First Eagle Funds Senior Advisor Jean-Marie Eveillard on the recent rise in the market and what to expect for the second half of the year.
The guy has a great track record and for that, what he has to say bears listening to. What is fascinating is how a single article he read in 2006 lead him to take action that saved his funds from the worst of the downturn.
Disclosure (“none” means no position):
This is a huge, huge win for General Growth Properties (GGWPQ). Interesting comments from debt holders that they acknowledge the CMBS market is effectively closed. So, if we know we are no going to liquidate, we know we cannot refinance because the debt markets are closed, then all that remains is debt maturity extensions, right?
There are some very telling statements in the ruling:
There was no evidence to counter the Debtors’ demonstration that the CMBS market, in which they historically had financed and refinanced most of their properties, was “dead” as of the Petition Date,32 and that no one knows when or if that market will revive. Indeed, at the time of the hearings on these Motions, it was
anticipated that the market would worsen, and there is no evident means of refinancing billions of dollars of real estate debt coming due in the next several years.The following testimony of Allen Hanson, an officer of Helios, is telling: “Q. Helios is aware that there are debt maturities that will occur in 2009, 2010, 2011 and 2012 that the CMBS market will not be able to handle through new CMBS issuances, correct? A. Based on the circumstances we see today, yes.”
Regarding SPE structure as “bankruptcy remote”:
There is no question that the SPE structure was intended to insulate the financial position of each of the Subject Debtors from the problems of its affiliates, and to make the prospect of a default less likely. There is also no question that this structure was designed to make each Subject Debtor “bankruptcy remote.” Nevertheless, the record also establishes that the Movants each extended a loan to the respective Subject Debtor with a balloon payment that would require refinancing in a period of years and that would default if financing could not be
obtained by the SPE or by the SPE’s parent coming to its rescue.Movants do not contend that they were unaware that they were extending credit to a company that was part of a much larger group, and that there were benefits as well as possible detriments from this structure. If the ability of the Group to obtain refinancing became impaired, the financial situation of the subsidiary would inevitably be impaired.
Later:
Delaware law in turn provides that the directors of a solvent corporation are authorized – indeed, required – to consider the interests of the shareholders in exercising their fiduciary duties. In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), the Delaware Supreme Court held for the first time that the directors of an insolvent corporation have duties to creditors that may be enforceable in a derivative action on behalf of the corporation. But it rejected the proposition of several earlier Chancery cases that directors of a Delaware corporation have duties to creditors when operating in the “zone of insolvency,” stating [w]hen a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners. 930 A.2d at 101 (emphasis supplied).34
This statement is a general formulation that leaves open many issues for later determination – for example, when and how a corporation should be determined to be insolvent. But there is no contention in these cases that the Subject Debtors were insolvent at any time – indeed, Movants’ contention is that they were and are solvent. Movants therefore get no assistance from Delaware law in the contention that the Independent Managers should have considered only the interests of the secured creditor when they made their decisions to file Chapter 11 petitions, or that there was a breach of fiduciary duty on the part of any of the managers by voting to file based on the interests of the Group.
The record at bar does not explain exactly what the Independent Managers were
supposed to do. It appears that the Movants may have thought the Independent Managers
were obligated to protect only their interests. For example, an officer of ING Clarion testified that “the real reason” he was disturbed by the Chapter 11 filings was the inability of the Independent Managers to prevent one:Well, my understanding of the bankruptcy as it pertains to these borrowers is that there was an independent board member who was meant to, at least from the lender’s point of view, meant to prevent a bankruptcy filing to make them a bankruptcy-remote, and that such filings were not anticipated to happen.(Altman Dep. Tr. 159:7-13, June 5, 2009.)
However, if Movants believed that an “independent” manager can serve on a board solely for the purpose of voting “no” to a bankruptcy filing because of the desires of a secured creditor, they were mistaken. As the Delaware cases stress, directors and managers owe their duties to the corporation and, ordinarily, to the shareholders. Seen from the perspective of the Group, the filings were unquestionably not premature.
Conclusion:
The Debtors here have established that the filings were designed “to preserve value for the Debtors’ estates and creditors,” including the Movants. Movants are wrong in the implicit assumption of the Motions that their rights were materially impaired by the Debtors’ Chapter 11 filings. Obviously, a principal purpose of bankruptcy law is to protect creditors’ rights. See Young v. Higbee Co., 324 U.S. 204, 210 (1945). Secured creditors’ access to their collateral may be delayed by a filing, but secured creditors have a panoply of rights, including adequate protection and the right to post-petition interest and fees if they are oversecured. 11 U.S.C. §§ 361, 506(b).
