Molycorp Earnings Surprise: 'Pain Ahead' For Shorts? [View article]
Raven,
I know you don't like Shocks opinion's + his persona online but this criticism isn't accurate. His articles get so much press and get 100+ comments from people like you and me because they were great in January and mapped incredibly well to future events. I agree with you that a lot of the articles since he initiated his positions have appeared more biased, but there is only so much fault you can find in that when he has a vested interest. Not only that - but here he basically just disclosed his opinion and stated a bull case (relating to both his previously mentioned criticisms and future liquidity concerns).
I know you and him are a bit confrontational on these boards and today is the day where you seem to have won, but there is no need to try and discredit the guy who didn't have the same opinion (especially when he acknowledged your side of things).
Thanks for the information. I wanted to add a few points here.
You mentioned the low ROA values and seemed to correlate that to a drop when the Fed slows/eliminates bond buying. The ROA is close to synonymous with Net Spread when talking about mREITs and this figure is actually suppressed by QE3. look to about a year back when mortgage rates were higher with no bond buying - spreads are much higher. Ending of low interest rate policy could cause cost of funding issues for mREITs, but slowing bond buying would increase net spread in the long run.
Also, you mentioned the expansion of mREITs to $400B in assets. This is a worthwhile note, although its important to remember that this is only 8% of the MBS market (as a recent article pointed out).
Don't Get Suckered By This Popular High-Yield Investment [View article]
Fair enough - I mentioned long run conditions / long run spreads, but short run effects do qualify as 'risks' so my first point is somewhat negated.
Regardless, given current economic circumstances do you actually see any risk of that happening in the next few years? I still think that its an unfeasible scenario / not something mReit investors in 2013 and probably 2014 need to worry about.
Also - if you have it, can you give me a time period / data source on when this effect has actually been realized in practice?
Don't Get Suckered By This Popular High-Yield Investment [View article]
Ian,
Your risk profile on the mREITs is significantly overstated in my opinion.
- You suggested "Margins would be squeezed (or even eliminated)." Some of that is possible but some of it is flat wrong and the concept is incorrect. Economics conditions will keep mortgage rates higher than short term funds rates. If this weren't the case banks would have better limited risk options and would essentially never issue mortgages. Margins can compress when rates change, but generally higher rates mean an amplified change in mortgage rates / higher long run spreads not smaller. In either case, the Fed has talked about altering their bond buying programs but not raising interest rates for years and there isn't really short term risk in this area.
- In a raising rate scenario the market value of the securities held by these mReits will drop and you mentioned their hedging strategy for this. You dismissed it as not good enough because the people holding the swaps could go bankrupt. This is a very big stretch to say the unknown situation of these other parties put mReits as an industry at risk. Not to mention that these swaps and swaptions can be sold on the open market to other potential buyers so in any case they would never be in a situation where they just have no value. I don't think that is the sort of risk that you can outline and make a bear case for a whole industry with.
What Might The Future Hold For The mREIT Sector? [View article]
Hi Regarded,
Thanks for the article. Most of the discussion generated seems to be regarding the second half of the content where you discussed rates, but I particularly appreciated the first half content / the Morgan Stanley graphic.
The potential for significant policy risk to the mReit business seems to have been overstated (at least in my view) in the past few weeks so its nice to see a counter argument to those fears.
Molycorp: Are Debt Covenants The 'Smoking Gun?' [View article]
Hey Raven,
Not sure if you are arguing the principal I stated or Shock's comment that "There has been a tremendous amount of short covering over the past few weeks," but the concept I was trying to point out is just a trend.
219K shorts are less than .5% of the previous 1/2 month interval's figure. The previous 3 intervals saw +17.8%, +7.2%, and +22.1% respective increases in MCP short interest.
The point of my comment was that since these figures indicate that as of 4/15/13 short momentum seemed to have stopped and is potentially reversing to the point where the short community will begin to cover / you will see a bit of the squeeze many MCP proponents are talking about.
