Happy New Year!
Things are relatively quiet during this holiday break. But don't be fooled by the lull in the action.
The Fed has nationalized the credit card securitization market (AXP, COF), the commercial paper market, the auto industry (GE, GJM), the world's largest insurance company (AIG), and the world's largest bank by assets managed (C) within the last three months.
My point: The credit crisis is not over. The bank system still are deteriorating. Short the financials across the board.
Transparency: The author purchased SKF July $100 Call contracts on 12/31 at $36/contract.
Thursday, January 1, 2009
The Treasury is handing out naked puts on behalf of the taxpayer
US Bancorp acquires Downey Savings & Loan and agrees to take the first $1.6B in losses and the FDIC will take any additional losses.
JP Morgan acquires WaMu in a deal that requires JP Morgan to take the first 30B in losses and the FDIC will take any additional losses.
Now IndyMac is acquired by a private equity group for $13.9B in a deal where they liable for the first 20% of losses, and the FDIC is liable for the remaining amount. No quantification of what that 20% is a percentage of. I am looking for the details.
What kind of deals are these? A free put contract for an asset already purchased at a severe discounted asset? The capitalization of the FDIC is not designed to recapitalize distressed mortgage asset portfolios. Thus the bill for these extended losses will be a virtual pass through to the taxpayer.
WaMu, Downey, and other deals like these all potential exposures much bigger than "first loss" amount describe above. My question is why can't the acquirer at least endure some of the extended downside. Maybe 100% first loss, then 25% after a certain threshold? But the current policy gives the companies no incentive to resolve deterioration of the underlying assets after a certain loss level. In fact, it may just make a great extended tax break subsidized by the general public.
In a year of panic and half baked ideas, this was one of the worst ideas to come out of the Treasury and I plan to write my Congressmen to communicate that.
JP Morgan acquires WaMu in a deal that requires JP Morgan to take the first 30B in losses and the FDIC will take any additional losses.
Now IndyMac is acquired by a private equity group for $13.9B in a deal where they liable for the first 20% of losses, and the FDIC is liable for the remaining amount. No quantification of what that 20% is a percentage of. I am looking for the details.
What kind of deals are these? A free put contract for an asset already purchased at a severe discounted asset? The capitalization of the FDIC is not designed to recapitalize distressed mortgage asset portfolios. Thus the bill for these extended losses will be a virtual pass through to the taxpayer.
WaMu, Downey, and other deals like these all potential exposures much bigger than "first loss" amount describe above. My question is why can't the acquirer at least endure some of the extended downside. Maybe 100% first loss, then 25% after a certain threshold? But the current policy gives the companies no incentive to resolve deterioration of the underlying assets after a certain loss level. In fact, it may just make a great extended tax break subsidized by the general public.
In a year of panic and half baked ideas, this was one of the worst ideas to come out of the Treasury and I plan to write my Congressmen to communicate that.
Goldman Sachs Pair Trade: Long and Short
Due to the credit crisis, the investment banking model is broken. Current stand alone investment banks are racing against the clock to find reliable funding source for their outsized portfolios. That being said, investment banks are voracious capitalist market makers with tremendously talented people. Goldman Sachs, the highest class of the bunch, has produced many powerful government officials and has led the world in financial innovation and ability to make profits facilitating markets.
What is an investor to do?
Recently Warren Buffett, at a pivotal time for GS, invested $5B in perpetual preferred shares of Goldman Sachs yielding 10% at par. If I were to read the tea leaves of why Warren Buffett made this investment, I would say Warren believes that despite all of the problems that Goldman Sachs has, it's track record as a profit machine will attract a white knight. Thus even if the credit crisis were to continue relentlessly and deplete all on hand resources for GS, at some point prior to any default event, a buyer will take the company private, making all preferred shareholders whole in the process.
What examples do I have for this thesis? Think about Warren Buffett and Salomon Brothers. That position started with an initial investment in preferred shares of the investment bank also. Second, look at the arrangement that PIMCO holds with Allianz as an independent subsidiary of Allianz insurance conglomerate. PIMCO has no liquidity problems despite having just as many leveraged positions.
