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  • 15.3% Dividend Yield Makes This mREIT Attractive [View article]
    Just spit-balling, generic Fannie 3.5s were at 105.5 on March 31 (not the 2013 lows, but close to them)...closed at 106.5 today. That's an NAV reprice since the date of earnings of +7% of book--assuming hedges are constant.

    I'm also betting that the spread of mbs/TSY--which can monkey-hammer your swaps if you're hedging off TSY--has come back in subsequently. Never been crazy about the "drop income" trade (CYS, cough...), or hedging via short TBAs.

    This is what eventually happens when you make aggressive unidirectional bets. Sooner or later the dice come up snake eyes.

    In sum, buy the competitors--esp the hybrids--on the big mreit dip that's coming tomorrow. Low-balls bids already in as the stops get blown out. Come to papa!
    May 2, 2013. 06:21 PM | Likes Like |Link to Comment
  • 15.3% Dividend Yield Makes This mREIT Attractive [View article]

    GK and the gang got caught with their pants down. Maybe it's not as bad as it looks at first glance, but a 2.73 haircut to book is an ugly number.
    May 2, 2013. 04:17 PM | Likes Like |Link to Comment
  • James River Coal (JRCC +30.1%) pushed higher all session after posting a Q1 loss that wasn’t as big as expected, but there's no apparent explanation for the stock's final-hour explosion on heavy volume. Some in the Twitter universe ruefully note Patriot Coal spiked just before declaring bankruptcy. reports JRCC debt is trading at distressed levels. [View news story]
    Capital Structure 101

    When a company's debt is trading at severely distressed levels--in this case .30 on the $--the bonds are pricing in a bankruptcy. This is not an insinuation, it's an empirical fact. For the thick-headed longs among us, that means that the people who are ABOVE you in the capital structure are pricing in a bankruptcy and a 70% haircut. You own only what's left over after paying them.

    I'll let you do the math and figure out how much this makes the common equity worth...
    May 2, 2013. 11:25 AM | 1 Like Like |Link to Comment
  • Are Investors Right To Panic About Exide Technologies? [View article]
    I always assume the worst case because I don't like to lose money. So if something is listed as a "current liability," I assume it needs to be paid. And paid in $US dollars--not in car batteries, inventory, goodwill, hypothetical RE sales of contaminated lead factories, or even from accounts receivable, which have a way of becoming less "receivable" when debtors sniff a bankruptcy in the air.

    If there is some FCF, then sure you can take that into account in terms of coverage for FY 2014. But my recollection of their position is that they've been bleeding cash and paying bills by borrowing on their credit lines. That's not sustainable.

    Southern Gentleman had this exactly right. If there's any long play here, it remains from the bond side. The prices at which the seniors and converts are trading signal the equity to be worthless. If the bondholders are pricing in a 50-75% haircut, why would you think that the equity is worth anything? Price out the liquidation value of the enterprise and, who knows, maybe the seniors are a bargain at 25?

    With all due respect to Tom, who's obviously a very smart guy and a great, lucid writer, even before the Lazard revelation and the environmental suits, BK was a foreseeable poss. A few months ago, deep OTM put options were paying 3.5 to 1 on a BK by the end of 2014, which is an implied probability of less than 33%. To my mind, it was more like 75%, making the short side the smart trade.
    Apr 27, 2013. 04:02 PM | 2 Likes Like |Link to Comment
  • A RadioShack Short Squeeze Waiting To Happen [View article]
    Other than to momentarily gratify you and a bunch of other knife-catchers, why would they <possibly> want to buy back shares? If the mgmt even floated that idea, they should be fired on the spot. Have you looked at their balance sheet? Assuming they had free cash (which they don't), the smarter move would be to try to negotiate some kind of discounted buyback of their debt, which is prohibitively expensive.

    They've got 820M in liquidity, over and against 800M in debt and current obligations coming due in 2013. Cell phones and prepaid, on which margins are risible, are more than half their revenue. But there are 13 other stores or kiosks in my local mall where you can buy cell phones--not counting stores in the mall outlots or within a few blocks, some operated by the very carriers whose products RS sells.

    Unless they can figure out a new business model and generate some free cash flow, this is going to be a really ugly year for them.
    Apr 23, 2013. 08:08 AM | Likes Like |Link to Comment
  • Are Investors Right To Panic About Exide Technologies? [View article]
    Sorry, Tom, you're a great writer, but I don’t share the optimism.

    We agree they have (had) $80M in cash and 80M they can tap from their revolver (assuming that this number hasn’t been further adjusted downward because of coverage ratios). They also have 550M in receivables (let’s say 440M applying a 20% haircut). Throw in the land sale for another 30M. Let’s say 630 in max liquidity for 2013. I think this is being *extremely* generous and not factoring in the rate of cash burn (and the spike in their short term borrowings in 2012) or the reliance on European orders.

