Wednesday, August 12, 2009

This is what America is all about....

So, we destroy perfectly functional automobiles (2 tons of metal, engine, and finished material) in order to sell a new vehicle that gets 2-5miles per gallon better fuel economy? The environmental payback on that is probably a nice 200-year time period, hope you keep up the scheduled maintenance on that new Ford Focus.

Is it really that important to destroy these vehicles just to keep union guys working on the line? Why couldn't we just keep subsidizing the unions AND NOT destroy decent cars. Who would've thought someone could get choked up seeing an Oldsmobile Aurora being read its last rites?

Thursday, July 16, 2009

Goldman forcing CIT into liquidation?

As analysts are furiously attempting to figure out whether CIT will be allowed further out on the government dole (and Geithner indicates they have authority/ability, but not necessarily the desire to assist CIT).......

It is interesting to note that Goldman Sachs claims no "net exposure" on its CIT secured credit line ($1.5Bln drawn/$3.0Bln commitment).

With Goldman in a secured creditor position and significant short positions (via long unsecured CDS), and a high likelihood that Goldman has "hedged" itself against more than its $3.0Bln secured exposure...... Goldman stands to benefit the most from no government intervention. As a secured creditor, their recoveries will be higher on their loans than the unsecured bonds. Additionally, if they push for immediate liquidations it could result in overly punitive haircuts on unsecured creditors (i.e- overly large gains on unsecured CDS long positions).

Given the fact that the government still has GE on the dole for north of $70Bln, what exactly is the major constraint on lending CIT a few billion (aside from the fact that it does not help Goldman's book?) I for one don't like any of this bailout BS..... but there is clearly something wrong with liquidating a company simply to benefit Goldman's trading book.

PS- If it were to be found out that Goldman had "net negative exposure" to CIT (i.e- $5.0Bln unsecured CDS long against a $1.5Bln secured exposure), would Goldman have committed a violation of securities law/disclosure requirements....since they claimed to have "no material exposure".

Interestingly, Goldman is reported to have "hedged" itself on $20Bln in AIG exposure, in spite of only $10Bln of insurance. One should expect a similar "hedge" on CIT....the real question, why did our corrupt regulators solicit Goldman's opinion when they have a profit-motive to see the company fail? Ironically, its not Goldman (whose stated purpose is to make large profits) that should have people going to jail, but the former Goldman-officials and bureaucrats that are abusing their office in an effort to bankroll Goldman.

Tuesday, July 14, 2009

Tobin's Q- Why Are We Seeking to Audit the CIA When We Can't Even Audit Our Own Federal Reserve?

Ostensibly, our Congress and government (aka, Goldman Sachs) representatives would have us believe that auditing our Federal Reserve would a) destroy "sanctity" of independent Fed b) compromise monetary policy c)lead to economic collapse/ruin d)lead to politicization/economic favoritization e)etc., etc.

So given these potentially dire outcomes that would be associated with auditing our Fed (which is the only method to ensure it is indeed acting independently, appropriately, without favoritism towards a particular investment bank), it bewilders the imagination why our Congressmen are in such a hurry to audit the CIA and demand public accountability.

Imagine that..."public accountability" for a SPYING ORGANIZATION. We are too scared to even audit our public monetary policy, but believe making our SPIES publicly accountable to elected representatives is more appropriate?

Anyone care to chime in on this genius.

