Monday, November 24, 2014

NII Holdings Equity To Be "Extinguished" Under Proposed Plan $NIHDQ

From the NII Holdings Plan Support Agreement released today:

"Existing NII Equity Interests shall be extinguished, cancelled and discharged as of the Effective Date, and holders of Existing NII Equity Interests shall receive no distribution in respect of their equity interests."

Saw On Twitter About Quicksilver $KWK

From LCD News: "Quicksilver bondholders said to hire Moelis for restructure talks; bonds hit record low, covenant violation near".

Bonds are yielding almost 200%!

Review of The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals

I should've read the Amazon reviews of The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals before buying it:

"The other disappointment of the work is that an enormous amount of exposition is devoted to discussing the development of commerce, the discovery of price records, and the supposition that since such records are found, it is natural to assume they were used for technical analysis. However, only the surface is scratched here. Lastly, the authors tend to give undue emphasis to various categories of non-technicians' disdain, ostracism of, disregard for, and general ignorance of technical analysis."
And:
"The author does not have any access to primary sources so there is absolutely nothing new in this book. If you want to write the history of something, you need access to primary sources, eg old newsletters, interviews, subscription statistics."
I agree with those criticisms. The book ex-notes is only 165 pages, so it's pretty thin. There were two interesting sections worth discussing, though. First, in the section about cycles:
"[I]n his 1993 Charles H Dow Award-winning paper, "Charles Dow Looks at the Long Wave" [pdf], Charles Kirkpatrick... observed that from 1700 to 1994, every period that saw both a decline in long-term interest rates and a rise in the stock market has been followed by a major stock market collapse."
Uh oh! That is what has happened over the past couple decades! Here's what the Kirkpatrick paper actually says (this is not quoted in the book even though it is profound):
"The period after interest rates peak is when stock prices rise as an alternative investment. During that period declining interest rates force yield-conscious investors into alternative investments of lesser quality in order to maintain yield. Since stocks are the most risky and least quality investments, they become the final alternative, especially when their price continues to appreciate as a result of increasing cash flow into the stock market. [positive feedback loop] The recent conversion of government-guaranteed CD deposits into stock mutual funds is typical during this period. Unfortunately, it eventually leads to the declining long wave in stock prices."
Note that if this theory is correct, the bond market panic or interest rate increase that bond bears are currently expecting will not happen for years, and then only after a stock market crash.

The second interesting topic alluded to in the book is the development of quantitative trading strategies, which have blurred the lines between technical and quantitative analysis. Technical analysis comes from a time (4-5 decades ago) when things like moving averages were calculated by hand. The significant effort required to calculate and continually update a 50 or 200 day moving average by hand was a barrier to entry, which meant that far fewer people were likely to have access to these signals than today.

There are no evergreen investment strategies that will always work. Having your investment operation in New York, where you got investment information faster, was once an advantage. Having a Bloomberg terminal was once an advantage. Being able to do a fundamental screen of stocks was once an advantage. I foresee a period of a few years where interpretation of Skybox quality satellite photos is going to be an investment advantage, but then it will just become part of the landscape.

By the time an investment approach becomes part of the landscape, the people who were using it have generally gathered assets and are rich, fat, and lazy. The 80 year old fund managers who made it big 50 years ago by being the first people to get copies of filings dropped off at the SEC offices (once a great edge!) are not hungry enough to develop tomorrow's cutting-edge technique. This is why every generation or so there is a New School of investing that displaces the old, like succession in an ecosystem.

Overall, this was only a 2/5 book. Actually, if you were just to reprint the most important technical analysis papers and excerpt the most important books cited in the notes, it would be a great volume that would be better than this book.

Molycorp and Walter #timestamp $MCP $WLT

The Walter Energy 8.5% due April 2021 is trading in the high 20s to yield over 40% to maturity.
The Molycorp 6% due April 2017 is trading in the mid 30s to yield over 50% to maturity.

Prediction: neither of these companies will be good buy-and-hold propositions for equity investors.

Young Money: "The American and Foreign Power Company" and Foreign Investments

YM:

"[I]f a depression or financial crisis shuts off the foreign-investment spigot, these countries will see no further reason to respect foreigners' rights. If their investments aren't confiscated, they'll be subject to actions that drastically limit their return on investment."
A correspondent writes,
"See what is going on with Clorox assets in Venezuela. Currency and price controls made it impossible to operate at a profit, they shut down the plant and decided to exit the market in Venezuela for the time being. The govt has now confiscated the property and is attempting to operate it. Granted, Venezuela is about as extreme as they come in terms of not respecting property rights, but this all happened in about two weeks."
This is the problem with the "BRICs" that I have written about before.

Jeremy Grantham On Market Cycles And Career Risk

This is important:

"[B]ecause asset class selection packs a more deadly punch in the career and business risk game, the great investment opportunities are much more likely to be at the asset class level than at the stock or industry level. But even if you know this, dear professional reader, you will probably not be able to do too much about it if you value your job as did the nearly 1100 analysts in my survey. Except, perhaps, with your own assets or, say, your sister’s pension assets."
These days, the asset class opportunity is to stay out of profoundly overvalued equities, an opportunity which is now presenting itself for the third time in less than 20 years.

WSJ: "Hedge Funds Bet on Coal-Mining Failures" $WLT

Funds are trading the capital structure by shorting the unsecured debt! (link)

Walter Energy is a particular favorite of distressed-debt investors, including Apollo Global Management LLC, Brigade Capital Management LP, Caspian Capital Management and Knighthead Capital Management LLC...

Walter owns some low-cost mines that produce metallurgical coal, the type used to make steel and the hardest hit in the recent downturn. Those mines could be profitable immediately if they aren’t saddled with Walter’s debt, analysts said.

The funds have been buying up much of a $1 billion bond secured by Walter’s assets for 85 to 90 cents on the dollar, people familiar with the matter said. The holders would have first claim to Walter’s assets in a bankruptcy. Meanwhile, the bonds yield as much as 14% at current prices.

Several of the funds had also sold short the company’s unsecured bonds, a wager that their value will fall. The bonds have lost 58% since June 30 and trade for 27 cents on the dollar.