This being said, no one can predict when the white knight will appear. In the process, Goldman could lose another 25%, or 50% or even 75% or more of it's stock price prior to being rescued. The common stock holds the greatest risk in this case, even though all classes of securities in the capital structure would suffer greatly.
Thus the position proposed is the following:
Long - Goldman Sachs A Series - Non-Cumulative Preferred Securities - Floating Rate
Short - Goldman Sachs - JAN 10 $55 put contract
(Or if you do not use options then short GS common shares directly at above $84/share)
Buy 1 put contract for every 100 preferred shares purchased
(Or short 100 shares of common for every 100 shares of preferred purchased)
Any investor should "leg" into this position. Buy puts at below $9 and buy the A series at $9/share or below.
What is an investor to do?
Recently Warren Buffett, at a pivotal time for GS, invested $5B in perpetual preferred shares of Goldman Sachs yielding 10% at par. If I were to read the tea leaves of why Warren Buffett made this investment, I would say Warren believes that despite all of the problems that Goldman Sachs has, it's track record as a profit machine will attract a white knight. Thus even if the credit crisis were to continue relentlessly and deplete all on hand resources for GS, at some point prior to any default event, a buyer will take the company private, making all preferred shareholders whole in the process.
What examples do I have for this thesis? Think about Warren Buffett and Salomon Brothers. That position started with an initial investment in preferred shares of the investment bank also. Second, look at the arrangement that PIMCO holds with Allianz as an independent subsidiary of Allianz insurance conglomerate. PIMCO has no liquidity problems despite having just as many leveraged positions.
This being said, no one can predict when the white knight will appear. In the process, Goldman could lose another 25%, or 50% or even 75% or more of it's stock price prior to being rescued. The common stock holds the greatest risk in this case, even though all classes of securities in the capital structure would suffer greatly.
Thus the position proposed is the following:
Long - Goldman Sachs A Series - Non-Cumulative Preferred Securities - Floating Rate
Short - Goldman Sachs - JAN 10 $55 put contract
(Or if you do not use options then short GS common shares directly at above $84/share)
Buy 1 put contract for every 100 preferred shares purchased
(Or short 100 shares of common for every 100 shares of preferred purchased)
Any investor should "leg" into this position. Buy puts at below $9 and buy the A series at $9/share or below.
Lockstep Investing - 2008 Performance Results
Performance is calculated with the assumption that equal weight is given to every investment put forth on this blog.
Portfolio Performance
UBS Long 850 1900 123.53% Closed
Citi Short 27 16 40.74% Closed
COF Long 10 14 40.00% Closed
BAC-PJ Long 16 17.4 8.75% Closed
PAC Long 21.5 23.39 8.79% Open
FRE-Y Long 9 0.3 -96.67% Closed
BAC Short 26 12 53.85% Closed
AXP Long 3 3.8 26.67% Open
COF Long 5.58 4.9 -12.19% Open
SKF Long 2.4 2.85 18.75% Closed
HBC Long 6.3 5 -20.63% Open
JBI Long 21 23.45 11.67% Open
BAC-PE Long 8.1 8.71 7.53% Closed
TLK Long 20.12 24 19.28% Open
Final 2008 Return 16.43% Total
All open positions marked to market as of 12/31 close. PAC position includes a single divident payment incurred of $.37.
Portfolio Performance
UBS Long 850 1900 123.53% Closed
Citi Short 27 16 40.74% Closed
COF Long 10 14 40.00% Closed
BAC-PJ Long 16 17.4 8.75% Closed
PAC Long 21.5 23.39 8.79% Open
FRE-Y Long 9 0.3 -96.67% Closed
BAC Short 26 12 53.85% Closed
AXP Long 3 3.8 26.67% Open
COF Long 5.58 4.9 -12.19% Open
SKF Long 2.4 2.85 18.75% Closed
HBC Long 6.3 5 -20.63% Open
JBI Long 21 23.45 11.67% Open
BAC-PE Long 8.1 8.71 7.53% Closed
TLK Long 20.12 24 19.28% Open
Final 2008 Return 16.43% Total
All open positions marked to market as of 12/31 close. PAC position includes a single divident payment incurred of $.37.
