Friday, June 9, 2017

The Winners of the New World

You have to throw out all of the matrices and formulas and texts that existed before. You have to throw them away because they can't make money for you anymore, and that is all that matters. We don't use price-to-earnings multiples anymore. If we talk about price-to-book, we have already gone astray. If we use any of what Graham and Dodd teach us, we wouldn't have a dime under management.

Tuesday, June 6, 2017

Cash Is King


The irony is that the well-to-do investor’s well-being would not be threatened by consumer price inflation rates two or three times the current level. Compared to most of the population, he or she spends only a modest portion of income or wealth on consumables, while expending a far greater portion on asset purchases, the prices of which have inflated dramatically in recent years. Nothing will destroy the wealth of the wealthy as fast as deflation in financial and real assets. Only cash protects against that risk. Interestingly, we rarely get the question “how do I protect my portfolio against asset price deflation.” Ironically, CPI deflation will precipitate or accompany asset price deflation. Cash, the all-purpose hedge, ends up being the perfect asset in both scenarios.

Tuesday, May 30, 2017

Moldbug On Fractional Reserve Banking

Great Moldbug post on "maturity transformation," aka the fractional reserve banking scam:

Our financial system is not a new operating system. It is a very old operating system. Worse, there is only one of them: the whole world runs the Anglo-American banking system, more or less as described by Walter Bagehot in Lombard Street (1873). Lombard Street is our Windows. There is no Mac. There is no Linux. Our experts in finance are not experts in finance. They are experts in Lombard Street finance. Asking them to imagine an alternative is like asking a Windows programmer to imagine OS X - except that Windows isn't 314 years old. [...]

The end goal is to phase out this lending-counterfeiter business, and construct a new financial system - the motorcycle - in which lending is really, truly private, and financial intermediaries match their maturities. If Bobby needs money for three weeks, he asks you for a three-week loan. He does not ask you for a one-week loan and then get a surreptitious, covert, informal three-week loan from the Fed's "technology, called a printing press."

In any such financial system, we would see the true yield curve, the graph of interest rates at every maturity, uncontaminated by maturity mismatching. My suspicion is that at least at first, long-term rates would be quite high. Which means lower house prices. In the spirit of portfolio neutrality, USG might want to print some more money and kick it back to homeowners, such as, of course, myself...
It probably would not be possible to get 30 year loans to buy real estate in a free market system where you had to borrow the money from an actual investor. It would be more like 5-10 year money. And if you take a look at what housing finance was like 100 years ago, I think that is pretty much how it was.

The current system results in subsidization of residential real estate. It leads to an allocation of capital to houses that is much larger than you would see under a free market system. This system also creates a lot of financial intermediation "jobs". The herding behavior of these bankers seems really non-free-market.

It's interesting that the comment thread on that post in September 2008 was much more intelligent than any other blog I can think of. I think it's really hard for most people to grapple with the existence of a flawed (crooked) system that benefits the elite and will therefore be kept around, with modifications and tinkering, to the extent possible.

Friday, May 26, 2017

Seadrill Bond Traded at 33 Cents

The Seadrill bond that's due in September traded at 33 cents today.

Comment from the earnings call this week:

"In April, we reached agreement with our bank group to extend the restructuring plan negotiating period until the 31st of July, reflecting significant progress made. We are currently in advance discussions with third parties and related party investors and our secured lenders on the terms of the comprehensive recapitalization.

We've received a new money proposal from third-party and related party investors, which remains subject to further negotiation, final due diligence and documentation. We are also in discussions with certain bondholders who have recently become restricted again. I appreciate you're all interested to understand more details on the restructuring, but at this stage, it would be inappropriate for us to comment on specifics. As you're aware, this is a large and complex transaction with multiple parties involved.

While discussions with our secured lenders and certain investors have advanced significantly, a number of important terms continue to be negotiated. And until such time an agreement is reached, no assurances can be given.

We continue to believe that implementation of a comprehensive restructuring plan will likely involve schemes of arrangement for Chapter 11 proceedings. It is likely that the comprehensive restructuring plan will require substantial impairment or conversion of our bonds as well as impairment and losses for other stakeholders. As a result, we currently expect that shareholders are likely to receive minimal recovery for their existing shares."

