Monday, June 22, 2009

Shocker: Insider Sales at Fastest Pace in Two Years

Bloomberg finally got to report the "news." I commented on it in early May. The article in part reads:
"Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.

Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by InsiderScore.com show. Amgen Inc. Chairman and Chief Executive Officer Kevin Sharer and five other officials sold $8.2 million of stock. Christopher Donahue, the CEO of Federated Investors Inc., and his brother, Chief Financial Officer Thomas Donahue, offered the most in three years.

Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.

“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”

Pardon me for posting that much, I personally dislike blog entries that do this. So what is actually happening?

Again, pay attention to the informational asymmetries in insider sales. If the stock is a good investment, why are the insiders selling? The one legit reason is estate planning. More often than not, people are greedy and if they see the prospects of a business looking up, they would likely double down, not sell. On rare occasions, there are forced sales (see CHK) due to margin calls, and those sales might be good opps to buy. But by and large, in a phony rally like the one we've had, insider sales are not a good omen.

Longer-term, the market is driven by earnings, and it does not seem like insiders think the earnings will be there in the near-term future. I personally do not think that the earnings, in real terms, will come back in a long time for a number of reasons: end of peak credit, political uncertainty in the US, grand-scale transfer of wealth from the taxpayers to the connected few, likelihood of increased taxation, the economic distortions of hyperinflation, the prospects of 20% U6 unemployment structurally(!), energy source depletion, and so on.

Thursday, June 18, 2009

More on Professional Sports

I just wrote two weeks ago that I am bearish on pro-sports (and lamented the few options available to take advantage of the apparent overpricing).

Our bubblevision friends at CNBC just reported that the Chicago Cubs sale is being re-negotiated. For the uninformed, this a part of the Chicago Tribute bankruptcy proceedings. Sam Zell sold out his office empire at the top, and proceeded to lever up the Trib, which subsequently drove it into Chapter 11, one of several recent newsprint bks. Anyway, for some time Mark Cuban, another well-known "sold out at the top" guy, was in the running. It is not very clear what happened there but it did not go through. Cuban has a very insightful write-up on his blog which I highly recommend. He basically walked based on the changed circumstances in the financial markets and the wider economy.

There were also rumours that Cuban's personality might have gotten in the way. I think the world would be better off if there were more Cubans and less Bud Seligs, but that is another topic. Anyway, in the end, this other wealthy white family, the Ricketts, won. Incidentally, the patriarch, Joe, was featured recently on this blog as a big time insider seller.

CNBC writes: "CNBC reported Wednesday that the deal between Ricketts and and Tribune Company hit a snag, with Ricketts looking to move the purchase price down by tens of millions of dollars."

I do not know where their comps came from, and I do not know any specifics, but my hunch is that there is no reason why an entertainment business with poor overall fundamentals, substantial crowding and huge fixed costs, coming off a ginormous talent cost bubble, is worth $1 bn. Now "several sources said that Tribune is now able to negotiate with other buyers."

Well, good luck with that. After NYC condo prices, pro sports might be the last place where the new reality has not yet fully settled in. It certainly has not at Real Madrid. I'd like to buy a CDS on them based solely on this guy.

Update (6/21/09): Bloomberg reported on Friday that 80% of the Montreal Canadiens will go for "more than $550 mm." Unclear, to me, whether CAD or USD. The buyers are the Canadian scions of this well-known branded company. Turns out that the seller, who also owns Liverpool F.C. in part, is having to come up with cash for a short-term loan taken out to buy the team. I am simply shocked that they cannot fund this through operations or roll the loan over. One caveat with the numbers thrown around is the value of the arenas that might or might not go with the team. Some places are truly multifunctional while others, not so much.

Update (6/23/2009): Now Reuters is reporting that the Phoenix Coyotes auction is scheduled for August. Here is something from the article that supports my views on the (non) business of sports: "The Coyotes, which filed for bankruptcy in May, have never made a profit since moving to Arizona in 1996." 13 years of losses and still in business? And I am sure they were not paying the full cost of having the ice box in the middle of the desert.
The NHL is meddling in the process and wants 1st round bidders that would keep the team in AZ. Only if "the August auction fails to attract a suitable offer, a second auction -- open to other bidders, including Balsillie, who could move the team -- would be held on Sept. 10, Salerno said." Balsillie, of RIMM fame, would move the team to Canada. His offer is for $212 mm. If I were him, if it comes to 2nd round, I would just bid $1.

Update (7/1/2009): "The National Hockey League is backing a bid by sports team mogul Jerry Reinsdorf to buy the bankrupt Phoenix Coyotes for up to $148 million rather than the $212.5 million offer from Canadian billionaire Jim Balsillie." Some tools, huh? To hell with the creditors.

