Jason Merriam

Long/short equity, value, special situations, bonds
Jason Merriam
Long/short equity, value, special situations, bonds
Contributor since: 2008
Company: Merriam Report Investment Research
Thomas,
Another piece of the puzzle I forgot to mention is the effect of dark pools on the aggregate market. It's not totally agnostic to your discussion of potential front running, because these are big-block institutional trades in private exchanges.
DP's have been around since the '80's but they account for about 40% of all US stock trades in recent years. The point here is these pools also contribute significantly to the consolidated liquidity in the market.
SA contributor SqueezeMetrics has written some good articles on this topic in more detail.
Thomas,
Your article was a very good read and well articulated perspective. Nice work.
I'd like to add some color to your salient discussion.
The Japan move to negative was quite a surprise no doubt. Marc Chandler pointed out that speculators added to net and gross long yen positions leading up to the BOJ meeting. This would suggest speculators were leaning the wrong way of the BOJ's surprise. Chandler noted while that speculators had shaved short yen contracts by 10%, the net long positions were the largest of the currency futures.
Ironically, speculators added to net long 10-year US Treasuries, the biggest increase in six months. This probably explains why 10 yr. note futures rallied so strongly to BOJ move.
As for equities, and to add to your good points is that balance on close orders at Friday's close were something like $4.9 billion to buy. Obviously, short covering and re-balancing accounted for some of the gains, but the increase of momentum in the last hour of trading adds meat to your suspicion of "hanky-panky".
If I circle back to Japan for a minute, I would not be the least bit surprised if some of the scrambling in the currency markets (particularly yen and to a lesser extent euro) was the fuel to ramp the major indexes (and by default the etf's you cited which mimic their representative index) into the close of last week's trading.
I've been in this business for 25 years and I've never seen anything like the volatility manifested during the past few weeks. But, your article fleshed out some excellent perspective as seen through your "crystal ball". I look forward to your future articles.
gardencove,
I think the appeal of T-bills is the sentiment of flight to safety (searching for a snug warm hole to hide). As to what could make them break down, several potential scenarios come to mind.
Inflation risk- inflation has been benign for years, but "whiffs" are beginning to show up in some data.
Convexity panic- for example, "shot-gun" volatility arising from an event which disturbs credit and currency markets simultaneously. My article link below discusses this in more detail http://seekingalpha.co...
Interest rate risk- this is an obvious no-brainer, but with Japan throwing another surprise currency-printing party, how many other central banks will feel compelled to join the party. I have to think that Japan's move to negative will push back the FED's plans. That said, your long-term T-Bills may have some wiggle room.
Who knows, but your question was a good one.
Marc,
Always appreciate the concise overview. It's a jungle out there. The mexican peso has been practically turned into chutney. I'm wondering if the peso dip is in any part to to ease of how it's traded (compared to other emerging market currencies)?
With Japan doing negative, does this mean central banks are going to start up the "beggar thy neighbor" party again?
Cabernet Sauv., Syrah and Carignane.
Ian,
I enjoyed the read, very interesting. I'm an amateur winemaker with 2 hectares in the Rosa de Castillo region of Baja. I can appreciate the economics of wine making and that's why it will likely remain a "hobby". You were right to point out scale.
Chile puts out some very good juice and your point about minimal Phylloxera is well taken. Another aspect to low Phyll incidence is the source of irrigation which depending on latitude is benefited by Andean snow melt.
Unless I'm mistaken concha y toro also controls some land in the Maipo valley.
Keubiko,
I agree that the NOI for both ground leased and owned stores to be in the ball-park to your $20B est. Starboard proposal is interesting and if they cherry-pick asset quality into structure carefully, it would be a win-win.
Jeff, Always appreciate the concise perspective. And thanks for the shout-out to Chuck Carnevale. He is one of the good guys and valuable to the SA community.
Any potential GMCR - SBUX divorce would be a net positive for SBUX. Starbuck consumers only purchased Keurig brewers because of Starbucks brand. Keurig knows that and presumably JAB does too.
It's worth noting that JAB (if deal goes through) will pay a premium for a company in operational and strategic disarray. Perhaps they have steps laid out to fix GMCR but it will involve a significant restructuring.
If SBUX had wanted to acquire GMCR, they would/could have, but I think SBUX management was keen to the messy jumble of GMCR asset base and legacy issues.
SBUX has operational leverage and benefits from the contribution margins in its arrangement with GMCR. It is a marriage of convenience which favors SBUX. GMCR is the ball-and-chain.
