Some Interesting Legal Opinion on General Growth Chapter 11

The firm of Wachtell, Lipton, Rosen and Katz has put out some very interesting opinions as to the General Growth (GGWPQ) Chapter 11. It goes to the central thesis we have here that the lenders, one way or another will end up extending maturities on the loans. This, in turn, will leave tremendous value for the common shareholders.

First this from 8/12:
GGP WLRK

Here is the applicable section:

Given the novelty of some of these issues, it is not yet clear how the coming wave of real estate restructuring and bankruptcies will play out. While this round went to GGP and against the SPE and CMBS lenders, it remains to be seen where the balance struck by the GGP court between creditors’ rights and the interests of equityholders leads when thorny issues such as cramming down secured lenders to extend maturities and alter pricing and other terms to the benefit of equity are presented to the court, or how negotiation and settlement discussions – both in formal bankruptcy proceedings and in consensual non-bankruptcy restructurings – will play out in the post-GGP era. The prospect of SPEs being included in consolidated bankruptcy proceedings will also raise issues not addressed in GGP, such as whether solvent SPEs will participate in an enterprise’s DIP financing, potentially structurally subordinating mezzanine lenders. Another twist may be the bypassing of the intricate consent and control mechanics in pooling and servicing agreements, with CMBS certificateholders working independently of their servicers.

Whether or not consistent with the expectations of creditors and debtors, the GGP ruling is consistent with the general tendency of bankruptcy courts to be pragmatic and to place substance over form. As the GGP court concluded: “These Motions [to dismiss] are a diversion from the parties’ real task, which is to get each of the [debtors] out of bankruptcy as soon as feasible. The [secured lenders] assert talks with them should have begun earlier. It is time that negotiations commence in earnest.”

Then on 8/24 this:
REIT and Real Estate Restructurings and Bankruptcies - Further Observations From the Front Lines


Again ,the applicable portion:

The “cramdown” provisions of the Bankruptcy Code (colloquially, in the case of a secured creditor, “cram up”) permit a plan of reorganization to be approved over the dissent of a class of creditors if the plan is “fair and equitable”. Even an over-collateralized loan need not be paid off in cash in a bankruptcy case, and in today’s climate of scarce refinancing capital, non-payment and partial payment have become common. With respect to secured creditors, a plan is fair and equitable if, among other alternatives, it allows the creditors to retain their liens and provides for new or “rolled over” debt in an amount, and with a value equal to, the secured claim. However, the appropriate interest rate, maturity and covenants of the new obligations are not specified by the Bankruptcy Code. Most courts refer to the market in deciding such terms, but some courts allow for the possibility that the market is inefficient (a serious risk in today’s financial climate) in choosing terms that will not result in the new instrument trading at par. In addition, the 2004 U.S. Supreme Court decision in Till v. SCS Credit Corporation – a chapter 13 case of uncertain applicability in chapter 11 – suggests that cramdown rates in the range of prime plus 1 – 3% are appropriate. Certain GGP shareholders have publicly floated the notion of cramming up GGP SPE debt with seven-year paper at current interest rates. Whether such terms would pass muster before a court depends on any number of factors. However, in the recent Spectrum Brands case secured creditors facing both a reinstatement and cram-up fight reached a consensual agreement with the debtor that gave them a 250 bps margin bump, a LIBOR floor and an actual shortening of maturity relative to their prepetition credit agreement.

This and other cases settled both in and out of court in recent months suggest that the uncertainty surrounding cramdown tends to lead parties, where debt is secured but cannot be refinanced, to compromise solutions – rates not so high as might be incurred in a refinancing, nor so low as the rates that prevailed in the recent bubble financing years.

It is important that the Judge in the case has a very wide range of latitude as it pertains to remedies. Other than maturity extensions, other options simply make very little sense. The battle now becomes over not whether or not to extend them, but for how long and at what rate. As long as CMBS markets remain as restricted as they are, the maturities have to be pushed out farther or the Judge risks being in the same spot a few years from now and this new debt comes due without a market to refinance it in.



Disclosure ("none" means no position):Long GGWPQ

Sears Misses: Cheerleaders Run and Boo-Birds Emerge

Well, its official, the boo-bird are back out on Eddie Lampert after Sears Holdings (SHLD) recent quarter. Now, it should be noted this is after Q1 results that "surprised" everyone being better that expected and the stock rallied from $35 to near $80.

So, who is right, the cheerleaders or the boo-birds? Neither.

