Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts 45 comments
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Long Solar
President-Elect Obama and virtually all the Democrats who have won congressional races have promised to invest in clean energy. I have a somewhat perverse interest in watching out-of-state candidates’ campaign commercials. Something like 50% or more of Democrats’ ads feature these promises, together with pictures of windmills and gleaming solar panels on a sunny day. I expect that they will keep their word. It’s both good policy and good politics.
Many good solar stocks are trading at small fractions of recent highs and shockingly low forward P/E ratios, in particular the polysilicon companies. I like Yingli Clean Energy (YGE), Solarfun (SOLF), Trina Solar (TSL), and Canadian Solar (CSIQ). While all of these stocks are sharply up the last few days, YGE trades at only 4 times 2009 earnings estimates, and TSL at 2.5 times 2009 estimates. Suntech (STP) is a bit more expensive at 5x ’09 earnings, but deserves its premium because it has strong economies of scale, lots of sales in the less mature United States, and is relatively more established overall. The sector is volatile, but offers incredible potential for medium to long term investors and the possibility of quick gains once Democrats formally take power and get to work on their first energy bill. Even with a narrow Democratic majority in the current Congress, solar subsidies were extended and increased.
Two more polysilicon stocks, Evergreen Solar (ESLR) and JA Solar (JASO), appear to have lost a large amount of money and loaned stock when Lehman Brothers collapsed. While they are also attractively priced, their relative price does not seem to reflect this risk, so I’d avoid them for now.
There were two main causes of the big solar sell-off earlier this year: big declines in oil prices and warnings from analysts about problems securing financing. The problem with the oil argument is that solar does not compete directly with oil. One powers homes and businesses, the other planes, trains, and automobiles. Solar is most directly in competition with coal and natural gas, both dirty power sources on which we will soon see new taxes and regulations.
I am also not worried about financing. Even if private investment capital for solar dries up (possible but doubtful), the Chinese government showed that it will stand by its burgeoning solar industry when it recently extending a large line of credit on favorable terms to YGE, which was then followed by more financing by a private Chinese bank. Moreover, the biggest customers of solar companies are financially stable electric utilities that are required by law to generate power from renewable sources. They will not let their suppliers collapse for lack of financing, and in the event of a cash crunch are another source of solar company financing.
More recently there are talks of supply gluts and a drop in demand that could impact earnings as much as 50%. Again, I am not worried. Drops in finished panel prices will be accompanied by drops in raw material prices. To the extent there is a mismatch between the two, it will necessarily be temporary. Further, tech manufacturing is the other major user of polysilicon, and demand for electronics is elastic.
Finally there is a worry that earnings will be hurt by a strong dollar because solar sales are concentrated in Euro-denominated currencies. While this is a valid concern, it is not a reason to be scared away from solar. Instead if this worries you, you can easily hedge solar stocks Euro exposure by pairing your solar investments by shorting the Euro. This can easily be done by shorting the Euro ETF (FXE).
Long GM Debt
GM is too big to fail. Obama and Democratic leaders in Congress are not about to let America’s biggest industrial enterprise and biggest private union employer go bankrupt on their watch. Doing so would destroy the balance sheets of many banks and hedge funds that own GM debt or are short GM default swaps, possibly send the federal Pension Benefit Guarantee Corporation into insolvency, and cause a cascade of bankruptcies among suppliers and foreclosures among individuals in Michigan, Indiana, Missouri, and Ohio, big swing states where GM’s operations are concentrated.
I expect a large equity investment in GM next year by the government that will be very dilutive to shareholders, but will bring big profits to investors like me who bought senior GM bonds (XGM) at current extremely distressed prices. GM senior debt is also convenient to buy for retail investors. It trades on the NYSE under the ticker XGM, and right now is yielding 33%. Talks are already underway between Big 3 representatives, the UAW, Speaker Pelosi, and auto state congressmen.
Speculating on Inflation Volatility
If the deflation scenario many are talking about plays out, Goldman Sachs (GS) is sunk. In fact, I’d argue that the company’s current mark to market book value now is less than zero. (Just to be clear, this does not mean I think GS is worthless. It has a lot of value that’s not captured in its book value.) Goldman debt, like GM’s, is probably way too big to fail, but that doesn’t mean that common shareholders won’t be largely wiped out. I just don’t buy the story that GS was able to eliminate its housing and credit market exposure before these markets collapsed. It was too highly leveraged to permit it to fully hedge its housing and credit market exposure, and we would have seen GS post lower profits compared to its peers as a result of these hedges before the market started to turn. Gigantic profit margins are possible for buyers of 2010 Goldman puts at strike prices between 10 and 30.
