AAA to A3 check, 2/3 A3 to AAA mate

Sorry, I couldn't resist the bastard cross of chess and bond ratings. Let me explain. Once upon a time there was a leveraged loan CDO arranged by Goldman called Greywolf. Greywolf, which sounds like a monster who wants to gobble up your money, was in fact a monster who wanted to gobble up your money. In the fullness of time, the AAA tranche was downgraded to A-, or A3 in Moody's speak. Now, according to Bloomberg, Morgan Stanley is doing the Re-REMIC (aka CDO-squared) trick on the Greywolf AAAs. That is, they are buying the AAAs into a SPV and issuing two tranches of notes on the other side, a CDO-squared structure. Bloomberg suggests the tranching is roughly two of AAA to one of Baa2.

My only question, really, is if these new bonds are downgraded too, will someone else step in and ReRe-Remic them?

Goings On In Oregon

"And this ring is where this great old tree survived a forest fire Billy" with apologies to Gary Larsen.

A Bank of America branch in a double wide trailer? Really?

We are big coffee people and we got a helluva mocha in the town of Hood River.

July 8, 2009 Recap and a Couple of Charts

This was one of the more volatile choppy sessions in recent memory. We've certainly had our share of intraday chopfests but they've mostly been thrashing around in very tight ranges. Today things oscillated much more and it really felt like things were getting overdone on the downside. Today's volume surge also makes me think that we've seen a selling climax, at least in the short term. As on Monday, there were a lot of bullish reversal candles made today. I like today's candles better though because most had much longer lower wicks, volume was higher and things are more oversold than Monday. However, the prevailing trend on most stocks is still down so I think the bounces are probably shorting opportunities. Of course, at this time of year you've got to know when any given stock is reporting earnings as those reports and guidance can easily trump any short term technicals.

The S&P 500 probed that 875 support zone that everybody's watching. I think it's too extended to breakdown here without some bad news to drive it.

Here's the Nasdaq chart:

OIH looks like it wants to bounce off of its 200-day moving average. I just question how far that bounce can go before hitting a wall.

FCX sttod out to me because it's right at support near 45. It's another chart that looks primed for a bounce back toward a downward sloping trendline.

Trend Table

No changes

TrendNasdaqS&P 500Russell 2000

(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend

*** I'm simply using the indices' relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

Distressed and bankrupt acquisitions: Should you do one of these deals?

The answer to the question above?  Absolutely ‘yes’.  That is, If you’re the distressed seller.  And if you are the distressed seller, you may have no choice anyway if you’re actually already bankrupt, insolvent or moments away from being so.

The answer for distressed sellers is easy.  Sell.  But for buyers the answer is more complex.

Cass Business School’s M&A Research Centre (of which I’m the Director) recently completed a very comprehensive study of distressed and bankrupt / insolvent M&A deals (with the sponsorship and support of the law firm Allen & Overy, investment bank Credit Suisse, accountancy and advisor Deloitte and the Financial Times / Mergermarket).  In comparing those types of acquisitions with healthy ones, the study looked at over 12,000 deals, including 2652 distressed targets and 265 bankrupt / insolvent ones.  The study period spanned 25 years from 1984 through 2008.  It focused on strategic deals, and excluded so-called ‘financial sponsor’ deals (typically done by private equity firms).  Details of the study (including definitions used to define a company as ‘distressed’ are included in a full report that can be ordered here).

Unfortunately for the buyers, ‘buying cheap’ does not guarantee higher returns to shareholders, except in the time immediately around the announcement of the deal.  Thus, the market appears to like these acquisitions initially when announced, but then the bloom comes off the rose as the hard work of saving — in fact integrating — the target begins.  Interestingly, as is commonly known, the typical M&A deal announcement results in an immediate decline in the purchaser’s share price (which is confirmed in this study), so at least purchasers of a distressed or bankrupt company get a better initial reaction.

Longer term, whether they bought a distressed or bankrupt company, the study found that the performance of the purchasers declined,.  This was measured by looking at a number of financial factors, including return on equity.  Thus it appears that these deals didn’t meet their expectations.  Caveat emptor. Let the buyer beware.  As with all purchases in life, if it looks like too much of a bargain, there’s probably something wrong with it that you don’t know yet.

