The Deepwater Horizon tragedy has been a fiasco. BP will owe billions and will continue to pay materially and in creditibility for many years. But despite all of this, BP will still exist when the noise dies down.
1) Energy security depends on it
BP owns well developed and yet to be developed strategic oil interests all over the world. BP owns interests in Azerbaijian, Angola, Brazil, and Norway. BP has also strategic rights to potential deepwater sites that could hold vast fortunes of oil resources. In bankruptcy, foreign governments may lose faith in US and Britain organization may lose these assets to major competitors from China and Russia. This is much more threatening to the administration than even the clean up effort.
2) BP is as much an American company as it is British
The current form of BP is the result of a merger between legacy BP, and Aramco, the legacy Standard Oil, in 1998, and a purchaser of ARCO, the Atlantic Richfield Co. in 2000, another major American oil producer, and Burmah Oil, PLC. The resulting company is the largest oil producer in the world. But the legacy of the company makes over 40% of the existing shareholders attributable to the Standard Oil and ARCO firms, and thus American interests. Moreover, over 23,000 of 80,000 BP employees are in the US.
So often in the debate about BP there has been accusations that the US government should punish foreign interests for their irresponsibility. Instead, the history of the firm points to a long history of American shareholder interest in BP. The US government has no interest in penalizing the firm to the detriment of US shareholders unless absolutely necessary
What to do?
Although the US government has had blistering criticism and threats to the BP organization, Bloomberg has reported that Obama said on June 16th "BP is a strong and viable company, and it is in all of our interests that it remains so." Thus if the US government has no interest in bankrupting the company through punitive measures, then someone needs to tell that to the bond market. BP bonds are selling at a 10%+ discount to previous prices. This offers a significant opportunity to the prudent speculator. Bill Gross, the founder of PIMCO, has already taken the leap and currently owns millions of subordinated issues.
Long BP Senior Debt "E" Series and Long BP Subordinated Debt
Sunday, June 27, 2010
Thursday, June 24, 2010
Ally Financial: Fighting the tide
GMAC Financial, now Ally Financial, is a wonderful example of a company who is making it's best effort to stabilize after a large US bailout.
Ally Financial, with liabilities of over $200B and a significant portion with dubious quality at the time of reckoning, received a total $20B infusion from the US Treasury in March of 2010 through the conversion preferred shares into common equity. With that, the Treasury essentially recapitalized the whole company and at the end of Q1 2010 had $14.8B in cash and cash equivalents. With stimulus across the world, Ally has been able to write up assets and unload risky assets from their balance sheet.
To that end, Ally Financial sold off it's European mortgage assets (1) but has continued exposure to Europe in auto loans and other areas.
This month, Ally Financial has attempted to securitize mortgage securities again by offering a senior not on a $166m mortgage pool with %25 credit enhancement.(2) This means that the pool of low LTV loans and prime borrowers can withstand 25% losses before the senior bond is at risk. The senior note was graded A by Moody's. The auction will not occur until next month.
Overall, Ally Financial is making great strides to reduce risk and return tradtional banking practices. It is still yet to be determined whether the company can stand on it's own. But due to the critical function the company performs in supporting the American auto industry, the implicit support from the US government will provide significant credit protection for all investors.
The author is long GKM until maturity.
(1)"Residential Capital (ResCap), the mortgage subsidiary of GMAC Financial Services, is selling its European mortgage assets and businesses to affiliates of alternative asset manager Fortress Investment Group (FIG: 3.37 -3.44%).
The transaction moves 10% of ResCap's total assets as of year-end 2009 — and 40% of total assets when adjusted for the required Financial Accounting Standard (FAS) 167 treatment of off-balance-sheet securitization — into Fortress ownership.
ResCap said the assets in the transaction are valued at levels established in Q4 2009, and it expects no material gain or loss from the transaction. With this deal, GMAC is essential out of the European market."
(2) "Moody's Investors Service assigned provisional ratings to a senior note issued by GMACM Mortgage Loan Trust Series 2010-1, a new residential mortgage-backed deal.
