additional thoughts on Devry/growing vs shrinking market, etc?

    It's pretty funny to see the moderator post off topic, though :o)

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  • Comment Link Reggie Middleton Wednesday, 10 June 2009 16:24 posted by Reggie Middleton

    Higher rates are going to kill those real estate investors who gorged on debt to buy sub-6% cap rate properties. It is also going to put a hurting on sick banks. See my newest post on inlfation, [url]http://boombustblog.com/Reggie-Middleton/996-Reggie-Middletons-Take-on-Investing-for-Inflation-pt.-1.html[/url] and search the blog for "the anatomy of a sick bank". I saw this one coming last year as well.

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  • Comment Link YAYANKEE Wednesday, 10 June 2009 15:30 posted by YAYANKEE

    Today's sloppy treasury auction may be the start of the expected resumption of the down move. With another $25 Billion auction tomorrow, the market action could get ugly, or beautiful if you are on the short side.


    "The auction was weak...There's some negative psychology," said John Spinello, chief fixed-income technical strategist with Jefferies & Co. in New York.

    The auction's "tail," or higher-than-expected yield the Treasury paid, deepened Wednesday's sell-off in the Treasuries market. Ten-year yield briefly touched 4 percent, a key trading support and a level not seen since October.

    The rise in Treasury yields since May has rippled across other markets and increased mortgage rates and other consumer borrowing costs. This has also fanned worries an economic recovery might be forestall, putting more pressure on the Federal Reserve and Obama Administration to do end the worst recession in decades.

    DEMAND SPIKES WITH YIELD

    Investors extracted 0.80 percentage point more in yield at this 10-year reopening than when the note was sold originally at the record quarterly refunding a month ago.

    The added yield incentive pulled reluctant participants from the sidelines, resulting in the strongest bid 10-year auction since September 2007.

    The bid-to-cover ratio, or amount of total bids to amount offered, came in at 2.62, while the share of indirect bids, which include those from foreign central banks and institutional investors, reached 34.2 percent, the highest for at a 10-year reopening in five years.

    To be sure, that 10-year reopening in June 2004 was much smaller at $10 billion.

    Disappointment over the 10-year sale cast a shadow over the Thursday's $11 billion reopening of a prior 30-year issue and subsequent Treasury offerings, analysts said.

    "One of the probable consequences is that auctions in general are going to be sloppier than what historical norms suggest that will be, and to what we have become accustomed," said Ward McCarthy, managing director at Stone & McCarthy Research Associates wrote in a research note.

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  • Comment Link Rumi Wednesday, 10 June 2009 13:47 posted by Rumi

    Shaunsnoll--doesn't velocity refer to how quickly money changes hands?

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  • Comment Link shaunsnoll Wednesday, 10 June 2009 13:43 posted by shaunsnoll

    rumi, i'm not sure you are defining "velocity" correctly. if you could explain what you understand the Velocity of Money to be then i think it would be easier to discuss with you. i feel like we are using two different concepts.

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  • Comment Link jarret Wednesday, 10 June 2009 13:23 posted by jarret

    Here is what I saw

    http://online.wsj.com/article/SB124464498136602283.html

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  • Comment Link Rumi Wednesday, 10 June 2009 13:16 posted by Rumi

    /someone should say something about Devry! /

    One of the big question marks, imo, is whether the entire industry grows going forward, or whether people start fighting over a shrinking pie (that's my current bias, but I'm not wedded to the idea). It doesn't seem like this was a consideration in the analysis (of course I read the thing at 1:30am, so I could be off)

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  • Comment Link Rumi Wednesday, 10 June 2009 13:12 posted by Rumi

    /so there is no way theoretically that the fed will "Fed just keeps printing until velocity picks up/

    Well, what I meant is that they will keep printing until the money supply compensates for the lack of velocity (which is a lot of printing!!). However, somewhere around that that point, velocity will pick up because people will recognize that it's a bad idea to hold dollars. At that point, supplyXvelocity goes to the stratosphere, and there's nothing anybody can do about it short of starting from Go.

    Once again, though, I'm just grasping at straws (and I suspect that the Fed and Treasury are, too).
    _______

    Jarret: Can you post a link? Do you know the terms of the investment? (are they the same as the terms that you'd get, for example? Offhand, I'm curious why he's buying 2/3 of the stock and 0% of the debt. Any ideas?

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  • Comment Link jarret Wednesday, 10 June 2009 12:50 posted by jarret

    What do you all make of this as I am currently very bearish on CRE....I know dont worry about a name brand investor but Paulson has had a great pulse on things the past few years.

    Real-estate services provider CB Richard Ellis Group Inc. announced hedge-fund operator Paulson & Co., which made billions anticipating a crumbling housing market, will buy $100 million in stock as part of a $550 million capital-raising effort by the company.

    CB Richard Ellis plans to sell $400 million in 10-year notes and $150 million in stock to repay other debt, ...

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  • Comment Link shaunsnoll Wednesday, 10 June 2009 12:08 posted by shaunsnoll

    hahahha, yeah someone should say something about Devry!

    the issue with a capitalist democracy is that the fed has zero control over the velocity of money. they can do some things that should affect it but in reality there is little they can do to control velocity. so there is no way theoretically that the fed will "Fed just keeps printing until velocity picks up" and that is the exact predicament they are in.

