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  • Lumber Liquidators Overshot To The Downside [View article]
    No position here, but the analogy is fallacious.

    Unlike Nike, which weathered bad press and scrutiny, LL faces unquantifiable civil tort liability from droves of class action bottom-feeders.

    I think they've gotten a bum rap, but the morality of the situation is irrelevant. The stock is still expensive relative to the potential legal overhang.
    Apr 13, 2015. 10:41 AM | 1 Like Like |Link to Comment
  • Spreads And Durations And Swaps... Oh, My! Digging Deeper Into Western Asset Mortgage [View article]
    Makes sense, and I think you're exactly right that (a) a lot of this is "non-economic" in the sense that it's about GAAP book keeping requirements to account for things whose economic fundamentals aren't really impacted but that (b) the ambiguities do potentially allow for some fudging or creative accounting. You're right to keep your eyes on this. I've found it peculiar that rather than just closing out swaps at a loss (which would require them to book the loss) they instead avoid the ugly tax consequences of this by taking on another off-setting receiver swap, which presumably nets out. And there's also the ambiguity that in many cases the "yields" they report on mbs aren't necessarily reflective of actual cash flows but are modeled in advance and locked in at purchase (thus giving them the discretion to claim a "catch up" credit if actual prepays come in slower than the original projections, or necessitating subsequent write downs if the model was too optimistic). I can remember during the halcyon days AGNC was able to juice earnings a couple of quarters by pulling that rabbit out of the hat.

    Bottom line: MBS fundamentals are complicated enough, and the accounting rules add another layer of difficulty that's hard to penetrate even for a bond investor.
    Apr 12, 2015. 10:01 AM | Likes Like |Link to Comment
  • Spreads And Durations And Swaps... Oh, My! Digging Deeper Into Western Asset Mortgage [View article]

    Nice work, and you're asking some interesting questions. I don't have time to dig into this right now, but will try to come back and look at this all more carefully someday shortly.

    But a couple of things jump out as ?

    1) Your chart of the Negative Duration Contribution of swaps per Q (which shows the declining neg duration). That could be indicative of several things on the part of mgmt. Either (a) it represents them taking off some swaps because they're loosening up a little bit and are now willing to run a bigger duration gap; or (b) the shifts they're making in the portfolio into non-agency floating-arms, jumbo balloons, and whole loans mean that they don't any longer NEED to hedge as aggressively given that these products are intrinsically less sensitive to IR risks than the 30yr agency 3s and 3.5s they were heavy on previously. I'd suspect it's a little of both, but mainly (b). That's the double-win you get in taking on some credit risk: spreads get wider, and you trade-off some of the extreme IR sensitivity of low coupon agency fixed rate paper for the credit risk of whole loans. So your premise that they may need to "replace" this negative duration in the future may not hold.

    2) On the cost of hedges varying so wildly between Qs. One way to think about this (the wrong way, I think) is to assume that the cost of hedging via swaps is relatively constant, and thus spending more or less per q is indicative of adding/subtracting some stable notional amount of IR protection. But the price of IR protection via swaps and swaptions isn't a constant but a variable, and thus it costs you more to put on (or take-off via off-setting variable pay) some notional amount X of IR protection depending on market expectations at that moment for the future direction of IR rates. Could changes in the price it costs them to hedge out the risk and/or some friction between the costs of taking off protection by purchasing off-setting swaps explain some of the variance? What was happening in IR rates and future forward curves when they were in the market for swaps in each of those Qs?
    Apr 10, 2015. 04:37 PM | Likes Like |Link to Comment
  • Miller Energy Resources - Another Distressed Preferred With 176% Upside Potential [View article]
    Don't have a horse in this race anymore (flipped some of the prefs a few months back for a quick trade), but this capital strategy of selling prefs at the market for .30 on the $ is insanity. Hedged or unhedged, and at any price of oil, there's no way they can earn a return on capital sufficient to justify that cost of funds. The divvies will be paid so long as Apollo (who's clearly calling the shots) thinks there's still something to be gained from dumping new pref shares into the market. After that, lights out...
    Apr 8, 2015. 02:37 PM | 3 Likes Like |Link to Comment
  • Pacific Coast Oil Trust: 6.5% Yield With Income Upside [View article]
    Yah, it's that "or" that could bite you in the rear!
    Mar 23, 2015. 10:36 AM | Likes Like |Link to Comment
  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    Points well taken: they were buyers at the top of the market and now will be divesting in a much less favorable market.

    Still, they're raking in a couple of billion a year in AFFO, have lots of stuff to sell (albeit not for the top dollar prices they paid). Unlike some of the more constrained producers (I own CDE's 7.785s of 2021), they've still got a decent leash to maneuver before being in true distress.

    Ultimately they (and most others in the space) will live or die by the price of gold, which is largely indeterminable.
    Mar 23, 2015. 10:33 AM | 1 Like Like |Link to Comment
  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    I don't think we fundamentally disagree--or at least our observations are compossible with each other.

    45X coverage is risible--that's like having no debt at all. 3X coverage isn't investment grade, which is why it's realistically a BB or BBB credit. Looks like they've aggressively made some acquisitions (including some bad ones) and are now eating some of them by write-downs. Probably got a little in front of their skis when gold prices were supposed to go through the roof.