Conversely, if the US economy is reflated by more and more bailouts, tax cuts, and spending, there is a chance that policy makers will overshoot and overinflate the economy. Goldman is already pretty richly priced, so I would not go long GS calls as well, even though they would do pretty well if reflation measures overshoot. Instead Ambac (ABK) strikes me as the #1 beneficiary of such an overly aggressive fiscal and monetary policy. Ambac Jan 2010 calls are cheap right now.
It’s almost inconceivable that both out of the money GS puts and ABK calls pay off. But I think both deflation and government attempts to prevent it overshooting are underappreciated possibilities. Inflation is great for debtors, and as the insurer of debts, if ABK returns to only one third of its early 2007 prices, the calls will return 2000% to 3000% . That’s a lot better than you would do with other inflation hedges like the gold ETF (GLD) and even leveraged plays like futures and miners.
Essentially the paired GS put/ABK call trade is a bet on money supply volatility. If you followed my previous SA calls to short financial stocks like Redwood Trust (RWT), Crystal River Capital (CRZ), Downey Financial (DSL), and Maguire Properties (MPG) you are sitting on a some real profits now. Betting on inflation volatility is a good place to put a portion of that money.
Lorillard: A Menthol Cigarette Ban Could Pay Off Big For LO Shorts
Lorillard (LO) derives about 95% of its revenue from the sale of a single brand of menthol-flavored cigarettes, namely Newport. The tobacco bill last year came very close to banning all flavored cigarettes. Menthol flavor makes cigarettes taste like peppermint candy and feel like soothing cough drops. Kids are more likely to start smoking menthol-flavored cigarettes because of the peppermint taste. They are also more dangerous because the menthol masks the harsh feeling of hot smoke, leading smokers to inhale more deeply. Civil rights groups strongly favor a menthol ban because a large majority of black smokers smoke menthol-flavored cigarettes. You can read more about this topic here.
So will civil rights and anti-tobacco groups succeed in getting Congress to ban menthol cigarettes next year? Maybe. I’d handicap it at around 50/50. Tobacco state Dems will oppose this law, but moderate Republicans in suburban districts will offset them. The risk of a menthol ban was big enough that the Loews family that controlled the Newport brand via its Loews Corporation for decades decided to fully divest this potentially toxic investment by spinning it off completely. Loews Corporation’s main line of business besides tobacco was insurance. And the good actuaries that they are, the company saw the huge risk in owning a pure-play menthol flavor cigarette brand.
LO puts with very low strike prices only started trading about three weeks ago. I believe the market has not yet correctly priced them. These June 2009 and Jan 2010 puts on Lorillard are a small part of my speculative portfolio, but could produce profits of 500% to 1500% in a worst case scenario for Lorillard. Even if this doesn’t happen next year, I expect cigarette sales to continue if not accelerate their secular decline, cash-strapped state governments to continue to raise tobacco excise taxes, and the weak economy to push dedicated smokers further into generic brands.
Disclosure: Long YGE, SOLF, TSL, CSIQ, STP, XGM. Long ABK calls. Long puts on CRZ, FED, LO, GLD, GS. Short DSL calls.
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This article has 45 comments:
So, when a smaller business fail, who gives a damn !!
You people should find out why this Big Guy failed ?
Let the regular folks know if the gov should bail them out or not.
That's your job, we hope.
I have been playing ABK with Jan10 calls but reduced my position out of concern that the company could not survive a long/deep recession.
I guess from a logical point of view ABK would be a beneficiary if an Obama administration elects to solve the economic crisis by inflationary means - but with Paul Volcker as an advisor inflation seems a very remote possiblity.
still have a problem with the solar crowd - why is every solar long all over the map with a basket of stocks to recommend? It appears that this will be dilutive to the price swing and why not just TAN Etf.
I am tired of chasing govern intervention plays in insurance banking clean coal carbon tax guns pharma solar geo housing tobacco. I feel Americans really got duped with this election. If you want to chase policy stocks history will show (just like Fannie Mae and 4 triliion homeowner votes) they will capture votes FIRST particularly union, second is destroying or minimizing the private sector and third is effectiveness for reelection purposes.
