Reggie Middleton's  Instablog

When I first came out with the PPD research (which I released for free as a public service, may I add), many were doubtful as the market was literally manipulated upward. I feel by blog's patrons were confusing the alleged "scam's" fundamental viability over time (and ability to avoid regulatory discipline) with the overall movement of the market. As you can see below, things are not going well for this company. If one had faith in the research and rolled puts and protected shorts over, one should start seeing some decent gains. If I am right and this market is simply in a bubblicious bear market rally, any aggressive action by the SEC will drive this beta driven stock into the ground, making what you see today and last month look like an actual rally. Hey, it couldn't have happened to a better company.

Prepaid Legal press release:

Pre-Paid Legal Services Announces FTC Developments

 

ADA, Okla., Nov. 19 /PRNewswire-FirstCall/ -- Pre-Paid Legal Services, Inc. announced that on November 18, 2009, we received a proposed draft complaint from the Federal Trade Commission ("FTC") seeking permanent injunctive relief (there goes that revenue stream), disgorgement of proceeds (that will hurt, a lot) and other relief, including costs, relating to our Identity Theft Shield and Affirmative Defense Response System ("ADRS") Program. The proposed draft complaint alleges our ADRS program and related materials violate Section 5(a) of the FTC Act regarding asserted misleading representations, express or implied. The proposed draft complaint also names Harland Stonecipher, our Chief Executive Officer, and Mark Brown, our Chief Marketing Officer, as defendants (That is something. The officers of the company are named personally, as well as the entity itself). We previously received a Civil Investigative Demand from the FTC on March 23, 2007 on the ADRS program. We have made voluntary revisions to the marketing materials originally provided to the FTC in 2007 and 2009. The FTC may decide to commence federal court proceedings with this proposed draft complaint. The ultimate outcome of the matter is not determinable but we will vigorously defend our interests in this matter.

Let's see what comes of this. If the SEC hits them, I would consider this a penny stock.

Previous opinions, and more than a few "I told 'ya so"'s' on the Flim Flam Scam:

1. Flim, Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause your wealth to Scram? Wednesday, 18 March 2009
2. Reggie Middleton's Continued Public Service Announcement on the Flim Flam Scam  Friday, 03 April 2009
3. A Demonstration of How PPD Management is Destroying the Company Tuesday, 07 April 2009
4. Additional Commentary on PPD Tuesday, 07 April 2009
5. The Flim Flam Scam gets SEC'd - I'm not going to say I told you so, again! Tuesday, 06 October 2009

Last Saturday I posted some thoughts on investing, NY real estate, and my macro outlook -  Boo!!! Will Halloween Scare the Market into Respecting the Fundamentals?, and I will continue that rant today since it leads into my most recent endeavors  - gathering shorts and puts in the commercial REIT space again. These positions were very lucrative in 2008 and the first quarter of 2009. Be aware that they are like private equity investments and take time to develop. My first bear positions were in 2007 (residential homebuilders and mall owners). It took about a year and a half to come to fruition, but threw off a blended return of about 400% - Mostly from GGP going bankrupt after I loaded up with puts and shorts at around $60. Well worth the wait in my opinion. Examples of the research that powered this and other related gains are available at the end of this article for those of you who are not familiar with my work.

The recent bear rally has driven most of the solvent, semi-solvent and absolutely insolvent CRE stocks up, quite a few approaching 100%, while their macro outlook has deteriorated significantly, along with their fundamentals. Quite a few have actually acted in cahoots with the banks that held their increasingly worthless debt, having issued secondary offerings basically converting the bank holdings of debt that didn't have an icicles chance in the hottest portion of Hell of getting repaid, into worthless toilet paper, heretofore marketed as stock certificates. They have also begun offering this used toilet paper as dividends. That's right, worthless stock issued in lieu of loans that couldn't be paid back are also being issued as dividends to cash flow investors from companies that can't afford cash dividends out of their cash flow. If this isn't the sector screaming for me to come back and short it, I don't know what is. 

2010 is the first of a series of heavy CRE debt rollover years, and the CMBS market is close to dead. The insurance companies and pension funds are having their own asset/liability mismatch problems (see "This supports both the HIG research and the recent reinsurer research"), and although they have benefited from the most recent market run, I believe it is just a bear market rally that has pretty much run its course. If I am right, they will be seeing devastation in their portfolios that will make March of this year look like a bull market. The banks aren't lending due to the many issues that I have elaborated on in my other articles, such as:

1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
4. And the next AIG is... (Public Edition)
5. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo
6. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 5 - PNC Bank

In addition to a lack of available credit, credit terms are tightening. On top of tightening credit terms is the difficult to overcome issue of many investors that simply overpaid for properties over the last 5 years - producing LTVs in this higher cap rate environment that simply wouldn't get refinanced even if we still had a credit bubble. You see, when you buy a property for $100 million using a loan of $75 million, it is hard to refinance that $75 million loan with collateral that is now worth $60 million. Many CRE investors simply have not wrapped their head around this valuation issue as of yet. I am confident the credit markets will wrap their head around it for them.

