I was a bit surprised that Evergreen Solar did not announce any kind of debt exchange offer or restructuring plan on Friday after hours, which would have given investors the weekend to think about it.
Based on their preannouncement this week, it seems clear that some kind of deleveraging will have to take place, and there is no sense delaying it. Maybe they are waiting until Q1 financials are finished before announcing another offer?
Industrial users of silver are switching to substitutes because of the silver rally. Don't expect them to switch back. The bigger this bubble gets, the harder it will eventually crash.
There has been a 55 percent rally in Evergreen Solar (ESLR) common stock since mid-April. This happened on no news (what good news could there be?) and at the same time, the company's secured and unsecured bonds hardly traded. Certainly, if there was good news, you would expect the yield on the secured, convertible bonds to be less than fifty percent.
The only explanation I had was that some seriously uninformed money had sat down at the Evergreen Solar poker table. You can see that they were "tweeting" and "stocktwitting" about buying the stock, even though they had no clue about the fundamentals. Since the stock rallied so much and the bonds were still cheap, the only thing that made sense was to add to the trade: buy more bonds and short more stock.
Today after hours, the company pre-announced results for the first quarter. Shipments were down hugely compared to the previous quarter, and the company's cash has been drawn down to only $33 million. Here is the most important part of the press release:
“As a result of our low year to date sales volume and potentially slower sales for the remainder of this year as the industry balances inventory levels, along with significantly increased pricing pressure, the cash that we had previously expected to realize through the reduction in accounts receivable and inventory from our recently closed Devens facility will be less than expected and will take longer than expected to realize. Therefore, our near term liquidity has been negatively impacted and may require us to secure additional sources of cash sooner than expected. Accordingly, we will continue to aggressively pursue opportunities to address our capital structure in the near term, including restructuring our existing debt."You can see that the stock is down twenty percent after hours, and will probably take out new lows.
This is one of those times where markets are stretched to the limit and any further upside will be minimal in relation to the extreme risk entailed. Sentiment has been dollar-bearish and risk-bullish for so long that a violent reversal is all but guaranteed. This is not to say that the absolute top is in, but that at the very least, another episode like last April-June is coming up.Also well put:
Or I can put it this way: the Fed has increased the monetary base from 850 billion to 2500 billion since 2007. Have your bank balance, salary and monthly bills increased 200%? If not, why should stock and commodity prices?
Here is a chart of gold priced in silver. In other words, it is the ratio or spread of the gold price to the silver price. Notice the collapse in the ratio.
Is gold all of a sudden not a "store of value," or not protection against inflation?
Now has 66 comments from angry silverbugs! Doesn't that seem like a crowded trade?
The Federal Reserve has started to talk more seriously about winding down its second program of quantitative easing (“QE2”). There is now a widespread view that yields on Treasury bonds will rise sharply once the program is over, ostensibly because the Federal Reserve will no longer be “holding the yields down” by buying them. Bill Gross of PIMCO shares this view, and his massive bond fund has apparently sold all of its Treasury bonds and gone short.
The original argument for the quantitative easing programs was that they would lower interest rates, because the “flow” of purchases of Treasuries by the Federal Reserve would offset the “flow” of new debt being issued by the federal government. The funny thing was that interest rates actually rose across the yield curve in both cases. What that argument failed to account for was the holders of the existing stock of trillions in outstanding Treasury debt perceived the quantitative easing programs to be inflationary, and therefore harmful to their position. They responded by reducing their holdings of Treasuries and purchasing riskier assets. This caused both interest rates and risky asset prices to rise.
The irony is that the consensus used to be that quantitative easing would be bearish for Treasuries. Now, the consensus is the opposite: that the end of quantitative easing will be bearish for Treasuries. Actually, no one need speculate because we have been through this process before, last summer, at the end of the first quantitative easing program (“QE1”). During the period after QE1 ended, from April through August of 2010, the yield on the 10-year note dropped sharply and so did the stock market. The Treasury bears who are so worried about who will buy Treasuries once QE2 ends should rather wonder: who will buy equities when QE2 ends?