Exactly as you said - we have no view of those figures from 4/15-4/25. During that time we've seen an upward push in MCP price/share of 10%+ since the 4/15 close of $5.06 (and 20%+ from the 4/17 low of $4.70) amid no news relevant to MCP being introduced besides continued drop in REE prices which is bearish. Since we saw that short trend and we have far more buyers than sellers over the unknown period when the only true catalyst was mildly negative, it seems likely, or at the very least a noteworthy possibility, that the squeeze may have started already / partially taken effect with what we've seen over that period.
Molycorp: Are Debt Covenants The 'Smoking Gun?' [View article]
A bit of an aside from the main article content.
- Nasdaq released their lagged short interest numbers yesterday and MCP short interest from 3/31-4/15 was immaterially different. This may suggest the short momentum we've seen in 2013 may be slowing and the direction may be reversing with a push to cover potentially driving what we've seen in the last few days. Seems notable given a lot of people are arguing a huge short squeeze is still to come.
- Most of the primary rare earth prices MCP deals in took a further hit this week and prices all seem to be down at the latest report. Haven't seen significant upward movement in a long time, and in the Q4 presentation management mentioned that they expected demand to begin accelerating during Q2. Not looking good for that prediction / if it does accelerate there are a good number of loses still to make up for before the environment is better than the one reported during the Q4 call.
With both of those things noted, MCP is up almost 10% in the past two days (just hit $5.68). Everyone can draw their own conclusions from this I suppose - but REE price drops and fewer shorts generally don't fuel sustainable gains.
Molycorp: Are Debt Covenants The 'Smoking Gun?' [View article]
Great research on this one Shock.
I would bet we don't see any of the regulatory / legal action you've mentioned, but that certainly gives a lot of credence to your comments that the true value of goodwill will eventually be marked lower than stated currently. Very nice article.
Molycorp: Recent Capital Raise Poses Reputational Risk [View article]
Interesting point Shock,
I know you were always positive in comments about management when Mark Smith's people were running the show, and this could be an uncomfortable signal of how Con K. is running things.
As I recall your affinity for management was a reasoning for why you would eventually go long at the right entry point if reached. You recently mentioned that at $2.21 you would go long on MCP as it is the true value you place on the stock. Given your feelings on management, would you still consider going long at your value point, would you need a deeper discount to make the investment more attractive, or are you losing interest in investing in MCP long at any value point rather than having your money elsewhere?
Why I Believe Molycorp Will Trend Lower [View article]
Carl,
As votingmachine pointed out they had an equity raise in January of ~250M, so you may want to correct this in your article since halving their true cash position is a bit misleading when noting liquidity risks as part of the bear case.
Also - its not Gold driving the price. Look at prices of elements Molycorp is actually involved in. Lanthanum and Cerium prices, for example, have fallen significantly over the past 6-9 months.
Molycorp is in no way affiliated with gold. You might get a secondary correlation since gold is a metal / similar commodity to their products, but there are clearly much better indicators.
Thanks for clarifying. I agree its not double counted the Q1 figures. I thought that the scaling was in anticipation of the write downs and bad Q4 '12-Q2 '13, but since your view appears to be that the market has not improved and "Q2+" still deserves that 25% shift that is certainly more than fair. Thanks again.
I believe it does to an extent, since you have a buyer (Molymet) already with a presence on the Molycorp board and 20%+ equity control of the company. If the stock was down around $2/share and Molycorp was struggling do you not think they would try to obtain a 50%+ stake and run MCP as a subsidiary, or just buy it out altogether? I think if MCP seriously ran into cash flow issues (I mean they were faced with liquidating assets to stay solvent) there is clearly an entity that would be willing to just "buy the balance sheet" essentially. Is there a reason you don't think this makes sense? I understand your point if there is no buyer - if they hit bankruptcy they just liquidate and pay debtors leaving equity holders at 0. Basic market concept.