Movants complain that as a consequence of the filings they are receiving only interest on their loans and have been deprived of current amortization payments, and Metlife complains that it is not even receiving interest on its mezzanine loan, which is secured only by a stock interest in its borrower’s subsidiary. However, Movants have not sought additional adequate protection, and they have not waived any of their rights to recover full principal and interest and post-petition interest on confirmation of a plan. Movants complain that Chapter 11 gives the Debtors excessive leverage, but Metlife asserts it has all the leverage it needs to make sure that its rights will be respected.
It is clear, on this record, that Movants have been inconvenienced by the Chapter 11 filings. For example, the cash flows of the Debtors have been partially interrupted and special servicers have had to be appointed for the CMBS obligations. However, inconvenience to a secured creditor is not a reason to dismiss a Chapter 11 case. The salient point for purposes of these Motions is that the fundamental protections that the Movants negotiated and that the SPE structure represents are still in place and will remain in place during the Chapter 11 cases. This includes protection against the substantive consolidation of the project-level Debtors with any other entities.
There is no question that a principal goal of the SPE structure is to guard against substantive consolidation, but the question of substantive consolidation is entirely different from the issue whether the Board of a debtor that is part of a corporate group can consider the interests of the group along with the interests of the individual debtor when making a decision to file a bankruptcy case. Nothing in this
Opinion implies that the assets and liabilities of any of the Subject Debtors could
properly be substantively consolidated with those of any other entity.These Motions are a diversion from the parties’ real task, which is to get each
of the Subject Debtors out of bankruptcy as soon as feasible. The Movants assert
talks with them should have begun earlier. It is time that negotiations commence in
earnest.
Disclosure (“none” means no position):Long GGWPQ
Etrade (ETFC) is essentially two businesses. The first is a very healthy brokerage/market making business. The second is an ill-timed foray into the mortgage backed securities markets. Losses in that area have brought the company to its knees so to speak. But, if they can make it through (I expect they will), the return for those buying now will be fantastic.
Let’s look at the loan portfolio (all quotes from most recent 10Q at end of post):
Regarding Loan Loss Provisions:
Provision for loan losses increased $85.4 million to $404.5 million and $305.5 million to $858.5 million for the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008. The increase in the provision for loan losses was related primarily to deterioration in the performance of our one- to four-family and home equity loan portfolios. We believe the deterioration in both of these portfolios was caused by several factors, including: home price depreciation in key markets; growing inventories of unsold homes; rising foreclosure rates; significant contraction in the availability of credit; and a general decline in economic growth. In addition, the combined impact of home price depreciation and the reduction of available credit made it increasingly difficult for borrowers to refinance existing loans. Although we expect these factors will cause the provision for loan losses to continue at historically high levels in future periods, the level of provision for loan losses in the second quarter of 2009 represents the third consecutive quarter in which the provision for loan losses has declined when compared to the prior quarter. While we cannot state with certainty that this trend will continue, we believe it is a positive indicator that our loan portfolio may be stabilizing.
Here is the current loan portfolio (click to enlarge)
Here is the key chart regarding the performance (click to enlarge):
If this trend continues into Q3, Etrade fortunes improve markedly.
Loans, net decreased 10% to $21.9 billion at June 30, 2009 from $24.5 billion at December 31, 2008. This decline was due primarily to our strategy of reducing balance sheet risk by allowing our loan portfolio to pay down. We do not expect to grow our loan portfolio for the foreseeable future. In addition, we plan to allow our home equity loans to pay down, resulting in an overall decline in the balance of the loan portfolio.
Loans held-for-sale of $12.6 million as of June 30, 2009 represents loans originated through, but not yet purchased by, a third party company that we partnered with to provide access to real estate loans for our customers. The product is offered as a convenience to our customers and is not one of our primary product offerings. The third party company providing this product performs all processing and underwriting of these loans and is responsible for the credit risk associated with these loans, which minimizes our assumption of any of he typical risks commonly associated with mortgage lending. There is a short period of time after closing of the loans in which we record the originated loan as held-for-sale prior to the third party company purchasing the loan.
We have a credit default swap (“CDS”) on a portion of our first-lien residential real estate loan portfolio through a synthetic securitization structure that provides, for a fee, an assumption by a third party of a portion of the credit risk related to the underlying loans. As of June 30, 2009, the balance of the loans covered by the CDS was $2.6 billion, on which $17.8 million in losses have been recognized. The CDS provides protection for losses in excess of $4.0 million, but not to exceed approximately $30.3 million. During the three months ended June 30, 2009, we began to receive cash recoveries from the CDS for amounts reported in excess of the $4.0 million threshold. We expect to recognize the remaining benefit over the next twelve months, which is reflected in the allowance for loan losses as of June 30, 2009.
