Michael Nau

Portfolio strategy
Michael Nau
Portfolio strategy
Contributor since: 2012
Not sure if % change in the VIX is the best way to measure volatility spikes- its a percent of a percent, which is weird. Maybe vol of vol is better.
Or maybe it is better to think qualitatively: yesterday the VIX went from extremely low to very low relative to the historical mean. I would guess that most of your other 5-sigma events are similar and don't correspond to a commonsense idea of a true crash or black swan event.
We have no dog in this fight, nobody over there likes us. Not even our "friends".
So long as there is no oil embargo, I don't see how our interests are at stake.
Seems unlikely, not a whole lot of synergy. In any case, the good parts of RSH (if there are any) can be had more cheaply in Chapter 11.
I don't think this is a partisan issue. Fact of the matter is that the U.S. military has a limited ability to impose political control over the Middle East, regardless of whether the CIC is a Democrat or Republican. Our military is designed to win wars, not occupations or revolutions.
We should just focus on those few who actively target the U.S., provide non-military aid to our friends and otherwise mind our own business.
The book value has probably already evaporated.
I don't know anything about the business, but I would guess that the company is very exposed to equity market downturns in general, particularly if Fed-based liquidity is drying up.
Excellent analysis, very informative. Out of curiosity, I took a quick glance at the balance sheet and it looks pretty fragile: stockholders equity of $250M, but goodwill of $410M and other intangibles of $150M, probably mostly from the rollup strategy. On top of that, $270M of equipment that is probably overvalued (if the thesis presented here is correct). The company seems to have minimal slack if it runs into trouble.
So what I'm wondering is whether the convertible or sub debt is an even better short than the equity, because the revolving credit line seems likely to eat up everything in the event of bankruptcy. I don't have access to fancy financial info, so I don't even know if this is workable. KCM, thoughts?
So they're all OTC? Maybe outsiders should wait until they are in the fully regulated markets.
The whole sector seems like a scam to me, but I'm no expert. Alan, is there any of these companies that you would actually own yourself?
Or more broadly, any companies trading above pennies with the strictest filing regime and timely SEC filings? If these companies are legitimate, why don't managers make sure the share price >$5?
greddy, I agree that CACC is just about the best in the business, as I have written before. The problem is that the business is very cyclical, is headed towards decline, and investors seem to be expecting steady growth going forward. That is extremely unlikely to happen.
I do like the company, though, and plan on buying after the stock starts trading according to normalized earnings/book value.
WM and BH, thanks! I won't try to estimate EPS for 2014, but there is a chance that the company has a few more quarters of earnings growth before gravity sets in. I think the key questions will be 1.) whether competition will continue to lower spreads 2.) the estimated default rate of 2014 loans, which may change to the upside or downside 3.) whether management decides to scale back or continue leveraging up despite the increased risk.
Personally, I'd like to see the company start deleveraging now, lock-in more conservative financing, and begin to hold some more cash. This would hurt earnings for a while but will help prevent the pennies in front of the steamroller phenomenon. It would also be much more likely to grow book value in the long run than the strategy of borrowing to buy back stock at all time highs. So when the cycle turns, I wouldn't be surprised if the company trades at $50, but it will take some time.
Is it the U.S. in 2009 or Japan in 1991? That is the question. It looks more like early 1990s Japan to me, so trailing PE metrics are misleading.
Well done, my IRA thanks you for your AIG write-ups a while back! Keep up the good work!
They did in December, but were losing $1M a day. Now they probably have something like $50M-$100M. Also, on the revolving credit agreement, the only other source of liquidity, the balance declines with inventory. I estimate that they have 3-5 quarters left until insolvency.
If you do believe in the turnaround, keep the position small and buy call options or sell puts. The options on this company are very skewed to the downside.
Thanks for the update. Do you have any idea of the likelihood the deal will actually close, or is this just a delay?
This sort of thing works out okay in Germany. VW is well managed and has union representation.
SU, well said. It should also be noted that there are several ways of thinking about wealth maximization. Short-term maximization is all about cost-cutting and accounting flim flam, long-term maximization is about building a business.
I disagree with the absolutist caveat emptor line of argument. Should everyone read the prospectus for SPY or VTI or whatever other index funds might be in their 401k accounts? Or all of their credit card agreements? That is impractical, most people won't, and don't have the time to spend their lives reading fine print.
