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laterre

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  • Walter Energy: The Bottom Is Near [View article]
    Yah, agreed, the unsecureds are really getting pushed down in the capital structure. And agree they'll probably get even cheaper. But they do have some nuisance value in a BK, the coupon pays some of the short hedge, and I can see them getting exchanged in the next 6-12 months to the detriment of the common.
    Aug 5, 2014. 05:07 PM | Likes Like |Link to Comment
  • Double Digit Return In 30 Days With Western Asset Mortgage Capital [View article]
    Agree with the general thesis that this stock is heading for a big bump, but I disagree with many of the details.

    MBS markets are *not* similar to the first quarter, and agency mreits with similar strategies (MTGE, AGNC) have already reported terrific quarters (WMC's last earnings was a headline disaster). With their shift to a hybrid/ non-agency model, it's harder to look-through into their portfolio, but if you assume that they remain heavily in 30-yr agency TBAs, and have returned to their old ways of running a healthy duration gap, their book value is likely materially higher than the last reported value of $15.44 on 5/31. Just spitballing, I'd guess it's currently in the neighborhood of $15.50 (reflective of the dividend paid), but there's a lot of variance given their portfolio

    Assuming that earnings are strong, and NAV grows, you can expect a nice pop at earnings release. But the bigger bump should come as they announce the divvy mid September and in the run up to ex-divvy near the end of September. I think they should be able to hold at .67. If the stock goes anywhere north of $15.50 in the run up, it's time to take something off the table.

    They're trading at a discount to NAV, so very unlikely they do another SPO anytime soon. They don't, in fact, do SPOs "often," though they clearly wanted to do a bigger issue last time around. Something to watch for after the next ex-divvy date if the share price sticks in the $15 range.
    Aug 4, 2014. 04:48 PM | 4 Likes Like |Link to Comment
  • Walter Energy: The Bottom Is Near [View article]
    If all the "if's" you outline should come together, then there's a very slight chance that WLT makes it to the other side of the mountain. But not only are these huge "if's"--and there's no empirical indication that we've hit a bottom in Met prices--but given where they stand right now, the common equity is still **way** too expensive given the risk-reward. With unsecured debt trading in the 40s and 50s, and falling by the day, how in the world is the common able to price through to a $385M market cap? This valuation makes absolutely no sense given their stressed capital structure. Going long the unsecured debt (nice + carry so long as they can keep paying the coupons...) and short the common (which has much farther to fall) seems like a better way to play this story.
    Aug 4, 2014. 04:25 PM | 3 Likes Like |Link to Comment
  • American Capital Mortgage Buy reiterated at Wunderlich [View news story]
    SHE is also the savviest among analysts covering the mreit space, IMHO. Check her record on calling the top and bottom.
    Aug 1, 2014. 06:35 PM | Likes Like |Link to Comment
  • Why I Believe Annaly Will Increase Its Dividend Soon And Shares Should Be Purchased Before Earnings Are Released [View article]
    Thanks much for the reply, RS. Actually, I'd think--based on your macro thesis--that you'd have preferred for NLY to have remained a pure (more or less) agency mreit which would be likely to perform better given the macro scenario of "lingering low rates" you describe.

    It's by no means clear that moving toward the hybrid model is any more certain (or less certain) to generate higher revs and earnings, as you assume. What it does allow you to do is to reduce IR risk and generate similar returns with lower leverage. It's a *defensive* move toward rates. If I held the view that IR were going to continue steady to downward (which I personally do), I'd much rather they stick to a pure agency model, which is more likely to generate at least some modest capital gains/ growth in book value.

    On the improbability of $19 per share (I never say "never," though this one's darn close...). You'll pardon me for saying that the $19 call smacks of anchoring bias. If you don't believe me, run the math in reverse: assuming an aggressive downward move in TSY10 from 2.5% to 1.5% over a 36 month time frame, and a current NAV of $12, what effective duration gap would they need to capture a gain in book value of more than 50%? The answer is a mind-boggling 50!

    To put that in perspective, that would be the same as buying a 20YR zero coupon treasury, putting two-ish turns of leverage on it, with no hedges. Any PM that would position a portfolio in that way should be fired immediately. Further complicating this with mbs, you also have to factor in that the lower IR rates necessary to move the needle on NAV are likely to reawaken pre-payment fears.

    These mreits can still be decent investments at these prices and should be able to throw off low teens returns for the foreseeable future. But you've also got to be realistic that it's mathematically impossible to replicate the kinds of mega earnings and cap gains these guys put up in the 2009-2013 period. $19 is not gonna happen, IMHO, but good luck to all.
    Jul 23, 2014. 02:35 PM | 5 Likes Like |Link to Comment
  • Why I Believe Annaly Will Increase Its Dividend Soon And Shares Should Be Purchased Before Earnings Are Released [View article]
    No position in NLY one way or another, and am inclined to agree with you that it's not bad at these prices (though it was better six months ago sub $10...). But I do question your belief that it could get back to $19.00 per share anytime soon (or ever).

