Are the 'Sharks' Waking Up?

On Tuesday, in the midst of one of the largest rallies this year, one of the biggest items we stumbled across almost went unnoticed.

The data miners at Bespoke discovered that the stocks in the S&P 500 that have done the worst since January 6, did the best overall during Tuesday’s climb. Stocks that did the best averaged a 4.39% increase while the worst performers added 18.3%.

We’ve been discussing the once-in-a-lifetime discounts on the market right now, and it appears Wall Street is starting to rub the Depression out of its eyes and wake up.

Does that mean we won’t have a pullback as the pros do a little profit taking – probably not. For money managers staring at some of the worst losses in a decade, profit is profit, and they should take some of that off the table.

Look for a couple days of profit taking.

This week should be a nice psychological “shot in the arm” to start getting the major players back in the water. Think of them as sharks. If they can’t smell “blood in the water” – meaning profit potential – then they’re going to stay away.

Strong multiple-day rallies are just the thing to rouse the big money managers and get the market moving again. As these up days become more common, expect the volume to increase as the participants do. This should give us more cause, not less, to find a few more values out there.

For a few more “beaten up” companies trading under a dollar, take a look at Advance America (NYSE: AEA), Anthracite Capital (NYSE: AHR) and Tuesday Morning (Nasdaq: TUES). All represent aggressive, speculative purchases for investors comfortable with risk. But all could give big returns to investors.

Comments

[Larry House:]

Yes, you MIGHT win in Vegas too. Any stock on any market COULD give a big return!

Mar 12 05:16 PM

[Mr Wall Street:]

Let's take a look at AHR (Anthracite Capital), an REIT containing primarily CMBS. I am a senior executive in the structured finance area of a large investment bank, and I can tell you that CMBS spreads are so wide right now that every securitized commercial real estate loan would have to default, followed by a 50% average principal loss, in order to support bond pricing as it stands today. In reality, less than 1% of securitized commercial real estate loans are currently over 60 days delinquent, and only a fraction of those will sustain a loss. Yes, things could get a little worse before they get better, but what is the absolute worst-case loss scenario? Our experts say 3.5%. So why do CMBS bond prices reflect 50%? Because, in the absence of tangible information, people run to safety no matter how invalid the underlying fundamentals may be, and prices eventually just don't make any sense anymore.

The same thing is true for AHR. This is not a business that may have to "close its doors" because sales have fallen. This is an REIT with a portfolio of income-producing assets that are simply impossible to value at this time, so in the absence of tangible information, people have sold the stock to absurd levels. However, once the credit markets free-up and the values of commercial real estate stabilize - whenever and at whatever levels that may be - it will once again be possible to peg values of CMBS, including those in AHR's portfolio, and the stock will rise substantially. It is inevitable. The only question is when.

If purchased at the current price of roughly $0.50 per share, it is hard to imagine a return of less than 10x within the next 18 to 24 months. Just be patient. The value and income are there. It just needs to be re-discovered.

For those who don't buy AHR today, put a reminder on your calendar exactly one year from now and see what happened. We have never seen a market like this in our lifetime, and it is presenting us with some unprecedented opportunities.

Mar 12 05:55 PM

[samwise:]

maybe sand sharks. The Great Whites are in the bond market, buddy.

Mar 12 06:27 PM

[sr9web:]

What other sub-$1 CMBS REITS do you like?


On Mar 12 05:55 PM User 375446 wrote:

