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laterre

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  • 1347 Property Insurance: Strong Long-Term Prospects [View article]
    Cashisking,

    Maybe this is too simplistic an answer, but in order to figure out whether their cost of reinsurance has increased on a per unit of liability basis, you'd need to know their amount of outstanding liability, no? In the aggregate, 13.8 versus 10.2 is indeed a 30+% increase, but this in and of itself tells you nothing unless you know how much liability they're reinsuring. Haven't they grown their business (and corresponding liabilities) significantly in the past year, in which case the cost of reinsurance would necessarily increase proportionately?

    As you say, it would also be nice if they enjoyed some pricing power as well and could jack up the cost of premiums to pass on any additional cost per unit--if indeed their cost per unit has increased.
    Jun 11, 2015. 07:58 AM | 1 Like Like |Link to Comment
  • Walter Energy - The Last Stand [View article]
    There's no reason for them to buy shares when the senior unsecured debt (on which they must pay interest or be forced into default) are trading (literally) at .03 on the $1. At those prices on the unsecured debt, which is senior to the common equity, the shares are ebullient toilet paper.
    Jun 10, 2015. 10:32 AM | 1 Like Like |Link to Comment
  • The #1 Stock In The World [View article]
    Hi Chris,

    Thanks for this interesting idea--as well as the many you provide to SA. I'll have to think more about the mechanics of this and look under the hood of XIV.

    But without looking more deeply into the details, I do worry about the idea of buying an instrument that's selling term volatility. Selling vol is a great business--until it isn't. I wouldn't say it's akin to picking up nickels in front of a steamroller, because, as you rightly point out, the behavioral inefficiencies/ irrationality of most vol-averse ordinary investors means that you're picking up $20 bills. But it's still a steamroller. And selling puts on it (as many were suggesting) seems only to exacerbate the potential for a very ugly fat-tail event.

    Also, as the folks at Long Term Capital found out, the funny thing about selling equity vol is that there are always lots of natural (sucker) buyers, but very few committed sellers. That is, people are happy to sell vol when it looks like free money--and I suppose this XIV instrument will continue doing so robotically even when every sane human being has ceased and desisted selling--but that supply tends to dry up when there's some danger of actually having to make good on it. Weak sellers of equity vol become desperate buyers. Shorts trying to cover with no sellers tends to exacerbate swings to the upside. Typically, the price flow on VIX is punctuated rather than fluid, no, with those punctuations being especially painful for those short it at the wrong moments?

    Maybe I'm barking up the wrong tree here, as I'm not sure how this widget actually works, but the more general point is be careful playing around short the VIX, especially if you're layering naked puts on top of it.

    You kind of address this with your very sensible points about SIZING this position correctly, keeping it small and doubling down, etc. But not sure that this will register with every reader given that people tend to think that if something is good, then twice as much ought to be twice as good...

    Just a few respectful cavils to what seems otherwise a promising idea. Thanks.

    LT
    Jun 9, 2015. 10:21 AM | 4 Likes Like |Link to Comment
  • Walter Energy - The Last Stand [View article]
    Love your optimism, Benitus, and more power to you if you can grab some nickles and dimes from this thing on its way to zero. True that most actual BK filings take place after hours, though I can recollect many (Patriot Coal, actually?) that announced while markets are open. Good luck flipping the hot potato :)

    I'm one of those greedy creditors. We're not in the business of waiting. If someone can't pay us back or make the coupon (which WLT can't) then someone will force them into BK. The only question now is when, not if, they file, and whether it's a prepack or straight Ch. 11. The senior secured lenders will get 95% of the Newco (and own all those "productive and lucrative" assets) for themselves, unsecured noteholders like me may get a small tip of the Newco, and equity holders will get zilch.