    All that said, I don't lose a lot of sleep with a company covering their interest 3X over--neither do other investors, apparently, which is why their notes are trading only 300 bps wide of treasuries. $850 AISC is still profitable at $1150 an ounce, and they've got assets they can unload to delever themselves. They won't come out and say it, but an equity issuance wouldn't be a bad thing. Certain kinds of enterprises, especially deeply cyclical commodities, really ought to be financed mainly with equity.

    Re. "solvency"--I'm not sure what you mean by that. very few cos--even IG credits--would be solvent if they were suddenly unable to roll their debt. ABX is easily covering their debt service; has ample liquidity over the next 2-3 years; has cut capex and opex in response to the new price environment; is planning to sell assets to raise more cash to retire LT debt; and looks to have an enterprise value and assets that cover the unsecured debt.

    is this a great business going forward if we stay at $1100 gold? Probably not. But mgmt obviously cares about the debt (and is behaving responsibly) by delevering and diverting operating cash flows from capex to debt retirement. The red flag would be if they can't execute any sales to deleverage--or if gold tanks below $1000.

    Not my area--and I don't follow this co closely--but your characterization seems excessively dire.
    Mar 22, 2015. 11:15 AM | 2 Likes Like |Link to Comment
  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    Any company in a position to reduce its long term debt by $3B a year is by definition not in distress.

    Show us the debt service coverage ratios. Unless they're below 1.5:1, yawn... It's a boring BBB credit.
    Mar 21, 2015. 08:58 PM | 3 Likes Like |Link to Comment
  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    No opinion on whether the equity is overpriced or underpriced. It's probably a first derivative of gold prices, and your guess (which is what it amounts to) is as good as anyone's. Flip a coin it goes up or down, with gold. But the bond market does not share your view that that debt is "stressed." YTM on even the lowest coupon debt is in the 4.5-5% range--borderline investment grade. If your thesis is that high debt is going to take them down, what's your revisionist estimate on coverage? Looking at it for 5 minutes, I don't see any short or long term coverage/liquidity issues.
    Mar 21, 2015. 08:53 PM | 1 Like Like |Link to Comment
  • Pacific Coast Oil Trust: 6.5% Yield With Income Upside [View article]
    With a $3 handle this is starting to look *very* interesting. Price sensitive, time insensitive folks might want to: (a) read the trust indentures *very* carefully (Philadelphia lawyer-like) and reassure themselves of the covenants re. liquidation upon 2 years of minimum income; and (b) upon satisfactory completion of (a), start stashing some of this away for a rainy day.
    Mar 21, 2015. 08:04 PM | 1 Like Like |Link to Comment
  • Dovish Comments From The Fed Make 12% Dividend American Capital Agency Attractive [View article]
    He also blew up (or, more charitably: presided over the blow up) of the 2ND (not the first) largest mbs portfolio in the world. Make of that fact what you want. I tend to think it's irrelevant in the current environment, but FWIW...

    Like somebody below says, didn't keep him from getting his hat handed to him in 2013 when the Fed tapered prematurely. But then again, he wasn't alone.
    Mar 20, 2015. 07:36 PM | Likes Like |Link to Comment
  • Lumber Liquidators A Value Play? [View article]
    Lots of us in the "market" like to make wagers that have positive expectancy--unlike Roulette. Like "heads we win a little, or only lose a little; tails we win a lot."

    LL doesn't seem to meet these criteria, yet.
    Mar 20, 2015. 04:13 PM | Likes Like |Link to Comment
  • Lumber Liquidators A Value Play? [View article]
    Thanks. Will have to check out the options route, although I hate going there--especially if there's some distressed debt to pick up with nice carry, which I gather there isn't here, yet.

    Yah, ditto on Tilson. Guy's a walking contrary indicator: the nicest euphemism I can come up with without getting myself banned from SA is that no one ever went broke fading T.
    Mar 19, 2015. 04:09 PM | 1 Like Like |Link to Comment
  • Lumber Liquidators A Value Play? [View article]
    Hey, thanks Max. Just went back and read the *outstanding*, clear-eyed analyses you've done of the complicated technical issues of testing. A model of inductive thinking for all investors--bulls and bears alike.

    Technically, what you say makes sense, and my gut is that LL is getting a raw deal from the "gotcha" crowd. But at the same time, bulls can be 100% right in the technical analysis of the flaws (or regulatory irrelevance) of deconstructive testing but the company still gets buried by legal/ administrative/ reputational factors.

    I like that they have/had little or no debt, and could potentially ride out a decline in sales for some time until the brouhaha calms down. At the same time, though, when one tries to spitball a range of potential outcomes and assign weighted probabilities for an expected valuation, the arithmetic mean may be positive but the geometric mean is still a zero. I'd need it to get *much* cheaper before jumping in...
    Mar 19, 2015. 12:57 PM | Likes Like |Link to Comment
  • Lumber Liquidators A Value Play? [View article]
    I love situations where pure uncertainty reigns. But the problem is that the price of LL isn't yet reflecting the full range of potential outcomes--one of which is zero. My guess is people are anchoring (mistakenly) on the fact that this used to be a $100 stock and thinking $30 and change looks like a fair discount. But it was so grossly overpriced to begin with that even now, it looks like a decent but not screaming bargain for a company facing no legal difficulties. Needs to go much lower before the bottom fishing can really begin. Otherwise, for day-traders--have at it. None of the real issues at stake are going to get resolved here for years...
    Mar 19, 2015. 11:02 AM | 1 Like Like |Link to Comment