Either way, I'd note I'm not completely on the same page with this strategy, and even though I am not a fan of Molycorp I agree with you that some of the write downs and devaluations in the analysis seem a bit arbitrary/excessive. I just wanted to point out something that has been published previously / is worth consideration when interpreting this sort of piece.
In one of his articles a while back he talked about Molycorp buyout scenarios. I think his idea is that as an independent company MCP is reasonably likely to fail under current conditions, but that will never happen because those waiting in the wings would offer a premium to the book value to acquire the company. Basically MCP has an insurance policy on the $0 scenario.
I think his arguments make sense if that is your investment strategy in Molycorp -> buy in at the lowest rationally determined book price if ever possible (hence the lowest fair price you would assume a buyer would pay to take over MCP in the short run). Then just hold on with the hope that either a) another party comes in fairly quickly when things are looking bleak and buys up MCP at a premium b) market factors make the company profitable and the equity appreciates, or at the very least there aren't short run arguments to make him lose a large % of his investment buying in at $2.21.
If that's your strategy I think the analysis is legitimate. I view the assessment as more of a "current state price floor" for investors rather than a rational entry point based on probability weighted future returns like you've touched on above. Putting it in terms of how he'd actually invest - I'd read it as his comfortable bull zone. I'd be stunned if that $2.21 was really his Bear/Bull inflection point and he wouldn't cover the shorts until then.
Thanks for the Article / the new price target. I share your general sentiment, but I think your target is a little low and you seem to be at risk of double counting a few factors.
That 25% discount was a market price delta we saw in January and pertained to BV inclusive of intangible assets. Losses and write downs were anticipated, so that was an approximation of the new projected short term BV once realized. Since you are writing down 100% of the intangibles already, and incorporating Q1 losses, either you are double counting with that adjustment or your assumption on top of the explicitly called out factors (which appear to be under worst case assumptions anyway) is that estimated long run cash flows after Q1 equate to an EV = 139M loss. Your article seemed to suggest the former. Can you clarify that?
Molycorp Earnings Surprise: 'Pain Ahead' For Shorts? [View article]
I know you don't like Shocks opinion's + his persona online but this criticism isn't accurate. His articles get so much press and get 100+ comments from people like you and me because they were great in January and mapped incredibly well to future events. I agree with you that a lot of the articles since he initiated his positions have appeared more biased, but there is only so much fault you can find in that when he has a vested interest. Not only that - but here he basically just disclosed his opinion and stated a bull case (relating to both his previously mentioned criticisms and future liquidity concerns).
I know you and him are a bit confrontational on these boards and today is the day where you seem to have won, but there is no need to try and discredit the guy who didn't have the same opinion (especially when he acknowledged your side of things).
End Of The mREIT Honeymoon? [View article]
Thanks for the information. I wanted to add a few points here.
You mentioned the low ROA values and seemed to correlate that to a drop when the Fed slows/eliminates bond buying. The ROA is close to synonymous with Net Spread when talking about mREITs and this figure is actually suppressed by QE3. look to about a year back when mortgage rates were higher with no bond buying - spreads are much higher. Ending of low interest rate policy could cause cost of funding issues for mREITs, but slowing bond buying would increase net spread in the long run.
Also, you mentioned the expansion of mREITs to $400B in assets. This is a worthwhile note, although its important to remember that this is only 8% of the MBS market (as a recent article pointed out).
http://bit.ly/130OoOU
Don't Get Suckered By This Popular High-Yield Investment [View article]
Don't Get Suckered By This Popular High-Yield Investment [View article]
Regardless, given current economic circumstances do you actually see any risk of that happening in the next few years? I still think that its an unfeasible scenario / not something mReit investors in 2013 and probably 2014 need to worry about.
Also - if you have it, can you give me a time period / data source on when this effect has actually been realized in practice?
Don't Get Suckered By This Popular High-Yield Investment [View article]
Your risk profile on the mREITs is significantly overstated in my opinion.