Thursday, June 11, 2009

Goldman Sachs Looks Shortable at $146

Short Goldman Sachs@$146, stop-loss around $155

-Goldman Sachs stock is up 200% from the lows six months ago. The stock hasn't taken a breather or shown any real consolidation since it was trading below $100/share. Goldman has torn higher, in spite of consistently lower trading volumes above $100/share. This suggests lack of strong buying interest and potential exhaustion in the move. In the words of Kyle from the Terminator movie: Listen, and understand! That Terminator is out there! It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead. (in spite of this, they do kill the Terminator in the end)

That being said, I believe Goldman Sachs stock is slightly more fallible. The stock was not trading much higher than its current price even in 2006-2007 before the extent of market losses could be quantified. In addition, they will likely show significant losses since the value of their public debt securities has risen in Q2 2009 (due to fair value accounting, major banks are able to report mark-to-market "gains" when the price of their debt securities declines below par). While Goldman may be raking in large gains from the recent surge in debt/equity issuance, even an optimist might view 10x earnings as a rich multiple to pay for an investment banker in the current environment. Essentially Goldman Sachs is arguably overvalued.

Shorting a small amount of shares here (may sell more short on a spike), along with implementing a put spread (buy $135 October Put/ Sell $105 put). A break below $140 might cause a severe decline to the $100 area (perhaps over 2 month period into August/September), although its fair to assume the Treasury would interfere if movements became any more severe than a 30-40% decline in Government Sachs' share price.

Sunday, May 10, 2009

Trade update- montpelier re (ticker MRH) is a good deal trading at $12.50 a share. Why? MRH is trading 20percent below its tangible book value of $15 per share. I have followed the company for 5 years and their investment portfolio is fairly low risk, which means the company could be liquidated at book value in a fairly short time period. At the very least, this suggests MRH is unlikely to decline much further, barring another hurricane like Katrina. Based on this, I am selling $10/ $12.50 puts for 1 month premiums of .25-1.00 (2-8pct one month returns), or up to a 96 percent annualized return. Alternatively, you could just buy the stock and write covered calls (sell the $12.50 call to generate income. I am ultimately more comfortable betting that MRH will not go down, versus betting that it will go up a lot

Thursday, March 26, 2009

Best Buy near long-term resistance... appears to be a good short

Best Buy near long-term resistance... appears to be a good short. $40 has repeatedly been a major resistance point for Best Buy historically, in year 2000, 2002, 2003, and 2004. This price point also served as minor support in 2008. Notice too, that long-term uptrend line around $18/share was never breached. While Best Buy "reported" EPS that "beat estimates" of $1.41/share, this excluded restructuring/layoff charges of more than $100Mln, which would have caused them to miss estimates.

Even with their "earnings beat", earnings still fell 6% YoY and are expected to be flat-to-down 10% over the next year. At a current P/E of 13.2x and earnings in a decline and unemployment continuing to rise, there are few positive catalysts for Best Buy. Best Buy may gain market share from Circuit City's implosion, but in the midst of a major downturn this will be offset by weaker consumer spending and credit contraction.

At the very least, selling near-term $42.50/$45 puts for a 1-2% premium seems like a safe bet.

Monday, March 16, 2009

Couple Points-GE, CCS, and HIG update

GE-A preferred- Over the past week there was an exceptional opportunity in GE baby-bonds, those listed and traded as preferred-stocks on the NYSE (even though they represent senior unsecured notes of GE Capital). The one I honed in on was GE-A Preferreds. This is a 2048 $25 par bond that was trading at $14 (below 60% of par!, for an 11% yield). Currently, this has rallied back up to $80 (8.9% yield). This is in-line with where GE's other long-term debt is trading, so the arbitrage is out of this for now.

CCS (Comcast Senior Note) is trading up to $18, up approximately $2.50 from my recommendation price on this blog (and about $2 from my average-buy in price. It should still claw its way higher, but at the current yield above 9% it still trades too low versus Comcast senior debt.

Finally, Hartford senior holding company debt appears extremely attractive, offered at a yield of 15% ($56 price for the 6.30% 2018 bonds). The holdco of Hartford carries $2Bln cash vs. $6Bln debt, which suggests it could repay 33% of outstanding bonds. Additionally, it controls interests in a property-casualty insurance company and a life insurance company, each of which generate north of $2bln pre-tax profits per year. The life insurance company has been bogged down by variable annuity/investment portfolio problems and may wind up being a writeoff (or only worth a few billion $ in a firesale). The P&C insurance company carries $12Bln statutory capital and is probably worth at least .8x book value, or a multiple of 5x normalized pre-tax profits= $10Bln nominal value. Based on this analysis, HIG's holding company should be worth approximately $10Bln (P&C)+$2Bln (cash)+$2Bln (firesale value of life insurance co.)=$14Bln, which represents 2.25x coverage of the outstanding holding company-debt.