If these problems don't sink the ship, the dwindling cash from operations may, for many REITs are literally relying on lease cancellation penalties as recurring income. This is a bad omen. If they can replace the tenants that leave (and in this environment, that is a "if"), it will be at drastically reduced rents.  This smashes head-on  with the pie-in-the-sky business plans that were proffered to banks and investors in the CRE bubble that promised big rents now, to be rolled into bigger rents later, that will eventually bloom into the biggest rents of all time as the projections of cap rates that approached ZERO marched on.

So, I had my team perform a fresh, new scan of RE investors with no limitations except minimal capitalization (some very weak companies are so thinly traded it is hard to get in and out of the positions), minimum share price and, of course, being a public traded company.

We came up with a lost less candidates this time around than we did in 2007 and 2008. On balance, the opportunity is just about as good how as it was back then though, thanks to the Bernanke put option that caused the market to bounce nearly 100% on top of deteriorating fundamentals. The initial shortlist came down to 59 companies, out of which we handpicked 11, and reduced that group to two after studying the filings and footnotes. Both of these companies will run out of money in 2010 sans some miraculous financing event. Even if that miracle does occur (you do believe in miracles, don't you), it would most likely occur via a significantly shareholder destroying, event. Dividends and capex will have to be cut, and/or properties will have to be sold on a distressed basis.  Do you guys remember when I made the same claim about GGP and they attempted to attack me because of it? Well, GGP filed for bankruptcy after swearing in their press releases and conference calls that any mention of the words "bankruptcy", distressed sales or "foreclosure" was heresy. Here is the chronology:

• GGP: Foreclosure vs Asset Sale
• GGP Refinancing Sensitvity Analysis
• GGP part 7 - Share value under the foreclosure analysis
• GGP part 8 - The Final Anaysis: fire sale of prime properties
• For those who were wondering what sparked that silly press release from GGP...
• My Response to the GGP Press Release, which seems to respond to blogs...

• General Growth Properties Files for Bankruptcy - DealBook Blog ...

This is simple cash flow and valuation math. It can be done with a calculator. There are many CRE companies that are at risk of doing the GGP! I will release research on the first one for subscribers next week, and the next company the following week. Currently, we are in the process of valuing each property, both consolidated properties and those in unconsolidated JVs as well as off balance sheet debt and contingent liabilities, of the respective companies' portfolios and rolling them up into our entity models.

Of course, CNBC, that bastion of investigative fundamental analysis, offers a counter-opinion:

US Commercial Property Up in Third Quarter: Index

Research samples on companies in various sectors from food processors to insurance companies to investment banks and industrials/manufacturing - free to download. I dare you to compare this to what you get from your local brokerage house: Research_Samples 11/17/2008 for examples). Show it to them and tell them you got it from a blog! I would like all retail and institutional investors to think long and hard about what you are getting for your commission dollars at the big sell side banks. As times get harder, their already conflicted analysts are being pared back even more!

•  March Real Estate Sector Intelligence Note 2009-10-22 01:47:20 143.74 Kb 
•  Macerich Summary 2009-10-22 01:44:45 910.94 Kb
•  Macerich Statistics Spreadsheet - Pro 2009-10-22 01:47:00 356.00 Kb
•  Macerich Sensitivity Analyis - Pro 2009-10-22 01:46:36 344.92 Kb
•  Macerich Forensic Valuation - Retail 2009-10-22 01:46:14 192.71 Kb
•  Macerich Forensic Valuation - Professional 2009-10-22 01:45:52 344.92 Kb
•  MAC Intelligence Note - 1Q09 Earnings 2009-10-22 01:45:34 307.68 Kb

On the residential builder side there was (these are free to download for non-subscribers):

1.  Lennar Forensic Analysis and Valuation update - 2/2009 2009-02-23 09:12:53 485.65 Kb
2. Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth 
3. Lennar Insolvent: Enron redux??? 
4. Lennar, Voodoo & the Year of the Living Dead! 
5. Now, a "Realistic" View of Lennar's Solvency 
6. Bubble, Banks and Builders 
7. Even as the corporate management, the treasury secretary, the Fed Chairman and the sell side called a bottom in 2007, 2008, and even now in 2009 (sound familiar) - see Bubbles, Bank, & Builders - Pt IV: I can't believe this guy andAgain, I say, Credibility is the key, Mr. Hovnanian.