Monday, June 15, 2009

A Quick Trip in the World of CRE Informational Asymmetry, GE Edition

Unless you've been under a rock (which is not a bad idea, these days), you probably know that not all is wonderful in the otherwise wonderful world of Commercial Real Estate (aka CRE). For many years, CRE was the land of milk and honey, with ever-falling cap rates and buoyant consumer spending helping retail businesses of all kinds expand. Today we had the Lightstone Chapter 11 filing (d/b/a Extended Stay hotels). Last week, there was the perfect commercial REIT IPO with the ticker GOV, based on their major tennant. That went, well, not quite as planned. IPO price $20, current price $18.80. Then you have the General Growth case, with Ackman being all over it both in the equity and providing the DIP. You can even see his overly optimistic, in my view, presentation here. What if the cap rates hit 12% vs. 8%, Bill? What if retail spend drops another 20%?

Anyway, last night I ran across what might well be a great example of a situation with informational asymmetry. Our friends over at GE have a huge CRE business, in case you did not know. So they set up this site, called ge1031.com, which welcomes you with this:

"This web site provides you with a quality selection of triple-net leased restaurant properties that are ideal for 1031 "like-kind" exchange replacement investments. We offer national and regional restaurants representing some of the largest and best known chains throughout the country.

We have been investing in the restaurant industry for more than 30 years and can work with you to quickly locate the property that meets the financial goals of you or your client."

What is happening here?

1. Big picture, GE with self-reported more than 30 years of experience is selling: should you be buying?

2. They are trimming their exposure to a highly cyclical industry (restaurants) which might well be in for a hard readjustment to the "new" normal: should you be buying?

3. They are going after 1031 money: could this be that no bank in its right mind would underwrite a loan for something like this and 1031's have tight deadlines? Should you be buying?

4. "Make an offer" tab on the listings: should you be buying?

5. They also helpfully link to their 100+ vacant building listings on loopnet. Nice touch to have the empty shells there: should you be buying?

As always, caveat emptor.

A Mini-Casestudy in Beta

Mid-day, the S&P is down 2.5%ish.
MCD is down less than 1%
RUTH is down 10%

3-month
SPY +22%
MCD +10%
RUTH +210%

This is beta.

Sunday, June 14, 2009

Orwell Revisited

Orwell is alive and well. I wrote about it earlier this year. As a reminder: "War is Peace; Freedom is Slavery; Ignorance is Strength."

Which brings us to today's news from the AP: "President Barack Obama says he's now found savings that will pay almost all the costs of a massive overhaul of America's health care system...In his address Saturday, Obama refers to a 10-year total of more than $600 billion in “savings” for health care. However, he does not explain in his latest comments that, under his revised budget released last month, $326 billion of that amount would come from tax hikes on Americans making over $250,000 a year, “loophole closers,” and higher fees for some government services. "

Ignorance is strength.
A tax hike is NOT savings, buddy. Especially if you penalize the most educated and productive people in society. I would support high marginal taxes on parasite occupations, such as government employees, fine arts professors and trial lawyers but not on actually productive occupations.

I think that I can already declare Obama's presidency a complete failure, much like Bush's presidency. Here is why:
(1) Glaring, scary innumeracy
(2) Personal finance details that have come out conform to the disastrous profligacy with taxpayer money that we have observed
(3) Lack of respect for the law if it favors a politically connected group
(4) Lack of respect for accountability when his cronies are threatened
(5) This is very broad: 100% wrong on every single major economic decision since taking office, be it the budget, housing "programs", brilliant tax ideas, money printing, "creating" and "saving" jobs, crony bailouts, etc.
(6) Continuation of the worst civil liberties violations of the Bush era
(7) The coming health care "reform" that is already a bigger disaster than the disaster it is supposed to replace
(8) Boneheaded immigration ideas
(9) Circumvention of due process and accountability via the appointment of various "czars"

I think something new pops up every week that can be added to the list.

Saturday, June 13, 2009

Sports Betting, Revisited

I have a lengthy post on a couple of sports betting strategies for non-sports fans below. Following up on the theme, here is a neat site on which one can bet with free money (really) on sports:
http://www.centsports.com/

These guys have found some sort of a loophole where an advertiser contributes $0.10 to your account and you can bet from there. If you lose it all, you get another $0.10. There is absolutely no cash participation required from the player's side. If you hit $20, you can cash out.

Here is my take on the site:
The good:
(1) Literally free
(2) No pop-ups
(3) Easy and quick interface (one can place a bet in under 30 secs)
(4) Increased coefficients by watching banner ads: sometimes you get an offer to increase your multiplier by, say, 50% if you see a banner ad. If you get less than 50%, you can try again and again. Very neat.
(5) Free refills of $0.10
(6) Referrals ("cronies") ongoing bonuses from there

The bad:
(1) Limited number of games to bet on: centsports for some reason does not have the breadth that a normal betting site has
(2) Start-up capital is very low
(3) Site is somewhat new so they can vanish any day (possibly with the money you earned)
(4) No more than 5-game parlay bet
(5) Some games appear on the "next 24 hr" list with a big delay

Of course, we have to check the math. Suppose I play "safe" only by the odds. Before you see a check in the mail ($20), how many consecutive bets do you have to make starting at $0.10?

Coefficient//consecutive cumulative bets to hit $20
1.01-- 533 bets
1.02-- 268 bets
1.03-- 180 bets
1.05-- 109 bets
1.10-- 56 bets
1.01 is -10,000 converted to money line, 1.02 is -5,000, 1.03 is -3,333, 1.05 is -2,000 and 1.10 is -1,000.