    If you assume that (a) share price is at least loosely tethered to NAV; (b) as an mreit, they'll continue to pay out most earnings as dividends; and (c) that they'll remain at least somewhat hedged and with relatively low leverage, it is a virtual mathematical impossibility that they'll ever again reach $19.00 per share.

    MBS at these prices (and low yields), means that there's limited upside in terms of capital gains (NAV appreciation). Unless they are willing to run a big duration gap (not their style) in anticipation of a material move in mbs, there's just no way that they move the needle that much in terms of book value. Run the numbers yourself--even if TSY10 dropped from 2.5% to 1.5% over the next three years, which wouldn't surprise me at all, the gains to book would still be of an order of magnitude less than you're projecting.

    Not a criticism of your macro thesis, with which I pretty much agree.
    Jul 23, 2014. 12:25 PM | 5 Likes Like |Link to Comment
  • Conflicts Of Interest: The Manager Got Your Money, Part 3 [View article]
    Hey CWMF,

    You're right that tracking ownership can be tricky, if you want to do it in a way that tells you anything useful about mgmt and incentives. The key is to separate out mgmt teams that have invested their own funds--material cash buys in the open market--versus those that have simply handed themselves chunks of stock and options. My impression (again, without systematic consideration, but from following this space intermittently over the past years) is that ARR and AGNC had relatively meager ownership by mgmt, and what little they had had been given as incentives. By way of contrast, I'd always respected the fact that Gary Kain was one of the seed buyers of MTGE on the IPO with a significant chunk of personal cash. The structure at EFC might be a bit convoluted, but those guys also own a big chunk of their own units.

    On the SPO's: just counting them up would be a useful exercise. Who were the serial offenders in 2010-2013?

    Lastly, the one variable (maybe the probitive one) that none of these variable captures: can they trade bonds? Even the worst and most conflicted structure might be justifiable if it gets you a first-rate team of traders.
    Jul 22, 2014. 07:36 AM | Likes Like |Link to Comment
  • Conflicts Of Interest: The Manager Got Your Money, Part 3 [View article]
    Another sensible treatment, and I think you nailed MFA as one of the best managed and responsibly governed entities in the mreit space. Still, I tend to think that your analysis misses some of the more important (relevant) variables for the mreits--such as mgmt ownership of shares, and propensity to do SPOs just to add to AUM. MFA has been a model in both of these regards: mgmt eats their own cooking, and were never quick on the draw to do SPOs.
    Jul 21, 2014. 04:19 PM | Likes Like |Link to Comment
  • Conflicts Of Interest: The Manager Got Your Money - Part 2 [View article]
    Hi CWMF,

    Not a problem. Obviously neither I nor anyone else can know the exact details of what occurred, and it's up to individual investors to decide to what extent--if any--the SEC settlement bears on the current mgmt of WMC. But in my opinion, the behavior characterized in the SEC settlement is irrelevant to WMC today and chickenfeed compared to some of the stuff that happened in 2007-2009.

    Hypothetically, in 2007 Wamco is running like $100M of pension money for the Dayton Pipefitter's Local 12345, or something like that, in what's supposed to be a low risk, investment grade fund. Somebody thinks they're doing them a favor letting them into a private placement for a mezzanine bond from some small unregistered CMBS deal--either not realizing that it's unregistered or for some bizarre reason the Pipefitter's don't qualify as accredited investors or can't own Rule 144 securities. Nobody would have noticed except that the mbs market seizes up, the Pipefitter's lose 30%, and their lawyers do an autopsy on the account and every single transaction. In hindsight, why did they have them in subprime ABS, etc? Any post-mortem of that period is bound to turn up some things that occurred that weren't strictly according to Hoyle (the "market" was non-existent...), particularly the courtesy cross-sale, and so Wamco settled on the technical rules violations. A $20M blink of the eye compared to some of the stuff that JPM, Goldman, etc. got away with scot free....
    Jul 15, 2014. 09:56 AM | Likes Like |Link to Comment
  • Conflicts Of Interest: The Manager Got Your Money - Part 2 [View article]
    You raise a great issue regarding many of these mreits--conflicted and incompetent mgmts. However, far and away the greatest mis-alignment is the huge incentive to do SPOs simply in order to jack up the value of AUM--and mgmt fees. This conflict is pervasive and largely irresolvable. You do identify some of the worst offenders. The number of SPOs done in the 2010-2013 period gives a rough sense of how influenced the various mgmt teams are by this conflict, and I'd single out ARR as the worst offender in this regard by far.