> Let's take a look at AHR (Anthracite Capital), an REIT containing
> primarily CMBS. I am a senior executive in the structured finance
> area of a large investment bank, and I can tell you that CMBS spreads
> are so wide right now that every securitized commercial real estate
> loan would have to default, followed by a 50% average principal loss,
> in order to support bond pricing as it stands today. In reality,
> less than 1% of securitized commercial real estate loans are currently
> over 60 days delinquent, and only a fraction of those will sustain
> a loss. Yes, things could get a little worse before they get better,
> but what is the absolute worst-case loss scenario? Our experts say
> 3.5%. So why do CMBS bond prices reflect 50%? Because, in the absence
> of tangible information, people run to safety no matter how invalid
> the underlying fundamentals may be, and prices eventually just don't
> make any sense anymore.
>
> The same thing is true for AHR. This is not a business that may have
> to "close its doors" because sales have fallen. This is an REIT with
> a portfolio of income-producing assets that are simply impossible
> to value at this time, so in the absence of tangible information,
> people have sold the stock to absurd levels. However, once the credit
> markets free-up and the values of commercial real estate stabilize
> - whenever and at whatever levels that may be - it will once again
> be possible to peg values of CMBS, including those in AHR's portfolio,
> and the stock will rise substantially. It is inevitable. The only
> question is when.
>
> If purchased at the current price of roughly $0.50 per share, it
> is hard to imagine a return of less than 10x within the next 18 to
> 24 months. Just be patient. The value and income are there. It just
> needs to be re-discovered.
>
> For those who don't buy AHR today, put a reminder on your calendar
> exactly one year from now and see what happened. We have never seen
> a market like this in our lifetime, and it is presenting us with
> some unprecedented opportunities.

Mar 12 08:43 PM

[Hari Seldon:]

I've also been interested in the composition of the rallies. I can, somewhat, understand why the most beaten down names would rally the most (higher beta) but to me it seems like instead of throwing the baby out with the bathwater, we are bidding up the bathwater with the baby.

Two examples:

NewStar Financial (NASDAQ: NEWS), a specialty finance company focused on financing PE transactions in highly levered transactions. The company finances itself with CLOs and warehouse lines (both of which are disappearing) and its underlying portfolio has to be suffering based on fundamentals. Yet today, it rallied 73% from $1.24 to $2.15 after reaching lows of $0.60. This surely is an over-correction.

Boyd Gaming (NYSE: BYD), a gaming company which owns 15 casinos and hotel properties and operates an insurer and travel agency (seriously), gained 41% from a low of $3.05 on March 9th to a high of $4.31 today. The company is extremely levered, at 7.7x Debt/EBITDA compared to an EV/EBITDA of 7.5x (they have some cash but basically no equity value). They will need to roll this debt soon and, given declining fundamentals and a difficult debt market, this will be difficult. The reality is this company is a good candidate for bankruptcy should reasonably DIP financing come available.

FD: Short BYD (stock and puts), No position in NEWS.

Mar 12 09:27 PM

[Mr Wall Street:]

None, actually. If the play here is to substantially capitalize on the rebound from the punitive damage CMBS bonds have suffered as a result of the residential mortgage meltdown and the credit crunch in general, AHR looks like the best option through the equity markets. If you have several million to play with, I would suggest buying investment grade (BBB- or better) CMBS securities themselves, but most of us don't have that much cash lying around for this type of investment.

I know the team at BlackRock, which manages AHR, and they are brilliant guys. I also know the management at several other publicly-traded concerns with high CMBS exposure, and I can't say the same (my opinion of course). Also, AHR has a reasonable amount of debt against their portfolio at favorable terms, and they have decided to limit the cash portion of their common dividend for a while to direct cash toward further reducing that debt and meet more stringent capital requirements - a great thing for the value of your investment in the long run, but not for those who need income, who frankly shouldn't be in this stock anyway. And finally, they do not have other lines of business draining the CMBS income like Centerline Capital, for example, which is actually losing money and possibly headed for BK. Conversely, AHR's most recent trailing 12-month earnings are $1.50 per share, THREE TIMES the value of the stock! I think I hear that Twilight Zone music playing somewhere...

Stick with AHR. It is the best risk/reward CMBS play out there.


On Mar 12 08:43 PM sr9web wrote:

> What other sub-$1 CMBS REITS do you like?

Mar 13 09:51 AM

[Mr. Buyside:]

Mr. Wall Street, thanks for your comments. Would you happened know the allocation of their portfolio to the post 2005 vintage CMBS. Recent loss estimates on this part of CMBS universe are at 6-7% and some people even suggest that AJ tranches could be wiped out in a prolonged recession, which implies over 12% loss for a typical deal. Was AHR buying dupers with 30% enhancement? If not, then their portfolio might be indeed worthless. Do they publish their portfolio?

Also, what do you think is going to happen to the commercial RE in the next 12 months?