Based on this analysis, Hartford financial service's 6.3% 2018 senior bonds are very attractive at $56, for a 15% yield-to-maturity. While the stock may have additional upside, given the vagaries of the current marketplace, we believe the bonds represent the most attractive risk-reward opportunity.

Monday, March 09, 2009

Updated Chart of CCS (Comcast 6.625% Senior Notes Due 2056)

At $15.70, CCS yields 10.5% and trades at a dollar-price equivalent of $.62 on the dollar (62% of par value). 30-year Comcast senior notes trade at a 7.6% yield ($95 avg dollar px) for similar risk. Why? we believe closed-end preferred funds (Nuveen) have been forced to liquidate shares of CCS in order to de-lever their fund. Based on this technical, CCS may decline further and I am buying into the drop. I would love to buy this at $15 or lower, where I bought it several months ago (before subsequently selling in the low $20s).

To refresh, Comcast generated more than $800Mln FCF in Q4 2008 and is cutting costs significantly. The bonds are actually on review for upgrade by the rating agencies. Leverage is low at 2x, given the stable business risk profile.

Recommendation: Buy at $15.70 and add as it drops. Regression-line suggests $18.50 as fair-value price (yield would be 9% at that price), but this issue could trade as high as $20-21/share, provided that the 30-year treasury yield does not rise significantly in the near-term. At a 10.5% yield for a stable, high-grade corporate bond, this looks attractive.

Sunday, March 08, 2009

Ten Things Everyone Should Know About CDS(or, "Bad Stuff 'bout CDS)

1. CDS represents a put contract (or, insurance) on a bond, that allows the CDS-purchaser to profit on the difference between par ($100) and the price of the bond on a default date (typically $0-30)

2. Unlike traditional insurance contracts, purchasers are not required to have an "insurable interest" in, or ownership of the underyling bond.

3. Why does this matter? [For example, your home-insurance agent sells you a $200,000 insurance policy on your home for a $500 premium payment. Then, your insurance agent goes to your next-door neighbor and sells 5 different $200,000 insurance policies on YOUR house. Then, the neighbor across the street buys 5 more $200,000 insurance policies on YOUR house. In total, your $200K house is now insured for a total of $2.2Mln... and your neighbors have much to gain from seeing your house burning down.

4. The premium on CDS contracts typically is incurred over time. As such, the insurance-buyer maximizes his gain the sooner a default occurs. For example, a purchaser might pay a "spread of +300 basis points", which equals 3% of the notional-insured value over time. Under our previous example, your neighbors would each pay $30,000/year (3% of $1,000,000 insurance) to insure your property. Since this is a very expensive premium to pay on a property with no insurable interest, your neighbors need one of two things to happen in the near-future: 1. Your house burns down/you default/you go broke 2. Someone else to buy their insurance from them at a higher price

5. The purchase of CDS (insurance) creates a self-fulfilling prophecy, which increases the probability of default. How does the probability of default increase? Using our prior example, it increases the cost of insurance to you, the homeowner, while simultaneously incentivizing your neighbors to see your house destroyed. Okay, but why does the cost of my homeowner's insurance increase(since I have a need and justifiable purpose for having insurance against my property)? Your cost to insure your property rises because there are multiple bidders vying to purchase insurance on your home.