A case in point are the altern energy they are down with a very favorable political win -
I do find your ideas very refreshing and to the point - I wonder how you feel about gun manufac - swhc
Also where is the REIT business going to go - is it going to be sued into oblivion for trial lawyer votes - is it a short
You definitely are right about GM - destroy private investors save the bonds and buy the votes
What about oil drillers will they have to politically contribute to continue or will they be sued and move to Dubai
I can't believe this was posted today after all the news about retail suffering and polysilicon makers saying that they will divert supply to the solar industry in view of reduced demand by the microelectronics sector.
The quoted sentence shows very tenuous grasp of the industry by the writer.
"Solar is most directly in competition with coal and natural gas, both dirty power sources on which we will soon see new taxes and regulations."...
WHA, WHA, WHAAATTTT??? Coal is filthy, but in a closed, filtered, recycled system, there is very little pollution. The USA and China have tons of the stuff, rely on it for the grid; and taxing it would jack up utility rates. Political suicide rarely happens on that grand of a scale.
Natural Gas is one of the cleanest-burning substances on the planet. You can direct-drive a turbine with an almost 100% clean burn, then use a heat exchanger to steam-drive another turbine with a closed-loop system. N.Gas plants fire up and shut down quick enough to compensate for surges and drops from the solar & wind power supplies. There are no toxic wastes from N.Gas as there are from solar production. You get it from the local dump, thus reducing methane, which is a FAR, FAR more potent greenhouse gas than CO2. There is no soot, birth-to-finish CO2 production is a fraction that of pure hydrogen, it uses no farmland, we and our UAE allies have tons of it... I could go on. That sounds better than:
..." the Washington Post reported that Chinese solar-silicon companies were dumping toxic waste. Luoyang Zhonggui High-Technology Co., which was cited by the Post as a prime example, sells silicon to Suntech Power..."
The premise of solar competing with dirty fuel is not quite accurate. I am very long solar, but only because of business reality, a belief in multi-tiered power supplies, and hope.
Science, however, supports CLEAN-burning natural gas and modern coal plants for a couple more decades.
Also, the premise of buying STP because they are American is not quite accurate. They are headquarted at 17-6 Changjiang S. Rd., New District 214028, Wuxi, Jiangsu Province, China.
I do like the rest of the piece, though.
You know I'm a big fan of yours. Question:
Isn't XGM preferreds and not bonds? Big difference if a re-structuring happens. I would much rather be a bond holder than preferred holder???
Thank you for the corrections. I meant electronic manufacturing demand is _elastic_, which is clear from the context, and I did indeed confuse the names of those companies. I will email SA corrections later.
Wez, XGM are senior unsecured notes. It know it is odd for notes to trade on stock exchanges, but these were aimed at retail investors. GM needed to leave no source of borrowing unturned.
seekingalpha.com/artic...
and the $25 par threw me off. Takes balls to make a short bet on GS right now.
That said, I don't mean to say that JASO is a bad play right now, just inferior to the other companies I mentioned.
Non-I:
I disagree that GM will be allowed to file for bankruptcy. While the job losses could be minimized with a quick bankruptcy and subsequent bailout, the huge credit losses to banks, retail investors, mutual funds, and GM's gigantic supplier base would still occur. Its creditors, quite rationally, have been willing to extend payment dates knowing that they will recover little in bankruptcy.
The best case scenario here is really amazing. If GM gets enough money for AAA rating, XGM will go ABOVE par because of the 7.75% coupon, to something in the 28-31 range. And why not? If the feds are the major shareholder, it makes sense that this debt will become among the safest of all corporate debt.
There are two issues with coal, CO2 which is not toxic but causes global warming, and second a large number of other toxic pollutants. There is slow but study progress on the toxic pollutants issue, but coal plants are still by far the biggest source of mercury pollution.
And while natural gas is less dirty than coal for power generation, there is still the CO2 issue. Further, the major source for natural gas in Europe is Russia, which has repeatedly shown its willingness to leverage its CO2 supplies against countries that oppose its foreign policies. This is why Germany, which is in particular vulnerable to this type of economic blackmail, is such a big subsidizer of solar despite its relative lack of sunlight.