Mar 13 03:09 PM

[Mr Wall Street:]

Anthracite has been an active buyer of lower CMBS tranches for many years, and yes, there is no doubt their portfolio has exposure to post-2005 below investment grade CMBS. However, deteriorating underwriting standards and overly generous loan terms, such as 10-year IO, were not rampant until 2007, so the amount of "risky" CMBS out there is not as large as some may think. Also, the ultimate loss realization from recent vintage CMBS is a big debate, and the figures you have quoted are very "doomsday" in nature.

Without opening the corporation's books, we cannot see an itemized list of AHR's holdings. But CAN see specific classifications through publicly-available reports, which show that the largest component of their portfolio is investment grade CMBS, and I can tell you from personal knowledge of their below investment grade acquisition history, that the majority of those holdings are older vintage. Nevertheless, there will unquestionably be losses to AHR's portfolio, and no one has a crystal ball to determine how much, so we must assume the worst case scenario, and I can't imagine anything worse than 10 to 15%. This would still support a stock value far north of $5.00 per share, as I suggested in a previous blog. In other words, there is no scenario, no matter how pessimistic, that suggests AHR's portfolio would ever be "worthless".

There is unquestionably some lingering downside for commercial real estate values, especially with the momentum of retailer bankruptcies and shrinking corporations. So I think it will get worse before it gets better, and CMBS will no doubt feel some pain from this, primarily from maturing loans. But we have some insulation from this since the CMBS loans maturing over the next couple of years were underwritten at a time when cap rates were higher, which for the most part should compensate for recent market value deterioration, and amortization was common, thereby making the refinancing scenario similar if not better than the original loan scenario +/-10 years ago. The real problem is the current credit crunch, which is preventing borrowers from obtaining take-out financing, but fortunately special servicers are extending maturing loans for now as we all wait for the credit markets to re-emerge. Great news, indeed.

I could go on for pages about all this, but I did want to ask what you meant by "dupers with 30% enhancement"? CMBS transactions do not contain any sort of "enhancement" such as credit default swaps and such. Super-senior AAA tranches typically have 30% subordination, which simply means that 30% of the transaction is tranched below that class, and there is nothing tricky or suspect about it. Securitization is a solid, 100% supportable structure with risk distributed among specific classes to accommodate multiple investor appetites. The only weakness would be from irresponsible lending attributed to the underlying loans, and that is a problem no matter how the loans are sourced, as we discovered during the S&L crisis in the 1980's.

Mar 14 10:18 AM

[Djuro:]

Thanks for the posts. Do you care to update yout thoughts following today's 4Q release?


On Mar 14 10:18 AM Mr Wall Street wrote:

> Anthracite has been an active buyer of lower CMBS tranches for many
> years, and yes, there is no doubt their portfolio has exposure to
> post-2005 below investment grade CMBS. However, deteriorating underwriting
> standards and overly generous loan terms, such as 10-year IO, were
> not rampant until 2007, so the amount of "risky" CMBS out there is
> not as large as some may think. Also, the ultimate loss realization
> from recent vintage CMBS is a big debate, and the figures you have
> quoted are very "doomsday" in nature.
>
> Without opening the corporation's books, we cannot see an itemized
> list of AHR's holdings. But CAN see specific classifications through
> publicly-available reports, which show that the largest component
> of their portfolio is investment grade CMBS, and I can tell you from
> personal knowledge of their below investment grade acquisition history,
> that the majority of those holdings are older vintage. Nevertheless,
> there will unquestionably be losses to AHR's portfolio, and no one
> has a crystal ball to determine how much, so we must assume the worst
> case scenario, and I can't imagine anything worse than 10 to 15%.
> This would still support a stock value far north of $5.00 per share,
> as I suggested in a previous blog. In other words, there is no scenario,
> no matter how pessimistic, that suggests AHR's portfolio would ever
> be "worthless".
>
> There is unquestionably some lingering downside for commercial real
> estate values, especially with the momentum of retailer bankruptcies
> and shrinking corporations. So I think it will get worse before
> it gets better, and CMBS will no doubt feel some pain from this,
> primarily from maturing loans. But we have some insulation from
> this since the CMBS loans maturing over the next couple of years
> were underwritten at a time when cap rates were higher, which for
> the most part should compensate for recent market value deterioration,
> and amortization was common, thereby making the refinancing scenario
> similar if not better than the original loan scenario +/-10 years
> ago. The real problem is the current credit crunch, which is preventing
> borrowers from obtaining take-out financing, but fortunately special
> servicers are extending maturing loans for now as we all wait for
> the credit markets to re-emerge. Great news, indeed.
>
> I could go on for pages about all this, but I did want to ask what
> you meant by "dupers with 30% enhancement"? CMBS transactions do
> not contain any sort of "enhancement" such as credit default swaps
> and such. Super-senior AAA tranches typically have 30% subordination,
> which simply means that 30% of the transaction is tranched below
> that class, and there is nothing tricky or suspect about it. Securitization
> is a solid, 100% supportable structure with risk distributed among
> specific classes to accommodate multiple investor appetites. The
> only weakness would be from irresponsible lending attributed to the
> underlying loans, and that is a problem no matter how the loans are
> sourced, as we discovered during the S&L crisis in the 1980's.