    Your treatment of WMC is highly misleading, however, if not outright wrong. The Western Asset mgmt company (WAMCO)--a huge complex of money managers and funds--settled with the SEC for questionable transactions undertaken in 2007 in the depths of the mortgage meltdown. This behavior could not have involved WMC itself (it wasn't formed until 5 years later), and the settlement was paid by the manager (WAMCO), not from WMC's assets, as you incorrectly allege here.

    Also, you have to put in perspective what apparently occurred, none of which seems to have involved anyone currently involved in running WMC. Someone accidentally purchased securities that were from a private placement (Rule 144) into a client account that wasn't allowed to own unregistered securities. This kind of thing happens routinely, and they'd probably intended to apply to have the bonds registered (made eligible) down the road. But because these particular bonds tanked during the financial crisis, the client screamed foul and Wamco was forced to compensate them for the loss. Had they not tanked, I'm sure the client would have been happy enough to pocket the extra yield or would have whined about being excluded from a private deal. And in the other case, rather than throw a client under the bus and force them to dump securities that had been downgraded into a bidless market, Wamco did a decent thing and arranged a cross-sale to get the client out at a reasonable price. Only, wow, so they took them out at the bid (which is at least as good as would have happened anyway) rather than the midpoint--no good deed goes unpunished...
    Jul 14, 2014. 04:17 PM | 1 Like Like |Link to Comment
  • 13.9% Div. CYS Investments And 18.4% Div. Western Asset Mortgage Capital Are Winning Their Bets [View article]
    "Long term rates are near all time lows. They will go up. When that happens WMC will be hurt badly with its current portfolio. Short term it may do okay, but when rates start to rise, it will take a bath unloading some of its 30 year fixed rate Agency RMBS."

    There's very little data to indicate that rates are headed up anytime soon. The notion "rates are low, rates must rise" is a meme. Everyone thinks this, but it may or may not prove to be true within an investable horizon.

    As of six months ago you would have been entirely correct that WMC was among the most aggressive in terms of running a large duration gap and owning low coupon 30 yr paper, which was (as we saw last summer) intensely exposed to IR rises. However (and much to my consternation) they're moving aggresively to a negative or zero duration and shedding the low coupon agency mbs in favor of non-agency and whole loans that are less IR sensitive. So they've already figured out (too late, and reactively) what you point out. Witness the losses they've banked the last two quarters.

    Your assessment of WMC is generally correct, but I think it's also backward looking.

    They held the divvy, which should bump the stock up into the $15-16 range ex-divvy. I'll be looking to unload all the shares I picked up with a 13 handle if/when it goes above NAV.
    Jun 21, 2014. 06:29 PM | 1 Like Like |Link to Comment
  • RadioShack: Will The Vultures Circling RadioShack Have To Call Off Their Feast? [View article]
    mKiwi--good points. Oftentimes more money is made between the 6th and the 8th innings of these kinds of situations, rather than trying to squeeze out the last nickel getting it all the way to zero in the bottom of the 9th. Weird and irrational things happen in the "BK zone."
    Jun 19, 2014. 09:47 AM | Likes Like |Link to Comment
  • RadioShack: Will The Vultures Circling RadioShack Have To Call Off Their Feast? [View article]
    Thoughtful responses all, and points well taken. There ought to be more of these kinds of conceptual discussions on SA.

    Hey, there's absolutely nothing wrong with a good punt--asymmetric risk rewards can be nice trades if you size them correctly and there's some reasonable basis for the upside scenario. Heads I lose 1, tails I win 5 isn't an inherently bad payoff distribution if you think that 5 is within the subset of possible outcomes. There are precedents for retail "turnarounds," most notably Rite Aid in the last year or so. Most importantly (and the reason why I've been consistently saying that this is no longer a juicy short at these prices whereas the calls were stupidly cheap), there are still concrete things that the mgmt can do (such as a debt/ equity exchange) that would be regarded as bullish for the equity and would almost certainly spike a brutal short squeeze.

    All that being said, much (though, in fairness, not all) of the data points being cited around here lately are indeed irrelevant and are clear evidence of confirmation bias. I stick with this assessment of much of what's being written.

    One last thought, FWIW (probably not much to anyone other than me). While it's fine to try to pick the next Rite Aid or AA, I have to say that I'm personally averse to these kinds of trades except in very unusual circumstances. For every Rite Aid or Alcatel there are dozens (if not hundreds) of these trades that end poorly. Just in the past year, for example, I've seen people make the same arguments of asymmetric risk rewards for GMXR, Orchard Supply, XIDE, JRCC, STPP, USEC, etc. None of these are exactly like RSH, obviously, or decisive with respect to RSH's turnaround potential. But it's also worth keeping in mind that *every single company* that is teetering on the edge of BK is by definition an asymmetric risk reward. So one has to be guided by something more empirical than just the calculation that there's prospectively a high payoff.