6. The lack of "insurable interest" requirement for CDS(insurance) caters primarily to speculative and destructive elements of human nature. Humans tend to purchase commodities (homes, internet stocks, tulips, etc.) when they are increasing in price. Thus, when your first neighbor buys insurance on your home as a speculation, it causes the price of additional insurance to increase. Your other neighbor (across the street) hears that the price of your home insurance just rose 10% overnight and that your next-door neighbor has already made a "killing" on his insurance policies covering your home. So, your other neighbor decides to buy some insurance (on your home) for his personal-account, which causes your home insurance premiums to increase another 20%. Both neighbors begin bragging about their large gains, which incentivizes neighbor #3 to buy insurance, thus driving up the price even more. This continues and the price keeps rising. Rumors about you walking around your garage with open gas-containers begin to circulate (never mind that you were filling up your lawnmower!) and word leaks back to your insurance agent.

Although you have never had an insurance claim against your property, so much insurance is being purchased against your house that your insurance agent refuses to renew YOUR homeowner insurance policy at year-end, due to the "high risk" associated with your policy that the market is pricing in. The insurer insists that the only way to insure your policy is if you pay 15% of your home's value as a deposit on the insurance, along with a 5% premium per year. Since you are required to carry insurance to hold a mortgage, you have no choice but to pay-up (15%+5%= 20% *$200K =$40K insurance premium, significantly above your previous insurance costs and your total mortgage payments). Given the high costs of insuring your home, YOU the original homeowner are now unable to afford to live in the home anymore and do not qualify for refinancing (since the lender will factor the insurance costs into his analysis).

As your ability to pay bills and maintain your creditworthiness is challenged by the rising financing costs and rumors, your neighbors are incentivized not to help you out. Assuming no one is interested in buying your house, you figure out that the only way out of your mess is to burn down your house and collect the insurance premium. Naturally, your next-door neighbors are all-too-eager to provide you with the gasoline, matches, and alibi (given their vested interest in your home's destruction).

6. CDS purchasers do not have to pass criminal background checks and are not obliged to even indicate their reason for purchasing insurance on an entity (all they need is a signed ISDA agreement!). Using our previous example, how would you feel if your insurance agent knowingly sold $1mln insurance policy on your $200K house to your neighbor* (in spite of full knowledge that your neighbor was a convicted arsonist and had burned down previous houses that he'd bought insurance on?). My guess is, you would be pretty pissed off.

7. CDS (insurance) sellers are not required to notify companies that they are issuing derivatives against that entity, or allowing others to be on their demise. Using our previous example, although you and your insurance agent are aware that an arsonist lives next to you, your insurance agent is not obligated to notify you that he has issued insurance policies against your home. (If this were required, my guess is that you would keep a fire extinguisher in every room and double-check your smoke alarms each night!)

8. CDS (insurance) is perversely designed to allow manipulation by purchasers rather than sellers. How is this done and why does it matter? Buyers of CDS pay a small premium (generally a 1-3 % of notional insurance value) and generally do not have to post margin/collateral on their purchases, since their total premium-payments are not viewed as large risks to their counterparties. In our example, a 5-year CDS contract might only represent total premiums of 5(years)x 1%x $200,000=$10,000 in premiums spread over five years. As such, if your neighbor has $200,000 in a bank account, he could easily purchase 20 insurance contracts on your home, without your insurance agent questioning his ability to live up to his counterparty obligations. Now reverse it for a second. You (the homeowner) see your insurance rates increasing and decide to sell insurance on your home, because you believe the rates are too high and you have no intention of burning down your home.

Assuming you have the same $200,000 in your bank account, that is sufficient capital to sell 1 (ONE) insurance contract against your home. How come $200K in capital is sufficient to buy 20 insurance contracts betting on your home's destruction, but is only sufficient capital for you to sell a single one of them (betting on your home's survival)? The answer is obvious, because to guarantee a $200K insurance payment would require the full $200K in capital. Thus, buyers of protection (aka, short-sellers) have a 20-fold advantage in purchasing power versus sellers. Perversely, if you did sell an insurance policy on your home and your neighbors began driving up your insurance rates, you would have to report "mark-to-market losses", even though you have no intention of burning down your house.