    On the current liabilities side of the balance sheet, they have 59M in maturities, 61M in short term borrowings they either have to pay or roll over, plus 730M in accounts payable and accrued expenses. They need to come up with cash or borrow a total of 850M in 2013.
    If you buy these numbers, this is a cash flow coverage ratio of 75% for 2013, against the backdrop of a company with 700M in long term debt and 225M in pension obligations in a cyclical industry where they’ve been deeply cash flow negative for more than a year.

    I’m sorry, but I see a visit to a Delaware court in their future. You don’t invite Lazard (and Akin Gump) at $5K per hour over to shoot the breeze over tea and crumpets.

    Putting aside the bankruptcy issue (which none of us can know with absolute certainty), there are only three possible outcomes here: (a) an invol ch. 11 if they can’t convince the noteholders to accept a prepack restructuring (and game this from their side, why WOULD they?); (b) a pre-pack that will put the nail in the coffin for the non-existent equity (strip out the goodwill and what’s the equity really worth?); (c) they limp along for another 18 months and then file. This is a troubled company whose debt-load is prohibitive. Seriously, look at this through the eyes of a bondholder rather than a starry-eyed day trader. Would YOU loan them money? On what terms?

    So game the three outcomes. If it’s not (a) or (b)—where the equity is wiped out and you lose 100%--what is the maximum possible return on (c)—maybe a quick 50% pop if you trade it just right? You are absolutely kidding yourself if you think that this stock is going to return to $5. So what you’re really doing in putting on your asbestos mittens and trading this hot potato is discounting the probability of (a) or (b)—yielding a 100% haircut—so heavily that you think the potential reward of a quick 50% pop is worth the risk of losing 100%, which can happen in either of two ways.

    I have no more knowledge than you or anyone else about whether they’ll end up in BK. Based on the cash flow projections alone, I would wager that they will. But even granting that this is not a slam dunk for a BK, the trade is an absolutely horrible, asymmetric risk/reward proposition.

    We shall see...
    Apr 20, 2013. 05:24 PM | 5 Likes Like |Link to Comment
  • Immediate Investment Income Strategy To Profit On J.C. Penney Failures [View article]
    Hey TJ,

    Hope JCP can turn it around--I really do. But I also have muted expectations. If they can raise a $billion by issuing some 3-5 year sub convertibles, say, in the 8% range, this would give them breathing room and put even more cushion beneath the senior secured notes. Either way, it's not going to be a quick death like some are expecting. Cue footage of lion and wildebeest.

    Actually, here’s a real short for you, gratis, in appreciation for all you do in the Laboratory…

    I used to rhyme with “candy,” but now you turn me up.
    I’m still at the mall, but now only for making calls.
    I’m burning cash, and have a big bill coming due in August.
    Goldman and Moody’s threw me under the bus, but no one blinked.

    Too easy? Unlike JCP, this one really could be over by the end of 2013...
    Apr 14, 2013. 03:09 PM | 1 Like Like |Link to Comment
  • Immediate Investment Income Strategy To Profit On J.C. Penney Failures [View article]
    They need a $Bill because they're afraid that drawing on their existing revolver (secured against inventory) will violate the terms of their senior indentures and cause a default. Noteholders have already filed a lawsuit on this point. Rather than risk it, why not issue more senior paper while you still can?

    There's smoke here. You're on to something...

    Disc: long JCP bonds: short JCP common synthetically.
    Apr 12, 2013. 08:12 AM | 2 Likes Like |Link to Comment
  • Short Armour And Long American Capital: mREIT Pair Trade [View article]
    Hey TJ,

    100% behind you on the superiority of MTGE/ AGNC to ARR. The excellence of the former and the mediocrity of the latter have never been in doubt. You've been dead-on this point for years.

    I also like pair trades. A lot! Did I mention I love pair trades? Low vol, non-correlation, and great way to profit from compression or reversions to the mean. I did nicely with a long AGNC/ short NLY pair riding up through QE3 last year. It was obvious that NLY had exactly the kind of portfolio that would get creamed, and that AGNC's NAV would pop. Cleared 15% in 4-5 months.

    That said, I'm not crazy about this trade, at least right now. MTGE is a little stretched out, whereas ARR has been beaten down. As bad as ARR's mgmt may be, the stock's been off since their horrific earnings and the divvy cut. People are dumb and will eventually gravitate back to the high divvy and the gimmicky monthly payouts. Plus, it's not like the MTGE management are going to let the stock price run up much. They're just as SPO-happy as the ARR guys.

