John Hussman disagrees and makes some strange arguments to back up his opinion I've addressed them here http://macrospeculations.blogspot.com/2009/03/john-hussman.html I understand that from the outside it just looks like I'm trying to find conforming evidence to defend my invesment in C bonds or pump them up bill gross style, but I'm still up on the pair trade(shorting the stock against). If I were worried about the position I would just short the crap out of C pref/common or just sell the bonds the last thing I would do would be rationalize in a forum, its just that I have a conviction that they are money good(worth par)
I can concede that buying C was a mistake, not because they are risky, I still stand that they are safe, since the bloomberg article doesnt mention that the government doesnt have the legal authority to 'haircut' bonds(I dont think you will see Geithner going to congress to ask for the authority to shed bank debt, since no US bank would be able to raise debt without a FDIC guarantee likely for years) What they can do is to ask for debt to equity swap, which you can say no. Regarless I'm going to short a bit more C today in this rally to further protect the position, Whitney says she still not a buyer of C, so the hedge could easly make money. This will get my short to 1/3 of the bond The reason it was a mistake is because I'm currently looking for bargains in the junk bond market and I'm finding some issues that are absurd. Take International Lease Finance Corporation(subsidiary of AIG, a tip from bill gross), the 2010 bonds yield 33% YTM, the company is hugely profitable, has access to the fed CP facility, has an inventory of $17b of airplanes that can be sold in order to generate cash yet because its AIG people are selling first and asking later. That fact that the company is connected to AIG raises the chance of survival since back in Sep AIG loaned about $1.7B to help the liquidity of ILFC. Even if ILFC were to go bankrupt, since they got tons of airplanes the bond recovery will be high, likely 100%. And they could get bought out since the company is still very much profitable And I'm seeing bonds like that over and over again. Goodyear is another one I'm looking at. I'm thinking of strategically buying bargain corporate bonds up to 15% of my networth to get me more comfortable in taking shorts
Daal, I can understand the rationale for buying some of these bonds, both as outright longs and also paired with an equity short. However I still think that outright equity shorts (and selling call options) offer better risk / reward profiles. For example BAC equity injections from TARP = $45 billion. BAC market cap of common stock @ $4.83 = $27.7 billion.
Yeah I can see some of these shorts still working. I also think it makes sense to increase exposure to assets with positve SP500 correlation. Its going to be annoying and it will make me work harder because I just wont sit and watch they tank. I'm going to have to find hedges(Like almost half of my networth in USD unhedged, my economic exposure is mostly the BRL so I have a 'long' that is negative correlated to SP500) and short some stocks for protection. Its just that I'm seeing lots of corporate bonds that are likely to be worth par even in stressed economic enviroments
Well Well maybe they will: Spencer Bachus, the top Republican on the full Financial Services Committee, said FASB and the SEC have not taken meaningful action to address the negative effects of the accounting rule. "Such action is long overdue," Bachus said at the hearing. "If FASB and the SEC refuse to use their authority to provide useful and timely guidance, this Congress may have no choice but to act in their place."
Short Bankruptcy Play Continental Airlines(NYSE:CAL) This is basically a liquidity play here. CAL has $2.6 in unrestricted cash and short-term investments. They are losing cashflow since the recession deepened. They lost more than $300m in cash from operations in Q3 and Q4 so their buffer is getting draw on(though they raised some through other means) But the bottom line is that this company has a cascade of events that will occur once they drop bellow $2b From their 10-K 'Under these processing agreements and based on our current air traffic liability exposure (as defined in each agreement), we would be required to post collateral up to the following amounts if we failed to comply with the covenants described above: a total of $72 million if our unrestricted cash, cash equivalents and short-term investments balance falls below $2.0 billion; · a total of $229 million if we fail to maintain the minimum unsecured debt ratings(unsecured debt rating of at least Caa3 and CCC- from Moody's and Standard & Poor's) specified above; · a total of $437 million if our unrestricted cash, cash equivalents and short-term investments balance (plus any collateral posted at Chase) falls below $1.4 billion or if our ratio of unrestricted cash, cash equivalents and short-term investments to current liabilities falls below 0.25 to 1.0; and(about 0.6 as of dec 08) · a total of $958 million if our unrestricted cash, cash equivalents and short-term investments balance (plus any collateral posted at Chase) falls below $1.0 billion or if our ratio of unrestricted cash, cash equivalents and short-term investments to current liabilities falls below 0.22 to 1.0.(about 0.6 as of dec 08) "Depending on our unrestricted cash, cash equivalents and short-term investments balance at the time, posting of significant amount of cash collateral could cause our unrestricted cash, cash equivalents and short-term investments balance to fall below the minimum of $1.0 billion required under our $350 million secured term loan facility, resulting in a default under the facility."(this last one could be ugly as it could set off a cascade of defaults in other debt agreements) The company has $3,767 in debt due and noncancellable commitments(like airplane purchases) for 2009.(Through some of this are 'operating' stuff that will come out of their revenue) Through they could renegotiate and work through such contracts and in capitalism we should expect this to occur(they could sell airplanes and other assets as well) but there will be a lot of pressure on their liquidity The company is likely to breach their minimum unrestricted cash levels, get downgraded as it continues to lose money and have to file for bankruptcy This short is specially good in my case as I'm long 5% of networth in ILFC(airplane leasing company), so if the airline business takes a tank and my bonds run the risk of default, CAL goes to $0. And if debt investors extend credit to CAL whos losing money they will as well to ILFC whos making it leaving me hedged
imho: * CAL' s P/E looks good, there is value at these prices. * the sector has been in a bear market for a very long time (around ~10yrs?); whoever is still around after 9/11, ~$150 oil, +creditcrisis, will probably make it.