There were some other interesting findings in the study:

  • If a target is distressed, it is more likely that the acquirer will be from the same industry (a competitor) than for healthy acquisitions.  It does seem as if there’s at least some attempt by those who know the industry well to try to save a company that’s had problems, although perhaps in light of the finding about long-term success, perhaps this is a case of hubris or misplaced confidence.
  • There was an interesting geographic difference:  the US and UK stock markets react differently to acquisitions of distressed targets.  There is insignificant or even negative immediate reaction in the UK to the buyer’s share price when they announce a deal involving a distressed company, but in the US the opposite is true.  The UK shareholders appear to have made the correct decision!

Lastly, and critical to today market situation, the study found that the best time to strike a deal for a bankrupt target is just after a major crisis (such as we have right now) when the markets are starting to recover.  In these times, both the acquirer and target show gains.

ECB’s “Review of the International Role of the Euro”

This review shows that the global financial turmoil, despite having a very marked impact on overall financial market activity, has not triggered any notable shifts in the currency preferences of market participants. As a result, the international role of the euro, when measured relative to the international role of other currencies, remained fairly stable during the review period. This also applies to recent developments following the intensification of the financial market turmoil in September 2008. All in all, this finding corroborates the conclusion of earlier reviews that the international role of currencies tends to be relatively stable over time.

Currency composition of global foreign exchange reserves

The ECB’s “Review of the international role of the euro”

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Treasury Names Firms for PPIP, Pimco Left Out

Following a comprehensive two-month application evaluation and selection process, during which over 100 unique applications to participate in Legacy Securities PPIP were received, Treasury has pre-qualified the following firms (in alphabetical order) to participate as fund managers in the initial round of the program:

AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;
Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
BlackRock, Inc.;
Invesco Ltd.;
Marathon Asset Management, L.P.;
Oaktree Capital Management, L.P.;
RLJ Western Asset Management, LP.;
The TCW Group, Inc.; and
Wellington Management Company, LLP.

Treasury evaluated these applications according to established criteria, including: (i) demonstrated capacity to raise at least $500 million of private capital; (ii) demonstrated experience investing in Eligible Assets, including through performance track records; (iii) a minimum of $10 billion (market value) of Eligible Assets under management; (iv) demonstrated operational capacity to manage the Legacy Securities PPIP funds in a manner consistent with Treasury’s stated Investment Objective while also protecting taxpayers; and (iv) headquartered in the United States. To ensure robust participation by both small and large firms, these criteria were evaluated on a holistic basis and failure to meet any one criterion did not necessarily disqualify an application.

Moreover, as Treasury previously announced, small-, veteran-, minority-, and women-owned businesses will continue to have the opportunity to partner with selected fund managers following pre-qualification. Set forth below is a list (in alphabetical order) of the established small-, veteran-, minority-, and women-owned businesses partnerships:

Advent Capital Management, LLC;
Altura Capital Group LLC;
Arctic Slope Regional Corporation;
Atlanta Life Financial Group, through its subsidiary Jackson Securities LLC;
Blaylock Robert Van, L.L.C.;
CastleOak Securities, LP;
Muriel Siebert & Co., Inc.;
Park Madison Partners LLC;
The Williams Capital Group, L.P.; and
Utendahl Capital Management.

Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair on the Legacy Asset Program

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VCs See Over 9x (Paper) Return on LogMeIn

Lost in the shuffle of the July 4th holiday, the LogMeIn IPO produced one of the biggest returns for VCs this year—at least on paper.

Mind you, there have only been six VC-backed IPOs so far. But still…

LogMeIn (Nasdaq: LOGM) priced at $16 on July 1 and shot up to $20.02 by the end of the trading day. That was the second best debut of a VC-backed offering this year, behind only restaurant reservation service OpenTable (Nasdaq: OPEN), which rose over 59% on its first day.

Following the IPO, five venture firms collectively held 10.8 million shares worth over $209 million at yesterday’s closing price $19.32. In addition, three of the VCs sold shares in the IPO for proceeds of more than $21 million.

Factoring in the $25 million the VCs collectively put into the company, that means the VCs have seen an overall paper return of more than 9x. (Of course, shares currently held by the VCs are subject to a lock-up period, and the stock price can go up or down between now and then.)