The securitization is sponsored by General Motors Acceptance Corp. Mortgage (GMACM). According to a source close to the deal, GMACM Mortgage Loan Trust 2010-1 priced on Tuesday.
Moody's has assigned a provisional single-A 2 status to one senior note with an original stated value of $166.35m. This note is supported by a subordinate certificate with an original stated value of $55.45m, which Moody's did not rate.
The transaction is backed by 1,981 loans with a combined unpaid principal balance of $222m originated and serviced by GMAC. Loans insured by the Federal Housing Administration (FHA) make up 97% of the pool, with the remainder insured by the US Department of Veterans Affairs (VA)."
Ally Financial, with liabilities of over $200B and a significant portion with dubious quality at the time of reckoning, received a total $20B infusion from the US Treasury in March of 2010 through the conversion preferred shares into common equity. With that, the Treasury essentially recapitalized the whole company and at the end of Q1 2010 had $14.8B in cash and cash equivalents. With stimulus across the world, Ally has been able to write up assets and unload risky assets from their balance sheet.
To that end, Ally Financial sold off it's European mortgage assets (1) but has continued exposure to Europe in auto loans and other areas.
This month, Ally Financial has attempted to securitize mortgage securities again by offering a senior not on a $166m mortgage pool with %25 credit enhancement.(2) This means that the pool of low LTV loans and prime borrowers can withstand 25% losses before the senior bond is at risk. The senior note was graded A by Moody's. The auction will not occur until next month.
Overall, Ally Financial is making great strides to reduce risk and return tradtional banking practices. It is still yet to be determined whether the company can stand on it's own. But due to the critical function the company performs in supporting the American auto industry, the implicit support from the US government will provide significant credit protection for all investors.
The author is long GKM until maturity.
(1)"Residential Capital (ResCap), the mortgage subsidiary of GMAC Financial Services, is selling its European mortgage assets and businesses to affiliates of alternative asset manager Fortress Investment Group (FIG: 3.37 -3.44%).
The transaction moves 10% of ResCap's total assets as of year-end 2009 — and 40% of total assets when adjusted for the required Financial Accounting Standard (FAS) 167 treatment of off-balance-sheet securitization — into Fortress ownership.
ResCap said the assets in the transaction are valued at levels established in Q4 2009, and it expects no material gain or loss from the transaction. With this deal, GMAC is essential out of the European market."
(2) "Moody's Investors Service assigned provisional ratings to a senior note issued by GMACM Mortgage Loan Trust Series 2010-1, a new residential mortgage-backed deal.
The securitization is sponsored by General Motors Acceptance Corp. Mortgage (GMACM). According to a source close to the deal, GMACM Mortgage Loan Trust 2010-1 priced on Tuesday.
Moody's has assigned a provisional single-A 2 status to one senior note with an original stated value of $166.35m. This note is supported by a subordinate certificate with an original stated value of $55.45m, which Moody's did not rate.
The transaction is backed by 1,981 loans with a combined unpaid principal balance of $222m originated and serviced by GMAC. Loans insured by the Federal Housing Administration (FHA) make up 97% of the pool, with the remainder insured by the US Department of Veterans Affairs (VA)."
Monday, June 21, 2010
Reiterating - Gold is going higher
I have taken great interest in the gold debate. Here is what I have found...
There are two major laws to investing in gold.
(1) Gold tracks neither inflation or deflation as a rule, instead gold tracks financial instability
In periods of financial instability, there is a rush to safety to buy treasury bonds and the like. Investors also become skeptical of paper currency. That is a strong bullish case for gold.
(2) Gold consistently increases when short term interest rates are at nominal zero
When the Fed is pumping money into the system to fight whatever financial ill is in the system, this is also a bullish scenario for gold. Right now, the Fed is trying to unemployment and financial instability. Both drivers warrant an extended period of low interest rates. So when will the Fed raise interest rates?
