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laterre

laterre
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  • The Mortgage REIT Bloodbath: How To Protect Your Portfolio [View article]
    Yes, absolutely CK, he knows that's the issue now for mbs. But as of last week, his rap about mreits--which I don't think he follows very closely--was still that dividends were coming down based on spread compression, and thus that share prices would necessarily drop further. He gave the example of selling NLY at 13.5 now and potentially buying it back later this year in the 12 range.

    Again, just trying to clarify what he was saying last week on his cc and on CNBC--not affirming his position. And he's probably not going to be talking up mreits even under the best of circumstances because they're his "competition," to some extent.
    Jun 12 07:17 AM | Likes Like |Link to Comment
  • RadioShack's College Bookstore Deal Will Send Shares Higher [View article]
    Ah, the timing, that's the $64K question...

    But setting aside the issue of the ultimate end game, the main point of the capital structure arbitrage is that there's a huge mismatch between the valuation being assigned by the bonds and that from the equity. The disparity can be reconciled short of bk. Either the bonds need to go back to par, or the equity needs to back down substantially from the 75% gains for the year on hopium alone.
    Jun 12 07:10 AM | Likes Like |Link to Comment
  • RadioShack's College Bookstore Deal Will Send Shares Higher [View article]
    One can spin all kinds of cool theories about what strategies might lead to a turn-around, but I'm an empiricist.

    2019 senior notes bled further down to 74 today. With bond prices now clearly in the distressed zone, and an implied 25% haircut to the senior secured debt, it doesn't exactly support the $350M market cap implied by the common. Bond prices say the equity is toast...
    Jun 11 04:42 PM | Likes Like |Link to Comment
  • The Mortgage REIT Bloodbath: How To Protect Your Portfolio [View article]
    Yes, Gundlach (smartest mbs guy in the world, IMO) has been panning mreits for the past six months. He's broadly correct in that some of the mreits (NLY is always his reference point) which are heavily invested in the (now) higher 4 and 4.5 coupons are going to be challenged reinvesting the prepays from those at comparable rates. And his further point is that as spreads come in, and dividend cuts are announced, the prices will inevitably re-rack downward to match the new yields.

    That's all broadly correct, but may not track precisely onto the issues confronting AGNC and the other higher duration mreits CK discusses. They've successfully LOCKED OUT those prepays (and thus their spreads should remain stable or even improve in the future). Their problem is precisely the OPPOSITE Gundlach mentioned: extension risk, and losses to NAV.

    The question of dividend cuts for AGNC, WMC, etc. which have gone this strategy is going to depend entirely on whether they choose to count unrealized losses (and realized ones, to some extent) against the spread income. If they do (and accurately "realize" the GAAP capital losses against their reit taxable income for purposes of calculating the divvy) then there will be some distribution cuts. If they don't (and I wouldn't if I were them), then their core earnings should support something in the neighborhood of the current payouts. We'll know one way or another in the next week or so....
    Jun 11 12:01 PM | 1 Like Like |Link to Comment
  • American Capital Agency And Rising Interest Rates: Cut Your Losses Or Wait It Out? [View article]
    I can't imagine a bankruptcy scenario (well, I can, but it seems very improbable...). What % chance of bk? Do you really want an answer to that?

    Being quick, dirty and inductive, here's what the market says: Jan 2015 $15 Puts (the lowest strike traded) are paying 10 to 1 in a hypothetical BK, which is an implied probability of 10%. Jan 2014 $13 Puts are paying 35 to 1, or an implied probability of less than 3%.