All that said, this could be a great opportunity to enter the solar market. Historic lows.Companies mentioned have some presence and may survive, even prosper. Quarter reports due later this month on TSL CSIQ. Last qtr was great, stocks still got killed.
Forward PE's are nearly meaningless at the moment. Pay attention. If forward PE's were accurate, the market would be where it was 3 month ago.
The CO2 per BTU of naural gas is extremely low, since every carbon atom is conneced to at least one, and as many as 4, hydrogen atoms. It contains many times the energy of H2 without the drawbacks. It is the only rampable and fast-adjusting compliment/backup to solar and wind. I wish T. Boone Pickens would shut up so that I could buy in. But I have no money to do so because...
...I own BGM, similar to the XGM you recommend. If they got AAA credit rating, then I would be rich. But General Motors MUST accelerate UAW benefit changes, renegotiate debt, lay off, merge divisions, and close dealerships. Bankruptcy is the only way they can do what has to be done. I think the Obama administration will be forced against its will to allow bankruptcy. I hope for my children's Christmas that you are right, and that I am wrong.
And I thought they were distressed when I bought them!
AIG, a much less important company in the eyes of the average voter has now Hoovered up $120 billion. If you forced me to guess, I think we'll see a recapitalization of GM by via a roughly $60 billion investment from TARP in exchange for 79.9% of the resulting common stock.
This would not actually cost taxpayers $60 billion, since many of GM's obligations would revert to the government anyway in the event of a bankruptcy, via the PBGC, medicare and medicaid, unemployment, food stamps, FDIC payments to Midwestern banks that GM would bring down with it, GM stockholders and bondholders deducting losses from their capital gains taxes, etc.
The job loss would actually be less with bankrutpcy; it would just be violently sudden. They are currently under contract with the UAW to hire and rehire unneeded workers, even on shuttered lines!
And the Midwest banks who made loans to a risky borrower should bear the same risk that I do. If they go under, the assets will be bought by a smarter bank.
My BGM dropped another 12.61%...
I see a lot of pointers in the bankruptcy direction.
I really, really hope you are right.
However I don't think there will be a bailout of GM until after Obama is sworn in. As bad as its cash crunch is now, it can easily last until then. So these notes may go lower in the intervening period.
Glad you are back. I was wondering what your thoughts were regarding CLNE since Pelosi owns it as well as what you thought of WGOV?
Thanks.
PLEASE POST MORE ARTICLES!!!!!!!!!!!!
GM:This could be a monster trade if the bailout does indeed happen ( i agree with your thoughts on the process) my question is what happens if it appears that they are going BK? They are trading for 12 cents now. How low can they go? My biggest concenr frankly is that the upside is seemingly insane, anywhere from 200-1,000% w relatively low risk all things considered yet no one is grabbing them. Is this another Lehman where they dont realize the magnitude until after? i lost a ton betting that Lehman wouldnt go BK.
I don't try to be perfect with timing. I try to buy XGM on days it hits new lows.
Obviously solar is not as attractive during a near depression and with energy prices dropping and credit tight for those with less than sterling credit. Most of the solar plays I follow have wisely scaled down, but have not stopped growing. They are still going forward with heavy R&D expenses, which is fat that can be trimmed in an exteme crisis.
However, long term interest rates are still low for (1) the US Gov, all the other big Western nations, and nearly all U.S. states (2) monopoly utility companies in the US and Europe (3) large non-profit organizations like universities, museums, and foundations. And they have no trouble getting financing and are all significant solar buyers.
For these buyes, record and near-record low interest rates mean financed investments in solar power will pay off. Lower prices are a good thing to stimulate demand.
..."the White House signaled an "orderly bankruptcy" remains under consideration."... "There's an orderly way to do bankruptcies that provides for more of a soft landing -- I think that's what we would be talking about."...White House spokeswoman Dana Perino.
A prestructured bankruptcy was the best solution, but I was certain they'd bail out on the third-fourth try. I have worked in government long enough to know that the officials will always throw the money away - I mean, make budget allocations.
...Or Congress could forgive the loans and issue more debt, as they do.
Greg Weston is a prescient genius.
If anybody looks at this article again, are there any calculations on the impact to GM cash flow from this:
seekingalpha.com/artic...