This is a lot of betting. Another strategy would have been doing a parlay bet on all games on a given day, until you win all to get a good headstart but the site does not allow more than 5-game parlays. Risk management 101 on their side.

Please note that I am not affiliated with centsports and I do not get referrals for this.

Thursday, June 4, 2009

Another great insider sales datapoint

In an earlier post, I commented on what seemed to be an interesting pattern in insider sales: huge volume by top insiders in some of the top companies. Today, Zero Hedge, a blog you should all be reading, makes a great observation regarding insider sales at Toll, a home builder (why not a house builder?). As "Tyler" puts it, money talks, earning call transcript walks. Their CEO said that now is a great time to buy a home. Well, look at the insider sales. Again, my favorite question, if the future is so great, why are you selling? All estate planing, surely.
ZH has been a favorite of mine for a while. The author/s are clearly in the flow and offer a no-holds-barred opinions and commentary, along with helpful Bloomberg screens.

Wednesday, June 3, 2009

An arb trade and some other random thoughts

Here is an arb trade that one can play with. As you undoubtedly follow the bedding industry, including the recent successful bid by Sleepy for the assets of the former Long Island City-based powerhouse 1-800-MATTRESS, you know that Sealy (NYSE: ZZ) has been going through a recap on its own. ZZ was a KKR portfolio company that went public may be two years ago, and has been on the decline ever since. KKR paid themselves a nice dividend with the IPO and transferred a chunk of the equity of the debt-laden mattress maker and marketer to the public. The little problem is that mattresses are discretionary and big ticket, and somewhat connected to housing (and sleeping). You get the picture. ZZ announced a recap plan a few weeks ago, consisting of a privately placed debt piece and a rights offering of a third-lien PIK convertible note, backstopped by KKR. You can read the materials on edgar, should you feel so inclined. The rights are now tradable as "ZZRT". Here are my thoughts from earlier today:
ZZ is at $2.10. The convert ZZRT is at $2.16. 13x ZZRT can buy a $25 convertible note that can be converted into 25 ZZ shares at $1 each (I think after 6/26).
Sell 2,500 ZZ for $5,250
Buy 1,300 ZZRT for $2,808
Convert 1,300 ZZRT into 2,500 "new" ZZ and cover the short
Net pre-comm $2,442
Seems too easy so I would be careful and check the math. I should recheck the math myself. My stupid online broker Fidelity does not let me short ZZ (as well as a number of other highly shortable names) so I am not doing the trade. Caveat's on you. Update: this does not work as 13 ZZ.RT require a $25 cash pay to get the convert.

ZZ is a great example of why one should not be buying when people in the know are selling. HTZ is a similar PE-owned masterpiece that recently announced a recap itself. HTZ were flipped very quickly with great returns because the sponsors were able to utilize some pretty creative securitization techniques on the fleet, wrapped in a guarantee by, you guessed it, everyone's favorite bond insurers. An even more aggressive package came with the Dunkin deal but they have held up thus far. Back to look who is selling: take a look at the IPOs of the former masters of the universe, such as BX (-70% since IPO) or GLG (-90%+ since IPO).

On to another potential short, HMR. This is a SPAC that has reportedly reached an agreement to buy the Florida Panthers. "Sports Properties Acquisition Corp. agreed to buy the National Hockey League’s Florida Panthers, Bank Atlantic Center, an arena-management company and some land for $240 million, Reuters reported, citing a person it didn’t identify." I am pretty bearish on pro-sports but there are very few pure-plays through which one can short them. Most teams are privately held by independently wealthy people who really do not care about the team's profitability. They normally stick their no-good sons or daughters to run the teams. There have been 1-2 bks recently in the pro-sport world, one in Phoenix and one in TX (and I am not talking about personal bks of athletes, mind you). So HMR, if the merger is approved, might well become a nice short: third-rate league with a third-rate team in a third-rate market during very slow times for entertainment revenues. May be they are counting on all the Canadians buying up the distressed properties down there once the loonie is 10 to 1 for the US dollar or something. And they (HMR) have Hank Aaron as a Director.

Finally, please note the nice bump in TBT since I last discussed it earlier this year. We are headed to double-digit interest rates very soon. Despite Zimbabwe Ben's attempts to manipulate the credit markets, I was delighted to see bond market 1, benny 0. We might also see the demise of the traditional 30-year fixed rate mortgage in the near future, replaced by a 50% LTV, 5-year, floating rate, weekly pay product. Something like L+2,000. I would also exercise caution in investing in companies that would do well in inflation (ie energy) as the current administration might well confiscate them (with popular support) directly or indirectly via backdated windfall taxation. Most elected reps are innumerate so if XOM is making nominal record profits due to inflation they would think that XOM is thieving when, in fact, the theft is occuring by the printing press. XOM's $10 bn quarter might well be its peak in real terms. Of course, if the dollar is devalued by 90%, $10 bn would not be so much. So keep that in mind, even if you think that secured lending does not matter if the prez sez so.