    Rather than focusing on a bk, I'd model a best case; worst case; and base case scenario, and decide if you and your wife can hack the worst case. Worst case, IMO, would be a share price in the high teens and a dividend cut to 10% off that new price level. If it hit that, would you feel compelled to sell and/or have to change your life plans? if so, then my advice is to back off your exposure or hedge it away by throwing some of the divvy toward some (now overpriced) puts...
    Jun 11 11:38 AM | Likes Like |Link to Comment
  • American Capital Agency And Rising Interest Rates: Cut Your Losses Or Wait It Out? [View article]
    Dividends#1

    Good luck to you, and as with anything, don't make decisions based on what I or anyone else says. Do what's right for you and your family given your own risk tolerance and financial needs. Most notably, how much can you afford to lose in the worst case, and what would you feel about waking up some AM confronted by a 10-15% haircut. Would you feel obliged to sell if confronted by a loss of that magnitude? To put things in perspective, I have less than 25% of my portfolio in "stocks" (as opposed to CRE or bonds and bond funds), and less than 10% committed to mreits. So I can afford to trade extremely aggressively on this small slice of the portfolio. I also don't rely on the income. For others--especially retirees or soon-to-be retirees--you should think carefully about what fraction to mreits (or other interest rate sensitive securities) makes sense. ideally, you'd want some things with negative duration to offset some of your IR exposure.

    Parenthetically, it's not just mreits but all kinds of spread products (MLPS, utilities, cefs, BDCs, etc) that have gotten whacked. Not sure that people fully realized ex ante how much IR sensitivity was baked into all these sectors.
    Jun 10 11:16 AM | Likes Like |Link to Comment
  • American Capital Agency And Rising Interest Rates: Cut Your Losses Or Wait It Out? [View article]
    Very quickly:

    1) Obviously I have no idea, and you're right that it's dependent on the price of mbs. My gut tells me that mbs has oversold, and that we'll have some recovery in prices in the 2nd half of the year. But here's the problem: the very same kind of systemic shock (fear of some economic crisis around the world, or realization that the US economy sucks and is triple-dipping) that it's going to take to juice TSY/mbs prices is also going to be risk-off for equities. So it will be harder, IMO, for AGNC et. al. to climb back up that wall of worry. Also, investors once bitten are twice shy. It'll never hit the highs again, and, going out on a limb, I think the new upside is low 30s.

    2) I'm actually optimistic about their core earnings potential. In one sense, none of this noise about NAV has any impact on their core earnings, and NIMs for AGNC, MTGE, WMC, are strong. But here's the wrinkle. I simply don't know how they'll choose to reflect some of the M2M losses and this mumbo jumbo with the drop rolls where they may actually have realized some losses. If I were in their shoes, I'd ignore these NAV losses and continue to pay out all the spread income every quarter in order to avoid a further negative repricing of the stock on a divvy cut. 20% yields will eventually bring the investors back; do another SPO and increase spreads/yields even further/ lather rinse repeat...

    3) No. Significant divvy cuts below 1.15 or so will result in another negative reprice lower.

    3a) I don't care if they're around in 5-10 yrs. I'm a trader, not an investor. If I had to own one mreit in a time capsule for 10 years it would be MFA or ANH.

    4) LOL, 27 is a very reasonable breakeven price. We could see that this week if they affirm a 1.25 divvy.

    PS: EVERYONE is greedy, so that's not the real issue. The issue to me is that their incentives are not sufficiently aligned with yours. IMHO, they aren't in the hot dog business so much as in the selling hot dog franchise business, and have been for some time. Some of those SPOs they did last year had to have been dilutive to spreads. Also to clarify, they are extremely talented traders, but the relevant point is all traders take risks. They make unidirectional bets, and more often than not they've been right. But that's diff than running a portfolio that aims to be market neutral and runs no duration gap, such as ANH.
    Jun 10 08:08 AM | 1 Like Like |Link to Comment
  • Why Exide Could Be A Compelling Speculative Buy [View article]
    Hey SG,

    2018s cracked into the mid-50s on the news but looks like there's some support there, and the 2013s went to low teens (toast). Yes, agree that it's not officially official until the "potential" filing in DE. But the market is now pricing in a filing as a done deal. Could the story just be a plant for negotiations in the environ case, maybe? Stranger things have happened.

