"This Month Was a Major Tell"

As one hedge funder we talked to explained it: this is the kind of month that in the future investors will ask about: How did you do in May 2011?

If you got clobbered, it just means you move up and down with the market.

If you made money, it means you're adept at moving with tide, and getting ahead of the curve.

This month was a major tell.

Callon Petroleum Company Announces Partial Redemption of 13% Senior Notes Due 2016

Our long road with Callon Petroleum is drawing to a close. The company will be partially redeeming the 13% Senior Notes Due 2016:

Callon Petroleum Company today announced it is redeeming $31.0 million of its outstanding $138.0 million 13% Senior Notes due 2016 with a portion of the proceeds from its previously announced common stock offering which was completed yesterday. The redemption will be made in accordance with the terms of the indenture governing the Notes.

Callon expects to redeem the Notes on March 19, 2011 at a redemption price of 113.0% of their principal amount, plus accrued and unpaid interest to the Redemption Date.

It has been a pleasant journey so far. I wrote a post about these notes back in August of last year when they were trading in the 90s. Getting taken out at 113 is a great IRR!

The company is actually not allowed (per the terms of the note indenture) to call any more bonds than this. I'm sure they would redeem more of them if they could.

Ouch

Bill Miller's performance since 2000.

Silver

Looks like Credit Bubble Stocks may have nailed the top in silver.

"In Investing, It’s When You Start And When You Finish"

Excellent graphic in the New York Times.

Legg Mason's Bill Miller Sees U.S. Stocks Up 15% in Next 12 Months

Here's a quote from the November 2010 market commentary of Bill Miller (manager of Legg Mason value) .

"There is a lot more to go in the next twelve months, in my opinion, in stocks if not in bonds. That’s 12 months, not 12 days or 12 weeks. I think the market can be up another 15% in the next year..."

I am going back and looking at some of the older Legg Mason market commentaries. The following quote is from David E. Nelson, Chairman, Investment Policy Committee in October 2007:

"Even if the economy suffers a recession in 2008, we believe the market could show positive returns in 2008, though it would almost certainly go down first. In our view, a recessionary market decline would likely do the most damage to the sectors where optimism is currently greatest—such as global cyclicals—while doing the least incremental damage to sectors—such as the financials—where pessimism is already quite pervasive."

What was Credit Bubble Stocks saying in the fall of 2007? I actually specifically criticized Legg Mason for buying Countrywide Financial (CFC) stock, saying sarcastically that they "liked it at $30 and they like it even more under $20. They will probably get really excited about buying at $10." [I had written a post in August 2007 called Why Countrywide is Done.]

It is clear that Bill Miller and Legg Mason do not understand what is happening and haven't for a long time. Their strategy worked well during a multi-decade bull market where the key to success was to "buy the dips", but since January 2000, Legg Mason Value is down 47%.

Another complacent investor is Ken Fischer, who was bullish in October 2007 and February 2008, and who says that "the next 10 years are going to be just as good as the 1990s." He thinks that people like me are "idiotic" for being structurally bearish.

I believe that most investors, especially older baby boomer investors, have been psychologically conditioned to buy dips, and there is not much else behind their strategies.

These don't see real estate agents in Phoenix buying 20 houses with NINJNA loans, or people on food stamps, or people who have been unemployed for 99 weeks. They just don't know.

I Was Right About Treasuries (TLT, IEF, TBT)

Here's a chart of the iShares Barclays 7-10 Year Treasury (IEF) versus the S&P 500:

May 4 was the date of my article, Treasury Bears Are Wrong - They Need to Look Closer at the Fed's Motives and Opportunities. I made three major points in that essay about Treasury bears:

(i) they in a crowded trade with barely any opposition, and (ii) inflation would be a disaster for the Treasury, and (iii) deflation would suit Treasury's purposes much better.

Other fund managers were short Treasuries and long equities. I said to do the opposite.

MGM Mirage (MGM)

Thank you Goldman Sachs conviction buy list.

That is all.

Market Heart Attack

This is unbelievable. My April 1930 hypothesis is correct.

Grubb & Ellis (GBE) Tanking Again

On Friday I declared "Mission Accomplished" on our Grubb & Ellis (GBE) short.

Fundamentals are taking over.



I'm buying back some of the short today for ~$1.71 in the expectation that I can reshort a bounce.

That is all.

Unwinding the Successful U.S. Concrete (RMIX) Trade

This morning U.S. Concrete (RMIX) reported its awful 2009 results, complete with a going concern warning.

The stock is down 25 percent on the day, to 40 cents, and the bonds are down slightly, at 56 bid 59 ask. Some big blocks of bonds have traded at the 58 level.

If you recall from my posts about the RMIX capital structure arbitrage trade, I bought the notes at an average price of 58.5. I was able to get out of them today for ~56, a loss of about 4 points (7%) counting the loss of accrued interest since the notes are now trading flat.

However, I hedged the notes by selling stock at $1, which has fallen 60%. And I sold more stock on the way down, including on Monday when RMIX inexplicably rallied as part of the market wide short squeeze.

Adjusted EBITDA was only $25 million in 2009! So the current enterprise value of $308 million is 12x last year's EBITDA - expensive!

