Sunday, May 22, 2016

Poor Macy's $M

Good store visit piece from BI:

"Herald Square is a hotbed of sweat, germs, filth, and tourists. It's like an ominous preview of what's to come."
Trump will have Macy's liquidated. Maybe we should short.

A correspondent writes,
Short Macy's, long tjmaxx. I wonder how the Nike / free people sections do compared to the others? Conclusion: "If your business depends on a healthy Middle Class then you are doomed"
Another correspondent writes,
Getting clogged with shop-worn, out-of-season merchandise that is so worn that it is unsaleable seems incompetent.
I used to mark down seasonal merchandise to make room for the next season's goods.
I could always figure out when to mark things down and how much to mark them down.
Some tweets about it:

Thursday, May 12, 2016

Conrad Q1 2016 Results $CNRD

Book value is $123mm. Market cap is down to $111mm (0.90x).

They're still profitable - quarterly EBITDA was $5mm so $20mm annualized.

Enterprise value is $100mm or so - 5x current annualized EBITDA. (Remember in 2013, EBITDA was $49mm!)

They bought back $3.4mm of stock in Q1 at an average price of $19.

Highlights from management:

*During the first three months of 2016, we added $11.9 million of backlog, as compared to $52.5 million added in the first three months of 2015, which includes a 30,000 BBL tank barge and a LPG barge. Our backlog was $189.9 million at March 31, 2016, $211.8 million at December 31, 2015 and $171.9 million at March 31, 2015.

*In response to market conditions, we have been providing more favorable payment terms to certain new construction customers, which decreases our cash balances and increases our costs and estimated earnings in excess of billings on uncompleted contracts, and this trend may continue during 2016

Wednesday, May 11, 2016

LINN Energy Filed For Bankruptcy $LINE

From restructuring term sheet (8-K):

  • The Company's 12.00% Senior Secured Second Lien Notes due December 2020 (the "LINN Second Lien Notes") will be allowed as a $2 billion unsecured claim consistent with the settlement agreement, dated April 4, 2016, entered into between the Company and certain holders of the LINN Second Lien Notes.
  • Unsecured claims against the LINN Debtors, including under the LINN Second Lien Notes and the Company's unsecured notes, will convert to equity in the reorganized Company or reorganized LinnCo (the "New LINN Common Stock") in to-be-determined allocations.
  • The Restructuring Support Agreement contemplates that Berry will separate from the LINN Debtors under the Plan. Claims under the Berry Credit Facility will receive participation in a new Berry exit facility, if any, and a to-be-determined allocation of equity in reorganized Berry (the "New Berry Common Stock").
  • Unsecured claims against Berry, including under Berry's unsecured notes, will receive a to-be-determined allocation of New Berry Common Stock up to the full amount of Berry's unencumbered collateral and/or collateral value in excess of amounts outstanding under the Berry Credit Facility.
  • Cash payments under the Plan may be funded by rights offerings or other new third party investments. The Restructuring Support Agreement contemplates that Berry may undertake a marketing process for the opportunity to sponsor its Plan.
  • All existing equity interests of the Company, LinnCo and Berry will be extinguished without recovery.

Tuesday, May 3, 2016

Seacor Holdings Annual Report $CKH

I thought this was interesting - from the Seacor Holdings 2015 Annual Report [pdf]

That there is no impairment charge according to GAAP does not mean that book value represents an achievable price were the asset today offered for sale. I would be happier if GAAP would, like international accounting rules, allow “mark-to-market” accounting for our fleet and permit me to delegate to a broker, or an appraiser, the responsibility for periodically determining a “clearing price” for our assets.

In the past, I have steadfastly refused to provide a SEACOR view of the value of our assets. There are many reasons for not doing so, apart from the army of lawyers who counsel reticence. My preference is to provide SEACOR stockholders information to reach independent conclusions. In this letter you can find the original cost of equipment, current insured values, book carrying costs, and historical information about earnings of different classes of equipment. The ability of our management group to divine the future is not necessarily much better, if indeed at all better, than that of our stockholders, journalists, “sell side” analysts, or palm readers.

In the absence of willing buyers and willing sellers for secondhand equipment, I generally default to replacement cost as the most useful point of departure. Manufacturers (shipyards in our business) are always willing sellers. Of course, the real cost can be elusive. Without a transaction born out of the crucible of negotiation, a shipyard’s list price is an “ask.” From replacement cost it is feasible to extrapolate an approximate value range for secondhand equipment, even if there are no “willing buyers” or “willing seller.”
Sadly, in the 2013 letter [pdf], there was no hint that oil was about to crash.Will be interesting to monitor this one - potential future restructuring candidate.

Also (as he discusses in this year's letter), they'll have to start making tough decisions about maintenance (special surveys, etc) on the idle ships.

Sunday, May 1, 2016

Not Bullish On Bonds

Last summer I noticed that the possible bond bear market was three years old. Now we might be four years into it!

Not saying that it's going to happen, but it's going to upset a lot of people's plans if SPX starts falling and bond yields start rising.

People are used to an overall falling interest rate trend (since Sept 1981!), which has been a tailwind for asset values, but they are also used to a shorter term inverse correlation where people flee equities for the safety of bonds.

That's the principle that 60/40 asset allocation is based on - if you own stocks and bonds, at least one will always be "working".