    I'd spent some time running the cash flows back in Jan/Feb for a short of the equity, but I'll try to find some time this weekend to spread the capital structure carefully and spit-ball a range of value for the hypothetical post-reorg entity based on multiples of (normalized) EBITDA. It looks like a crappy business with lots of headwinds, aggravated by unserviceable debt, but my recollection was they they were at least EBITDA positive. We wouldn't know exactly the details until (assuming) they file and announce the terms of the DIP. And this environmental liability requires a huge margin of safety, as those kinds of things (not just regulatory agencies, but future civil liabilities from 3rd parties). What you say about the European subsidiary is interesting (and potentially important for recoveries). Also, there's the wild card of how much debt a bk judge would assign to the new entity. Whoever okayed the previous bankruptcy was overly optimistic about their ability to service the debtload, so if it indeed goes that way maybe they'll err on the other side here.

    This one has a lot of variance, which makes me cautious, but there's money to be made in these special situations.

    PS: you aren't holding anything from RSH or CZR are you? They're both showing hints of weakness in the senior debt the past week. Not sure whether this is unique, or endemic to the junk market more generally. Anecdotally, seems like people are getting shy on HY with all the vol in the markets.
    Jun 7 12:32 PM | Likes Like |Link to Comment
  • Why Exide Could Be A Compelling Speculative Buy [View article]
    And now it's *officially* a party!

    It looks impossible that the equity is worth anything post-reorg given the pricing on the unsecured subs, but I'll prob take a flier on some 2018s tomorrow if I can get a decent block with a low 50 handle. That looks like the fulcrum. The distressed funds have been all over this with a microscope for months now, so it may not bleed too much lower on a filing. The unquantifiable environmental liab is what scares me.

    Also, yes, SG, the DIP will jump to the front of the line, and it'll be interesting to see what they can arrange in this regard.
    Jun 6 05:54 PM | Likes Like |Link to Comment
  • American Capital Agency And Mortage REITs Post-Memorial Day Sale [View article]
    Hey Taymere,

    Thanks for this, and I hate to pick nits because I generally agree with the point you're making that rising rates can sometimes bring opportunities, and that they're not sitting still like deer in headlights.

    But I think your comments potentially confuse two very diff things and overstate the case for positive cash flows. Yes, absolutely, IOs, floaters, IIOs, and other CMO "derivatives" get M2M daily, and thus a firm will gain a positive contribution to NAV on days when rates rise. However, CMO strips aren't "derivatives" in the true sense of the term, like when you buy or sell a synthetic index like the ABX or IG and "settle" for cash daily or monthly with your counterparty for changes in the index.

    They're just regular bonds, with CUSIPs, and ordinarily there's no "counterparty" in the sense that a derivative has a counterparty with whom you exchange collateral. The reason the price swings so dramatically on a daily basis is because, for example in the case of a plain-jane IO strip, the expected value of your future income stream can be projected to decline less rapidly (though it will always decline) in a rising rate environment because mortgages extend. Similarly, with IIOs or floaters, the actual income stream that you'd collect as part of your "coupon" is divvied up diff as a "derivative" of current interest rates (1-X). But in both cases--whether it varies in length of time (IO) or amount within some range (floaters)-- the cash coming in the door is no diff than the interest portion of the regular coupons you receive periodically from any other pass-thru structure. EFC and others who speculate more actively on credit may have derivatives on indices that they can monetize for cash, but this is diff from buying IOs (although, in support of your point, you can always just *sell* IOs when they're up to raise cash...).

    And even in cases where--as you describe--a firm like AGNC has entered into fixed pay/ variable receive IR swaps with a counterparty, and $ are exchanged every day to settle, you can't really expect them to take the cash on any given + day and run right out and plunk this into mbs. Reinvesting their collateral in any significant way would mean, on the other side, that they'd have to sell the mbs they've bought on down days and at unfavorable prices.

    You're basic point stands: that they're hedged and gain compensating credits to NAV through IOs or swaps moving into the money,but there's no way to sugar coat bad days as significant opps to pick up cash flow. Notwithstanding all the hedging and fancy structured finance tricks, the sad reality is that in mbs land, cash moves slower, for better or worse, when rates head up... Now NEW money, on the other hand, is going to get them significantly better spreads on a going-forward basis, which goes directly to your point.