Deposits
Regarding the balance sheet:
The decrease in total assets was attributable primarily to a decrease of $2.5 billion in loans, net, offset by an increase of $1.7 billion in cash. The decrease in loans, net was due to our strategy of reducing balance sheet risk by allowing our loan portfolio to pay down. For the foreseeable future, we plan to allow our home equity loans to pay down, resulting in an overall decline in the balance of the loan portfolio. For the remainder of 2009, we also plan to allow total assets to decline in order to release additional regulatory capital which we are required to hold against these assets.
The decrease in total liabilities was attributable primarily to the decrease in wholesale borrowings which was partially offset by an increase in customer payables and deposits. The decrease in wholesale borrowings was a result of paying down our FHLB advances and securities sold under agreements to repurchase in the first half of 2009. Customer payables increased due to higher trading activity during the first half of 2009 and net new brokerage customer acquisition. While our deposits increased by $287.6 million during the first half of 2009, we expect these balances, particularly the non-sweep deposit balances, to decrease over the remainder of 2009 as we focus on decreasing total assets.
Here is the Corp. debt picture (click to enlarge):
While not a huge fans of debt, Etrade has done a good job extending that debt into the future in which at such time they ought to have rid themselves of most of the RMBS portfolio freeing up reserves held for losses on it for debt repayment.
Management believes that our common stock offerings combined with the expected completion of the pending debt exchange offer, will substantially improve the regulatory capital levels at E*TRADE Bank as well as significantly enhance parent company liquidity, especially through the end of 2011. As a result, we believe we will be in a position to take advantage of favorable market conditions with regard to any additional capital planning actions, such as further debt-for-equity exchanges, additional cash capital raising activities or sales of any non-core assets.
During the fourth quarter of 2008, we applied to the U.S. Treasury for funding under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program. We continue to view TARP funding as a possible component of our capital planning program. We cannot predict when or if our application will be acted upon. However, given the success of our capital raising efforts to date, we believe that our financial health is not dependent upon receiving TARP funding.
What to do? First, this is only for those with patience and strong stomachs. Loan portfolio’s take time to wind down and the ride in doing so is a bumpy one. Because of that, the ride will be rocky. But in Etrades case, they have a stable and strong brokerage business that is adding new accounts at a very healthy pace. That ought to buffer investors and its performance will begin to take more precedence as the loan portfolio is wound down.
I bought yesterday at $1.40 a share. I will be watching one thing. The loan portfolio. If it continues it recent improvement, the stock will appreciate. If it falters, I will pull the trigger on it. Simple…
Another side point, as Etrade lower is loan risk, priced at this level it does become dramatically more attractive to a potential suitor. While I would not invest based on this possible event alone, one does have to take it into account here in conjunction with other factors
Full 10Q
Etrade Q2 10Q
Disclosure (“none” means no position):
When the boys at Brookfield Asset (BAM) are buying, I am intrigued.
August 08, 2009 David Friend
THE CANADIAN PRESS
Executives at investment giant Brookfield Asset Management Inc. are confident they can scour the international market for distressed assets and acquisition deals for at least two more years, even if the economy starts to recover and the U.S. housing market rebounds.“While the capital markets are more positive than they have been for a long period of time, that doesn’t mean that people who overfinance their properties – or are in extreme distress – are fixed,” chief executive Bruce Flatt said on a conference call. “There are still a lot of opportunities out there, and we think there will be for 24 months minimum. I don’t think we feel any rush to be doing anything.”
Flatt told analysts that the company has spent the last year and a half buying out partners, acquiring rights offerings and making other deals for distressed assets. “We still believe this is one of the greatest investment periods for these type of assets that we’ve seen in a long time,” he said. He also said Toronto-based company wants to put capital into “distressed opportunities as we find them, and where we have an operating base.”
Brookfield said profits in the second quarter rose by 33 per cent to $147 million (U.S.), or 24 cents per share for the quarter ended June 30, up from a year-earlier profit of $110 million or 17 cents per share. Cash flow from operations declined during the period to $276 million or 46 cents per share, compared to $378 million or 62 cents. Brookfield said last year’s cash flow was boosted by special items. Total quarterly revenue fell to $3 billion from $3.4 billion a year ago.