I have not covered the short yet, since I think the stock is worth zero, but I will start to cover as it goes lower. I mainly wanted to get out of the bonds today because they are under-reacting to the financial distress.

Reefing my Sails

The market is now down about 5% since I wrote my Next Leg Down post.

In sailing they say "the first time you think of reducing sail you should," which is what I'm doing in my portfolio today - buying back some of my REG and GGC shorts.

Callon Petroleum (CPE) Notes Trade at 96 Today

On November 16, 2009, Credit Bubble Stocks suggested buying Callon Petroleum (CPE) notes in the 60-70 price range.

Today they hit 96, to yield 14.4%. I would still be more likely to be a buyer than a seller at this price.

November

November was a good month - the Callon Petroleum exchange went through making my bonds more valuable, even though this is not reflected in the price (they hardly trade anymore).

I have more bond trades in the pipeline and will hopefully get them written up by next week.

I will say that I would short every share of YRCW that I could borrow right now.

Time to Unwind the Georgia Gulf (GGC) and Olin (OLN) Pair Trade

The Credit Bubble Stocks pair trade of GGC and OLN was posted at prices of $29 and $16.5, respectively. GGC has fallen to $15.65 and OLN to $15.79 as of right now, which were declines of 46% in the short and only 4% in the long. The pair worked brilliantly.

GGC's performance and adjusted EBITDA was better than I expected. Here are my thoughts on valuation.

I sold out all of my OLN and have covered about half of my GGC short. Normally, I would want to capture the additional downside that I foresee on GGC. However, I am being charged an enormous amount to borrow the stock.

I would not have covered if the huge spike rally at the open had continued all day, and I will probably reshort if it hits those levels again.

Time to Add Capital to Regency Centers (REG) Pair Trade

The other big pair trade (besides GGC/OLN) that I am doing right now is the short REG, long REG-E trade.

This trade has been cleaning up too: REG is down 10.8% and REG-E is up 5.8% (chart). The spread really widened the past few days.

I am planning to add more capital to this trade, so I made a P&L matrix:

Assumes equal share amounts. I bolded the values that I think are likely outcomes. This trade is also nice because it has positive carry.

Chemical Industry Watch: Georgia Gulf (GGC), Olin (OLN) and PPG Industries (PPG)

Georgia Gulf Corporation (GGC) will be releasing Q3 financial results on Wednesday, November 4, 2009 at 5:00 p.m. ET, with a conference call the next morning at 10:00 a.m. ET. Olin (OLN) announces earnings this Monday with a conference call on Tuesday.

The pair trade has been doing well. Since Oct 2, GGC is down 29% and OLN is down only 5%. I bought more OLN after the big dive it took today, having already shorted more GGC earlier this week.

I will be very curious to see the earnings results.

Competitor PPG Industries had their Q3 conference call last week. They were weighed down by their commodity chemicals operations (the segment that competes with GGC and OLN), which suffered a 43% y-o-y decrease in sales (page 7 of investor presentation). This was the result of big price and volume declines. Year to date chemicals sales were down 32%, meaning that the commodity chemicals decline picked up in the third quarter (segment sales comparisons).

On the conference call, PPG said that they do see the electrochemical unit (ECU) pricing improving a bit so far during the fourth quarter.

GGC also amended their registration statement again. This is the fourth amendment - they already amended it two days ago. Previously I speculated that their motive for these amendments was to stall the SEC from making the registration statement effective. However, I notice that this statement has an opinion from law firm Jones Day dated yesterday (Oct 22) regarding the validity of the new shares. So maybe they were just waiting for that?

I may make the chemical industry a focus area of investing - I am planning to go through a pile of chemical industry books when I get the chance.

Results of Reader Poll

It's not too late to vote in the Credit Bubble Stocks poll about what kinds of posts you prefer.

Only a single digit percentage of daily readership voted. By an overwhelming majority, those voters wanted actionable trade ideas. Specifically, "long analytical posts about trade ideas."

People seem to like it when I cover a situation exhaustively, as I did with Downey Financial, Standard Pacific, and now Georgia Gulf.

So, I will try to deliver more of that type of content. It has been helpful to have more active commenters, giving feedback on ideas.

I will tell you about the two names I am researching now: Realty Income (O) as a potential pair trade and Winnebago (WGO) as a short. More to come on those.

Georgia Gulf Amends Registration Statement Again

Georgia Gulf (GGC) got creamed again today, down 5%. Olin (OLN) was down 2.4%. I have been selling GGC outright in addition to the pair position I have.

They amended their registration statement for the new shares (released a new S-1/A) again today.

In big red letters, the statement says, "The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective."

I believe that the SEC has to declare a registration statement effective. I think that these amendments cause delays in the process.

It seems like they are deliberately amending the registration statement in order to keep the new shares off of the market. They have previously amended it on October 7 and September 25. The original was filed on September 8.

Anyone with more securities law experience, please comment.

Update on Georgia Gulf (GGC) and Olin (OLN) Pair Trade

GGC is now down 23% and OLN down less than 1% since I recommended the pair trade of short GGC and long OLN.

GGC has been falling on higher volume days, although the volume pales in comparison to the number of shares the bond funds would probably like to sell.

There has been no news on GGC - presumably just selling pressure from the new holders is moving the price.