To add to Sir Falstaff's comment above, JAB has to know the shot accross its bow is not to be taken lightly.
If SBUX is committed to K-cups, they have the cash-flow and working capital to allocate capex for manufacturing. Another possibility coming out of JAB deal might be SBUX acquiring and/or a JV arrangement with JAB to rationalize excess capacity within GMCR operating base.
JAB and SBUX are competitors, but so were SBUX and GMCR. GMCR was the contract manufacturer for the industry and it was by necessity not choice.
I suspect Schultz and co. will make any K-cup participation going forward to pencil in.
Adam,
Yes, it was late 2013 after the May forced selling and it wouldn't take much to spook Treasuries out their snug little holes.
Adam,
I always enjoy reading your perspectives on the CEF landscape and appreciate the effort you put into each article. The only CEF we jettisoned end-of-year was inflation-protected Treasuries, but are keeping other baskets we've held for years.
Discounts are wide now, but I haven't seen any panic selling of note and redemption risk doesn't plague closed-fund managers the way it does open-funds. Your leverage discussion is timely and it's good to see reader comments delving into libor floors (which wasn't widely talked about in years past).
What I am hoping for, is that savvy managers will use the bond shakeout to re-position their portfolios and benefit from a potentially steepening yield curve.
Timberwolf,
Informative article and appreciate the effort., thanks. We own SNAK in some growth portfolios and cautiously optimistic things will turnaround. Capturing recall costs are never easy even for larger capitalized co.'s, so I can empathize with what management is dealing with.
Good portfolio of brands and licensing arrangements give me hope, but improving operational leverage will be critical going forward.
The intercreditor arrangement between Wells and BSP is interesting and I can't help but wonder if SNAK might be ripe for being taken private.
Enjoyed your article.
Very interesting and diversified food for thought, thanks.
I hold Shkreli with equal disdain to that other bum Jeff Skilling. Skilling as you recall, threatened to educate lawmakers on the nuances of "complex accounting".
cbama,
Das hast du richtig erkannt!!
Regarding forecasting: I heard meteorologists were brought to this world to make economists look good.
Courage,
I will never assume to be smarter than anybody else. But, I am confident that JAB will eventually be faced with a need to further rationalize the assets being purchased. GMCR carries lots of goodwill on their balance sheet and the company paid excess premiums on most of the acquisitions made.
They have made questionable treatment of "identifiable" intangibles not to mention a protracted decline in the operating environment going on three years now. Kelley was supposed to be the fix-it man, but obviously it hasn't gone well since he arrived. What would you do if there were dark clouds behind you and another storm ahead? I won't speak for Kelley, but either find shelter from the storm or get the hell out of dodge. It looks as though Kelley opted for the latter.
I have no idea to what JAB intends, except to hopefully rationalize what they can do to realize a meaningful ROI. Perhaps they can get the assets to sweat harder than Kelley was able to. Or, it might be a sum of the parts situation were pieces are jettisoned.
One benefit of being private is the ability to be more aggressive in a restructuring. There are also accounting alternatives which would allow JAB to decide which assets will be treated as GAAP (a spin-off or return to public IPO down the road would require the assets be treated similarly). Or, the integrated assets, if determined there might be additional economic value realized, could amortize.
There are also considerable differences in treatment of capitalized vs incurred expenses between IFRS and GAAP. Regardless, as Sir Falstaff said, the subjective flexibility is running out of rope no matter who owns the assets.
This has nothing to do with admitting "wrong". I've taken a lot of crap for my views on GMCR and in this business it goes with the territory. It was a broken company in 2010 and the go-private deal suggests it remains broken. The premium paid was a blessing for Coke and an answered prayer for Kelley and the company.
Dave,
Enjoyed the article and timely subject to discuss now that rates are finally nudging a bit. Floating rate instruments act as a proxy for a rising rate environment and it's about time.
That said, I would also make a case for closed-end funds. Start with the fact that the market for bank and first lien paper is relatively illiquid. Unlike mutual and etf funds, cef managers are less likely to sell holdings as a means to meet redemptions.
The exception to that was some of the damage we saw during peak of credit crisis. Many institutional players experienced forced selling either due to margin calls or to cover nasty unwinds of carry trades gone wrong. CEF baskets were the last shoe to drop, which suggests those selling likely would have preferred not to sell, but needed to raise cash...and quick.
Drawbacks to CEF senior loan baskets are leverage which is affected by libor- floors and borrowing costs. However, buying cef's at a discount to NAV can help mitigate the expense ratio to some extent.