Brookfield’s massive office property portfolio – including Brookfield Place and the Exchange Tower in Toronto, Bankers Hall in Calgary, New York’s World Financial Center in and Bank of America Plaza in Los Angeles – is 95 per cent occupied. The company reported that it has also contracted about 80 per cent of its renewable power generation until the end of 2010.
Chief financial officer Brian Lawson expressed some optimism for the company’s residential business.“The results from our number of our shorter duration businesses, such as our residential operations, appear to have bottomed out, albeit at pretty low levels,” he said. Flatt said Brookfield has spent the past six months buying residential land, and invested $250 million in its U.S. residential business. “We believe we are past the worst of the down cycle in housing,” he said. “While we don’t expect a robust return, we believe we have or will soon see a bottom in many of the key U.S. housing markets.”
Brookfield controls Fraser Papers Inc., wood panel producer Norbord Inc., Great Lakes Hydro Income Fund and the Brookfield Real Estate Services Fund, that includes Royal LePage and other brands. The holding company’s forestry assets have been battered by the global economic downturn, with Fraser Papers being forced to file for creditor protection in Canada and the United States in June. Fraser Papers reported that it lost $8 million or 36 cents a share for the quarter ended June 30, down from $15.6 million or 31 cents a share for the same 2008 period.
During the second quarter, Fraser booked a net gain of $12.5 million from unwinding its foreign exchange hedging program.Shares in the company gained 12 cents to close at $21.86 yesterday on the Toronto Stock Exchange.
What does it all mean? Notice what he said “the next 12-24 months”. No matter what anyone says, housing NEVER has a “V” recovery. It is a Nike Swoosh recovery. A steep fall followed by a long bottom and then a very gradual climb out. What Flatt is saying is that we are nearing that bottom part and will enter the prolonged bottom dredge.
This goes to what we have been saying here for a while, 2010 will be the bottom in housing and then we will sit and then begin the climb out.
Why is all this positive? It means the dramatic price falls are a thing of the past. We more than likely have some more downside 10%-15% and then we flatline before climbing out. When do prices recover to 2006-07 levels? If history tells us, it will be 7 years based on the 1990-91 housing bust. Now, it should be noted that fall was from far less loftier levels that this one. Because of that 7-10 years would seem to be the more realistic scenario.
Disclosure (“none” means no position):
True to his word it appears Ackman is going for the long haul in Target (TGT). My guess is his TIP REIT idea is not dead and rather have a large option position that management used against him in the proxy fight, he is going to own shares.
It is a good idea. Rather than allow them to say he simply wants a quick profit before his options expire and cares nothing about the long term health of the company, he in one fell swoop both takes that argument away from them and also bolsters his own “I own more shares than management and have more a a vested interest” argument.
Looks like we have another battle brewing….
From the filing:
Item 1. Security and Issuer.
This Amendment No. 9 to Schedule 13D (this “Amendment No. 9”) amends and supplements the statement on Schedule 13D originally filed on July 16, 2007 (the “Original Schedule 13D”), as amended by Amendment No. 1 through Amendment No. 8 (the Original Schedule 13D as amended and supplemented by Amendment No. 1 through Amendment No. 8, the “Schedule 13D”), by (i) Pershing Square Capital Management, L.P., a Delaware limited partnership (“Pershing Square”), (ii) PS Management GP, LLC, a Delaware limited liability company, (iii) Pershing Square GP, LLC, a Delaware limited liability company, (iv) Pershing Square Holdings GP, LLC, a Delaware limited liability company, and (v) William A. Ackman, a citizen of the United States of America (collectively, the “Reporting Persons”), relating to the common stock, par value $0.0833 per share (the “Common Stock”), of Target Corporation, a Minnesota corporation (the “Issuer”, the “Company” or “Target”).
As of August 7, 2009, as reflected in this Amendment No. 9, the Reporting Persons are reporting beneficial ownership on an aggregate basis of 32,994,586 shares of Common Stock (approximately 4.4% of the outstanding shares of Common Stock), which include shares of Common Stock and shares subject to certain stock-settled American-style call options.Item 4. Purpose of Transaction.
Item 4 of the Schedule 13D is hereby supplemented as follows:
As of May 26, 2009, the date of the last amendment to this Schedule 13D, the Reporting Persons beneficially owned approximately 7.8% of the then outstanding shares of Common Stock, consisting of 3.3% in shares of Common Stock and 4.5% in stock-settled call options. As a result of the transactions reported in this Amendment No. 9, the Reporting Persons sold options and engaged in net purchases of shares of Common Stock, resulting in a net increase of Common Stock ownership of 0.2% and a decrease of beneficial ownership to 4.4%, consisting of 3.5% in shares of Common Stock and 0.9% in stock-settled call options.Item 5. Interests in Securities of the Issuer.