By the way, the reason I mention the Treasury market at such length is that it has become very cheap to purchase an option on falling long term yields (i.e. rising prices of Treasuries). The cheapness or expensiveness of an option is described in terms of an option's implied volatility. Recently, the implied volatility of short term, out-of-the-money calls on a basket of Treasury bonds is around 12%, much closer to the 52-week low of 9% set just before the May 2010 flash crash, and far from the 52-week high of 22% set in May 2010 after the flash crash.
Low implied volatility indicates a complacent expectation that things – Treasury prices, Federal Reserve policies – will not change very much. It is part and parcel of the complacency which abounds in this market. Implied volatility on the S&P 500 index recently fell to the lowest level since 2007.
I view these call options on Treasury bonds as a very inexpensive way to bet on another spell of deflation or a sudden flight to safety like the May 2010 flash crash. They are also asymmetric: the most the trade can cost is the option premium, but they would be worth multiples of the option premium if Treasury yields fell sharply.
Treasuries sold off this morning after S&P cut their outlook on U.S. debt. This was a good fade, because ratings agencies are always a day late and a basis point short.
Notice that Treasuries are back up on the day, and in a strong uptrend since early April.
NYT: Do Cellphones Cause Brain Cancer?
In The Plex: How Google Thinks, Works, and Shapes Our Lives
The Greek sovereign credit curve is inverted with the 2-year now yielding around 18 percent and the 10-year with a 13 percent handle the last time we checked. The inversion is usually a signal of default as investors/traders start worrying more about absolute price of the bond and potential downside rather than yield.
WSJ: "I'm not sure anymore that we even have blue chips," Mr. Silverblatt says. "I still want to believe, but maybe we all were wrong to believe that blue chips ever existed."
The bull ratio for the Investors Intelligence survey suggests a very high likelihood of a correction.
Economist: Foreign banks' exposures to Greek, Ireland, Portugal debt. This is why the can keeps getting kicked. If it was possible to solve this, it would have been solved already. Instead, this is a 2008-style denial of reality that is going to blow up. That is why you want to be long volatility.
WSJ: What happens to option contracts when the underlying stock is halted. This would be a nightmare. A good reason that markets should rarely be halted.
Oil companies are developing a set of portable capabilities that can be rapidly deployed to any offshore accident site.
Today, I was trying to figure out the economics of water desalination. The water bulls would have us believe that the world is running out of fresh water, and we should buy a water ETF trading at nine times book value or something. However, if water desalination is economical (or will be someday), then I don't think we need to worry as much about the supply of fresh water.
There are differing opinions regarding how far (in terms of cost per cubic meter or acre foot) desalination is from being at parity with other sources of water. Here is a review of the water desalination cost literature giving a broad overview, as of several years ago, on the cost of water desalination. One important obseration is that the cost depends on the type of feed water being desalinated: brackish water is less expensive than seawater. Also, the cost depends on the amount of dissolved solids in the water.
A couple years ago, a company called Energy Recovery Technologies said that they had desalination cost down to $0.46 per cubic meter, and was very optimistic on desalination as a water source for California:
"We demonstrated that we could now, in California, desalinate a cubic meter of water for a total of 1.58 kilowatt hours. [...] Colorado today spends about 1.9 kilowatt hours just to pump the state water around to California. In addition to that, about 1.6 kilowatt hours of additional energy is spent just to slush the Colorado River water around in California. When you look at all the energy being consumed by California today just by pumping water around, you realize that it is actually cheaper to desalinate water from the Pacific Ocean."Another perspective, from Wikipedia,
"Desalinated water may be a solution for some water-stress regions, but not for places that are poor, deep in the interior of a continent, or at high elevation. Unfortunately, that includes some of the places with biggest water problems." and "Indeed, one needs to lift the water by 2,000 metres (6,600 ft), or transport it over more than 1,600 kilometres (990 mi) to get transport costs equal to the desalination costs. Thus, it may be more economical to transport fresh water from somewhere else than to desalinate it."Writing about the high cost of lifting and transporting water, a Credit Bubble Stocks correspondent observes,
So it looks like California and New York City will never demand water from Lake Superior or Lake Michigan.I found another study that is more pessimistic about the costs of desalination. This one is interesting because it cites electricity usage figures for desalination, which seem to range from 10-20 kWh/1000 gallons of water. Also, the capital cost of the plants are around $10 million per million gallons per day. Or, $10 per daily gallon.