    Don't take my word for this, please. Look at the prices on the bonds. They scream a total wipeout for anyone below the revolver and senior secured liens.
    Jun 8, 2015. 08:34 PM | 2 Likes Like |Link to Comment
  • Western Asset Mortgage Capital Corporation And Rising Interest Rates [View article]
    Thanks for the detailed thoughts, Steve, as always. Agree 100% that this is a great company, but not only does it look overvalued in absolute terms (nudging up against SPO territory), but it's positively defied gravity relative to AGNC, MTGE, and other really solid players that are now trading at >=20% discounts to NAV. Some very good mreits (not to mention quality high yield CEFs) are getting whacked in anticipation of some big explosion in rates that may or may not ever happen.

    I've pared all my trading shares and am now liquidating my "core" position in WMC so long as it stays >$15. Will look to replace the position on the next big pullback.

    One other thing that concerns me a bit about WMC--and on the subject of silent risks and embedded potential surprises--is the fact that their move into non-agency, risk sharing, whole loans, etc. doesn't seem to have been accompanied by the expected reduction in leverage. This bothers me for two reasons. First, while I generally buy the assumption that many of these credit or floating rate instruments have very low or even negative empirical duration, things move in weird directions during sell-offs, and some of these credits to which they've imputed negative duration may turn out to be more IR sensitive than people imagine. Second, and relatedly, while I can see dialing up the leverage 7 or 8 times when you're dealing with relatively liquid agency mbs, and even IOs or IIOs, a lot of the stuff they've been acquiring seems anything but liquid. Either high leverage OR illiquidity is fine, but most of the great "black swan" disasters involved a combination of those two things. And as the 2013 summer "Taper Tantrum" showed, even things that are supposed to be liquid have a way of getting less so when the market suddenly goes bidless.

    Odds are, they'll be absolutely fine, and I'm just paranoid (as usual!). But it seems like they're taking some chances in the current market that other players have decided to pass on...

    My 2 cents, FWIW.
    Jun 7, 2015. 01:09 PM | 1 Like Like |Link to Comment
  • Walter Energy - The Last Stand [View article]
    Day-traders beware. Expect the filing no later than the expiration of the grace period on July 15...

    http://bloom.bg/1BQIeju

    Kinda figured the senior lenders weren't willing to let $22M in cash slip out the door at the last minute to pay the unsecureds.
    Jun 7, 2015. 12:24 PM | Likes Like |Link to Comment
  • 1347 Property Insurance: Strong Long-Term Prospects [View article]
    I think you're absolutely right about this being a good, solid long-term business priced cheap (relative to the market right now). For me, that's a bonus/ part of the margin of safety but not the main attraction.

    Just based on the corporate actions alone--and the way Kingsway spun this thing out rather than disposing of it directly or keeping it in house--they're angling to make some money off of this through some kind of strategic event. Or at least they've incentivized themselves to do so. One never knows, but the odds here look heavily asymmetric to the upside.

    The difficulty, which you kind of allude to, is this puppy is illiquid. Of the total outstanding shares, it looks like only a fraction 30% or so, are freely tradable shares. Couple that with the miniscule size, and it's hard to accumulate any size here without moving the market. I suspect that's why there's been very little interest or coverage. When I saw your article, I was like, crap, there goes my chance to get my full allocation ;)

    Still, a good find!
    Jun 4, 2015. 10:28 AM | 1 Like Like |Link to Comment
  • 1347 Property Insurance: Strong Long-Term Prospects [View article]
    Nice analysis. I don't know the biz they're in, but it's easy to see that there's a pretty decent margin of safety. But the most interesting thing to me are the insider stock options--both for the execs and the mother company that spun them off. Execs and the parent company stand to benefit big time if there's a strategic transaction. Also, interestingly, the CEO's options with a strike of $8--which were set to expire at the end of May--were just extended for a single month...

    Scratch the above...more options at a $10 strike, and a further extension for Raucy's:

    http://1.usa.gov/1GlorQj
    Jun 3, 2015. 07:55 PM | 2 Likes Like |Link to Comment
  • Walter Energy - The Last Stand [View article]
    Speaking as a bondholder, I'm *delighted* that they've decided to make one last coupon payment before turning out the lights. Really wasn't expecting it, and actually won't believe it until I see it.