(a), (b) Based upon the Issuer’s quarterly report on Form 10-Q for the quarterly period ended May 2, 2009, there were 752,279,589 shares of Common Stock outstanding as of June 3, 2009. Based on the foregoing, 32,994,586 shares of Common Stock (which includes Common Stock and physically-settled listed and over-the-counter American-style call options), representing 4.4% of the shares of Common Stock issued and outstanding, are reported on this Amendment No. 9.
As of the date hereof, none of the Reporting Persons owns any shares of the Common Stock other than as reported herein.
Item 5(c) of the Schedule 13D is hereby amended and restated as follows:
(c) See the trading data for the last 60 days attached hereto as Exhibit 99.1. Exhibit 99.1 is incorporated by reference into this Item 5(c) as if set out herein in full.
Except as set forth in Exhibit 99.1 attached hereto, within the last 60 days, no other transaction in shares of the Common Stock or derivative securities were effected by any Reporting Person.
Disclosure (“none” means no position):nONE
Been about a month (3 weeks) since we first talked about this intriguing pick. I have not bought shares (up 13% since then).
One interesting note is that on Aug. 10th the board authorized they approved a 1-year extension of the Company’s discretionary equity buy-back plan and an expansion of the plan to include common stock. Under the broadened plan, the Company may purchase warrants and up to 20 million shares of common stock in open market and private transactions through December 31, 2010, at times and in amounts as management deems appropriate, subject to applicable securities laws. 20 million shares is 18% of the outstanding total as of 6/1/2009.
Heckman said:
Mr. Richard J. Heckmann, Chairman and CEO of Heckmann Corporation, stated, “We have successfully closed both of our pending diversified water business transactions and are currently in the process of installing a 40-mile pipeline that will serve customers seeking to dispose of saltwater and frac fluid generated in oil and gas operations. Once this pipeline is operational by year-end, we expect a substantial contribution to revenue and earnings from our new subsidiary Heckmann Corp.
“We also made significant progress during the second quarter on our China business strategy,” Mr. Heckmann continued. “Renovation and installation of our bottled water and non-carbonated drink facility in Xi’an is nearing completion, which will significantly improve our capacity and utilization metrics as we service major contracts like Coca-Cola China as well as other recently established bottling and servicing contracts.
“We also bolstered the management team and continued optimizing the financial reporting structure in China as we prepare to fully participate in the growth and expansion that experts and economists are predicting for that region over the long term. At the same time, we recovered a portion of shares and warrants issued to former China Water insiders and are confident that we will fully execute this plan in due course. We expect to obtain a final determination on the purchase price allocation for our China Water acquisition during the current quarter. Our cash and investment balance remained essentially unchanged for the second quarter, and we maintained a strong balance sheet that holds approximately $298 million in cash and investments as of June 30 — ample resources to pursue our acquisition objectives, continue the optimization of current assets and maximize opportunities in our businesses as they unfold,” Mr. Heckmann concluded.
The business is tracking as one would like to see since Q1. It would appear the China water business, once they clear out the mess has great potential with existing contracts and the expansion of the business with Coke China.
Greer exploration is in a great business that will just keep producing revenues as its services are essential to the industry it serves.
What remains to be seen it what happens next. The $298m cash on hand is essentially 75% of the companies current market cap and there still is zero debt. I like that a lot as it provides huge flexibility AND allows the company to make the right long term decisions with the pressure of creditors.
Still not 100% sold yet BUT am becoming more interested. Will keep on it.
Disclosure (“none” means no position):
A solid if unspectacular quarter. One has to be struck by the optimism expressed on the call.
Key quote (paraphrase):
“We are excited about the current and upcoming acquisition environment and see the bid/ask gap that exists in the private company sale market narrowing. We are in the unusually advantageous position of being able to deploy capital without the assistance of 3rd party financing”.”
Other Comments:
Listen to the earnings call here
Disclosure (“none” means no position):Long CODI
“Davidson” sent this to me last week (Aug 5th) when I was away”
REITs displayed dramatic upside performance and many have asked why. This sudden move is in the face of continued and wide spread headlines that commercial real estate continues to face a tsunami of frozen debt that according to many will create the next great financial crisis. Many view the market activity of yesterday as irrational and insane and refuse to be drawn in.