But remember Charles Dow Looks at the Long Wave: that pattern that asset allocation is based on has existed because we've been in the long period in between the peak in interest rates and the peak in stock prices, as Charles Kirkpatrick explained:

"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."
There could be a period when stocks and bonds go down together. For example, instead of stock declines -> people wanting the security of bonds, people might decide that stock declines lead to bailouts which are really stealth currency devaluations, and decide they want no part of the long end of the yield curve.

Remember, all of the federal, state, and municipal governments are planning to borrow to cover their operational and pension shortfalls. They think it will be no big deal thanks to low interest rates. In the most recent Fortune, Trump essentially says that he would grow the national debt - he's a developer and he loves low interest rates!

I've said that the federal public debt was only $6 trillion when Bush left office, and there's easy ballpark math that says that within a decade, the public sector will need to borrow that much every year.

The other scary thing for bonds is the effect that interest rate increases have on this system, because it contains so many feedback loops. The pension assets become worth a lot less, the interest expenditures rise (and they are borrowing to pay the interest since there is no debt service), so the credit quality (such as it is) deteriorates.

Also, corporate pensions have the same problem and an interesting feedback loop of their own. To the extent that their pension funds lose money, earnings will take a hit. As we know from Grantham, when earnings fall multiples fall too.

It is very, very nonlinear, because once bonds lose momentum, who will want to own them? Professional asset management and retail investor sentiment are both all about momentum. And every credit - government or corporate - looks much worse with rising interest expense. I think we will come to realize that a lot of stuff in the economy (junk bonds, private equity) was part of a virtuous interest rate cycle.

For the counterargument that the Fed will just buy bonds to "keep rates low", you have to face the fact that QE invariably caused rates to rise, and you could (and we did) make money buying bonds every time the Fed stopped buying them. As I kept trying to explain, the QE bond purchases may have been respectably large in relation to the flow of debt issuance, but they were puny in relation to the stock of $60T of dollar denominated debt. It freaked creditors out about inflation more than it helped.

The legitimate purpose of public debt is to borrow money to build infrastructure improvements that have a positive net present value. However, a vast portion of federal expenditure now leaves nothing tangible, leaves no collateral. A treasury bond is a certificate that money has successfully been expended on section 8 housing, or on make-work military "jobs".

The lack of collateral makes these treasuries creatures of social mood. They are no more valuable than tulip bulbs or south sea shares. That makes them vulnerable to going down with stocks when social mood becomes more pessimistic.

If you synthesize the best parts of Falkenstein and Redleaf, you predict that the next crisis is going to come in the investment that is currently perceived as riskless enough for highly leveraged institutions like banks to buy. Right now, government bonds are accorded zero risk in calculating bank capital ratios. The idea that government bonds are riskless when governments are planning to flood the market and when the expenditures are consumed (building no collateral) may prove to be the latest extraordinary popular delusion.

Krugman has spent years poking at the "invisible" bond bear. The problem is that years of success at borrowing for consumption (not investment) without any noticeable effect on interest rates made the Keynesians in government complacent and cocky.

P.S. For Buffett fans: he didn't become a billionaire until 1986, five years after rates peaked. 99% of his net worth was made during the declining interest rate trend.

Junk Bonds Are a Creature of Falling Interest Rates

Man, Gundlach is a lot smarter than Bill Gross.

Wednesday, April 27, 2016

Thoughts About Failing Businesses

I was just looking at the list of companies we've blogged about as potential failures that either did fail or else essentially wiped out shareholders in a restructuring:

First I looked at them in terms of industry categories. The biggest category was coal/mining, with 7 companies. Molycorp was what you call a science project stock, funded with expensive debt, not too hard to see poor equity returns coming there. But the six coal companies were on top of the world in 2011. Much cheaper natural gas came out of nowhere and destroyed them.

To have rationally invested in those coal companies, you needed to know what coal prices would be many years in the future. But that means knowing about the prices of coal's competition for electrical generation (natural gas, solar, etc.) which is tough.

The next category is oil & gas, where there were six failed companies. This is pretty similar to the thoughts on the coal companies; in fact the oil & gas glut is in a sense what caused all the coal failures. Once again, there were very explicit oil price assumptions that were necessary for the success of the companies' capital expenditures and for the success of equity investments in those companies.

Financials had six failed companies but they were all 2007-2009, there haven't been any recently obviously thanks to reflation. Maybe what's noteworthy is that they were extremely levered, which magnified the effect of bad investment decisions.

Next category is solar and alternative energy, with five failed companies. The alternative energy ones were once again science project stocks. Maybe it's a bad idea to invest in public companies with 9+ figure enterprise values that don't yet have a product that they can sell for more than it costs to make. And then the photovoltaic solar companies were dealing with a product where the underlying technology was rapidly improving but they had sunk huge capital into manufacturing plants. Also, there's the theory that the Chinese PV solar firms were a deliberate bust-out to take advantage of naive American investors.

Two of the firms were pharma - those fit the science project category again. Then two were shipping and two were building materials: firms that run with a lot of leverage to make up for low margins that come from undifferentiated products.

One thing that would be interesting to look at is how much these companies spent on capex in the final years of their lives when the businesses should've been in runoff mode. For example, Radio Shack was remodeling stores and buying "Super Bowl" ads right up until the end.

It's also remarkable how quickly the change from extreme best-ever success to failure can happen. In fact, it's almost as though those extreme levels of success can signal big change ahead.