Following the IPO, Prism VentureWorks was the company’s largest shareholder, with 3.9 million shares (or 17.6% of the total) valued at $75.3 million on July 7; Polaris Venture Partners was second with 2.94 million shares (13.28%) worth $56.8 million; 3TS Capital Partners was third with 1.99 million shares (9.01%) worth $38.4 million; Integral Capital Partners was fourth with 1.12 million shares (5.07%) worth $21.6 million; and Intel Capital was fifth with about 889,000 shares (4.02%) worth $17.2 million.

Separately, three firms sold shares in the IPO: 3TS sold 555,248 shares for $8.9 million; Polaris sold 462,860 shares for $7.4 million; and Integral Capital Partners sold 312,524 for $5 million.

I sought comment via email from Woody Benson, who represents Prism on LogMeIn’s board, but he didn’t get back to me, presumably because the company is still in a quiet period following its IPO.


Not quite 30 glorious years

In history:

30 28 25 23 glorious years

The last 30 years were momentous for investors but what did they mean to you? I’m writing the story of the stockmarket in the words of the private investors who bought and sold shares since the Thatcher years. The article will appear in Money Observer later this year, when the old lady (that’s the mag., not Mrs T, and definitely not MO’s editor) celebrates her 30th anniversary. If these events rekindle memories, please leave a comment, or email me,

1979 is a famous, some would say infamous, year in our political history, the year Margaret Thatcher became prime minister, but it’s impossible to assess the last thirty years, without remembering what went before.

In his history, John Littlewood described the 15 years from 1964 to 1979 as:

…the most consistently negative post-war period for the stock market investor, and many would say the same 15 years form the most dismal of any for the state of the economy and the failure of political history.

The purpose of owning shares, he said, is to participate in the growth of the economy and to protect against inflation, but shares failed to match inflation, let alone growth. Despite bull markets, as well as bear markets, between 1964 and 1979 shares lost a third of their real value as prices rose seven-fold. Investors in bonds did far, far worse.

The backdrop of trade union power, failed incomes policies, dividend controls, profits squeezed by polices that were better at controlling prices than wages, the Winter of Discontent, and three-day weeks, is a distant memory now.

But, after thirty glorious years for investors, or perhaps 23 if you take out the down years 1979, 1990, 1994, 2000, 2001, 2002, and 2008, some experts like CLSA’s Russell Napier are thinking that the next decade will look more like the sickly seventies than the eighties or nineties.

If that’s so, naturally bullish investors will need to feed off memories of the 1980’s and 1990’s, while pondering to what extent they’re to blame for the mess we’re in now…

…In 1979 the stockmarket had been rising in anticipation of a Conservative victory but, after it hit a new high the day after the election on 3 May, it fell 30% over the remainder of the year.

Mrs Thatcher had promised trade union reform, lower taxation, reduced government borrowing and the denationalisation of aerospace and shipbuilding. She quickly added the abolition of price, dividend and exchange controls and a wholesale switch to the free market. In his first budget, chancellor Sir Geoffrey Howe cut government spending and raised interest rates, attacking inflation with a monetarist straight jacket.

With inflation and interest rates soaring, investors began to appreciate the magnitude of the task ahead. Littlewood quotes a market report by Rowe & Pitman from July 1979 to illustrate their dilemma:

In explorer’s language the valley threatens to be rather deeper than expected but the light across it is that much brighter.

And four months later, on the day interest rates peaked at 17%, the stockmarket embarked on a record breaking bull run that lasted until 16 July 1987 when it was punctuated only briefly by the bear market either side of Black Monday. In seven years eight months,  the FTSE All Share index rose from 219.85 to 1,238.57, or 463%.

Apart from Black Monday and a bear market sparked by the onset of recession in 1990, the only other major setback before 2000 occurred in 1998 when Russia devalued and restructured its debt and Long Term Capital Management, a hedge fund, collapsed, threatening the financial system. Governments on both sides of the Atlantic responded to the panic, just as they had after Black Monday, by cutting interest rates.

The FTSE All Share rose to a peak of 3,265 in September 2000, and despite the technology bust it surmounted that peak in the summer of 2007 before falling to its current level, 2,140. The first decade of the twentieth century looks like being far less glorious, in stockmarket terms, than the two decades before.