I offer a different view. For some time I have alerted clients to the actions of investors deemed insightful by other insightful market participants. Often when most are acting on the headlines, there seems to always be a few savvy investors taking a contrarian position that much later proves to have been savvy. I think the untold story of yesterday was hidden in the headline and not visible unless one had been in the habit of following key individuals.
I ascribe yesterday’s events to Donald Trump recapturing the Atlantic City Casino property he once held by partnering with Andrew Beal of Beal Bank. Trump has been considered savvy, but Andrew Beal has been considered by many to be very sensitive to investment valuation. I think his participation in Atlantic City Casino has sparked some to view his action as signaling that values are attractive and some investors at least have become more bullish. Forbes ran a profile on Andrew Beal on April 3, 2009 which you can access using the URL below:
http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html
There are many examples of contrarian activity by key individuals that in hindsight can be shown to have been helpful with investment decisions. Part of my research effort is focused on the identification of as many of these individuals as possible. I monitor their activity and market commentary in conjunction with an asset class Return/Risk analysis. I find that this effort very helpful.
In my opinion yesterday’s “REIT “Melt Up!” is due to Andrew Beal.
Disclosure (“none” means no position):
“Davidson” sent this to me last week (Aug 5th) when I was away”
REITs displayed dramatic upside performance and many have asked why. This sudden move is in the face of continued and wide spread headlines that commercial real estate continues to face a tsunami of frozen debt that according to many will create the next great financial crisis. Many view the market activity of yesterday as irrational and insane and refuse to be drawn in.
I offer a different view. For some time I have alerted clients to the actions of investors deemed insightful by other insightful market participants. Often when most are acting on the headlines, there seems to always be a few savvy investors taking a contrarian position that much later proves to have been savvy. I think the untold story of yesterday was hidden in the headline and not visible unless one had been in the habit of following key individuals.
I ascribe yesterday’s events to Donald Trump recapturing the Atlantic City Casino property he once held by partnering with Andrew Beal of Beal Bank. Trump has been considered savvy, but Andrew Beal has been considered by many to be very sensitive to investment valuation. I think his participation in Atlantic City Casino has sparked some to view his action as signaling that values are attractive and some investors at least have become more bullish. Forbes ran a profile on Andrew Beal on April 3, 2009 which you can access using the URL below:
http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html
There are many examples of contrarian activity by key individuals that in hindsight can be shown to have been helpful with investment decisions. Part of my research effort is focused on the identification of as many of these individuals as possible. I monitor their activity and market commentary in conjunction with an asset class Return/Risk analysis. I find that this effort very helpful.
In my opinion yesterday’s “REIT “Melt Up!” is due to Andrew Beal.
Disclosure (“none” means no position):
There is now no reason to sell Dow Ag unless Dow Chemical (DOW) CEO Andrew Liveris intends to commit career suicide.
From the press release (emphasis mine):
Midland, MI – August 4, 2009 – The Dow Chemical Company (NYSE: DOW) today announced that it priced a $2.75 billion underwritten public offering of debt securities, including $250 million aggregate principal amount of floating rate notes due 2011, $1.25 billion aggregate principal amount of 4.85% notes due 2012, and $1.25 billion aggregate principal amount of 5.90% notes due 2015.
Dow intends to use the net proceeds of the offering to repay borrowings under the Company’s bridge loan, and for refinancing of other outstanding indebtedness. Borrowings under the bridge loan were incurred to pay a portion of the purchase price for Dow’s acquisition of Rohm and Haas Company.
Together with previously announced asset sales totaling $3.3 billion of gross proceeds (expected to be completed by year-end), today’s capital raising efforts will enable Dow to completely retire the outstanding balance of the bridge loan facility well ahead of its end-of-year commitment.
“Once again, investor confidence in Dow’s long-term strategic direction has been underscored with the completion of yet another oversubscribed debt offering,” said Andrew N. Liveris, chairman and chief executive officer. “When combined with proceeds from the asset sales we have already announced, this offering will enable us to fully pay down our bridge loan. It is further evidence of the Company’s commitment to enhancing liquidity and financial flexibility. At the same time, this provides us with more options in how we execute future non-core divestitures in order to further de-lever our balance sheet and free up capital for ongoing investments in our advanced materials, agricultural sciences and performance portfolios.”
There is no reason to throw that last line in unless you are signaling to the world that you intend to invest heavily in these areas and there is no reason to invest heavily in an area that you intend to sell soon. Why? Any investment in Dow Ag will not bear fruit for some time (years). That is simply the nature of the business. On does not discover a new genetic trait for corn to make it more drought resistant and bring that product to market in less than 2-4 years. That being said, there would be no reason to continue to make these investment if the possibility of a sale was definitive….none.