The Bon-Ton Stores, Inc. (BONT)

Jenna Loren Giannelli, Citigroup Inc, Research Division - Director and High Yield Credit Retail Analyst
Okay. And then just one final one. I know you affirmed the guidance for the debt repayment of $20 million to $30 million this year. Are you anticipating that to just be sort of regular way debt repayment, or would you anticipate the possibility of maybe buying back -- bonds back in the open market, given your liquidity position?

Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP
At this point, we are not contemplating any repurchase of the debt. I think we really need to focus on the business and make sure we maintain our liquidity to support the business. But we continue to evaluate other, say, lease-back transactions and things that might add additional cash for us. But at this point, this is really coming out of the operations.
BONT has an 8% note due June 2021 that is trading in the low 40s - a yield to maturity of ~37%.

Monday, May 15, 2017

Low Marginal Cost Onshore Shale - Bad For Seadrill!

Fortune article about Warwick Energy:

“In the Scoop and the Stack, we can break even $30 oil, and 20%-60% returns at between $40 and $50,” says Richard. Indeed, it’s the fast growth of such low-cost areas that’s counterbalancing the declines in expensive parts of areas such as the Bakken and Texas’s Eagle Ford, and igniting a resurgence in shale production. For example, the rig count for horizontal drilling in the Scoop and Stack has risen by 49% since July of 2014, when prices hovered around $90. It’s a similar story in the best portions of the Permian in Texas and New Mexico. In the Permian’s Midland and Delaware Basins—areas providing returns approaching those of the Scoop and Stack where Warwick is also an active buyer—17% more rigs are at work today than at the peak of 2014.

In April, U.S. shale production rose by an impressive 109,000 barrels per day over March. That bump lifted output to almost 5 million barrels, just 10% below the all-time high of 5.5 million. And if the trend continues, shale production could reach 6 million barrels by early 2018. Of course, that’s far from certain, especially given the recent slide in prices.

Still, Richard spotlights three trends that should keep U.S. shale thriving. First, the industry has become far more efficient. Producers have substantially lowered corporate overhead and obtained deep discounts on both new leases and rates paid to contractors who do everything from supply pipe to sinking the wells.

Second, low prices have produced a gusher of creativity. “Shale is really a play on oil patch ingenuity,” Richard says. “The downturn has been a boot camp for the industry.” Shale producers are relentlessly experimenting with new ways to extract more and more oil at lower cost. “They’re improving the use of sand and ceramics,” she says. “They’re designing different wells to fit different geologies more than ever before. And they’re finding ways to extend the length of the horizontal wells up to two miles to get more oil from the same well.”
How can offshore oil compete?? Seadrill has a big bond maturity coming up in September, and the bond is trading at 36 cents.

Thursday, May 11, 2017

"I attended the top of the Canadian Housing Market, so you didn't have to"

Amazing, read the whole thing:

"Originally, I thought this would be a bit of a joke. There were billboards in all the Toronto subway cars advertising the Canadian Real Estate Wealth Expo - learn how to become a millionaire. I thought this was so ridiculous, it may be fun. What better way to experience the top of the housing market than watching Tony Robbins and Pitbull along with a bunch of US real estate professionals explain how Toronto real estate is the path to riches.

Prices were originally $150 per ticket, but I was able to buy for $50. While it deeply bothers me that I paid $50 to these shameless (amoral) self-promoters, I thought it would be worth it to witness, in person, the top of the housing market.

I had thought, there can’t be that many people stupid enough to attend this, but I was very wrong - 15,000 people were there! I was blown away. Bubbles are largely psychological. This crowd was tangible proof of that. 15k people in one spot listening to Americans explain why real estate in Toronto is an exceptional investment. The whole experience was horrifying. The crowd was very well-dressed, middle- to upper-middle class (from appearances), and super excited to hear how much money could be made if you just buy real estate (most of them clearly already owned)."
Followup posts about Canadian lenders and then HCG blowing up.