    Based on some of the better pricing we're seeing in mbs, I think you could even justify an SPO that was slightly dilutive to NAV if it was significantly accretive to spreads.

    Sorry to be pedantic--as I generally agree with your comments!
    May 31 08:32 AM | 1 Like Like |Link to Comment
  • American Capital Agency And Mortage REITs Post-Memorial Day Sale [View article]
    Nice work, CK! Looks like calmer heads are starting to prevail. We may have some more bumps along the way with all the vol in TSY-10s, but that felt like a bottom

    Picked up some more WMC with an 18 handle; re-loaded on PDI, which I'd been selling down; and my ITM AGNC calls are up nicely. Will prob cash these out this afternoon for a quick 20% pop.

    You need a blue-light special like this every once in a while just to keep things interesting.
    May 30 10:44 AM | 1 Like Like |Link to Comment
  • American Capital Agency: Time To Abandon Ship? [View article]
    20% is a fair guesstimate on the gross hit to the mbs portfolio NAV. But you have to factor in the compensation from the swaps, on the other side. Even if these are based off of 5 and 10 yr treasuries, which haven't been pounded as bad as FNMA 3.5s, have still moved into the money.

    Also, the mgmt of AGNC may be reckless, but they're not stupid. You're assuming that they haven't made adjustments to bring down the duration gap since being slammed mid-Q1.
    May 29 03:41 PM | 1 Like Like |Link to Comment
  • Don't Panic: Survival Guide To Prospering With Mortgage REIT 12% Yields [View article]
    Hey, CK, what a day, huh!

    I finally couldn't resist the smell of blood in the water this afternoon and picked up some Sept OTM calls on AGNC for (I think at that moment) less than intrinsic value.

    Random observations from the rubble:

    1) it's official, at long last, mreits are trading more like credit than risk.
    2) marginal ownership has very low conviction.
    3) maybe sometimes "genius" mgmt is really just aggressive surfing of a bond bubble.
    4) unlike last year, where everyone who'd ever owned an mreit had made money, there are now lots of sore losers out there. Once bitten, twice shy. If you think people are going to line up to overpay for ARR's next overpriced SPO, forget about it.
    5) welcome to 2011's yield curve and price structure. maybe the days of BATESAT (buy AGNC at 28 sell at 30) are back again?
    6) will be very interesting to see if this keeps up for another 10% or firms up.
    7) I'm with you 100%: I don't think the selloff in TSY is sustainable beyond a 2.5% 10 yr.
    May 28 05:35 PM | Likes Like |Link to Comment
  • American Capital Agency: Time To Abandon Ship? [View article]
    Great points, mcp3m! No question the NAVs are lower this week than they were at 3/31/13 earnings date.

    Negative convexity is a real bee-yotch, and they've aggravated the problem with the pay-ups. If your concern is extension risk (in a rising rate environment), then the last thing you want to have are a bunch of 3s and 3.5s you paid an extra 2-3 points for to make sure the borrowers were going to stick around for a while. Assuming rates continue upward (I don't assume this, BTW) you'll be stuck with those mtgs forever (and by "forever," I mean 12-15 years).

    But what does that really mean when the rubber hits the road? It means that you're now "stuck" with a bunch of mtgs that have lost 10% of their value but upon which you're earning a nice 2% spread over your cost of funds, meaning that you don't have to resort to things like closing up shop or buying up your misbegotten subsidiaries just because they happen to hold a bunch of crappy legacy cmbs.
    May 28 12:35 PM | 2 Likes Like |Link to Comment
  • American Capital Agency: Time To Abandon Ship? [View article]
    "There is ton more pain left in AGNC..."

    No offense, but I certainly hope so! I don't own any AGNC but would love to do so at those prices and would buy it hand over fist!
    May 28 12:15 PM | Likes Like |Link to Comment
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