Along the way, we’ve experienced riots, national strikes, inflation over 20% and by one measure below 0%, the privatisation of a huge swathe of nationalised industry, the spectacular growth of companies like Vodafone and WPP and the catastrophic collapse of Polly Peck and Parkland, the rise and fall of 80’s icons Body Shop, Sock Shop, Tie Rack and Laura Ashley, scandal at Guinness and Barings, war in the Falkland Islands, Iraq and Afghanistan, and an alphabet soup of manias from conglomerates to utilities including technology companies, cash shells and property. Oh, and there was the millennium bug. Remember that?

Prosperity came from North Sea oil, the end of the Cold War, globalisation, freer markets, freer trade, and cheaper imports that meant falling inflation and interest rates and a painful shift from uncompetitive manufacturing to a service based economy. It was, especially later on, financed  by rising indebtedness, accompanying the rise in confidence.

Now some of those trends are abating or reversing, it’s tempting to imagine the first two decades were a glorious period for investors, where you only had to be in the stockmarket to be successful. The third decade is much harder work, and maybe the next one will be too.

In the late 1990’s the mantra was investing is easy, all you had to do was buy and hold. That view seems much less fashionable now.

But I didn’t invest in the eighties, or for much of the nineties, so perhaps my reading glasses are rose-tinted and it wasn’t as easy as buy and hold then, either. What do you think?

In practice:

Not yet Armageddon

Despite the gradual ebbing of the market in the last two weeks, its value as measured by the long-term price earnings ratio is still 11. That’s cheap, but not quite in bargain territory, meaning it’s a good, but not perfect time to be buying shares.

Looking at inflated prices compared to book values and historic PE ratios, David Rosenberg is more cautious about the US stockmarket, concluding:

…it is unlikely that we have crossed the Rubicon into new bull market terrain. As a result, the best advice is for active rather than passive investment strategies, and to maintain a conservative income-oriented tilt over the near-to-intermediate term across asset classes.

Notice he doesn’t say buy and hold.

I go along with the conservative element of his prescription, without being too concerned about income. That means ferreting out good companies at cheap prices. There will be some in my list of financially strong companies with high F_scores and low long-term price earnings ratios:

The table is ordered by year end, so the company with the most recent financial year end is top (all are within the last six months). Ggearing is the percentage of total assets that is shareholders’ equity, and EPS count is the number of years of earnings data used in the long-term PE calculation. The data is from and Sharescope.

Next Monday’s company profile will probably come from this list.

Venture Capital – time for V3.0

It's impossible to escape the debate of whether Venture Capital is "broken" – tech blogs, national newspapers, even the overheard conversations in my favorite coffee shop (Café Del Doge in Palo Alto and no, I'm not an investor, just a happy patron!) debate the "death" of venture capital. Like any "system" that has been "enhanced" over decades, the architecture of the venture capital business isn't broken but has fundamental issues that slow or even limit its ability to adapt to new market requirements. Few companies survive a major architectural overhaul of their main product family. Years ago I lived through just such a transition at Tandem Computers as the operating system and related system software (small things like the transaction monitor, database, communication products etc.) all had to be overhauled to deal with faster processors and larger memory. The original system had been designed in the 70's when the idea of more than 255 processes in a CPU was considered a "huge" number – you can probably guess that the process id was encoded in 8 bits. Years later, the CPUs were so much faster that you couldn't run them at 100% utilization because of that process limit. The process id and similar system data had to be made larger – the ramifications were staggering in their impact. Project EXCEED was the code name for the project to remove operating system limits. It was originally estimated at 300 man years of work – in the end it "exceeded" that by several multiples – consuming a large percentage of the development staff. This was a critical time as the "open system" transition was accelerating. Tandem missed the wave, lost market share as its systems were relevant to a smaller market niche and eventually was acquired, first by Compaq and then by HP. Venture Capital firms are caught in an architectural transition:
  • Too much capital in the aggregate.

    The supply of capital into Venture funds isn't balanced by the market exit potential (IPO, M&A) to generate an acceptable rate of return. The same things happened with capital inflows into the LBO funds which I wrote about back in January 2007 (but was my concluding observation about early stage capital off the mark!).