Unlike any other retailers, Sears is mainlined to the US housing market. With 40% of the US market share for appliances, what happens in housing is acutely felt at Sears. With that appliance share, when housing is good, Sears will do well, unfortunately, the opposite hold true. When folks comes to Sears for an appliance for a new home, they will pick up paint in the paint dept., lawn tools, bedding, TV's etc...

Let look at some number more closely. At Q1 2007 American's were buying (at an annualized rate) $281 billion in "Furnishings and durable household equipment" (furniture, appliances). That represented the high water mark for that category (wasn't that the peak in most housing markets also?). FY ending 2/2007 also marks the high water mark for Sears Holdings earnings (the annual average in 2006 vs 2005 for consumer expenditures rose appreciably). By the time Q4 2008 rolled around, consumers were now buying $259 billion a year of those products, a $22 billion annual decline. Remember, Sears holds 40% of the US appliance market. (Note, not all of the $22 billion are appliance sales but with Sears selling appliances and furniture, it is safe to say a significant chunk of the revenue declines at Sears can be traced directly here).

As of Q2 2009, that number is now at $251 billion annually. As of just Q2 2008 the number was $276 billion, an unprescedented one year drop. Anyone still wondering why Sears is seeing declines? ....

Appliances are the main reason folks come to Sears, absent that reason, Sears is just another retailer. So, when housing rebounds, one ought to expect Sears to once again show top-line growth. For that reason, the Q1 Cheerleaders came out way to soon and will probably stay hidden until Q1 or Q2 2010 when housing begin to gain some footing. The good news for them is that by then comps. will be so low that Lampert & Co. will be able to step over them.

Now for the boo-birds. You will be correct for now. BUT, lets look at what Lampert has done. He has steadily used Sears cash to repurchase shares. This is meaningless now but when housing does turn, the 20%+ fewer shares there will be outstanding will mean that a $1 million profit next year will equate to a 20% higher per share number, that is huge. For that reason, Lampert will not even have to deliver profit dollars in absolute numbers anywhere near what he did in the past for shareholder to reap large gains.

For several years the boo-birds have been saying Sears is "dead", "dying" etc. Yet it has maintained a balance sheet healthier than almost every large retailers with the exception of Wal-Mart (WMT) and Target (TGT). Sears is not going to become extinct. The stories you are reading today are essentially reprints from any bad quarter over the last 4 years. Ignore them. Will Sears still be a big box retailer 5 years from now? Maybe, maybe not. The point is, "Sears Holdings" will still exist.

Sears is also making radically changing its online presence in a way that will differentiate it from all other brick and mortar retailers. It way too soon to know if this will payoff but if it does, the payoff will be multiples of what was invested. Pay attention to MyGofer, my gut tells me there is something there consumers will flock too.

My friend "Davidson" has this take on Sears:

While Lampert has improved the financial structure and efficiencies, he has not yet unlocked the value of the brands, i.e. Lands End, Die Hard and Craftsman. He needs to lay out a plan of attack in my opinion that lets investors understand his thinking on expanding brand distribution. At the moment they appear to be locked-up within a dull plain wrapper that is frayed at the corners.

He is right. Lampert's silence is just fine when things are going great, but, when things are shaky, nervous investors need to be reassured or communicated with more. Lampert need not hold investors hands or bother giving guidance to Wall St., but an occasional letter to shareholders would not hurt. Davidson is right in his call for Lampert to communicate the strategy, shareholders "think" they know the strategy, but no one really "knows".

I do get the whole "long term approach" Lampert espouses, but if folks are not clear where the ship is ultimately headed to, I'm not sure they can accurately look at where it is today and make an accurate assessment of progress.

A note: After Q2 Morningstar raised its "fair value" for Sears to $105 (hat tip reader Justin)

Just remember, most of what is said out there is simply "noise".

Sears = Housing, don't forget it.


Disclosure ("none" means no position):Long SHLD, WMT, none

Wall St. Media 8/27: Thank You To Portland Sea Dogs

Special thanks to Pitching Coach Mike Cather and the Portland Sea Dogs organization and players for having my boys Cameron and Luke at bat boys for a double header when we were up on vacation. Truly an event they have not stopped talking about since...

Doug and I also talk about Natural Gas (UNG) and some Biotech's he likes...



The boys in action ans with Coach Cather..






Disclosure ("none" means no position):Long UNG

"You Think The Market Isn't A Casino Now?"

Got this in an email from a reader this weekend, just had to share as it makes just way too much sense.....