Arizona may be able to take a larger share of Colorado River water. Water won't be pumped over the Rockies, looks like.
Earlier, I wrote about my China-avoidance policy and how it had kept me out of trouble. The reason this is a problem is that U.S companies have slowly disappeared from the deep value screens (e.g. net current assets), leaving only Chinese companies.
Over the past couple years, a Chinese company called HQ Sustainable Maritime (HQS) would always pop up on my screens for small cap, deep value situations.
However, I have a China-avoidance policy: I don't invest in China. I do this out of lack of familiarity with the country (how can I have an edge?), inability to speak the language, and concern about accounting standards, property rights, and corporate governance.
I just saw on Frank Voisin's blog that HQS is now under suspicion: its auditor has resigned, shares were halted, and the company is postponing the filing of its annual report. Shares are down 42% year-to-date.
So, although I have undoubtedly missed investing opportunities in China, I also avoided a blow-up. HQS seemed virtually risk-free if you believed the reported numbers. It looks like some hedge funds probably got caught long though.
Wow: VIX Slumps to Lowest Level Since 2007. Which means... there's never been a better time to buy volatility!
Seriously, I think it makes sense to have a fair amount of assets in put premium right now. Although, owning TLT calls works just as well. (Unless you think that Treasuries won't benefit from a flight to safety anymore.)
From the WSJ article on Google Earnings
But what stood out was Google's surging costs as the Mountain View, Calif., company seeks to stay ahead amid an increasingly competitive and fast-changing Silicon Valley scene.It's interesting to think that two grad students started the entire company relatively cheaply, but now they have to invest over $1 billion per quarter in R&D to maintain position / make marginal improvements. Diminishing returns!
Google's operating expenses—what it spends on salaries, marketing and research—rose 54% from a year ago and represented a third of its quarterly revenue.
Look at the yields on the Greek and Portuguese ten year notes!
How about a European banking collapse (triggered by sovereign haircuts) that sparks a risk selloff and a big rally in Treasuries??
So, there is at least one other person in the world who is not bearish on Treasuries.
Jeff Gundlach has also noticed that Treasuries selloff during "easing programs", and rally whenever the Fed is not buying Treasuries.
Part of my thesis on Treasuries is that the federal government needs to extend the maturities of its outstanding debt, i.e. "term them out". You can see the change from February 2011 to March 2011.
I've posted a number of micro cap value ideas on the blog recently. Companies this small tend to trade "over the counter" (OTC), i.e. on the pink sheets or other venues that are not exchanges.
This is something that has negative connotations. Stocks are generally traded OTC because they are unable to meet an exchange's listing requirements or because they are unwilling to pay listing fees and conform to the exchanges’ regulations.
I was reading a study, "Do investors overpay for stocks with lottery-like payoffs?An examination of the returns on OTC stocks", that looked at how these OTC stocks do over time. The study finds that most OTC stocks are money losers, which I agree with, although this is emphatically not true about the deep value situations that we look at on this blog. [For example, Conrad Industries, which has risen over 40% since I first posted about it.]
The sample in the paper covers the period from January 1, 2000 through December 31, 2008. They found that
[T]he median total cross-sectional return in our sample is an astonishing -97%. [...M]ore than half (53.8%) of the stocks in our sample lose more than 95% of their value over the sample period. 84.8% of the stocks have negative total returns. The table also shows that 117 stocks have more than a ten-fold increase in value. But this is only 1.8% of the stocks in the sample - far too small a fraction to make up for all the stocks that become nearly worthless.This is actually good news from the perspective of a value investor trying to find underpriced companies on the pink sheets. A distribution that is so lopsided will cause many investors to shy away from the market completely. The study authors even recommend this:
"In the aggregate, investors in the OTC markets lost about one hundred and eighty billion dollars over our sample period... We think the size of the capital loss in the OTC market along with the very substantial negative annualized rates of return we document suggest that individual investors are well advised to stay far away from OTC stock markets, unless they possess substantial ability to gather fundamental information..."Many of the market participants are there to buy stock promotion scams. Also, there is a very large fraction of retail investors that buy and sell securities, including OTC stocks, with out any regard to valuation whatsoever. Concepts like capital structure and cash flow multiples are outside of their experience. This leaves the actual value investments ignored and unloved!