    They have no choice, though, as there's no rational reason why bondholders should make concessions outside of BK; and even if some portion of the debtholders were willing to wait, after the 30 day grace period for non-payment anyone who wants to front the legal fees can file suit and force them into BK anyway.

    Unsecured notes are a nuisance claim at this point in BK, as the senior secured lenders will end up owning 95% of the Newco, maybe unsecured bondholders will get a token % of the post-reorg entity, and, sadly, equity holders will be wiped out.
    Jun 3, 2015. 07:16 AM | 1 Like Like |Link to Comment
  • One Way To Value Miller Energy Preferred D Shares (MILL -PD) -Potential For Up To 700% In Gains [View instapost]
    "Everyone would only think wonderful things about them if there weren't warts, and if there weren't warts you wouldn't be able to buy the preferred's for less than $4."

    Haha, and fair enough! I'm going to pass on this one even at $3 and change, but GLTA.

    Thanks again, Darren, for the quality work you do on SA.
    Jun 1, 2015. 07:18 AM | 2 Likes Like |Link to Comment
  • One Way To Value Miller Energy Preferred D Shares (MILL -PD) -Potential For Up To 700% In Gains [View instapost]
    Hey Darren,

    Nice job--and I appreciate the spirit in which this is offered. A prime example of what ought to be happening on SA. In the spirit of generating critical discussion, and with all due respect, here are a couple of thoughts.

    A) First, in one sense I think the discounts you apply are sensible, and maybe even more conservative than the haircuts I'd typically apply if looking at a distressed situation. Nothing much to quibble with in terms of your numbers.

    But stepping back (and you allude to this in pointing out the divergence with an EBITDA-based valuation), I really worry about the "value" of oil and gas assets if there's no economical way to get them out of the ground. Just wondering: do these third-party estimates take the cost of recovery into account?

    Hypothetically, imagine that there is potentially $100M worth of gold in a mine in Antarctica. No one disputes that it's real gold or its market value. But the extreme costs of mining and recovery are prohibitive, meaning that whether one is thinking about this mine as an owner-operator (i.e. the NewCo of Mill after the impending Ch. 11 reorg) or as a potential buyer of assets in a bust-up fire sale, the value someone would pay for these assets is still zero.

    Ok, so perhaps this is a dis-analogy, but there are some clues to suggest that maybe this isn't so far removed from the Mill situation. First, what's the rationale for these Alaska drilling credits? Sincere question; I don't know! Aren't these premised on the fact that drilling in Alaska (as one might suspect) can be prohibitive unless the state kicks in something to make it economical for operators? These Alaska subsidies (and the hedges) seem to be keeping the lights on for them.

    Second, in addition to drilling lots of dry wells, their IRR even on the good wells hasn't exactly been inspiring. I don't think it's too much of an exaggeration to say that they've continually bled cash on their drilling operations. This implies one of two things. Either (a) Mill are lousy operators, or (b) the economics of drilling their properties in Alaska suck, and would suck for potential acquirers as well. With respect to (a), the argument I've heard from bulls since I started following this is: "well, now they're *really* serious and are going to *really* start trying to make money." But this begs the question of whether, if it was possible to make money with their assets, why weren't they doing so previously? I hate this fallacy in investing, and a fallacy is exactly what it is, and yet you hear it all the time. The alternative (b) is that actually Mill are pretty good operators, and if they can't make these assets pay, then why would we think that some larger operator would step in and pay good $ for the privilege of flushing more money down the toilet.

    B) We know much less about the valuations of their assets and operations than do their lenders. I take this for granted. If you agree with this premise, then doesn't it trouble you that senior secured lenders who are way *above* you on the credit stack (and presumably easily in the money) are falling all over themselves trying to get their cash back out of this investment? If they're spooked and trying to grab cash, what does this say about their own reckoning of the safety of unsecured debt below them?