- You suggested "Margins would be squeezed (or even eliminated)." Some of that is possible but some of it is flat wrong and the concept is incorrect. Economics conditions will keep mortgage rates higher than short term funds rates. If this weren't the case banks would have better limited risk options and would essentially never issue mortgages. Margins can compress when rates change, but generally higher rates mean an amplified change in mortgage rates / higher long run spreads not smaller. In either case, the Fed has talked about altering their bond buying programs but not raising interest rates for years and there isn't really short term risk in this area.
- In a raising rate scenario the market value of the securities held by these mReits will drop and you mentioned their hedging strategy for this. You dismissed it as not good enough because the people holding the swaps could go bankrupt. This is a very big stretch to say the unknown situation of these other parties put mReits as an industry at risk. Not to mention that these swaps and swaptions can be sold on the open market to other potential buyers so in any case they would never be in a situation where they just have no value. I don't think that is the sort of risk that you can outline and make a bear case for a whole industry with.
What Might The Future Hold For The mREIT Sector? [View article]
Thanks for the article. Most of the discussion generated seems to be regarding the second half of the content where you discussed rates, but I particularly appreciated the first half content / the Morgan Stanley graphic.
The potential for significant policy risk to the mReit business seems to have been overstated (at least in my view) in the past few weeks so its nice to see a counter argument to those fears.
Molycorp: Are Debt Covenants The 'Smoking Gun?' [View article]
Not sure if you are arguing the principal I stated or Shock's comment that "There has been a tremendous amount of short covering over the past few weeks," but the concept I was trying to point out is just a trend.
219K shorts are less than .5% of the previous 1/2 month interval's figure. The previous 3 intervals saw +17.8%, +7.2%, and +22.1% respective increases in MCP short interest.
The point of my comment was that since these figures indicate that as of 4/15/13 short momentum seemed to have stopped and is potentially reversing to the point where the short community will begin to cover / you will see a bit of the squeeze many MCP proponents are talking about.
Exactly as you said - we have no view of those figures from 4/15-4/25. During that time we've seen an upward push in MCP price/share of 10%+ since the 4/15 close of $5.06 (and 20%+ from the 4/17 low of $4.70) amid no news relevant to MCP being introduced besides continued drop in REE prices which is bearish. Since we saw that short trend and we have far more buyers than sellers over the unknown period when the only true catalyst was mildly negative, it seems likely, or at the very least a noteworthy possibility, that the squeeze may have started already / partially taken effect with what we've seen over that period.
Molycorp: Are Debt Covenants The 'Smoking Gun?' [View article]
- Nasdaq released their lagged short interest numbers yesterday and MCP short interest from 3/31-4/15 was immaterially different. This may suggest the short momentum we've seen in 2013 may be slowing and the direction may be reversing with a push to cover potentially driving what we've seen in the last few days. Seems notable given a lot of people are arguing a huge short squeeze is still to come.
http://bit.ly/WeFPcq
- Most of the primary rare earth prices MCP deals in took a further hit this week and prices all seem to be down at the latest report. Haven't seen significant upward movement in a long time, and in the Q4 presentation management mentioned that they expected demand to begin accelerating during Q2. Not looking good for that prediction / if it does accelerate there are a good number of loses still to make up for before the environment is better than the one reported during the Q4 call.
With both of those things noted, MCP is up almost 10% in the past two days (just hit $5.68). Everyone can draw their own conclusions from this I suppose - but REE price drops and fewer shorts generally don't fuel sustainable gains.
Molycorp: Are Debt Covenants The 'Smoking Gun?' [View article]
I would bet we don't see any of the regulatory / legal action you've mentioned, but that certainly gives a lot of credence to your comments that the true value of goodwill will eventually be marked lower than stated currently. Very nice article.
Molycorp: Recent Capital Raise Poses Reputational Risk [View article]
I know you were always positive in comments about management when Mark Smith's people were running the show, and this could be an uncomfortable signal of how Con K. is running things.