(1 + 2) The Fed historically has only raised rates six months after unemployment starts to fall from peak levels
Based on the current reports regarding the dwindling stimulus and the temporary census jobs boost, unemployment should decline from current levels for the rest of 2010 and early 2011. Thus with the instability in Europe, and these structural problems in the US, the Fed will keep interest rates low as a safe strategy. This is an "all clear" bullish sign for gold for the rest of the year.
There are two major laws to investing in gold.
(1) Gold tracks neither inflation or deflation as a rule, instead gold tracks financial instability
In periods of financial instability, there is a rush to safety to buy treasury bonds and the like. Investors also become skeptical of paper currency. That is a strong bullish case for gold.
(2) Gold consistently increases when short term interest rates are at nominal zero
When the Fed is pumping money into the system to fight whatever financial ill is in the system, this is also a bullish scenario for gold. Right now, the Fed is trying to unemployment and financial instability. Both drivers warrant an extended period of low interest rates. So when will the Fed raise interest rates?
(1 + 2) The Fed historically has only raised rates six months after unemployment starts to fall from peak levels
Based on the current reports regarding the dwindling stimulus and the temporary census jobs boost, unemployment should decline from current levels for the rest of 2010 and early 2011. Thus with the instability in Europe, and these structural problems in the US, the Fed will keep interest rates low as a safe strategy. This is an "all clear" bullish sign for gold for the rest of the year.
Wednesday, May 12, 2010
Gold is on the rise
No confidence that more loans will resolve the issue of too many loans in the Euro Zone.
Gold is the play of social instability.
Selling GLD Jul 10 $118 puts for $4.5 and buying $115 GLD Jul 10 puts for $2.9
Gold is the play of social instability.
Selling GLD Jul 10 $118 puts for $4.5 and buying $115 GLD Jul 10 puts for $2.9
Thursday, May 6, 2010
Ignore the credit raters! Buy GMAC Senior Debt
The author is adding another safe investment with a US government "put" to support the security. The intent will be to hold until maturity.
The whole investment logic for this one is supported by a quote from Bill Gross, PIMCO, in his May Investment Outlook
“Still, as future bond issuers belly up to the bar with their rating agency seals of approval, it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!
Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recently upgraded B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It’s the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a “positive outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with what are called “smart notes” that Investment Outlook readers can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!”
The author of this blog has found something comparable to purchase…
NYSE: GKM – GMAC Senior Debt, 7.25% yield at par ($25), currently priced at $20.85 (8.69% yield to maturity) – Callable any time after 2008 and due 2033
NYSE: GJM – GMAC Senior Debt, 7.35% yield at par ($25), currently priced at $21.02 (8.69% yield to maturity) – Callable any time after 2008 and due 2033
I am going to buy a little of both of the above for myself right now. FYI: When they retire the debt, they normally start with the higher yielding one first.
Bought GKM at 20.96 on May 5th and sleeping well.
The whole investment logic for this one is supported by a quote from Bill Gross, PIMCO, in his May Investment Outlook
“Still, as future bond issuers belly up to the bar with their rating agency seals of approval, it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!
Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recently upgraded B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It’s the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a “positive outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with what are called “smart notes” that Investment Outlook readers can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!”
The author of this blog has found something comparable to purchase…
NYSE: GKM – GMAC Senior Debt, 7.25% yield at par ($25), currently priced at $20.85 (8.69% yield to maturity) – Callable any time after 2008 and due 2033
NYSE: GJM – GMAC Senior Debt, 7.35% yield at par ($25), currently priced at $21.02 (8.69% yield to maturity) – Callable any time after 2008 and due 2033
I am going to buy a little of both of the above for myself right now. FYI: When they retire the debt, they normally start with the higher yielding one first.
Bought GKM at 20.96 on May 5th and sleeping well.
Wednesday, April 28, 2010
Stimulus, Strikes, Restructuring and Stability? - Go Long Volatility
This looks like an absolute no brainer.
We are at the top of the stimulus, 70% of the money will have been spent by September. Stimulus programs are fading out all over the world (except maybe China).