9. Collateral requirements ensures there will be more buyers than sellers of CDS (insurance), which virtually guarantees that rates will increase over time for any insurable entity. As protection buyers chew through each entity (with low insurance costs) and drive the rates up, the buyers will report "mark-to-market" gains on their "trading" books. These reported profits will increase their book-capital, thus enabling their ability to purchase more and more insurance contracts and drive CDS spreads ever higher.

Purchasing CDS insurance is virtually riskless for speculators determined to drive spreads wider, given the near-limitless upside potential. For example, cites the following about a John Paulson bet against Lehman, "Long before the financial crisis hit, Paulson, according to one person briefed on the trade, invested $22 million in a credit default swap that eventually paid $1 billion when the federal government opted not to rescue Lehman Brothers. That amounts to a staggering $45.45 for each dollar invested. "

10. As structured, the CDS (insurance) market appears singularly designed to support massive speculative trading and wreck companies. This dire view is based upon the skewed upside-potential on CDS insurance, lack of an "uptick rule" (preventing a single buyer from pile-driving spreads and wrecking a company from a spread-standpoint), negligible collateral requirements on purchasers of CDS insurance, lack of reporting requirements on purchasers or sellers, and perhaps most importantly............ no requirement of "insurable interest" for purchasers of CDS insurance. Is it any wonder that CDS spreads on Berkshire Hathaway of GE are significantly wider than the cash-spreads on their underlying bonds (what a "mystery")

If you read this, it should be clear that the risk/reward of CDS is skewed against sellers of CDS (those betting on stability) and favors the buyers (those betting on defaults and panic). Unlike equity markets, there are no real reporting requirements and negligible collateral requirements on "short-sellers" of credit. Most disturbingly, CDS spreads directly affect cash-spreads on corporate bonds, which represents the life-blood by which many companies fund their operations and payroll. When massive CDS speculation squeezes out and eliminates a company's ability to fund their operation, it represents more than a zero-sum game between two disinterested counterparties, it represents an unnatural destruction of a company/entity. In presenting my "homeowner example", I tried to analogize how horrible this market would be if applied to individual people. The negative outcomes are obvious. believe in capitalism and free markets, but CDS represents a flawed and contorted anomaly that has warped corporate bond markets for too long (largely within the last five years). CDS markets have been a critical driver of this "credit crisis". So the next time you hear someone cry about "naked short selling" of equities (which is regulated, reported, and restricted by margin constraints), point out how trivial their concerns are next to the +$60 trillion CDS markets and the issues I have laid out.

PS- In case you are curious, it is illegal for your insurance company/agent to sell insurance when there is no "insurable interest"

P.S.S- The next logical question you might ask is, "Wouldn't your hypothetical insurance agent [from my example above] go bankrupt from writing all these CDS (insurance) policies that are designed to self-destruct? The answer: Yes, your insurance agent would become insolvent. The name of your insurance agent is AIG. :)

Best Regards, Troy

Friday, March 06, 2009

Bought more CCS @ $16-16.50 (10.2% yield)

Bond yield above 10.2pct now, versus non-listed comcast 30yr bonds that yield only 7.5pct.

Some other ones that are dicey include hjv (jc penney) yielding 22pct and trading at 30pct of par, or cpv (cbs corp) yielding 17pct at 40pct of par.... Not 100pct on those ones


Monday, January 26, 2009

Look who is out calling for a stock-market bottom now......?

Unfortunately, the stock-market bottom was subsequently intercepted and returned for a six-points by the other team.

In all seriousness, this chart doesn't look like the "preferred scenario" for many people calling a bottom.....

Sunday, January 25, 2009

XOM long-short idea- Barron's published over the weekend with the title "Buy Oil". Ironic, given the last Barron's cover to blithely beg readers to "buy" anything was its "Buy GM" issue, when the stock was in the teens. Not a good omen, but the proof is in the pudding.