I dont know which PE you are looking at, they are losing money right now so no PE exists. The sector is in a bear market for a long-time but the global economy doesn't support recovery. Continental Airlines might make it but CAL might not, I'm just betting that this issue of their common stock wont make it (they have gone bankrupt twice in the past)
These could be interesting plays, but let's be a bit more realistic on the risk here. Any finance company's current profits (i.e. backward looking) are irrelevant - what matters are its future cashflows. So IFLC should be analysed for 09 and 2010 cash earnings, not 2008 paper/GAAP earnings. I am not saying they won't make money the next 2 years, just pointing out that your investment case should focus on that and not on their last year earnings. Lots of homebuilders had great earnings in 06 after all, but 07 and 08 weren't so pretty. Second, their collateral will collapse in value. Aeroplanes are big ticket items heavily dependent on financing. If we get an extended recession/depression, plane values will collapse, eroding the collateral for the bonds. This needs to be accounted for in any investment analysis. If a firesale occurs, then half the world's airlines will be bust and firesaling planes at the same time. The collateral will follow a similar trajectory to the Baltic Freight index last year and your margin of safety evaporates. As for Goodyear, their main customers are having the biggest industry bust since the 1930s, so much if not all of the yield is simply compensating for the very real risk ("certainty" may be a more accurate term) that the auto sector goes up in smoke. I agree that corp bonds are more value than stocks, so a spread play on the capital structure could prove profitable despite the huge short-squeeze risk, just keep your size down because the stocks can go up 100-200% in a week on air, making the "spread" far more risky than a simple bond outright position. Are you earning multiples more $$$ with a bond/stock spread compared to a pure bond long, per unit risked? I am not so sure. A bond risk is max 100%, a bond/stock spread max risk is 400 or 500% (like the VW voting/non-voting stock "arbitrage" that turned out to be more risky than a 2:1 margined long in FNM). Yes that's probably quotational risk rather than risk of permanent capital loss, but only if it's a small position. Even a 1% short becomes a 5% position in a short-squeeze. As for bond outrights, just like Asia 1998, UK 1974, Nasdaq 2002 or USA 1932 I expect they will first get to bargain prices, and then collapse another 50-80% from there. Historic bear markets always sucker in value players before they make their biggest move down. Bill Miller was first, Marty Whitman second, Buffett third, now Gross will go. The credibility of all value players must be destroyed before it becomes time to make any investments.
I agree with most of these concerns about ILFC. However I'm a *2010* bondholder. All I care is that the company stays LIQUID till my maturity, then I will be out and could care less if they go bankrupt one month later The fact that they set record revenues and earnings for 2008(most of their revenues are from non-US markets) just adds to the pie. They have access to the following funding sources -Their EBITDA is more than 2x interest expense -Export guarantees -Unsecured bank loans -Fed Commercial paper(Set to expire on Oct 2009, its very likely to get extended well into 2010 if not 2011) -Revolving term loans -Borrow against Airplane collateral up to $4b -Public markets -AIG Funding can loan cash like in Sep, so as a long AIG is liquid(And their liquidity is guaranteed by Geithner/Bernanke), its likely ILFC will be liquid. It would crazy for AIG to let a profitable company die due illiquidity -Company could merge or be acquired since people would see their profitability but illiquidity and think its a bargain -Airplane firesale to avoid bankruptcy -Company could default of their airplane purchase commitments with Boieng and Airbus without triggering defaults on their bonds *apparently*(They are their largest customer its on their interest to keep them as a going concern) -Other unknown solutions that arise in capitalistm But even if all of that fails(an a downgrade of their rating could complicate things), bankruptcy is likely to recover near 100% The estimate of 100% recovery in bankruptcy comes from a private research note I read that accountants then to depreciate airplane on the books every year beyond their true value and this fact is likely to be known in the airplane market(that is, they know book value understates the real value), although I cant be sure of that. The company could sell airplanes over a number of years instead of flooding the market