As I recall your affinity for management was a reasoning for why you would eventually go long at the right entry point if reached. You recently mentioned that at $2.21 you would go long on MCP as it is the true value you place on the stock. Given your feelings on management, would you still consider going long at your value point, would you need a deeper discount to make the investment more attractive, or are you losing interest in investing in MCP long at any value point rather than having your money elsewhere?
Why I Believe Molycorp Will Trend Lower [View article]
As votingmachine pointed out they had an equity raise in January of ~250M, so you may want to correct this in your article since halving their true cash position is a bit misleading when noting liquidity risks as part of the bear case.
Also - its not Gold driving the price. Look at prices of elements Molycorp is actually involved in. Lanthanum and Cerium prices, for example, have fallen significantly over the past 6-9 months.
http://bit.ly/11hkrbD
http://bit.ly/15au3ZR
Molycorp is in no way affiliated with gold. You might get a secondary correlation since gold is a metal / similar commodity to their products, but there are clearly much better indicators.
Molycorp Is Worth $2.21 [View article]
Thanks for clarifying. I agree its not double counted the Q1 figures. I thought that the scaling was in anticipation of the write downs and bad Q4 '12-Q2 '13, but since your view appears to be that the market has not improved and "Q2+" still deserves that 25% shift that is certainly more than fair. Thanks again.
Molycorp Is Worth $2.21 [View article]
I believe it does to an extent, since you have a buyer (Molymet) already with a presence on the Molycorp board and 20%+ equity control of the company. If the stock was down around $2/share and Molycorp was struggling do you not think they would try to obtain a 50%+ stake and run MCP as a subsidiary, or just buy it out altogether? I think if MCP seriously ran into cash flow issues (I mean they were faced with liquidating assets to stay solvent) there is clearly an entity that would be willing to just "buy the balance sheet" essentially. Is there a reason you don't think this makes sense? I understand your point if there is no buyer - if they hit bankruptcy they just liquidate and pay debtors leaving equity holders at 0. Basic market concept.
Either way, I'd note I'm not completely on the same page with this strategy, and even though I am not a fan of Molycorp I agree with you that some of the write downs and devaluations in the analysis seem a bit arbitrary/excessive. I just wanted to point out something that has been published previously / is worth consideration when interpreting this sort of piece.
Molycorp Is Worth $2.21 [View article]
In one of his articles a while back he talked about Molycorp buyout scenarios. I think his idea is that as an independent company MCP is reasonably likely to fail under current conditions, but that will never happen because those waiting in the wings would offer a premium to the book value to acquire the company. Basically MCP has an insurance policy on the $0 scenario.
I think his arguments make sense if that is your investment strategy in Molycorp -> buy in at the lowest rationally determined book price if ever possible (hence the lowest fair price you would assume a buyer would pay to take over MCP in the short run). Then just hold on with the hope that either a) another party comes in fairly quickly when things are looking bleak and buys up MCP at a premium b) market factors make the company profitable and the equity appreciates, or at the very least there aren't short run arguments to make him lose a large % of his investment buying in at $2.21.
If that's your strategy I think the analysis is legitimate. I view the assessment as more of a "current state price floor" for investors rather than a rational entry point based on probability weighted future returns like you've touched on above. Putting it in terms of how he'd actually invest - I'd read it as his comfortable bull zone. I'd be stunned if that $2.21 was really his Bear/Bull inflection point and he wouldn't cover the shorts until then.
Molycorp Is Worth $2.21 [View article]
Thanks for the Article / the new price target. I share your general sentiment, but I think your target is a little low and you seem to be at risk of double counting a few factors.
That 25% discount was a market price delta we saw in January and pertained to BV inclusive of intangible assets. Losses and write downs were anticipated, so that was an approximation of the new projected short term BV once realized. Since you are writing down 100% of the intangibles already, and incorporating Q1 losses, either you are double counting with that adjustment or your assumption on top of the explicitly called out factors (which appear to be under worst case assumptions anyway) is that estimated long run cash flows after Q1 equate to an EV = 139M loss. Your article seemed to suggest the former. Can you clarify that?