In fact, there may be buys in the oil sector, but they might require more intellectual insight than simply "buying the sector". One idea that stands out slightly is to short XOM (Exxon Mobil). Currently, Exxon is trading at a market capitalization of $400Bln. After netting out $36Bln cash, less $10Bln debt we derive an enterprise value of $375Bln. This suggests that Exxon alone is worth more than 5% of the S&P 500.

Interestingly, at $78/share, Exxon stock is trading roughly 15% below its mid-2008 price (when oil prices were above $100/barrel). Given that oil is close to $50/barrel now, this alone suggests that the price may have further to fall.

Another signal that Exxon may be overvalued is that you could construct an oil conglomerate by purchasing BP($106Bln), Chevron ($144Bln), and Conoco($72Bln) for a combined $322Bln. The combined reserves of this "conglomerate) is roughly 39.2Bln BOE (17.6, 10.8, 10.8, respectively). This reserve total is 73% greater than XOM's reported reserves of 22Bln BOE.

From a revenue standpoint, this "conglomerate" would have generated combined revenue of $886Bln in 2008, vs $457Bln for XOM (94% higher).

While Exxon has the strongest cash position, it is not nearly large enough to justify the valuation differential. Thus, either Exxon is dramatically overvalued, or the other oil companies (collectively) are significantly undervalued. My guess is that the answer is somewhere in between. As such, there is a compelling case for doing a long-short (buying a basket of oil names vs. selling XOM), or simply selling Exxon (buying puts)

Monday, January 05, 2009

Recommendation to buy USM bonds- UZV, UZG, GJH

USM analyis-
Recommendation to buy USM bonds- UZV, UZG, GJH
I previously recommended buying UZV preferred (see earlier post for cursory credit analysis). As a refresher, UZV is a preferred-stock whose underlying asset is 30-year senior unsecured notes of US Cellular (USM 7.5% notes). Based on current price of $15 (60% of par), the yield on this senior note is approximately 12.5%, whereas peer-company bond yields for Verizon, Telefonica, Vodafone, DT (Tmobile), and AT&T average nearly 6.5% (+350bps over 30yr treasury rate of 3%).

US Cellular is a good credit risk, with minimal leverage relative to the underlying value of the business. For example, Verizon recently purchased Alltel (in cash) for $28Bln, which equates to a valuation multiple of $2,500 for each of Alltel's 11Mln subscribers. Although Verizon dramatically overpaid for Alltel, let's assume that US Cellular is worth at least half of this multiple ($1,250/subscriber). Based upon 6.3Mln subscribers x $1,250/subscriber=$7.9Bln implied enterprise value. Since US Cellular has only $1bln in debt and a core business intrinsically worth at least $7.9Bln, its debt is well-protected and safe (by a factor of 7.9x). In addition, the company also owns a 5.5% interest in a major Verizon wireless asset (SMSA LP) that generates an additional $80Mln income per year. I assume this is worth an additional $800 Mln ($80Mln/10% discount rate).

In total, US Cellular's enterprise value is worth $8.7Bln ($7.9Bln for core business + $800Mln for partnerships owned). After subtracting out net debt of $820Mln ($1Bln gross debt- $180Mln cash), the remaining intrinsic value of the equity is $7.9Bln. This equates to $90/share in intrinsic value per share ($7.9Bln/87Mln shares outstanding). Currently, USM stock is at $45/share, which implies a 50% discount to the intrinsic value of the company.

Recommendation- USM bonds appear to have at least 50% upside and are generating significant current income, regardless of whether management maximizes the value of the company. As such, I recommend buying UZV. Full disclosure- I have owned UZV since $11.50 and have been a buyer as high as $14.50. I would only buy the stock if it fell into the $30s (200% upside), as the bonds (traded on NYSE under UZV, UZG, GJH are more attractive and safer at current levels)