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  • Comment Link Rumi Wednesday, 10 June 2009 12:03 posted by Rumi

    btw, was anybody going to comment on DeVry?

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  • Comment Link Rumi Wednesday, 10 June 2009 11:35 posted by Rumi

    Pyr: /This would boost US competitiveness, jobs, and GDP while at the same time helping to return overvalued real estate assets to their intrinsic value. It would also reduce the government debt burden./
    _____

    I'm not sure where the US was really competitive before, other than finance. Manufacturing
    has been going offshore for a long time now.

    My *very* simplistic mental model is that the dollar will over time continue to drop until its (Agricultural + Military) exports ~= consumption imports. This means that:

    1. Dollar will keep dropping for a very long time
    2. Agriculture will keep rising (enormously)
    3. US standard of living will continue to decline
    ___
    Shaunsnoll,

    I honestly no longer have a strong opinion one way or another. I don't think that even Bernanke is stupid enough to print *so* much money as to compensate for the lack of credit available, but I honestly keep getting surprised by government policies. I guess the worst case scenario is that the Fed just keeps printing until velocity picks up. At that point, there will be a lot of money, and it will all be changing hands very quickly as people try to avoid holding any.

    But there are lots of other factors as well. Many, many people around the world hold dollars as a form of savings--I don't mean governments holding TBills or some equivalent; I am talking abuot individuals holding cash. What if they decide to dump them? Will this have a significant impact? I have no idea. Similarly, I don't know what people would start to use instead of the dollar (I guess that's the big question at the moment), or if there is even a need for the entire world to use a single reserve currency.

    From a purely detached perspective, I can't imagine Asian countries continuing to buy USDs for much longer, though--even if they wanted to, I don't think they can afford this much longer, since they have increasing deficits as well.

    Again, this is a very, very clouded model I'm using. I'm pretty much in the dark and just throwing things at the wall at the moment when it comes to a macro picture.

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  • Comment Link shaunsnoll Wednesday, 10 June 2009 10:37 posted by shaunsnoll

    rumi, i think you're perhaps under estimating the impact the decrease in the velocity of money has on GDP and inflation. it is a very very large impact, small changes in the velocity of money have dramatic impact (see china where they control much of the velocity of money through bank control), inflation of enormous size will only occur should the banks start lending with vigor.

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  • Comment Link pyor Wednesday, 10 June 2009 05:06 posted by pyor

    Inflation shows up as increase in the price of hard assets long before it shows up in the CPI. Nobody is surprised that the obvious hard assets are going up in price as the dollar goes down, i.e. Gold, oil and commodities.
    Companies are also hard assets and their value is rising relative to the dollar. I think this is the reason that the rally has continued much longer than most people expected.
    If the dollar depreciates another 15% then it shouldn't be surprising if companies valued in dollars go up another 15%.

    Personally I think the government would like to devalue the dollar back to where it was pre crisis. This would boost US competitiveness, jobs, and GDP while at the same time helping to return overvalued real estate assets to their intrinsic value. It would also reduce the government debt burden.

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  • Comment Link Rumi Wednesday, 10 June 2009 02:49 posted by Rumi

    BTW, the whole CRE model is based on ever-increasing forward values and on leverage. A delevereging environment destroys the viability of that model anyway, causing a downward spiral under any circumstances.

    Again, jmo.

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  • Comment Link Rumi Wednesday, 10 June 2009 02:46 posted by Rumi

    /If the money printing frenzy feeds mostly into the deleveraging of banks, companies, and consumers then wouldn't that have little effect on inflation?/

    I'm a total amateur and will likey be corrected, but:

    1. Inflation = money supply x velocity. Prices are a side-effect of inflation. The real question is how to define money supply--if you include all credit, then we're still in a deflationary spiral. If you are just looking at narrow money, I guess we're going through inflation now.
    2. The gov't can print money, but it can't dictate where the money flows once it is printed. The only way (IMO--I'm in a minority on this now, I think) that the banks can become solvent is for the underlying laons and real-estate on their books to significantly increase in value. That flat-out can't happen until nobody has anything better to do with the money, which means that many, many other undervalued things will have to go up (significantly) beforehand. In other words, the dollar will have to be worthless before RE denominated in dollars are worth anywhere near the amounts banks say they are. I guess it's possible that people/businesses may borrow (and find lenders) to buy RE on the grounds that it's something that can hold value in a time of increasingly worthless $, but I guess the easier and more automatic reaction is to just dump dollars and put the $somewhere else (like agriculture...).
    3. As soon as banks can deleverage, they'll probably start lending $ again--hence more inflation (velocity...)

    Sorry--this is probably incredibly incoherent even by my standards, but it's past my bedtime...If someone else jumps into this, you're probably better off listening to them, to be honest..

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  • Comment Link Rumi Wednesday, 10 June 2009 02:34 posted by Rumi

    1. The debate is interesting and somewhat enlightening. Thanks for posting both sides
    2. I'm a little surprised that nobody is questioning the assumptions on future enrollment--how many people could possibly be willing to take business and management now?? Why the big difference in enrolment numbers now vs earlier?
    3. Did anyone check into the success rate of grads in finding jobs/increasing their job classifications or salaries as a result of going through these programs? Or in graduates' willingness to recommend these programs to others?
    4.Did anyone check to see how traditional universities (or competitors, for that matter) view these companies? Are they worth competing against? Are they going to just be ignored? Are they going to be bought out? Etc.

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