Monday, December 15, 2008
Talk about TLK!
The largest telecommunication company in Indonesia, PT Telekomunikasi Indonesia (NYSE:TLK), with $6B+ in revenue and over $1.2B in profit per year. Growth is measured at 20% YOY right now but will likely reduce with the on coming global recession. The balance sheet is strong with $1B+ cash and less than $900m in total long term debt. No need to go to the debt markets for handouts here. The current market cap is $9.82B with $1.2B in free cash flow. Thus the stock is selling at less than 9x cash flow with over 50% market share of the Indonesian cell phone market. Growth prospects are tremendous for this firm, considering that market penetration stands at only 40% of the Indonesian cell phone market.
What could go wrong? Excluding the major Asian meltdown of 1990s, the Rupiah has traded at most at a 30% discount todays value. Also assume a major slowdown in growth due to global pressures, reducing the growth to nil YOY. Even then, the stock would be trading at approximately 11.7x last years cashflow (9.82B / .84B = 11.7). I'll take it! At least I will buy a piece, and hope that something unfortunate and unrelated does not happen so that I can buy A LOT MORE at a lower price. :)
Transparency: The author purchased TLK at $20.12/share on November 20th and will buy again when it reaches that price point in the future.
What could go wrong? Excluding the major Asian meltdown of 1990s, the Rupiah has traded at most at a 30% discount todays value. Also assume a major slowdown in growth due to global pressures, reducing the growth to nil YOY. Even then, the stock would be trading at approximately 11.7x last years cashflow (9.82B / .84B = 11.7). I'll take it! At least I will buy a piece, and hope that something unfortunate and unrelated does not happen so that I can buy A LOT MORE at a lower price. :)
Transparency: The author purchased TLK at $20.12/share on November 20th and will buy again when it reaches that price point in the future.
Tuesday, December 9, 2008
Playing the Spread: Income Investing in a Treacherous Market
Nowadays I am enamored with income investing. It may be a case of the the Stockholm syndrome due to my FRE preferred positions. But who says market investing is not a case of constant flogging anyway, up or down.
Soooooo here is what we have learned over the year...
BSC preferreds were a great bet...
WM preferreds got wiped out...
C preferreds are hanging on and continue to pay...
WB preferreds, after much stomach flipping turmoil, were also a good bet...
My rational attraction to preferreds and income trusts stems from the low yields available in the market. It appears to me that there are some very stable companies being treated like they have serious default risk. Thus the spread between risk free income and corporate investment grade yields is very wide. Moreover, in the case that the economy is deflating at 3% this year, then the DUK debt will a real 12% yield. Not to mention the comparison between the income and general market performance.
10 year Treasury - 2.5%
Duke BBB Junior Debt (JBI) - 8.5%
BMY Debt Notes (XFR) - 8%
BAC Preferred Floating (BAC-PE) - 11%
Transparency: The author has established a position in JBI (Duke Energy Debt Trust) at 21 (8.5% real yield) and a position in BAC-PE at $8.1 (10% real yield).
Soooooo here is what we have learned over the year...
BSC preferreds were a great bet...
WM preferreds got wiped out...
C preferreds are hanging on and continue to pay...
WB preferreds, after much stomach flipping turmoil, were also a good bet...
My rational attraction to preferreds and income trusts stems from the low yields available in the market. It appears to me that there are some very stable companies being treated like they have serious default risk. Thus the spread between risk free income and corporate investment grade yields is very wide. Moreover, in the case that the economy is deflating at 3% this year, then the DUK debt will a real 12% yield. Not to mention the comparison between the income and general market performance.
10 year Treasury - 2.5%
Duke BBB Junior Debt (JBI) - 8.5%
BMY Debt Notes (XFR) - 8%
BAC Preferred Floating (BAC-PE) - 11%
Transparency: The author has established a position in JBI (Duke Energy Debt Trust) at 21 (8.5% real yield) and a position in BAC-PE at $8.1 (10% real yield).
Tuesday, December 2, 2008
8 Good Reasons to Short HSBC
1) Primary real estate exposure is Hong Kong residential mortgages
With the slowdown in China, demand for Hong Kong real estate should fall steeply.