Your premise is sound and you raise very good points about credit quality. Our portfolios have owned senior paper for almost 15 years. Most of the better syndicated pools have been drawn down (replaced w/ lower rate term and lien paper) so the lower hanging fruit has already been picked through.
As a result, senior loan funds have been adding corporate bonds and other debt instruments to their allocations in an attempt to generate distributions.
Good article and I appreciate the effort you put into this.
Premis of your article is quite sound
Sir Falstaff,
Your comment is one of the best I've read yet! The GMCR knuckleheads are the luckiest cats on earth and I admire anybody who stuck with their short conviction over the long haul. No moral impasse there. You nailed it with stupid risk-free market to aid and abet.
Since GMCR didn't have the balls to write down crap that was clearly viable 2nd test impairment-worthy, JAB will certainly have to eventually. They might be able to retro-in some of the new PCC accounting for amortizing goodwill (using 10 year shelf vs realizing "new" economic value). Private co.s also get some flexibility with treatment of derivatives.
However, given the private-portfolio shedrow of JAB, it's unlikely they would exercise an exit strategy anytime soon. Thus, and as you say, they'll be writing down a chunk of something. Hopefully, they have steps #2 and #3 lined up so it won't feel like being bent-over in an unpleasant position.
At least the author has earned a clear-conscience, unlike other folks around here who make liberal use of sell-side ambiguity to cover their "if-x-happens-y-might-... conditional calls.
Seth,
I read the article with interest. I'm hoping you can clarify several issues:
As of 10-2, KO determined that the loss in FV of their GMCR stake was not other than temporary, citing primarily non-Kold issues in their evaluation and confidence in remedial steps expected to be taken by GMCR management.
Obviously, the JAB bid mitigates impairment risk to KO, but could you clarify exactly what "not yet public details" being disclosed more specifically? I have my own reasons to believe that Kelley's arrival may have been more than a coincidence, so I'm hard pressed to think KO orchestrated their departure based on Kelley BSing his former employer about the virtues of Kold. Obviously, the similar bid price to KO's cost basis suggests KO had incentive to be represented.
You have chronicled the technological deficiencies of Kold well, but if Kelley was privy during early development phase, KO management or at least its well-seasoned acquisitions team would likely be in a similar neighborhood.
Muhtar Kent for his part is an opportunist and KO's incremental stakes in other companies tend to be low-double digit percent of net income. I believe GMCR's purchase of Bevyz was more a suppression tactic to preserve market share rather than a later realization of inferior technology.
JAB's agenda is not clear except for the opportunity of footprint, manufacturing base and end market. Perhaps they can fix what Kelley couldn't but that is their problem should deal close as planned.
As for KO, the capital appreciation following GMCR's Q4 results should have been some comfort to KO management and board.
You also suggest not wanting to publicly embarrass Mr. Kelley regarding his departure from KO and then qualifying the statement with it being a mutual need between the parties involved.
That is a very ambiguous tie-in considering KO showed up at GMCR's door wagging a check for a billion plus dollars only eighteen months after Kelley jumped ship. Would you clarify the point you are trying to make?




Steve,
Revenue (Annual Y-o-Y) growth change percent.
Marc,
Always appreciate the perspective, thanks.
Moon,
Could not agree with you more.
Arie,
Nice overview thanks. GT is benefiting from focus on improving operating efficiencies, smart capital allocation and capital productivity.
Gregg,
Thoughtful approach to the cef bond universe, thanks. According to LCD, junk prices fell some 186 bps on Tuesday to 2015 lows. What worries me is that once mutual funds and etf's have their run on redemptions, it may spill over into the cef baskets.
It happened in 2011 and we saw NAV deterioration rates fall faster than widening discounts to NAV. I'm dying to add to my yield cef's but I suspect there may be some more forced liquidations coming down the pike.
It used to be credit spreads between inv. grade and junk were tight, but they have been widening dramatically in recent weeks.
Sir Falstaff,
There really is no relationship between the age of a company and the use of lenient accounting. If anything, accounting standards should be a high priority for any company, "disruptive" or not.
George,
always enjoy the read, thanks. The tortured logic angle re GMCR is interesting in context of kid-gloves.
Ben,
Excellent article as usual. High levels of accruals don't help matters either.
Jae Jun,
You have provided SA readers incredible resources. Thank you!
Peter,
Always appreciate your analysis and perspective on the sentiment/forecast implied by actions of market makers. It has proven very helpful to the risk management of our portfolios. Thanks again.