On Dec 19 10:38 AM 31October wrote:
> Ah, it was a ploy - the president offered $9.4 billion to General
> Motors, and Treasury Secretary Paulson said Congress should authorize
> $350 billion from the financial bailout fund. If automakers fail
> to produce a plan by March 31, they must repay the loans...
> ...Or Congress could forgive the loans and issue more debt, as they
> do.
>
> Greg Weston is a prescient genius.
>
> If anybody looks at this article again, are there any calculations
> on the impact to GM cash flow from this:
> seekingalpha.com/artic...
On positive notes, GM will be temporarily bailed out because:
1. People would be really mad if Wall Street bank bosses got bailed out, and manufacturers did not.
2. Although Chapter 11 would allow a permanent fix, people PERCEIVE the sudden layoffs as being more expensive to taxpayers, and politicians will dodge it.
3. Politics in the Rust Belt is made for supporting the UAW. Politics outside the Rust Belt are non-sequitar, since we have one-party-rule effective 20 Jan.
4. When I was a fiscal analyst, I ate lunch monthly with reps & senators (fed & state.) The government is going to do a bailout. It is how they think. It is all they know. It does not matter what we showed them. They will throw money at GM at least twice.
But the loan has no lift on your XGM or my BGM price because:
1. GM does not have the long-term ability to pay the coupon. GM bonds have the lowest credit rating possible. GM went from “bankruptcy is not an option” to admitting that their cash position will be less that the level needed to operate in the first quarter of 2009, plus they will need $4 billion in cash before next week.
2. GMAC is about to go belly-up. According to Barclays, if GMAC were to fail, GM could need an additional $9 billion to $13 billion in funding to supply financing to its dealers.
3. There are indicators that bondholders will be damaged one way or another.
Chapter 7 bankruptcy would mean liquidation of everything for pennies on the dollar. It will not happen.
GM has problems that no amount of bailout can fix. Chapter 11 prestructured bankruptcy would allow GM to operate. This scenario WILL happen. No congressional appointee is going to talk creditors and the UAW into taking one for the team, which is why there will be a bankruptcy. Bond payments could be slashed. If the bonds were called, it would be for pennies compared to par. We might be forced to exchange bonds for new stock. A court will decide which creditors will be paid, how much, and when. Members of both US parties are commenting on prearranged bankruptcy. The bright side is that we creditors would have first crack at the crumbs on the floor.
Here’s the crazy part: It probably will never be a declared bankruptcy, but a de facto one from a government “loan.” If the government gives GM loans, even outside of bankruptcy, it can mandate a change in the terms provided to bondholders. They can allow the restructuring that mirrors a Chapter 11 bankruptcy reorganization without declaring it.
[[Without Chapter 11-ish conditions, a bailout cannot work, so there would naturally be another bailout. The second one also cannot save GM, and Americans will get mad at Congress. Congress would discontinue the bailouts and then GM could go into real bankruptcy.]]
Some bondholders might sue: My The Financial Times RSS says large GM bond holders like PIMCO are fighting parts of GM’s recovery plan. “… Bond holders have nothing to gain from swapping for equity in an unsustainable capital structure, he said.”
I am extremely jittery about playing with nitroglycerin/GM bonds in a rough market. But don't dump your shares. The gov-mint will print yet more cash before asking for austerity measures.
We'll see how big the next round of GM refinancing is. Right now the money has just been enough for an orderly shutdown of GM plants and to allow GMAC to start funding loans for the majority of buyers who don't have 720+ FICO scores.
This level of funding does not match the rhetoric of converting plants to make a new generation of clean and efficient vehicles that get America off its dependency on foreign oil.
On the plus side, the terms of the December financing were more favorable than I expected to GM shareholders.
OCT31 brings up a good point in his last comment: Bill Gross and PIMCO are big time holders of GM debt. Gross is a smart guy with a lot of influence, and his large holdings mean that he has an incentive to speak for the rest of us.
I have been going back through you picks last year and they were all spot on. Looking forward to some more articles or if you have a subscription model let me know.
Thanks
Jarret
I will continue to write for Seeking Alpha when I have any free time away from my legal practice.
On May 22 12:04 AM Greg Weston wrote:
> Jarret and Proximo: Thank you for your kind words. I do have another
> GM column in the works.
>
> I will continue to write for Seeking Alpha when I have any free time
> away from my legal practice.