    Many Limited Partners believe that Venture Capital isn't an asset class but an ACCESS class – the majority of venture returns have been generated in the past 10 years by a very small subset of firms. If you could get into those firms you were going to make a return – or at least that was the theory…
  • Too little operating expertise.

    The bubble run up resulted in the inflows of two forms of capital into Venture firms… money and people. The expansion in human capital attracted a lot of very smart people but with little operating experience.

    You wouldn't want a medical procedure to be performed by someone who had been trained but was about to conduct their 3rd or 4th procedure - on
    Continue reading "Venture Capital – time for V3.0"

Preliminary VC Deal Data Shows Mixed Bag

Venture capitalists invested $2.94 billion into 360 U.S.-based companies during the second quarter, according to preliminary, unaudited data from Thomson Reuters (publisher of peHUB). That’s down significantly from the $7.57 billion investors put into 1,042 companies during the same period in 2008, although is beginning to approach the $3.1 billion invested in Q1 2009 (and will probably top it, once all the surveys are counted). The official MoneyTree report from the National Venture Capital Association and PricewaterhouseCoopers, based on Thomson Reuters data, is expected to come out later this month.

Biotechnology and health care investments buoyed the investment totals in Q2, accounting for nearly 45% of the dollars put to work during the three-month period.

Four of the 10 largest deals done the quarter were health care deals. Investors put $145 million into anti-cancer company Clovis Oncology; $108 million into orthopedics company Small Bone Innovations; $50 million into light-therapy company PhotoThera; and $46 million into anti-infective medicine developer Cempra Pharmaceuticals.

The two biggest deals were both non-standard VC investments. The $145 million that Clovis raised from New Enterprise Associates, Versant Ventures, Domain Associates and Aberdare Ventures will likely be the only investment it takes. The company is similar to a blank-check acquisition corporation that looks to buy six to seven drug candidates to commercialize. The Clovis management team members previously worked together at Pharmion, which similarly bought drug candidates, and which went public in 2003 and sold to Celgene Corp. in 2008 for $2.9 billion.

Small Bone Innovations went far afield to raise its $108 million. It raised $25 million from Khazanah Nasional Berhad, an investment arm of the Malaysian government and set up its Asia-Pacific hub in Kuala Lumpur. Small Bone Innovations also took an undisclosed sum from The Family Office, a multi family wealth management firm based in Bahrain. Other investors included Goldman Sachs and private equity firm Trevi Health Ventures.

Although VCs put fewer dollars to work overall, each company that got money collected more than it might have a year before. The average investment round size was $8.18 million during the second quarter, up from $7.2 million during the same period a year ago.

Cleantech investments fell significantly during the second quarter. VCs put $237.8 million into 21 companies, according to the preliminary data. That’s down from $898 million VCs put into 67 cleantech companies during the same period last year.

Thomson Reuters’ preliminary data runs counter to a report late last month from accounting firm Deloitte and the consultancy Cleantech Group, which reported that investments in cleantech reached $1.2 billion in 94 cleantech companies during the second quarter, a 12% increase over the first quarter, when global investment bottomed due to the global banking crisis. However, Cleantech Group’s quarterly investment report included subsized federal loan guarantees and investments in companies based outside the United States. It is unclear if their report also includes project financing.

The biggest cleantech deal of the quarter, according to Thomson Reuters, was the $50 million carbon-sequestration company Powerspan Corp. raised from AllianceBernstein, George Soros, Tenaska Energy, the Angeleno Group, Calvert Social Venture Partners, NGEN Partners, Persimmon Tree Capital and Rockport Capital Partners.

Fund-raising down, too

Deal activity wasn’t the only downer for VCs in Q2. U.S.-based venture firms raised just over $2 billion for 25 funds during the second quarter, down nearly 80% from the same period in 2008, according to preliminary data from Thomson Reuters. The NVCA and Thomson Reuters expect to release official fund-raising data later this month.

The amount raised by U.S. venture firms is the lowest since the third quarter of 2003, records show.

Health care investor Domain Associates raised the most money during the second quarter, collecting $371 million for an eighth fund of unspecified size that is still in fund-raising mode, according to reports.

IT and cleantech investor DCM held a $350 million first close toward a $505 million sixth fund, according to reports.