    C) Let's assume you're absolutely right on all your valuations, and as things stand right now, the preferreds are well in the money in a bust-up fire sale. But if there's value there to be had, what makes you think that something in the capital structure won't change in the next 12-18 months to the detriment of the preferred holders, who have little or nothing in the way of covenants or security? They've already announced (more or less) that Global Hunter is going to be doing a restructuring. It goes without saying that any new $ coming into this company is going to come in secured and senior to the prefs. New secured liens mean that pref holders will be pushed down and out, so even if you're right on your valuations, they may not hold in a year when $100M in new senior capital waltzs in the door and get in line in front of you.

    To be clear: I'm not saying this is a bad investment, as the upside here is enormous if you're right. The risk/reward is nicely asymmetric, and maybe this is worth a punt after all But there's very little in the way of a margin of safety, and no "edge" that I can discern.

    My 2 cents, in the way of stimulating debate, and thanks again for sharing your excellent and thoughtful analysis.

    LT

    PS: after Friday's action, DR's options on that other stock we talked about are nearly ITM...
    May 31, 2015. 03:29 PM | 2 Likes Like |Link to Comment
  • All Is Not Lost For ARMOUR Residential [View article]
    "I believe" (to quote the most overused expression in this article) that pigs can fly and money grows on bongo trees. What evidence does the author have for any of these projections about how rate moves, costs of funds, or CPRs are going to suddenly benefit ARR? If they could have done better before, wouldn't they have done so?

    This is bar-none the worst managed mreit in the space. They make the guys at CIM look smart. They struggled even during the good years. When quality players like AGNC or MTGE are now trading at +/- 20% discounts to NAV, ARR's discount to NAV makes perfect sense.

    Only way this thing moves if if Goldstein and Bulldog come along and green-mail them into buying back shares, which they ought to be doing anyway, as there's no way they can earn greater than 25% IRR with a current yield spread of 1.2%.
    May 31, 2015. 02:47 PM | 2 Likes Like |Link to Comment
  • The King Of Bonds Is Shorting Bonds [View instapost]
    Actually, he got his hat handed to him (so far), because he got caught selling vol in stupidly irresponsible amounts...

    http://bv.ms/1dsSAAB

    Gross is a gambler, and has lost his touch...
    May 25, 2015. 08:46 AM | Likes Like |Link to Comment
  • Spreads And Durations And Swaps... Oh, My! Digging Deeper Into Western Asset Mortgage [View article]
    Agree and look forward to the NLY article. NLY's mgmt profited horribly at shareholder's expense. Compensation packages for Welli and the former brains of the operation were ridiculous. And don't get me started on the B team at CIM. How much shareholder value did those nudniks vaporize...
    May 11, 2015. 04:06 PM | Likes Like |Link to Comment
  • Spreads And Durations And Swaps... Oh, My! Digging Deeper Into Western Asset Mortgage [View article]
    Agree in principle that mreit mgmts have on the whole behaved scandalously (and not just those two guys in the strip mall in Veiro Beach who stunk even when the going was good...)--selling shares at the exact top of the market. But I'm not sure an actual takeover by an activist is either desirable or feasible. This isn't like running a widget factory, and you don't want some loudmouth Nelson Peltz type trying to make intricate calculations on hedging, swap books, and repo. The curve sucks for anyone running the portfolio. And for most of these guys, the break up fees on the mgmt agreements are medieval--just too costly to try to strip the assets away from the mgrs.

    I'm glad that at least WMC's mgmt seems to have handled the market nicely so far. And the good thing is that this WMC vehicle is pretty marginal to Western Assets main business, so the mgmt seems less conflicted than most. For most of them, this isn't their day job.
    May 11, 2015. 08:56 AM | Likes Like |Link to Comment
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