Wednesday, July 29, 2015

Energy XXI Bond Trades At 80% YTM

Some of the EXXI 3% note due 2018 traded today for just over 13 cents; a yield to maturity of over 80% and a current yield of 23 percent.

Peabody Second Quarter Results

Peabody announced results yesterday. Revenue was down 13% quarter over quarter but costs were down less, resulting in "adjusted EBITDA" falling 44% from the first quarter to $87 million. That is less than quarterly interest expense of $119 million, resulting in a decline in interest coverage ratio from 0.95 in Q1 to 0.73 in Q2.

Note that Peabody's results actually lag the declining thermal coal prices because the company contracts prices with customers to some degree in advance. The remainder of 2015 prices have already been agreed upon, for example, although they may likely average lower than the prices that were realized in Q1 and Q2.

The 4.75% note traded at 10.5 cents - that's a current yield of 45 percent! Own the bond for free after a little over two years if it keeps paying coupons.

Tuesday, July 28, 2015

Three Mini Book Reviews

How's Your Drink (3/5)

"By portraying himself as a man who enjoyed drinks in abstemious moderation, T.R. managed a straddle of Clintonian sophistication: He may have sipped the occasional Mint Julep, but he didn't inhale them.

Roosevelt testified that in the years since he left the White House he had put only two Mint Juleps to his lips. One of those, he said, was at the St. Louis Country Club, where he only took a couple of sips. The St. Louis Post Dispatch teasingly accused T.R. of perjury. After all, the Mint Juleps made by the country club's bartender, Tom Bullock, were just too good for anyone to taste and put aside. 'To believe that a red-blooded man, and a true Colonel at that, ever stopped with just a part of one of those refreshments,' the Post Dispatch editorialized, 'is to strain credulity too far.'"
Prohibition (1920-1933) is so far in the past that it is hard to fathom. Remember that Prohibition ruined fine dining for decades in the U.S.; especially French cuisine with wine parings and wine-based sauces that were illegal, and that per capita alcohol consumption did not regain pre-prohibition levels until 1973! What federal government nonsense today will seem equally absurd in 2097?

The Sociopath Next Door (3.5/5)
"Our normal affinity for the occasional thrill can make the risk-taking sociopath seem all the more charming - at first. Initially, it can be exciting to be invited into the risky scheme, to be associated with the person who is making choices outside of our ordinary boundaries.

Let us take your credit card and fly to Paris tonight. Let us take your savings and start the business that sounds so foolish but, with two minds like ours, could really take off. Let us go down to the beach and watch the hurricane. Let us get married right now. Let us lose these boring friends of yours and go off somewhere by ourselves. Let us have sex in the elevator. Let us invest your money in this hot tip I just got. Let us laugh at the rules. Let us walk into this restaurant dressed in our T-shirts and jeans. Let us see how fast your car can go. Let us live a little."
Wall Street and finance are full of sociopaths. They are incompetent investors, and it is a shame that the sociopaths who gambled their firms and lost were bailed out and allowed to continue to direct production.

The Idea Factory: Bell Labs and the Great Age of American Innovation (3/5)
"We usually imagine that invention occurs in a flash, with a eureka moment that leads a lone inventor toward a startling epiphany. In truth, large leaps forward in technology rarely have a precise point of origin. At the start, forces that precede an invention merely begin to align, often imperceptibly, as a group of people and ideas converge, until over the course of months or years (or decades) they gain clarity and momentum and the help of additional ideas and actors. Luck seems to matter, and so does timing, for it tends to be the case that the right answers, the right people, the right place–perhaps all three–require a serendipitous encounter with the right problem. And then–sometimes–a leap. Only in retrospect do such leaps look obvious. When Niels Bohr–along with Einstein, the world’s greatest physicist–heard in 1938 that splitting a uranium atom could yield a tremendous burst of energy, he slapped his head and said, 'Oh, what idiots we have all been!'"
Simultaneous invention. This book is a history of Bell Labs and the many important inventions of the scientists there: transistor, solar cells, telephone switching, cell phones, etc. See also the socionomic perspective from Prechter on the timing of the antitrust lawsuit against AT&T in 1974 (following major bear market) and the breakup into Baby Bells in 1982 (following another bear market).

Monday, July 27, 2015

Tales From the Valley: Amazingly Bad Startup Idea

Heard of an amazingly bad startup from Uber driver in San Francisco. You rent out your (exorbitantly expensive, small) San Francisco apartment during the day to startups that can't afford real office space. They save money and your apartment "generates income" during otherwise idle hours when your stuff would otherwise just be sitting there, unmolested by strangers.

It was not clear whether the same startup would work from your apartment every day (can they keep some pens and letterhead there, then?), or if every morning the startups would look for a new empty apartment.

More interestingly, this startup is marketing itself via Facebook ads. That is important because the supposedly mature, profitable startups in advertising businesses (FB) derive revenue from these dubious new startups. Since the dubious new startups are unprofitable and funded by equity, when they are eventually exposed as worthless mimics, not only will they evaporate but so will significant amounts of revenue at the "mature" unicorn companies.

Previously on the startup bubble:

Hussman On the Impending Bear Market

Latest Hussman:

"When one examines many market collapses in history, it is simply not the case that the bottom had to fall out of earnings or the economy. Yes, sometimes elevated profit margins retreated, but that’s really not what drives cyclical market gains and losses. Our own concern about elevated profit margins is not that earnings will be weak over the completion of the current cycle (though that increasingly appears likely), but that investors are using historically extreme profit margins and record earnings as if they are completely representative of decades and decades of future earnings, and are using those earnings figures as a sufficient statistic for valuation."

Wednesday, July 22, 2015

More Leveraged Commodity Producers On The Ropes

Energy XXI (EXXI) - Gulf of Mexico oil & gas producer

  • The 3% note due December 2018 traded at 13 cents today. That's a current yield of 23% and a yield to maturity of 82%!
  • The yield curve for EXXI unsecured debt is inverted - the 2017 note yields 60% to maturity, the 2019 note yields 50% to maturity. (These both have current yields in the low 20% range.) An inverted yield curve happens when bond investors start trading the paper based on recovery value and number of coupons before default.
Peabody Energy (BTU) - thermal coal producer
  • The 4.75% subordinated note traded at 12 cents. That's a current yield of 40%! (Yield to maturity is not much higher because this one doesn't mature for a long time.)

Monday, July 20, 2015

A Theory of Narrowing Breadth

Worth revisiting my theory of narrowing breadth, since breadth is getting very narrow indeed:

"Narrowing breadth is a mania concentrated in fewer and fewer speculative vehicles. It's created by momentum investors with stop loss rules who consolidate into their winning positions."
The new NASDAQ high came from... Google. And - to a lesser extent - Facebook. Meanwhile, new highs minus new lows aren't confirming.