"an old, family controlled company with tons of retained earnings in some mundane business... If it's hoarding cash, it's usually doing it for the same reasons a big cap company hoards cash. Management has few options in the existing business and doesn't know much about putting money to work elsewhere. They aren’t doing right by shareholders. Paying the cash out would be better. But they probably aren’t criminals either. They’re probably just humans running a no-growth business that throws off more cash than they can use."This was basically the story with Conrad, and with George Risk, and a number of other microcaps that are net current asset value plays. So, we will continue to look for profitable companies on the pink sheets with huge margin of safety (thanks to very low enterprise values) and low valuations.
A company called IBISWorld has put together a report called "Dying Industries", which looks at the universe of close to a thousand industries to identify the 10 that are most hopelessly in decline.
These industries all experienced drastic revenue decreases over the past decade, and are expected to continue to decline, due to factors like damaging external competition, advancements in technology, and industry stagnation.
In descending order of 2010 revenue, the industries are:
1. Wired communications carriers
2. Mills
3. Newspaper publishing
4. Apparel manufacturing
5. DVD, game and video rents
6. Manufactured home dealers
7. Video postproduction services
8. Record stores
9. Photofinishing
10. Formal wear and costume rental
In most of these industries, the companies' valuations are already pricing in an eventual end to the industry. I think there may be shorting opportunities in paper, though, and in old-media companies generally.
Michael Burry was one of the hedge fund managers profiled in The Big Short by Michael Lewis.
As I mentioned in my review, I liked Burry and his value investing concept of "ick" investments, which means "taking a special analytical interest in stocks that inspire a first reaction of 'ick.'"
Burry gave a speech last week at Vanderbilt, and the distressed debt investing blog attended and posted their observations.
One of Burry's observations was that there are value opportunities in small caps because they have lost research sponsorship at most sell-side firms.
This rings true, and I have a post coming out about the micro cap universe on Wednesday.
I was just reading a paper by a Federal Reserve economist, "Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts". A welcome relief, as I have thought enough about macroeconomics now for one lifetime. From the abstract:
"This paper uses rich, new data to examine the fleets of corporate jets operated by both publicly traded and privately held firms. In the cross-section, firms owned by private equity funds average jet fleets at least 40% smaller than observably similar publicly-traded firms. Similar fleet reductions are observed within firms that go private in leveraged buyouts. [...] Results thus suggest that executives in a substantial minority of public firms enjoy more generous perquisites than they would if subject to the pressures of private equity ownership."One of the big problems in corporate governance and in politics is the difficulty of motivating one party to act on behalf of another: the principal-agent problem. The question at public companies is, are the jets saving the executives’ valuable time and functioning as an efficient form of compensation, or are executives overusing corporate aircraft because shareholders are unable to monitor the executives effectively?
"In a sample of all public and private U.S. firms with 2008 sales greater than one billion dollars... PE-owned firms operate significantly smaller jet fleets, even when controlling for size, industry, and location in a variety of flexible ways. Estimates suggest that PE-owned firms are at least 25 percent less likely to operate a jet. Conditional on operating at least one jet, they have smaller fleets as measured by total passenger seating capacity. Overall, PE-owned firms average a ratio of jet seats to firm sales more than 40 percent lower than observably similar public firms."He also examined the changes in jet fleets within a panel of 69 buyouts of large, standalone public firms that were taken private between 1992 and 2008, and found that:
"buyout targets are about 32% less likely to have a jet in the three years after their LBO than in the year before, even after controlling for changes in firm size following the buyout. Their average seats-to-sales ratio falls by more than 40% over the same period."So, it seems pretty clear that executives at public companies waste money on corporate jets. Public ownership leads to agency problems, especially when the companies are owned by retail investors or by long-only mutual funds that are asleep at the switch because they have hundreds of positions. This is the problem that activist hedge funds have been invented to solve.