Just look at the top 20 stocks traded on Friday.. Most are pieces of Sh...

Citibank trades 1.4 billion shares!!! When I got started in the business in the early 80’s everyone was worried what would happen when the WHOLE MARKET TRADED 100 MILLION!!

This volume is distorting the fact that most investors are doing nothing. This is not healthy volume in terms of sponsorship.. John Hussman of Hussman funds is probably right about this..

Disclosure ("none" means no position):

Another Look at Dr. Copper

An update from an article back in March...

"Davidson" submits:

It is useful at this time to review “Dr. Copper” and the Baltic Dry Index which many believe offer insight to global economic activity. As I review the multitude of current forecasts there are many which state that the market has over-reached economic reality, others state that while there has been an economic up-tick it will quickly deteriorate to a second dip-the so-called “W”-Shaped recession and a very few see a so-called “V”-Shaped Recovery. Many forecasters point to the short term movements in Comex Copper prices and the Baltic Dry Index to anchor predictions. The net result is a series of “UP” forecasts with up movements in the indices and “DOWN” forecasts with the dips. In some weeks the Baltic Dry Index and Comex Copper are not in alignment and the forecasts are mixed.

My suggestion is to apply Ockham’s Razor and focus on the 3mo trends to smooth out the weekly volatility. Net/net, both of these economic indicators appear to be in up trends.

In my experience there will always be analysts that find a reason to discount market movement. In the current instance their advice is to ignore the trends of Comex Copper and the Baltic Dry Index as being caused by China’s restocking of inventories and that this does not reflect a true increase in economic activity. I disagree! I interpret China’s activity as looking forward to potential needs and making a timely use of excess $US to buy cheaply priced commodities with the marginal cost of production of oil reported in the $70bbl-$80bbl range and for copper the marginal cost of production is reported to be in the $1.50lb-$1.80lb range.

I believe we should view Comex Copper and the Baltic Dry Index in the context of US car and truck sales. US sales turned up months before “Cars for Clunkers” program began and were coupled with anecdotal stories of workers being brought back to factories to replenish inventories. Add to this increased manufacturing activity a story of BYD(the Buffett Chinese electric car company) on August 22, 2009 in which BYD announced its plans to bring its electric cars to the US market in 2010. This is much earlier than previously anticipated.

It seems to me that economic activity is accelerating and that Comex Copper and the Baltic Dry Index are a reflection of this activity. Certainly the activity observed to date does not mean that it will not suddenly stop. But, history supports the notion that once economies begin to turn more positive they generally continue in the same direction even if it appears that government stimulation was involved.

I view this information as positive for investment in stocks and bonds.

Disclosure ("none" means no position):

Brookfield Properties Analyst: "No Reason for Material Discount"

For those not familiar with it here is the original investment thesis for Brookfield Properties (BPO)


The report said (emphasis mine):

Dow Jones) TD raises Brookfield Properties (BPO) to hold from reduce, citing a "dramatic turnaround in freely useable liquidity." Firm says the Canadian office giant recently raised $1B in an equity offering that improved its outlook dramatically. "With our liquidity concerns essentially gone, we no longer see reason for a material discounted relative valuation," TD says. BPO up 1% at $1.38.

Relative valuation is the key here. The REIT industry is currently trading at a PE ratio of about 14 times earnings. Brookfield, at 6 times. What the report is saying is that Brookfield now should not have a "material discount" it now does to the industry. Simply put, the stock can rally 100% and still trade at a discount to its peers (barring any large earnings surprises).

We bought shares at $9.54 and will hold them as this is a class management team whose company is trading a a large discount to its true value...


Disclosure ("none" means no position):Long BPO, none

"Econonmics in One Lesson"

Here is a section of the book that applies more than a bit to today....

There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to “insufficient private purchasing power.” The remedy is just as obvious. All that is necessary is for the government to spend enough to make up the “deficiency”.

An enormous literature is based on this fallacy, and, as so often happens with doctrines of this sort, it has become part of an intricate network of fallacies that mutually support each other. We cannot explore that whole network at this point; we shall return to other branches of it later. But we can examine here the mother fallacy that has given birth to this progeny, the main stem of the network.

Everything we get, outside of the free gifts of nature, must in some way be paid for. The world is full of so-called economists who in turn are full of schemes for getting something for nothing. They tell us that the government can spend and spend without taxing at all; that is can continue to pile up debt without ever paying it off because “we owe it to ourselves.” We shall return to such extraordinary doctrines at a later point. Here I am afraid that we shall have to be dogmatic, and point out that such pleasant dreams in the past have always been shattered by national insolvency or a runaway inflation. Here we shall have to say simply that all government expenditures must eventually be paid out of the proceeds of taxation; that inflation itself is merely a form, and a particularly vicious form, of taxation.