The only new firm to successfully close a fund was Andreessen Horowitz. The early stage IT fund raised $300 million, beating the $250 million target it had set.

East coast firms seemed to weather the financial crisis better than their West Coast counterparts. Firms based between Connecticut and Alabama raised $990 million, data show.

Perhaps limited partners have more faith in the region’s ability to produce successful companies than Greylock Partners, which shuttered its Massachusetts offices last quarter.


Chamberlain in Moscow

Being on a road trip, we’ll take what papers we can get. And today that means The New York Times.

Just last week in “Nobel Freakonomics” we mentioned the Times in a less-than-flattering light—i.e. that we haven’t been reading it for serious news since the publisher decided to cut costs by outsourcing the Times’ newsroom to the White House.

It was an off-hand joke. But apparently that’s exactly what happened, judging by what passes for today’s story on the Moscow summit.

“Obama Resets Ties to Russia, but Work Remains.”

That’s the headline, parroting directly the administration’s ceaseless ‘Reset Button’ yammering about everything it has been trying to disinherit from George Bush. Still, since that apparently didn’t sound upbeat enough to the White House, the Times adds a more pleasant, editorial-style subheading:

“A Trip Brings Progress but Fissures Persist.”

How, exactly, did this trip bring “progress” you wonder? Reading the story itself, the “progress” is unclear. Here’s how the Times describes it—and we are not making this up—in paragraph two:

But while Mr. Obama and President Dmitri A. Medvedev of Russia declared a reconciliation, they did so partly by agreeing to disagree on important issues and by selectively interpreting the same words in sharply different ways.

Substitute “Chamberlain” for “Obama” and “Hitler” for Medvedev,” and the Times might be describing what happened in Munich back in 1938.

But the Times does not stop with that howler, because it apparently did not suit the White House editor. How else to interpret the apparently thin-skinned Michael McFaul, Obama’s point man on Russia who told the reporters, quote/unquote:

“I dare you to think of a summit that was so substantive.”

Apparently, none of the reporters dared think of Reagan/Gorbachev.

In any event, the Times did not get to the verge of Chapter 11 by letting facts get in the way of its own, narrow-minded world-view, and since the headline promised “Progress,” the reporter gives us progress:

…the two leaders agreed to slash strategic nuclear arsenals, resume military contacts suspended after the war with Georgia and open an air corridor across Russia for up to 4,500 flights of United States troops and weapons to Afghanistan each year.

Of these three, the first is a no-brainer for both sides; the second is a clear win for Putin, who gets to “reset” things to where they were before he invaded Georgia; and the third, while nominally a victory for Obama, is even better for Putin: who wouldn’t want to let us fight a war his own country demonstrated could not be won?

What other signs of “progress” came out of the summit that we are “dared” to question? Again, we making nothing up:

Mr. Obama and Mr. Medvedev announced an agreement to open a joint early-warning center to share data on missile launchings. But Presidents Bill Clinton and Boris N. Yeltsin announced the same agreement in 1998. Mr. Clinton then announced it again with President Vladimir V. Putin in 2000. Mr. Putin and President George W. Bush recommitted to it as recently as 2007.

And none of them ever actually built the center.

Wordsmithing aside, what you really need to know about the event might just as easily be summed up in the photograph of Putin and Obama at the top of the story.

Obama, back to the camera, is leaning earnestly towards Putin, who sits, legs open, with about as blank a look on his face as any ex-KGB agent ever held in any meeting with any President of any country. He looks like the same Vladimir Putin whose eyes George Bush once looked into and declared he had seen the man's non-existent “soul.”

It is no wonder the Times buried this description of the two men’s meeting well off the front-page:

Their breakfast ran two hours, and Mr. Putin spent the first half in a virtually uninterrupted monologue about Russia’s view of the world, aides said afterward.

Substitute “Hitler” for Putin, and once again you’re describing Munch.

Reset? Sounds more like the computers crashed.

Ah, where’s a New York Post when you need it?

Jeff Matthews

I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Options Available for New S&P 500 Triple ETFs

Though they are less than two weeks old, the two new triple ETFs based on the S&P 500 index already have options available to trade. The bullish 3x ETF, Ultra ProShares (UPRO) has July options that expire one week from Friday with strikes from 60 to 95, including single dollar increments from 80 through 90. The bearish -3x Short ProShares (SPXU) has options available from 70 to 95, with all the strikes in single dollar increments.

