Sunday, August 2, 2015

WSJ: "The Demise of the Small American Bank"

Today's WSJ:

"[D]odd-Frank, a law intended to take on the systemic risk of 'too-big-to-fail' banks, is multiplying the problem. 'The big banks that are too big to fail are bigger now than ever, but the regulations have trickled down to the smaller banks that didn’t cause the financial crisis' Mr. Hill says. As a result, community banks are disappearing. 'When I started my first bank in the 1970s there were 24,000 banks in America,' he says. 'There are now 7,000 banks. It may soon be 500 or even fewer.' [...]

He laments that the Community Reinvestment Act, a catalyst of the 2008 subprime mortgage crisis, still hasn’t been repealed. 'We are literally required to make loans that we know are going to fail.'"
A correspondent writes, "It's driven in part by politics and regulation and in part due to technological change and market competition. I say the latter only because different tech platforms are allowing traditional roles of banks to be decentralized across time and space (payment platforms, loan intermediation, escrowing, etc)."

Note that this is actually bullish for cheap small banks: those trading below the value they would receive in a merger, and especially those trading below book value.

Wednesday, July 29, 2015

"Multiple discovery and invention: Zeitgeist, genius, or chance?"

"The occurrence of independent contributions by 2 or more scientists can be interpreted in terms of zeitgeist, genius, or chance. The relative adequacy of these 3 theories was examined by examining the general and intradisciplinary probability distribution of multiples and the relationship of individual eminence with multiple production and priority. An analysis of 579 multiples and of 789 scientists and inventors gave the most support to the chance theory, followed by the zeitgeist theory. Results are integrated into a single probabilistic perspective that incorporates some of the major features of all 3 theories. A small group of highly productive individuals is most likely to participate in multiples, including independent rediscoveries. These same persons are also unusually intimate with the 'technoscientific' zeitgeist and perhaps equally gifted with an inordinate amount of good luck."

Peabody Energy Conference Call Q2 2015

Q - Matthew Fields: Okay. Thanks very much. And then one follow-up, just sort of where bond prices, with where they are, what they are in the $0.20, $0.30 on the dollar. Are you planning to be buying these up in the open market?
 

A - Amy B. Schwetz: So I would say that given both our equity and our bonds are publicly traded, you can probably appreciate that we can't comment on specific strategies. Our objective is always to preserve and enhance the company's value. And at this point in time, we really think that's done by focusing on our areas of emphasis. And particularly in the area of financial strength you'll see that our current near-term goal is to maximize liquidity and reduce leverage over time.

Q - Matthew Fields: Okay. And then just sort of on the back of that, if you're not going to be buying bonds back in the open market, I guess a good way to take advantage of the discount to in fact delever would be to exchange based on current prices. And your sort of first-lien capacity you could do quite a lot it seems, especially with the $1.5 billion 2018 maturity looming. Can you talk about that and your sort of appetite and outlook for how to deal with that maturity, please?
 

A - Amy B. Schwetz: I guess as it relates, again, we're not going to get into the specific strategies as it relates to our debt or equity at this point in time. The 2018 maturity is about three years away, so we feel like we have plenty of runway to deal with that as the date approaches.
 

Q - Matthew Fields: Okay. Thanks very much

So it sounds like they are too dumb to take advantage of debt trading at 10 cents, and they'll just hope that coal prices will bounce back.

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).