    Better still (and my own personal preference): rather than gambling on "heads I win 5, tails I lose 1,) find or structure investments that contain a margin of safety. The very best opportunities are "heads I win a little or at least don't lose anything, tails I win a lot." These are admittedly harder to identify than trades with 100% downside, but I also think (following Klarman et. al.) that over the long haul this strategy generates more alpha than pure speculation based on the magnitude of the potential upside.

    Good luck to all--especially because, as an owner of the bonds, this really is "heads I win a little, tails I win a little more" for me.
    Jun 17, 2014. 09:46 AM | 1 Like Like |Link to Comment
  • RadioShack: Will The Vultures Circling RadioShack Have To Call Off Their Feast? [View article]
    Ugly dog contests prove nothing, and the numbers don't really help the bull case.

    Yes, utilities such as SBC, Verizon, electricals, pipelines, etc. tend to carry large debt-loads relative to their equity. That's the nature of the biz. But when healthy they also tend to be FCF machines. Regardless of the company RSH keeps, I don't follow how burning cash, with a negative FCF ratio of +/- -9 (which I assume is derived by dividing the debt costs, a positive number, by a negative FCF number?) is a bullish indicator. The point is (or should be) that they're FCF negative and are burning +/- $100M of cash every quarter they keep the lights on. Sooner or later (I'm guessing post-holiday 2015 on the long end) they'll either (a) exhaust the remaining liquidity in their credit line; or (b) trip a covenant violation on the senior debt. Could sales pick up, or margins improve for a "turnaround"? Hypothetically, sure, but I don't see one shred of inductive evidence to support this thesis in their recent results.

    Putting all this aside, and given that I have relatively little at stake here, I've gotta say that the behavioral economics dimensions of the discussions of RSH on SA are absolutely fascinating. Confirmation bias (refusal of people to change their views in the face of red-flag counter-factual evidence, or clinging to irrelevant data such as "cash on hand" as confirmatory evidence); narrative fallacies (telling stories that paint a certain outcome for which there exists no empirical evidence as possible or even likely); systematic over-estimation of the possibility of good outcomes (ten bagger!) and an unreasonable discounting of the probabilities (and costs--i.e. instantaneous 100% loss) of the downside scenario, anchoring bias on how much the stock used to trade for versus current price--all these are textbook examples of bad investment decision-making (regardless of the ultimate outcome, which as I've acknowledged, could indeed be a very profitable short squeeze for the bulls).

    Whether you are long or short the stock, people (myself included) should always step back and look objectively for any behavioral biases that may be informing your decision-making.
    Jun 16, 2014. 10:42 AM | 2 Likes Like |Link to Comment
  • Orchid Island Capital: A Deep Look Part II [View article]
    I have no position in Bimini or Orchid--and no axe to grind one way or another.

    But as someone who's followed the mreit and mortgage finance space for many years, I have to say that this article and the other are pretty shallow.

    Like several of the other more aggressive non-agency mreits, Bimini blew up during the financial crisis under the management of Zimmer (who jumped ship to form ARR) and the current crew (who stayed put to clean up the mess). They were playing with jumbo and non-conforming mortgages at high leverage, and like so many players at the time (including, we forget so easily, Freddie Mac's proprietary book with Gary Kain at the helm) they got fried when the non-agency market seized up. Draw whatever conclusions you want to draw from their performance in the face of that crisis, which took down half of Wall Street, the Agencies, several BDCs, and virtually everybody who had anything to do with the more aggressive end of the mortgage origination market.

    The copious "litigation" you cite is virtually all related to the 2007-2009 blowup--either claims that they misled investors in securitizations or failed to make good on commitments to buyback securities. Everyone in the origination/ securitization end of this space has had to wade through these kinds of lawsuits, some of which undoubtedly have merit.

    They had (if I recall) some legacy assets, whose value was being completely obscured by the overhang of pending litigation. No underwriter would do a capital raise for Bimini due to this overhang. Thus, Orchid was spun off as a "clean" vehicle into which the legacy assets and new capital could be put to work.

    The mgmt agreement that you cite as so egregious--with the triple cancellation penalties and sliding scale on expenses and AUM--is standard for the industry and designed (a) to incubate the fledlgling spinoff and (b) serve as a poison pill to keep someone (Goldstein and Bulldog, cough...) from buying up the assets below book and stripping them from the mgmt team.

    Whether these guys know how to run an mreit is an open question. You can be the judge of how probitive we ought to consider failure in 2007-2009 for answering that question. But I personally don't think that any of the random factoids you gather together have much relevance to their likely performance going forward.

    No position or any intention to initiate one.
    Jun 12, 2014. 04:58 PM | 3 Likes Like |Link to Comment
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