In anticipation of a broad range of applications and the potential for some significant movement, the strikes for the December options range all the way from 30 to 140 for UPRO and from 40 to 150 for SPXU.

While both of these triple ETFs have been attracting more volume each day, neither has managed to break the million share mark yet. I anticipate that we will begin to see million share days in each of these ETFs next week and shortly thereafter, UPRO and SPXU will begin to trade in the volumes currently associated with leveraged ETF pairs such as FAS/FAZ and SSO/SDS.

As these triple ETFs are based on the same underlying as the VIX, an entire new genus of trading strategies is being hatched as I write this…

Denbury Resources’ CEO Extracts a Lucrative Exit…

driOn June 30th, company founder Gareth Roberts stepped down as the president and CEO of Denbury Resources Inc. (DNR), an oil and natural gas company that operates in Mississippi, Louisiana, Alabama, and Texas.  And, based on the 8-K the company filed yesterday, we know that the concept of the Golden Parachute is alive and well.  (We also know that Roberts will continue to serve as the co-chairman of the board of directors and in the “non-officer role” as the “Chief Strategist of the Company”.)  Since the company had a succession plan in place, the move was not unexpected.

Roberts signed a “Founder’s Retirement Agreement” that provides for:

  • a payment (made June 30) in the sum of $3.65 million in cash;
  • the Company’s issuance to him of $6.35 million of the Company’s 93/4% Senior Subordinated Notes due 2016;
  • the sum of $250,000 per year for serving as Co-Chairman of the board through 2012;
  • payment for serving as “Chief Strategist” in the sum of another $250,000 per year, through 2012;
  • the right to participate in the Company’s insurance plans through 2012; and
  • assuming that he continues to work as the company’s Chief Strategist, Roberts “will be entitled to vest over time in his currently existing, unvested equity awards granted under the Company’s 2004 Omnibus Stock and Incentive Plan as per the existing terms and conditions of those awards”; and
  • Roberts also “entered into a 10b5-1 trading plan providing for the sale of up to 30,000 shares of the Company’s common stock at a specified minimum price between September 14, 2009 and December 31, 2009.”

The company’s press release (quoting board co-chair Wieland Wettstein) on the change credits Roberts for growing the company “from no more than an idea into its present stature into a leader in tertiary recovery with over 800 employees.”

However, the recent headlines about the company might lead one to conclude that the retirement agreement is extremely generous. For instance, this article from early May looks at the company’s 1Q 2009 loss of $18.3 million (compared to a net income gain of $73 million for the same period last year).  At the time, Roberts noted that commodity prices had fallen, but the company had made money “if you adjust for the non-cash fair value adjustments on our derivatives.”  He also noted that the company had increased its productions levels.

The production factor may have changed, though.  Yesterday this article reported that Denbury Resources lowered its production outlook for the rest of 2009.  The company sold a majority of its stake in the Barnett Shale natural gas assets to Talon Oil & Gas, LLC.  Now Denbury Resources says that it expects to reduce its production by 3,500 barrels of oil equivalent per day.

Fortunately for Roberts, the pipeline of cash flowing to him looks a lot more reliable.

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What To Make Of The Market (special Hood River edition)

We are in Hood River, OR. We got here yesterday did a lot of milling around the town, down toward the Columbia River where there was some sort of kiteboading event going on. When we got on the plane at about 10:30 yesterday the S&P 500 was down 1.35% and things got a little worse in the second half of the day. I heard a little of CNBC in the car on the way to the airport but I imagine the tone there was somewhat dour?

I think I covered a lot of this ground the other day and maybe now it is playing, or it isn't. There is tremendous psychic value in preparing mentally for a decline when odds of one are pretty good and after a 40% rally... The green shoots sentiment was bubbling up pretty good there for a while. I thought that excitement was overdone and if the market goes down to 700 on the SPX then I imagine that the fear (or whatever other feeling it might create) will be overdone as it was a few months ago, IMO.