CSFB analyst John McNulty wrote the following:
This news follows successful debt and equity offerings in May when Dow raised $2.25 billion in new equity and $6 billion in new long-term debt. The latter was three-times oversubscribed.
Through a combination of these capital raises and asset sales, the company will be able to repay it well ahead of its year-end target date to repay the $9.2 billion bridge loan that it had used to complete the Rohm and Haas acquisition. Dow has announced asset sales totalling $3.3 billion of gross proceeds, including the sale of Morton Salt, its stake in the Dutch refinery TRN, and its calcium chloride business to Occidental Petroleum.
In other words, no Dow Ag sale…..
Disclosure (“none” means no position):Long DOW
Before you slough this off as being “years away”, take a look at where we are going with this already. AutoNation (AN) has teamed with Velocitude to give it the first smart phone friendly auto dealer website out there.
Currently users can search for a vehicle using several parameters (price, type, make etc.) and then located one at a nearby dealer. In the future users will be able to schedule a service appt. from their smart phones and, get notifications when a specific vehicle they want is available near them.
What will this do for AutoNation?
• Drive Transactions:
Allow customers to search for new and used vehicles anywhere, anytime. They will also enabled customers to schedule service appointments in real time from their mobile device. This will make Service Programs much more effective.
• Capitalize on Lost Sales Opportunities:
Consumers are frustrated from mobile web browsing because most websites are designed for desktop and laptop browsing. AN’s new Mobile Platform will make its business easily accessible and usable from almost any mobile device.
• Increase Effectiveness of Marketing Campaigns:
Expand reach of Promotions, Loyalty Programs and Coupons through a mobile device.
• Build Brand Awareness:
Create excitement around product introductions. Share product usage benefits.
• Deliver an Improved Customer Experience:
After deployment, AN will use our mobile analytics to constantly improve the relationship
between them and their customers.
So is this a panacea for AutoNation? No, but it does move the needle more towards them. Already gaining market share as thousands of dealers across the US shutter their doors, this is another move to help AutoNation to pull away from the pack. It is about branding.
Think of it this way. You are a car buyer looking for another Chevy Suburban for your family. There may be 4 or 5 dealers within 20 miles of you depending where you live. If you are out looking for cars, now at any location you can find a vehicle you may like at a price you want to pay on the road, at your leisure. What AutoNation is doing is giving potential buyers another reason to choose their dealers over the others. They are moving the auto dealership model into the comfort zone of a growing percentage of auto buyers. That can only help as we move forward from 2008-09.
As this site becomes more interactive with users, its benefits will grow. It will be interesting to watch that unfold.
What does Velocitude do?
VELOCITUDE puts your business in the hands of your customers by taking the content of your existing website and making it available in a format customized for a mobile device.
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Disclosure (“none” means no position):Long AN
Got an email when I was on vacation from a reader in the natural gas industry (UNG). He asked to remain anonymous due to his position (of course I oblige) and I received permission to repost his comments. Being long UNG, I found his commentary backs my bullish stance on the commodity.
The reader says…
…..read the XTO and EOG and RRC and FST and CHK conference calls.. Those guys are some of the best in the business and I haven’t seen them this bullish in years. There are good discussions about why nat gas production is about to fall off the cliff in Q4 and that all the focus on the storage numbers each week is irrelevant.
EIA published its last production report and it showed a 0.8% DECLINE in production in May even though production in Louisiana and Oklahoma grew. It is called the EIA-914 monthly natural gas report. Big decline curves in Texas combined with the drop in rigs is finally showing up in the numbers. But I have been in this business 25 years and know”it doesn’t matter until it matters”.. And since 90% of “investors” are really just day/swing traders, none of those guys are paying any attention to what is really going on..
Things you will hear on the calls..
- EOG is completely UNHEDGED for 2010.
- CHK took OFF hedges for the back half of 2010.
- XTO is 40% hedged at $10 mcfe and waiting to put more on.
- FST is seeing production declines in the Rockies.
- EOG and CHK have internal models that are predicting 2-5 BCF declines by next year.
- ECA and CHK are starting to shut in production.
Basically it comes down to big decline curves in Texas more than offsetting the ramp in production in the Marcellus and Haynesville and the hurricane damaged production in the Gulf versus the weather (el nino) versus industrial production usage returning..