Having put aside for later consideration the network of fallacies which rest on chronic government borrowing and inflation, we shall take it for granted throughout the present chapter that either immediately or ultimately every dollar of government spending must be raised through a dollar of taxation. Once we look at the matter in this way, the supposed miracles of government spending will appear in another light.

A certain amount of public spending is necessary to perform essential government functions. A certain amount of public works — of streets and roads and bridges and tunnels, of armories and navy yards, of buildings to house legislatures, police and fire departments—is necessary to supply essential public services. With such public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of “providing employment” or of adding wealth to the community that it would not otherwise have had.

A bridge is built. Ifit is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money had it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.

Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.

This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.

But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer. Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.

The same reasoning applies, of course, to every other form of public work. It applies just as well, for example, to the erection, with public funds, of housing for people of low incomes. All that happens is that money is taken away through taxes from families of higher income (and perhaps a little from families of even lower income) to force them to subsidize these selected families with low incomes and enable them to live in better housing for the same rent or for lower rent than previously.

I do not intend to enter here into all the pros and cons of public housing. I am concerned only to point out the error in two of the arguments most frequently put forward in favor of public housing. One is the argument that it “creates employment”; the other that it creates wealth which would not otherwise have been produced. Both of these arguments are false, because they overlook what is lost through taxation. Taxation for public housing destroys as many jobs in other lines as it creates in housing. It also results in unbuilt private homes, in unmade washing machines and refrigerators, and in lack of innumerable other commodities and services.

And none of this is answered by the sort of reply which points out, for example, that public housing does not have to be financed by a lump sum capital appropriation, but merely by annual rent subsidies. This simply means that the cost to the taxpayers is spread over many years instead of being concentrated into one. Such technicalities are irrelevant to the main point.

The great psychological advantage of the public housing advocates is that men are seen at work on the houses when they are going up, and the houses are seen when they are finished. People live in them, and proudly show their friends through the rooms. The jobs destroyed by the taxes for the housing are not seen, nor are the goods and services that were never made. It takes a concentrated effort of thought, and a new effort each time the houses and the happy people in them are seen, to think of the wealth that was not created instead. Is it surprising that the champions of public housing should dismiss this, if it is brought to their attention, as a world of imagination, as the objections of pure theory, while they point to the public housing that exists? As a character in Bernard Shaw’s Saint Joan replies when told of the theory of Pythagoras that the earth is round and revolves around the sun: “What an utter fool! Couldn’t he use his eyes?”

We must apply the same reasoning, once more, to great projects like the Tennessee Valley Authority. Here, because of sheer size, the danger of optical illusion is greater than ever. Here is a mighty dam, a stupendous arc of steel and concrete, “greater than anything that private capital could have built,” the fetish of photographers, the heaven of socialists, the most often used symbol of the miracles of public construction, ownership and operation. Here are mighty generators and power houses. Here is a whole region, it is said, lifted to a higher economic level, attracting factories and industries that could not otherwise have existed. And it is all presented, in the panegyrics of its partisans, as a net economic gain without offsets.

We need not go here into the merits of the TVA or public projects like it. But this time we need a special effort of the imagination, which few people seem able to make, to look at the debit side of the ledger. If taxes are taken from individuals and corporations, and spent in one particular section of the country, why should it cause surprise, why should it be regarded as a miracle, if that section becomes comparatively richer? Other sections of the country, we should remember, are then comparatively poorer. The thing so great that “private capital could not have built it” has in fact been built by private capital—the capital that was expropriated in taxes (or, if the money was borrowed, that eventually must be expropriated in taxes). Again we must make an effort of the imagination to see the private power plants, the private homes, the typewriters and television sets that were never allowed to come into existence because of the money that was taken from people all over the country to build the photogenic Norris Dam.

I have deliberately chosen the most favorable examples of public spending schemes—that is, those that are most frequently and fervently urged by the government spenders and most highly regarded by the public. I have not spoken of the hundreds of boondoggling projects that are invariably embarked upon the moment the main object is to “give jobs” and “to put people to work.” For then the usefulness of the project itself, as we have seen, inevitably becomes a subordinate consideration. Moreover, the more wasteful the work, the more costly in manpower, the better it becomes for the purpose of providing more employment. Under such circumstances it is highly improbable that the projects thought up by the bureaucrats will provide the same net addition to wealth and welfare, per dollar expended, as would have been provided by the taxpayers themselves, if they had been individually permitted to buy or have made what they themselves wanted, instead of being forced to surrender part of their earnings to the state.