Mar 18 11:10 AM

[Glen Bradford:]

l am waiting on the news today. But I'm in if things look up.


On Mar 14 10:18 AM Mr Wall Street wrote:

> Anthracite has been an active buyer of lower CMBS tranches for many
> years, and yes, there is no doubt their portfolio has exposure to
> post-2005 below investment grade CMBS. However, deteriorating underwriting
> standards and overly generous loan terms, such as 10-year IO, were
> not rampant until 2007, so the amount of "risky" CMBS out there is
> not as large as some may think. Also, the ultimate loss realization
> from recent vintage CMBS is a big debate, and the figures you have
> quoted are very "doomsday" in nature.
>
> Without opening the corporation's books, we cannot see an itemized
> list of AHR's holdings. But CAN see specific classifications through
> publicly-available reports, which show that the largest component
> of their portfolio is investment grade CMBS, and I can tell you from
> personal knowledge of their below investment grade acquisition history,
> that the majority of those holdings are older vintage. Nevertheless,
> there will unquestionably be losses to AHR's portfolio, and no one
> has a crystal ball to determine how much, so we must assume the worst
> case scenario, and I can't imagine anything worse than 10 to 15%.
> This would still support a stock value far north of $5.00 per share,
> as I suggested in a previous blog. In other words, there is no scenario,
> no matter how pessimistic, that suggests AHR's portfolio would ever
> be "worthless".
>
> There is unquestionably some lingering downside for commercial real
> estate values, especially with the momentum of retailer bankruptcies
> and shrinking corporations. So I think it will get worse before
> it gets better, and CMBS will no doubt feel some pain from this,
> primarily from maturing loans. But we have some insulation from
> this since the CMBS loans maturing over the next couple of years
> were underwritten at a time when cap rates were higher, which for
> the most part should compensate for recent market value deterioration,
> and amortization was common, thereby making the refinancing scenario
> similar if not better than the original loan scenario +/-10 years
> ago. The real problem is the current credit crunch, which is preventing
> borrowers from obtaining take-out financing, but fortunately special
> servicers are extending maturing loans for now as we all wait for
> the credit markets to re-emerge. Great news, indeed.
>
> I could go on for pages about all this, but I did want to ask what
> you meant by "dupers with 30% enhancement"? CMBS transactions do
> not contain any sort of "enhancement" such as credit default swaps
> and such. Super-senior AAA tranches typically have 30% subordination,
> which simply means that 30% of the transaction is tranched below
> that class, and there is nothing tricky or suspect about it. Securitization
> is a solid, 100% supportable structure with risk distributed among
> specific classes to accommodate multiple investor appetites. The
> only weakness would be from irresponsible lending attributed to the
> underlying loans, and that is a problem no matter how the loans are
> sourced, as we discovered during the S&L crisis in the 1980's.

May 15 12:51 AM

[H.J. Huneycutt:]

"The data miners at Bespoke discovered that the stocks in the S&P 500 that have done the worst since January 6, did the best overall during Tuesday’s climb. Stocks that did the best averaged a 4.39% increase while the worst performers added 18.3%."


My entire portfolio (www.kaching.com/kachin...) was designed partially based around this premise. Of course, I don't want anyone to think that I just randomly went out picking stocks that performed poorly. You can find great stocks that have been murdered in the downturn. It's really all about valuation. Certain industries are cyclical and always perform poorly in downturns and the market tends to overreact. Likewise, these same industries do extraordinarily well in a boom and the market overreacts there as well.

May 15 05:59 AM