Here is the report he references:
EIA-914_ Monthly Natural Gas Production Report
From the EOG earnings call:
Our view of the North American gas and oil markets is consistent with our previous earnings call, except that we’ve become more bullish regarding 2010 and 2011 gas prices. We still expect North American gas prices to remain quite low through year-end. As you know, we’ve historically devoted a lot of work to developing domestic gas supply models and we think our
current model is the most granular and best we’ve ever built. It’s telling us that December 2009 domestic production will be 4.8 Bcf a day lower than year-end 2008 and this deficit will deepen further throughout 2010.When added to the Canadian supply drop of at least 0.8 Bcf a day, we expect the gas market to turn sometime early in 2010 almost regardless of what happens to LNG imports. Everybody seems to be focusing on the supply growths from new horizontal plays, but the 800 pound gorilla in the
room is Texas vertical gas production. This represents the largest single block of production in the U.S. 16.3 Bcf a day in December ’08, and the rig count here has fallen from 450 rigs in January 2008 to 145 rigs today.Our model shows production from this large segment of domestic production will fall from 16.3 Bcf a day at year-end ’08 to 13.2 Bcf a day by year-end ’09 and then 11.6 Bcf a day by year-end 2010 down 4.7 Bcf a day over two years. In my opinion, this is the most important well population that people should be focusing on if they want to understand what’s going to happen to gas supply over the next 24 months.
From the XTO call:
If we just take a little look at U.S. gas production for a moment, we from the very beginning have said you would not see U.S. gas production drop until May. Looking at the EA 914, you’re down about half a B a day from April to May, which is what we anticipated.
If you were to maintain that same fall for the next seven months of the year, you could potentially be down four Bs a day in U.S. natural gas productions. We’ll wait to see but that’s not an unreasonable number. If we look at EA 914 and break it down to onshore only, we’ve actually been down five in the last seven months and we’re off 1.7B a day just in U.S. gas production onshore.
What’s made the difference is onshore has been coming back on because of the hurricanes and is up 1.1B today and that’s the real difference in what you’re seeing. So I think you are seeing the decline that we’ve all talked about with U.S. natural gas recount dropping from 1600 to 675, and you will continue to see that, which should set you up for rebound in natural gas prices going forward.
If you’re over supplied 3 or 4Bs a day that would indicate you should be balanced by the end of the year. Obviously, there’s a lot of the year left to go. We do have the next 90 days will be very interesting as storage is relatively full at this point in comparison in history, and you may have some gas on gas competition as you get into the September and October timeframe. But I think we are setup as we’ve all talked about for a rebound in natural gas prices in ’10.
From the CHK call:
I would point out, though, that with the rig count having dropped, for natural gas, to well below 700, and kind of leveled out in the 675 or so rig count range, that really sets the stage for natural gas prices to decline materially into the back half of this year and the first half of next year.
We have seen a slow steady climb in gas production from 2005 through March of 2009. And it’s leveled off to a very slow sequential decline through the summer, but that should pick up dramatically and we can see production decline on a year-over-year basis, of perhaps as much as 2.5 to 3 Bcf per day by the end of the year, approaching 5 Bcf a day down year-over-year by late spring early summer next year.
More from CHK here
Now this will take some time but prices for natural gas simply cannot stay this low for very long. ANY economic recovery will push prices higher….fast..
Disclosure (“none” means no position):Long UNG
The case for RHI Entertainment (RHI) and the expectation we had when we first looked at it still stands. Q1 and Q2 were expected to be poor and they were. Q’3 and 4 were expected to show a marked improvement and based on what is in production and what is expected to be delivered, that is also the case.
SEC filing:
RHI Q2
This one will require some patience although after Q3 is reported, if we do not see some real progress, we may want to take a look at reconsidering or at least tearing apart the investing thesis and starting order to see if we come to a different conclusion.
Disclosure (“none” means no position):Long RHI
This is a quick video but for those who do not want to watch, here is the salient point.
CEO Massoud does a great job in the three minutes allotted him in describing the principle difference between his company, Compass Diversified Holdings (CODI) and the KKR’s and Blackstone’s (BX) of the world.
Of course the gang missed the opportunity to ask him what he may be doing with it in term of potential deals but that is another point I guess.
Disclosure (“none” means no position):Long CODI, none
This is a quick video but for those who do not want to watch, here is the salient point.
CEO Massoud does a great job in the three minutes allotted him in describing the principle difference between his company, Compass Diversified Holdings (CODI) and the KKR’s and Blackstone’s (BX) of the world.
Of course the gang missed the opportunity to ask him what he may be doing with it in term of potential deals but that is another point I guess.
Disclosure (“none” means no position):Long CODI, none