Nassim Taleb, the author of Fooled by Randomness and The Black Swan has a concept called antifragility, meaning the opposite of fragility. (See his discussion and draft chapter for antifragility book.)
Taleb's concept is that the opposite of "fragile" is not "robust," because robustness denotes resistance to shocks but not the property of benefiting from shocks. He asks us to imagine a package marked "antifragile" instead of "fragile":
"The contents of such package are not just unbreakable, but benefit from shocks. Let us coin the appellation "antifragile" for such a package; a neologism is necessary for there is no simple, noncompound word in the Oxford English Dictionary that expresses the point of reverse fragility."It occurred to me that the United States (and other countries like Japan) are very fragile to the extent that they rely on imported oil, and can be brought to their knees by supply shocks. In contrast, Russia is robust because it has already been through a collapse that resulted in resilient institutions with a lower level of complexity (but also lower productivity). Dmitry Orlov calls this the "collapse gap." As one Credit Bubble Stocks correspondent puts it,
Russians own their own houses, such as they are, free and clear because the state that owned them went out of business and left no one else with a stronger claim on the houses. Compare that with the % of Americans underwater on their houses, in debt to lenders who are simply unworthy of payment. Americans would have to repudiate their mortgage debt just to draw even with the Russians.But Russia is also anti-fragile to the extent that it benefits from higher energy and commodity prices. They are making money off of the Libya events by selling more natural gas at higher prices to western Europe.
Americans would have to repudiate federal, state and local debt, too, just to draw even with the Russians, for the Russians do not have a debt-based currency.
Also, Russia has a public transportation network--trains, buses, trucks. Nothing like it exists here. So we have to spend thousands and thousands of dollars a year to maintain private transport
Russians, even when they live in the cities, get part of their food from their own plots of land. We have very little of that here.
A lot of our GDP is vapor. Beauty contests, TV shows, financial manipulations.
I did a post the other day about the coming decline in commercial real estate.
Today's WSJ has an article about the increase in the shopping center vacancy rate. Mall vacancies hit their highest level in at least 11 years, and strip malls/neighborhood shopping centers are doing especially poorly.
Dallas Fed President Richard Fisher is the fellow who brought us "Old Doc Nadler's Remedy". Today, he gave a speech called "'Is America's Decline Exaggerated or Inevitable?' The Role of Monetary and Fiscal Policy". He admits that the bailouts created moral hazard:
In saving the system, for example, it can be argued that we protected imprudent lenders and investors from the consequences of their decisions; we rescued sinners and penalized the virtuous.He also comes down hard on monetization:
Postcrisis, the “too big to fail” financial behemoths that had placed our economy in jeopardy have ended up with even greater financial power. (And, adding insult to injury, by the grace of their shareholders, most of their leaders retain their posts and few, if any, have suffered financial setbacks). This concentration of power comes at the expense of community and regional banks, an imbalance that the Federal Reserve and other authorities must now address through tough-minded, clear-eyed regulation.
Our duty is most distinctly not to monetize―or even be perceived as monetizing―the debt of fiscally imprudent government. Throughout the history of nations, monetizing the budgetary excesses of governments has proven to be a direct path to economic perdition. Having already peeked inside that door, I feel strongly that we must now shut it, lock it and throw away the key.Finally, he admits that moronic risk taking has come back in a big way:
In my view, no amount of further accommodation by the Fed would be wise—either by prolonging or “tapering off” the volume of purchases of Treasuries past June, or adding another tranche of large-scale asset purchases. Indeed, it may well be that we should consider curtailing what remains of QE2.
We have seen a resurgence of “covenant-lite” loans, with some $24 billion issued in the first quarter versus $100 billion for all of 2007; private-equity firms are back in size and turning to leverage to pay dividends; credit-boom acronyms most thought would never return after the Panic, such as “payment-in-kind,” or PIK, and “toggle” notes, are prominent once again; traditionally unleveraged asset managers, such as insurance companies and pension funds, are turning to leverage and exotic asset classes to juice returns. These are all signs of the intoxicating effects of the ambrosia of inexpensive and plentiful money. Further spiking the punch bowl with accommodative monetary policy would do nothing to rein them in.This seems very bearish for risky assets (equities and commodities) and very bullish for the dollar and Treasuries. Which is very interesting, considering how cheaply you can buy Treasury volatility right now.