Here is an online version of the book







Disclosure ("none" means no position):

Wall St. Media 8/20

Talking ti Doug about Brookfield Properties (BPO), Natural Gas (UNG), Yankees/Red Sox and thanking @tejcc for hooking up the Sullivan boys as bat boys at Friday's Portland Sea Dogs game




Disclosure ("none" means no position):Long BPO, UNG

AutoNation"s Jackson on "Cash for Clunkers"

Mike Jackson CNBC 8-19-2009 from http://marccannon.vox.com/


Disclosure ("none" means no position):

Dow's SmartStax Looks Like a Blockbuster

Folks have wondered why I am so high in Dow Chemical's (DOW) Dow Ag division. Came across this while on vacation:

From Bloomberg:

Monsanto Co., the world’s largest seed maker, plans to charge as much as 42 percent more for new genetically modified seeds next year than older offerings because they increase farmers’ output.

Roundup Ready 2 Yield soybeans will cost farmers an average of $74 an acre in 2010, and original Roundup Ready soybeans will cost $52 an acre, St. Louis-based Monsanto said today in presentations on its Web site. SmartStax corn seeds, developed with Dow Chemical Co., will cost $130 an acre, 17 percent more than the YieldGard triple-stack seeds they will replace.

“Our pricing has the flexibility built in to ensure the grower captures the greatest return from his seed investment, irrespective of market volatility,” Chief Executive Officer Hugh Grant said today in a statement.

Grant is introducing new modified seeds that boost yields as part of a plan to double gross profit from 2007 to 2012. The new soybeans, which resist Monsanto’s Roundup herbicide, produce 7.4 percent more soybeans per acre than the older version. SmartStax kills insects in multiple ways, reducing the amount of conventional corn that must be planted to deter insecticide resistance.

“SmartStax pricing is higher than we initially expected,” Vincent Andrews, a New York-based analyst at Morgan Stanley, said today in a report.

Monsanto rose $1.57, or 1.9 percent, to $84.03 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have gained 19 percent this year.

Acreage Forecasts

SmartStax corn seed will be planted on as many as 4 million acres in 2010, its first year on the market, with a potential for as many as 65 million acres in the U.S. eventually, the company said. The new seed boosts yields 5 percent to 10 percent compared with other products, partly by reducing the amount of land that must be planted with conventional corn to 5 percent from 20 percent, Monsanto said.

Pricing for SmartStax is at the high end of expectations, Laurence Alexander, a New York-based analyst at Jefferies & Co., said by telephone.

You see, Dow Ag is already growing earning 15%+ a year, without this product. This is a product, it needs to be noted that has every making in no uncertain terms of a blockbuster. It is a JV with Monsanto (MON) so it has the selling/marketing and research arms of two multi-billion dollar companies behind it.

It also has the EPA's blessing and has shown to improve yields for farmers 5%-10%, huge. Here is a .pdf of the Monsanto/Dow announcement from 2007

Look for more color on sales in Q4 2009 Q1 2010. It is gonna be big....unless we somehow find more farmland or need to feed less people...



Disclosure ("none" means no position):Long DOW, none

Rep. Ron Paul on Fed Transparency at CATO Institute

The Cato Institute hosts a discussion on increasing the public transparency of the Federal Reserve featuring Rep. Ron Paul (R-TX); with comments by Gilbert Schwartz, Partner, Schwartz & Ballen LLP, Former Associate General Counsel, Federal Reserve; and Bert Ely, President, Ely & Company, Inc. Moderated by Mark Calabria Director, Financial Regulation Studies, Cato Institute.


Disclosure ("none" means no position):

Wall St. Media 8/18

A quick conversation with Doug regarding Brookfield Properties (BPO) from 4,000 ft. above sea level in New Hampshire's White Mountains......Skype is pretty awesome...




Disclosure ("none" means no position):

Buffett: Inflation a Real Threat

I'm guessing Geithner/Bernanke will not be quoting Warren anymore in front of Congress...Berkshire's (BRK.A) Buffett on what he sees as a potentially huge problem lying in wait down the road.





Full Op-Ed:

IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Disclosure ("none" means no position):

Back on Vacation

Everything is OK folks, thanks for the concerned emails. We are back on vacation until the 28th. Spotty posting until then...