On the other hand, Spain, Portugal, and Greece have all been downgraded and face further market pressures on their debt this year. According to NakedCapitalism, Greece is going to face the most stringent economic constraints ever placed on a sovereign nation to receive their IMF alottment. That will just delay the problem for six months to a year. Once they blow through the first set of conditions, the market will be bigger questions to address.
I don't care if the IMF (a.k.a. US) and it's european friends bailout all of these PIIGS. They won't do it until it is the final option. That guarantees volatility before we get there.
Long VXX at 20.06.
Deleveraging is in effect and it is ugly.
We are at the top of the stimulus, 70% of the money will have been spent by September. Stimulus programs are fading out all over the world (except maybe China).
On the other hand, Spain, Portugal, and Greece have all been downgraded and face further market pressures on their debt this year. According to NakedCapitalism, Greece is going to face the most stringent economic constraints ever placed on a sovereign nation to receive their IMF alottment. That will just delay the problem for six months to a year. Once they blow through the first set of conditions, the market will be bigger questions to address.
I don't care if the IMF (a.k.a. US) and it's european friends bailout all of these PIIGS. They won't do it until it is the final option. That guarantees volatility before we get there.
Long VXX at 20.06.
Deleveraging is in effect and it is ugly.
Monday, April 26, 2010
First Marblehead recovers from a bump
Investing in FMD takes pure guts! (Or just faith in the vampire squid)
FMD has $422m cash ($380m market cap) and a $15m quarterly burn rate. Yet it has no real income because it was forced to stop all banking transactions because of it's capitalization levels and loan guarantees. It continues to take shrinking losses on that previous portfolio. The government lifted the cease and desist order on their bank subsidiary after they sold off their complete student loan portfolio at a sizable loss. So now they can get back into the business in a much better market climate than before.
For me, it is impossible to believe that the private student loan securitization market is permanently impaired. There is plenty of supply of private student loans to be made out there. There is plenty of demand for it from investors due to the strict recovery provisions. FMD servicing capibilities have proven to decrease default rates and increase recovery rates, crucial for student loan securitization investment returns.
A first peek of sunlight is a recent agreement with Sun Trust to perform $200m worth of loan processing, production support, program support and portfolio management, and program administration services. There is no timeframe yet in regards when they will execute this program.
So I think there is a market for them, it just has not reemerged yet. Others have made this bet before, but have yet to realize a return. But with the recent SunTrust deal, real revenues are on the horizon.
Finally, I can say all of these wonderful things, strike them, and still say the fact that Goldman invested $1B in private equity and has a vested interest in seeing a return on that investment is a good enough reason to dabble in FMD. Does anyone have a doubt about Goldman's ability to find a profit, ethical or not? I did not think so.
The author is long at $3.57.
FMD has $422m cash ($380m market cap) and a $15m quarterly burn rate. Yet it has no real income because it was forced to stop all banking transactions because of it's capitalization levels and loan guarantees. It continues to take shrinking losses on that previous portfolio. The government lifted the cease and desist order on their bank subsidiary after they sold off their complete student loan portfolio at a sizable loss. So now they can get back into the business in a much better market climate than before.
For me, it is impossible to believe that the private student loan securitization market is permanently impaired. There is plenty of supply of private student loans to be made out there. There is plenty of demand for it from investors due to the strict recovery provisions. FMD servicing capibilities have proven to decrease default rates and increase recovery rates, crucial for student loan securitization investment returns.
A first peek of sunlight is a recent agreement with Sun Trust to perform $200m worth of loan processing, production support, program support and portfolio management, and program administration services. There is no timeframe yet in regards when they will execute this program.
So I think there is a market for them, it just has not reemerged yet. Others have made this bet before, but have yet to realize a return. But with the recent SunTrust deal, real revenues are on the horizon.
Finally, I can say all of these wonderful things, strike them, and still say the fact that Goldman invested $1B in private equity and has a vested interest in seeing a return on that investment is a good enough reason to dabble in FMD. Does anyone have a doubt about Goldman's ability to find a profit, ethical or not? I did not think so.
The author is long at $3.57.
Subscribe to:
Posts (Atom)