Not to be a wise guy but the US financial system and ordinary way of life was perceived to be in serious jeopardy. We have all sorts of problems the magnitude of which are quite bad and if you think of policy in terms of either speeding up a fix or hindering a fix we might all lean toward hindering right now but there is no need to stick a fork in the US--even if the SPX does break the March low before this is over.

I will continue to say that the better way out for most portfolios will be with more foreign exposure. The US probably creates a drag for a lot of countries, yes, but it will not cause all countries to grind to a halt however.

At this point, down a ton from the peak and churning around for a while now, I think it makes sense to still have some defense on and also start to think about adding to themes you believe will be important over the course of several years. I've got a couple of things mostly figured for the next two or three purchases when the time comes before now have cash built up, a little less than I did earlier, and now a full starter position in SDS (recall I added some a couple of weeks ago).

There is one reader (I think just one) who keeps posting asking what I'm going to do now that we are below the 200 DMA again. He also asked before it went below, what I would do. A few things, first I will not front run anything I might do for clients in a blog post. Second, we are not handing out fish here, do your own work. Third I just added some SDS a couple of weeks ago. No one should copy anyone. This means you should not copy me. I don't have all the answers I have the framework for a strategy that I have been working with for a while now and while you can look at the quarter end videos to get a sense of how it has gone, do you really think you are helping yourself if you copy someone else in the middle of the event?

That is just not what this site is about. For the rest of you, thanks for indulging me that.

We are headed out to Mt Hood this morning before heading over to Astoria. Hood River reminds us a lot of Durango, CO. On a hillside, some water down below, somewhat touristy, some neat buildings. Candidly we had a tough time getting any pictures we really liked.

Wednesday Links

Meriwether Said to Shut JWM Hedge Fund After Losses

How Citi Blew Itself Up By Cleverly Avoiding AIG

Goldman, Morgan Stanley Threatened by CFTC Review

US efforts to vilify energy traders might backfire

EU courts US dealers with flexible derivatives rules

The Cold War in high frequency trading

Our banks are beyond the control of mere mortals

Why Robert Shiller’s New Housing ETFs Are Dangerous

Don’t trust the Swiss?

Swiss Vow to Block UBS From Providing Data to U.S.

Is Goldman Sachs evil?

A conspiracy so vast

The challenges of communicating the crisis

Google Plans to Launch Operating System for PCs

Forty words for ‘trousers’

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Growth vs. Stability

I have a conjecture. Like most conjectures in finance, it isn't susceptible to proof. Indeed, were people to act as if it were true, it might well change the system enough that it was no longer the case. Anyway, here it is:
There is a tradeoff between growth and financial instability. The system can be worse than the limit - more unstable or slower growing - but it cannot be better.
One of the reasons I think that something like this might be true is that a supply of cheap credit allows faster growth, but at the cost of instability when there is a downturn. A recent article in the FT supports this. As you might expect, securitisation - the primary cheap credit channel - has come to a grindng halt in many areas.As the FT says:
...the freeze in securitisation markets has led to a dramatic shortage of lending power – a “credit crunch”. Thus the policy question now is whether there is any way to restart or replace this securitisation “motor” to stop the economy slowing further.
This implies of course that faster growth is necessarily a good thing. If the conjecture is correct, then shouldn't we have a discussion about its consequences rather than going broke for growth again?

July 7, 2009 Stock Market Recap

The S&P 500 held above its 200-day moving average for most of the day but it gave in to the selling pressure late in the day. It's now set to retest the support/resistance zone around 875. That was resistance in late January, early February as well as April before flipping to support in May. There's not a lot of obvious support below that zone so a breakdown would be a big deal in my eyes.

Things don't look nearly as bad over in Nasdaq land. That index broke its 50-day moving average today but it's still well above its 200-day and its May lows. That could change quickly though, especially if the S&P breaks that 875 zone and people start looking for stocks to sell (short) with a lot of air under them.

Trend Table

More damage done today...

TrendNasdaqS&P 500Russell 2000

(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend

*** I'm simply using the indices' relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

Transports Test Triangle Support

After forming a lower high last week, the Dow Transports declined to triangle support with a sharp move lower the last three days. As of 3PM ET on Tuesday, the Average was down over 8% from last week's high. A triangle break would be bearish and call for a retracement of the March-May advance.


SharpCharts users can click this chart to see the settings.