The current implied volatility of TLT calls is 11.7%. The 52 week low for IV 9.3% on April 21, which was right before the flash crash. The 52 week high was 21.6% on May 20.
We are near the low end of the range.
Remember the Chinese coin counterfeiting operation that I mentioned? Apparently, fake silver coins are turning up in fake PCGS holders.
A large number of funds have yet to earn back their 2008 losses:
The research firm HedgeFund.net estimates that roughly 35 percent of the 2,500 funds that have continuously reported since 2008 have not recovered — with smaller hedge funds dominating the list.This is why I am so concerned about major drawdowns, and why I believe it's OK to "miss" mania periods like the one going on right now. And, even better to bet against manias as long as you can do so without capital impairment should they last longer than expected.
As of yesterday, AAII percent bullish was 44% (highest since February 17) and the bull-bear spread was 15%.
Mid-February was the market's peak (which has still not been exceeded), and after that high sentiment reading the S&P 500 proceeded to fall 90 points in under a month.
GE bought PrimeStar Solar, which is a Colorado based company that makes thin-film photovoltaic panels (and is therefore an Evergreen Solar competitor). The article says that GE plans to scale up rapidly.
A long article in WSJ today about the difficulties at Grubb & Ellis. A must-read if you are following the GBE trade. This paragraph echoes one of my early observations about these human services firms:
In recent years, in a bid to boost its brokerage business, Grubb has increased the "split," the percentage of commissions that brokers get to keep. The firm hoped to attract better brokers by offering them roughly 65%, compared with the 50% to 55% being offered by other firms. But the move cut into the firm's profits.Right. It doesn't take that much capital to start a brokerage firm, which means that the employees have quite a bit of negotiating leverage to demand higher splits.
Just released in an 8-K:
Grubb & Ellis Company (the “Company”) has extended the expiration date for its consent solicitation with respect to its 7.95% Senior Convertible Notes Due 2015 from 5:00 p.m. New York City time, on April 4, 2011 to 5:00 p.m., New York City time, on April 11, 2011, unless further extended by the Company in accordance with the terms of the consent solicitation.No information about how the consent solicitation is going.
As part of my ongoing interest in oil & gas exploration & production, I have also become more broadly interested in energy: its sources and uses.
I think most investors don't understand the flow of energy through the economy (which is really an ecosystem). Economic systems are for turning sunlight and nutrients into human biomass or, stated another way, for helping sets of human genes uses nutrients and sunlight to make additional copies of human genes,
These investors are wooly thinkers and get distracted by things like casino operations and the latest social networking scam. It is all to be expected in the late stages of a centuries-long bull market.
Anyway, I've made a list of a few interesting books on the topic:
Economics of the Energy Industries: Second Edition
Energy Economics: A Modern Introduction
Energy Trading and Investing: Trading, Risk Management and Structuring Deals in the Energy Market
You have to hand it to Prechter. Notice that in 1999, there was a wide breadth of internet startups, with the 24 largest comprising $70 billion in market capitalization. Now, there are five companies - the big, bubble names from Dotcom 2.0 - comprising the same valuation.
From a Credit Bubble Stocks correspondent:
Think about this in connection with the undervaluing of Russian equities.
For physics, Moscow publishes the most papers of any city in the world, but they are not in the orbit of the West and they publish in Russian, so they don't get cited as much. For chemistry, Moscow publishes the most papers of any city in the world, but they don't get cited so much for the same reasons that apply to physics.
I guess this has to do with empire building, grant hunting, favor trading, monoglotism and such.
For psychology, London publishes the largest number of papers of any city in the world and they are heavily cited. Moscow doesn't bother. Hardly anybody outside Western Europe and the United States does. This might be an aspect of the chattering done by people with soft hands and baby rabbit minds, in declining empires
As a Bengali friemd of mine said to me, once, "Psychology ... bogus!" He was an engineer.
Or it might be as the result of specialization for complicated swindles.
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