2) Large US subprime exposure
Yes, it is still there. HSBC Finance, formerly the Household Finance Inc subprime lender, holds many loans with the expectation of holding until maturity. In fact it was one of the largest US subprime lenders until late 2007. Reading the annual report and related news articles, there are multiple mentions of securitized mortgages that were sold to HSBC affiliates or other subsidiaries. This allows HSBC to move the securities off balance sheet and avoid marking the securities to market. As a result, there is a significant chance that within months HSBC will need to raise capital in this increasingly unattractive capital raising environment.
3) Very large US consumer revolving credit exposure
The HSBC USA subsidiary is one of the largest credit card lenders in the US market.
[I will add facts to support this later.]
4) Global slowdown in key HSBC markets
US is already in a recession. UK is very close to admitting it is in a recession. China is slowing seriously and cannot see the bottom of the downturn. Thus HSBC will be pushed to recapitalize in at least two of the three major markets.
5) Madoff Discount
Thanks to Mr. Madoff's astute business model, you can erase $1B in market valuation in HSBC just due investments in Madoff managed funds alone. HSBC is now facing lawsuits due to alleged negligence advising it's clients.
6) Large Chinese manufacturing exposure
All consumer loans, industrial loans, and real estate loans made in China by multinational companies are at risk because of the huge slowdown export related manufacturing in the Greater China region. HSBC is heavily exposed to China in this manner.
7) $1T Credit Default Swap exposure
Credit default swaps, even if no default events occur, drain precious capital because of the counterparty collateral requirements. With a few potential major credit events on the horizon, CDS are a toxic security to hold.
8) Large Middle East Commercial Loan exposure
HSBC is pervasive in all areas of the former British Empire, the Middle East is no exception. But with the drop in the price of oil and the deflationary effects of the credit crisis, many of their commercial outlays in this region will be at risk or at least deserve to be marked down.
Transparency: The author is long HSBC JUN 09 $40 put options at $6.3 and
long HSBC JAN 10 puts at $3.1
With the slowdown in China, demand for Hong Kong real estate should fall steeply.
2) Large US subprime exposure
Yes, it is still there. HSBC Finance, formerly the Household Finance Inc subprime lender, holds many loans with the expectation of holding until maturity. In fact it was one of the largest US subprime lenders until late 2007. Reading the annual report and related news articles, there are multiple mentions of securitized mortgages that were sold to HSBC affiliates or other subsidiaries. This allows HSBC to move the securities off balance sheet and avoid marking the securities to market. As a result, there is a significant chance that within months HSBC will need to raise capital in this increasingly unattractive capital raising environment.
3) Very large US consumer revolving credit exposure
The HSBC USA subsidiary is one of the largest credit card lenders in the US market.
[I will add facts to support this later.]
4) Global slowdown in key HSBC markets
US is already in a recession. UK is very close to admitting it is in a recession. China is slowing seriously and cannot see the bottom of the downturn. Thus HSBC will be pushed to recapitalize in at least two of the three major markets.
5) Madoff Discount
Thanks to Mr. Madoff's astute business model, you can erase $1B in market valuation in HSBC just due investments in Madoff managed funds alone. HSBC is now facing lawsuits due to alleged negligence advising it's clients.
6) Large Chinese manufacturing exposure
All consumer loans, industrial loans, and real estate loans made in China by multinational companies are at risk because of the huge slowdown export related manufacturing in the Greater China region. HSBC is heavily exposed to China in this manner.
7) $1T Credit Default Swap exposure
Credit default swaps, even if no default events occur, drain precious capital because of the counterparty collateral requirements. With a few potential major credit events on the horizon, CDS are a toxic security to hold.
8) Large Middle East Commercial Loan exposure
HSBC is pervasive in all areas of the former British Empire, the Middle East is no exception. But with the drop in the price of oil and the deflationary effects of the credit crisis, many of their commercial outlays in this region will be at risk or at least deserve to be marked down.
Transparency: The author is long HSBC JUN 09 $40 put options at $6.3 and
long HSBC JAN 10 puts at $3.1
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