I received this message the other day through the messaging system in my site:

"I read your article from early Sept about the next four banks likely to fail. I writing to let you know we filed our thrid quarter call report but more importantly, we are filing our earnings release today, It should be out there within the hour. I know your article was based on call report data and you can't base your analysis on other factors that you don't have, but I think the title of your article was a stetch and way too provacative. It probably helps sell your services but is a great diservice to those struggling daily to clean up the mess. I hope after your read the new informtion you'll write an article closer to reality and retract anything you may have said that isn't likely. Thanks, Very Interested Party, United Security Banchares "UBFO""

I removed his identity since he contacted me privately and didn't expressly communicate he wanted his opinion published. He is far from a disinterested party though, and is referring to an article that I wrote on the Doo Doo banks in September, "More Doo Doo Banks Available to the Public". For those of you who do not know, I used this term to coin the list of banks that I predicted may hit the fan in the spring of 2008 - "see 32 banks in deep doo-doo". If one peruses the list of the Who's Who in Doo Doo, one can see that it appears that I had a valid point as many of those banks collapsed or had to be rescued. In re-reading the article, I don't think the title of the article was a stretch at all, nor too provocative, considering the path of previous banks with similar metrics have taken. In addition, I never said these banks were likely to fail. They are in trouble, though. I understand his point, but I do not agree with it. I am sure if he viewed this from outside the bank as compared to inside, he would consider his bank's numbers to be precarious as well. 

Now, let it be known that I am a disinterested party here. I simply scanned the numbers for a list of  banks that appear to have significant credit issues. I also do not have a position in this company, long or short, thus I feel I am more likely to be objective than the person who wrote the note above. Ironically, the bank who was to be the subject of the forensic analysis turned out to be one of the healthiest of the bunch (still unhealthy, but relatively healthier than many in the group it was presented with), thus at this time we have postponed moving forward with it.

Alas, to be fair I did have the guys go over the latest numbers as per this reader's request and this is what we concluded:

As of the most recent quarter, the company came into profits of $0.7 mn in 3Q09 against a loss of $1.3 mn in 3Q08 primarily because of reduced provisioning  for loan losses . Provision for loan losses were 0.4 mn in 3Q09 against 6.4 mn in 3Q08. The bank’s net interest income declined 3.6% (y-o-y), non-interest income declined 36% (y-o-y) and non-interest expense increased 31% (y-o-y). Below is a trend matrix for the various credit ratios.

1. In 3Q09, the provisioning rate reduced to 0.3% of total loans from 5.0% in 2Q09 while the gross charge off rate increased to 1.4% from 1.1% in 2Q09. Consequently, the allowance for credit losses shrunk to 2.7% of total loans from 2.9%
2. While the allowance for credit losses declined owing to lower provisioning, the  non accrual loans, 90 days past due loans and 30 days past due loans all continued to increase. Non accrual loans increased to 10.35% from 10.25% while the 90 days past due loans increased from 0% to 0.12%. The 30 days past due loans saw the maximum jump reaching 1.37% of total loans from 1.06%. The excess of NPLs over allowance increased to 7.64% of the total loans from 7.36%
3. Although the non performing assets declined from 17.01% of total loans to 16.88%, the decline was owing to decline in other real estate assets which were disposed off by the company, largely at a loss. Management cites the sale of property worth $9.5 million at loss of 4.8% in 3Q09. The Management also says that post 3Q09, the bank will sell 21.6 mn of properties at a loss of 1.7%. In 3Q09, the Bank’s write downs on foreclosed properties and expenses on foreclosed properties increased by 0.8 mn and 0.9 mn, respectively. This is actually a very interesting trend to note. The banks get these properties at significant discount to market retail, yet somehow still take a loss upon liquidation. This goes to show how low property values can actually drop.
4. While the credit metrics continued to deteriorate, the improvement in Texas ratio is primarily because of an increase in tangible equity coming from the reduction in unrealized losses on investment securities and reduction in intangibles.

I am not sure why the interested party quoted above feels I should post a retraction based upon the metrics above, unless the sole reason is because he is an interested party. From what I can discern, the accounting provisions for losses were reduced in the face of an increasing trend of credit quality deterioration. If he came from an accounting background, it is possible that he feels the reduction in provisions is a reason to rejoice. While that may be a plus from an accounting earnings perspective, it is counter-intuitive and apparently in error from an economic or prudent owner/investor perspective - at least in my opinion. If I am somehow reading this wrong, I welcome any and all to point it out to me and if valid I will gladly post it publicly on my blog.

I do believe I am a fair arbiter of value and am not out here with an agenda.