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Darren McCammon
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Darren owns ProActive Financial LLC where he provides Financial Planning and Analysis consulting services. In addition to these consulting services, he also manages family investment accounts as well as the yield focused, 50+ Portfolio. Darren's education includes a Bachelors in Economics, an... More
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  • Why I Am Short LendingTree.com (TREE)

    There's been various full length articles explaining why the LendingTree.com (NASDAQ:TREE) business process does not put the borrower first, creates annoying feeding frenzy calls from lenders, and must continue to spend a lot on advertising. Here's two:

    "LendingTree Won't Bear Long Term Fruit"

    "LendingTree, Inc.: Unrealistic Expectations"

    I won't reiterate the arguments in detail here, you can read the links above.

    What I will do is give you the basic reason why I'm short TREE, ridiculously high valuation. I listened to the latest conference call from LendingTree.com. The CEO seemed to continuously imply that they should be thought of as the Google (NASDAQ:GOOG) of debt. While I agree that their business models are similar, delivering interested eyeballs to their customers, one must realize that Google dominates search whereas TREE does not dominate credit search. TREE faces major competition not just from offline historical ways of getting a loan (banks, loan centers, direct mail, etc.) but also from the likes of Zillow.com (NASDAQ:Z), CreditKarma.com, Bankrate.com (NYSE:RATE), and even social media sites and general search sites like Google.com itself. This is why TREE brings 5.6% of revenue to the bottom line whereas 22.4% of GOOG's revenue becomes bottom line profit. Tree.com in no way dominates the way Google.com does. However, let's for a moment suspend belief and say TREE deserves the multiples of GOOG:

    GOOG P/E = 26
    TREE P/E = 66
    Implied Valuation = -60%

    GOOG EV/EBITDA = 20
    TREE EV/EBITDA = 53
    Implied Valuation = -62%

    GOOG P/B = 3.5
    TREE P/B = 6.5
    Implied valuation = -46%

    So assuming TREE does deserve a valuation comparable to GOOG (not true), TREE should still decline in price somewhere between 46 and 62%. This is the basic reason I am short TREE.

    May 01 10:11 AM | Link | 1 Comment
  • Arlington Asset Investments (AI) Q4 Highlights:

    I just finished reading Arlington Asset Investment (NYSE:AI) Q4 earnings release and conference call.

    They had a lousy quarter. AI lost 8% in economic value (= 87.5¢ dividend - $3.12 change in book value / $27.95 NAV at beginning of quarter). Core operating income of $1.50 easily covered the dividend but the hedges declined much more in value than the MBS went up.

    AI is currently trading at an 11% discount to NAV (= $22 current price / $24.83 NAV). Prepayments increased (note for other mREITs more exposed to prepayments) but AIs' portfolio is largely prepayment protected so their specific CPR was only 8%. This actually helps the non-agency side since it is only held on the books at 75¢ on the dollar and would get $1 in a refinance. The mix is moving more towards agency paper and the leverage going up as refinanced non-agency and new note proceeds are being invested on the agency side. They sold some of the longer dated hedges but this seemed more to shorten duration of the hedges concurrent with higher prepayment on the MBS rather than a change in policy.

    They continue to hedge essentially all their agency MBS, unfortunately over the last quarter these hedges didn't work to well.

    Going forward, the same spread change that so unfavorably effected book value this quarter, should indicate higher spreads on the money put to work in March and early April from the sale of notes.

    Overall, a lousy quarter; however, if you are focused on the income stream, I don't think it representative of what is to come. Rather just normal price variance due to an unfavorable change in the spread between the agency MBS assets and their corresponding hedges. Sometime in the future the opposite could happen and those spreads could change favorably. If you invest in a company like AI which usually fully hedges it's agency MBS, this can happen. AI doesn't typically try to make timing calls with it's hedges the way a company like NLY might.

    Tags: AI, mREITs
    Apr 28 4:01 PM | Link | 10 Comments
  • The King Of Bonds Is Shorting Bonds

    I found this interview of Bill Gross on CNBC very interesting: finance.yahoo.com/news/bill-grosss-short...

    Now of course Mr. Gross is talking his book and trying to garner a little publicity for the Janus Unconstrained Bond Fund (MUTF:JUCTX) which he recently took over. However, if one looks at the actual holdings of JUCTX (as of 3/31/ 2015) it is rather telling of what the "King of Bonds" thinks about the current bond market:

    Not only is Mr. Gross short the German Bund, but if you look deeper, you will see he is also short long term US Treasuries and his effective duration for the whole portfolio is under 2 years. Additionally, the short RXM5 position (short 5 year German Bunds) is his largest single position and overall his net non-domestic developed market bond position is -8.7%. So the short position is not small; he has high conviction. Now understand Mr. Gross has to invest in bonds, the mandate of the fund doesn't allow him to switch to equities. However, it is obvious he does not think German Bunds or generic AA and above rated domestic bonds for that matter are the place to be (over 75% of holdings are BBB or below). As evidenced in his holdings, Mr. Gross is clearly afraid one day rates will rise and cause significant losses for high quality bonds with any duration to them.

    As an example of what could happen I chose one of the largest Johnson & Johnson (NYSE:JNJ) AAA bonds. According to Morningstar (quicktake.morningstar.com/StockNet/Bonds...) it currently trades at 138 with a 5.95% coupon and a yield to maturity of 3.5% ($3.50 per year in earnings on a $100 investment). Where rates to rise 1% this bond should lose about 13.8% in value (13.8 years duration). In other words, were you to buy this bond today and interest rates rose 1%, it would take about 4 years for the yield to make up for your expected loss in price. If you ask me, this is an example of picking quarters up off the railroad track when there is potentially a freight train barreling down upon you. Now I don't particularly see any freight train in sight, but like Mr. Gross, I also don't have a lot of faith in my ability to time interest rate changes. Many holders of JNJ bonds will say I bought at issuance and plan to hold to maturity (2037), so I'm making 5.95%. That is fine, but realize you could also sell now for a 38% capital gain and reposition the money elsewhere or just hold it in cash. That 38% in immediately realizable capital gain represents over 6 years worth of yield. You could sit in cash for 6 years, using the capital gain to substitute for your income, and see if there are better opportunities then.

    In the interview Mr. Gross discusses timing saying he doesn't know when, but that it is costing him little to short the bund, 0.1% yield (no that's not a typo, only 10 basis points). He further elaborates that he see's -.2% yield as the potential downside (the ECB has indicated they would not buy German Bunds below -.2%) whereas the potential (eventual?) upside to his short position is significant.

    Those of you holding 3 year+ duration AAA corporate bonds should take note, the "King of Bonds" doesn't particularly like your position.

    Apr 22 12:15 PM | Link | 2 Comments
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