Perhaps the SEC can come up with a warning label system for strange/complex, or questionable stuff like TVIX, making it more clear to investors that they may not know what they are doing. This sounds especially reasonable for instruments like TVIX because futures and options (TVIX is based on futures) have more of a gatekeeping structure than common stocks or index funds.
Thanks for the analysis, your argument seems spot on. Out of curiosity, how do you compare reinsurance companies that are primarily fixed income shops with others like GLRE or perhaps Y?
Good analysis, there is a decent business in there. The problem is that I don't trust Artal to do right by non-controlling shareholders. It is just too tempting for them to pile on the bad news in the coming months and take the company private for a song.
I wouldn't bet on Eurocrats sorting things out before the whole ship sinks.
Tom and phawk, I think you do a good job of briefly summing up the bull case. And the market seems to agree for now that AA will turn things around with its new strategy. But neither of you address the related issues of 1.) current valuation 2.) financial weakness.
If AA can make the leap, then perhaps optimism is warranted. But if not, then the company is in serious trouble. Where we seem to disagree is 1.) the extent to which the macro environment in the coming year will support this new strategy 2.) whether financial weakness will spell disaster if things don't go according to plan.
Time will tell who is correct, good luck!
Good points about the risks in emerging markets. Russia, Japan, and China (add Egypt and India) have historically been quite risky.
So I think the question is whether the losses in the first half of the 1900s were "random", or a cyclical phenomenon. In other words, does international trade and liquidity regularly expand and contract over the long term? It seems like it does: WWI marked the end of a long globalization cycle and EM investors were more-or-less wiped out. International trade and capital flows have been growing steadily since 1950, especially after 1980. So are we to expect more globalization forever, or are there serious imbalances that will eventually end the liquidity cycle? Looking at the debt bubbles in China and Brazil and the massive overcapacity across EMs, it seems to me that the EM party will be over within the decade.
Did we read the same earnings transcript? GAAP EPS negative, yoy revenue decline, soft aluminum market. Management tried to spin this as positive, but these "restructuring" costs not counted in adjusted EPS seem to be a central part of the business model now. So what is there to be bullish about, especially looking at deflation in Europe and the coming credit bust in China? If I shorted stocks, AA would be near the top of my list.
Wow, excellent article, well reasoned and articulate. Personally, I side with BOFI management on interest rates, but who knows, they are making a large gamble. I do totally agree about the longer-term problems with funding, runoff from MBS, and heightened competition- I've changed my mind significantly in the last year about the sustainability of BOFI's moat (weak to nonexistent).
All that said, valuation shorts seem risky in this market. This is clearly a battleground stock with huge price swings and widespread disagreement about fundamentals. Shorts and longs should both be careful. Good luck everyone!
Well, the stock is down. So they need something to pump it back up so they can sell more.
If that is the case, then CA should stop giving handouts to the affluent and use the money on something more productive.
Sensible analysis and proposals, the HFT threat to retail in terms of scalping is way overblown.
I guess I'm a little less convinced that "flash crash" events are no big deal just because the 2010 crash was quickly reversed. In 1987, options and futures markets came close to collapse, and I'd hate to have the fate of markets depend on the whims of a few people in positions of power. That's why I'd add a very small transactions tax for trades held less than one minute (or hour or day or whatever). Won't affect long-term investors at all, but will make some of the HFT business models obsolete.
CAT Revenue is declining, most quickly in Asia. And China's investment binge is just starting to end. This will not end well for CAT longs- revenue does not need to decline much further before margins will be crushed.
I think the issue hinges on strategy: should HPQ be 1.) a runoff company as its existing businesses with poor growth prospects but good cash flows are milked and cash returned to investors, or 2.) reinvented with current cash flows to compete in higher-growth areas.
I'd prefer to see the first. Management is not Warren Buffet and tech is hard to get right for old, bureaucratic companies, so the second strategy seems doomed to failure. But unfortunately, being a conservative steward of company cash is not a formula for quick jumps in the stock or large bonuses for dealmakers, particularly in HPQ's industrial neighborhood. So unless I see real cash coming back to shareholders, I'd have to discount cash from operations heavily in my valuations.