    I just don't see a big upside on this one that justifies tying up so much capital, whereas there's a downside scenario (albeit very unlikely). MTGE's got some credit sensitivity with the non-agency portfolio, and in a tail risk event their book would i theory be hurt worse than ARR.

    As mediocre as ARR may be, they'll fluff the divvy with some SPOs and blunder along. If you really hate them, though, and want to bet against them, why not use the divvy from MTGE to buy deep OTM puts against ARR? Or short the ARR prefs? If they run into trouble, the prefs will go into the single digits in a second.

    Like the thinking but don't love the trade...
    Apr 11, 2013. 02:30 PM | 1 Like Like |Link to Comment
  • Mortgage REITs: Sell In May? Not If Spreads Hold Up [View article]
    ??? "Long term treasuries taking it in the chin." What "dip"?

    Dude, this was one of the best days for TLT +2% and ZROZ +3.5% in the past six months. FNMA 3s exploded back near their Jan highs, erasing four months of losses.

    Mreits behaved perfectly rationally and traded in line with duration, rather than with equities.
    Apr 5, 2013. 10:35 PM | 1 Like Like |Link to Comment
  • American Capital Agency Catalyst For Capital Appreciation [View article]
    Mystery solved...

    +=a div increase
    - =accounting restatement correcting for accretion errors and moving a few cents from one column of core earnings to another.

    Hope this wasn't what kept them from doing an SPO earlier in the quarter.
    Apr 2, 2013. 06:36 AM | 1 Like Like |Link to Comment
  • American Capital Agency Catalyst For Capital Appreciation [View article]
    No idea--and not particularly concerned re. the timing or their ability to pay up. Assuming that their NIM and leverage haven't changed since earnings, it'll be at least as good as last qtr. WMC aren't some shady crew operating out of a garage somewhere--it's WAMCO, one of the biggest bonds opps in the world, and they aren't going to stiff shareholders.

    One theory: I'd kind of expected to see a 2ndary snuck in immediately before or after ex-div, so it could be they were planning around that at some point pre-div, and are holding out for a better price, though mbs prices have moved back up some in the meantime and new $ from a 2ndary don't look as attractive now as they did, say, the last week of Feb.
    Apr 1, 2013. 03:12 PM | 1 Like Like |Link to Comment
  • American Capital Agency Catalyst For Capital Appreciation [View article]
    I hear ya, TJ. AGNC isn't my favorite either, but I picked up some during the selloff and have held the small position. Seems solid enough for the time being.

    WMC has really pulled away from the pack in terms of its #s. Far and away my favorite (and largest position) for 2013. Like you say, EFC is a great team (and among my largest positions for most of late 2011-2012) but I don't think they'll be able to match 2012 performance. Prices in CMBS and ABS are scaring me... Be careful with IVR and the like and keep them on a short leash.

    Apr 1, 2013. 07:27 AM | Likes Like |Link to Comment
  • American Capital Agency Catalyst For Capital Appreciation [View article]
    Hi searcher,

    To a point vol is fine if that's what you signed on for (though I personally pay good money to hedge away as much of the beta of my portfolio as I can afford). Non-correlation is the cheapest hedge you never need to pay for...

    But I'd imagine some folks in AGNC for the income would be a little disconcerted to wake up some AM and discover that AGNC is down two bucks and change for no other reason than because some yahoo decided to dump 50,000 E-minis on the market at 3AM.

    For me, the disadvantages of extra volatility and correlation far outweigh the extra 200K shares or whatever that get bought up by the index funds.

    Disclosure: long AGNC
    Mar 30, 2013. 08:21 AM | Likes Like |Link to Comment
  • American Capital Agency Catalyst For Capital Appreciation [View article]
    Hey TJ,

    I get your point about the marginal demand from potential inclusion in the indices. But I have to politely disagree with your thesis on two grounds.

    First, the reason AGNC and MTGE recently did SPOs had (I would submit) absolutely nothing to do with this change. Or if it did, the mgmt should be fired. They issued shares because of the widening of spreads in mbs, and they timed this move brilliantly, I'd add. They're already sitting on some tidy gains on anything they bought in Feb.

    But secondly, and most importantly, I don't think that including mreits in the S&P index is a good thing at all. One of the nice things about mreits is their relatively low beta and correlation (often inverse) to the equity market. They're much more closely correlated (as they should be) with the HY and agency bond markets. Including them in the S&P or other major indices will subject them to the same "tail wags dog" effect whereby massive trading (manipulation) in S&P futures and linked ETFs drives the prices of component shares.

    Mreits are not stocks, and the prospect of the mreits becoming (like much else in this market) a derivative of the EURUSD is not something I relish (though it does introduce the possibility of irrational volatility and inefficiencies that can be exploited).
    Mar 29, 2013. 06:42 AM | 6 Likes Like |Link to Comment