Disclosure ("none" means no position):

"Davidson" on the Investing Noise

This is a great piece of advice from my friend "Davidson".

The term Ockham’s(Occam’s) Razor is attributed to a Franciscan Friar William of Ockham:

William Ockham (c. 1285–1349) is remembered as an influential nominalist but his popular fame as a great logician rests chiefly on the maxim attributed to him and known as Occam's razor: Entia non sunt multiplicanda praeter necessitatem or "Entities should not be multiplied unnecessarily." The term razor refers to the act of shaving away unnecessary assumptions to get to the simplest explanation.

The great mass of material that is presented to us each day on investment analysis could benefit in my opinion by “…shaving away unnecessary assumptions to get to the simplest explanation” There is much more information presented in a single day than any single individual could possibly hope to digest in a lifetime. Most of it is designed to encourage a high level of trading based upon momentary headlines that in most instances are of little long term significance for most of us. This is information overload in the extreme!!

I advise that most are better served by applying Ockham’s Razor. This forces one to step back far enough to gain a wider perspective of market history, manager performance and the actions one can take to monitor and offset risk once it has been identified. The investment process becomes one of locating successful managers and letting them attend to the details while we monitor the broad cycles, historical Return/Risk relationships and parse the deluge of daily reports for specific commentary and investment activity of insightful investors known for their keen sense of investment valuation. Then, by rebalancing vs the Return/Risk assessment as it evolves from our broad analysis, portfolios can be adjusted as the situation appears appropriate.

Even with leaving much of the detail to others, continuously monitoring the market keeps me busy each and every day. In this effort, it is not necessary to perfectly identify market “Bottoms”/”Tops”, it is not necessary to make split-second decisions and determine whether a particular issue is or is not owned by a particular manager. These are details that do not determine manager selection or the Return/Risk characteristics of an asset class. In the portfolio management process the focus is on larger issues, namely the on-going Return/Risk relationship of each asset class.

However, examining the details of our manager portfolios as to what is selected and when does provide some insight to their investment decision making. Understanding the manager’s investment style is important to manager selection. I do the same for a select group of individual company CEOs as to which of these corporate managers are best to monitor for their investment insights. Together the selected group of portfolio managers, CEOs and private investors comprise approximately 300 individuals which is continuously tracked. This information can be used manage an all cap US portfolio depending on individual needs and desires as the US portion of a globally balanced portfolio.

The amount of investment commentary available is enormous. Taking the Ockham Razor approach greatly simplifies the investment process. By allocating the detail to others who have proven themselves skilled, the larger and more important allocation decisions can occur with less attention to the daily market static.

With many calls for the market correcting in the near term, the longer term evidence supports remaining positive and disciplined within this context.

Disclosure ("none" means no position):

Wall St. Media 8/14

Talking about Brookfield Asset Management (BAM) and Brookfield Properties (BPO) that were first featured in this post

Go to Wall St. Media for more video



Note: Late Friday Monish Pabrai disclosed a stake in Brookfield Properties


Disclosure ("none" means no position):none

Active Value Investing Presentation

Readers. This book is perhaps the best investing book (for me) that I have read. It changed the way I looked at Value Investing and has made this year my best to date (so far). Please do yourself a favor and read it....

"Value investing" DOES NOT EQUAL "buy and forget"


From Vitaliy:

A presentation/speech of Vitaliy Katsenelson's book (on Active Value Investing. This presentation/speech explains why we are likely suffering through a range-bound market. I updated the data; found a better way to explain old and new topics; changed my mind on some things; and answered questions that have been raised by readers. I have to warn you this PDF is 20 pages long. However, a lot of space is consumed by charts and tables thus don’t let the size scare you. Kill some trees, don’t kill your eyes – print it.

Avi Presentation

Disclosure ("none" means no position):

Deep Breath Everyone, Ackman Did Not Sell General Growth Shares

So I am sitting there at the kids hockey practice Friday afternoon having a blast watching son #1 score some pretty goals and son #2 go "Abu Ghraibe" on a few kids when my blackberry starts going nuts. "Ackman sold GGP shares" were the emails and a few twitter DM's said the same. Buzz kill.....

You see Pershing Square filed its 13F late Friday and General Growth was not listed as a holding....

Here is the story. General Growth Properties (GGWPQ) is no longer classified as a "reportable security" for the purposes of 13F filings by the SEC. Don't ask we why they say it isn't (my guess is because it is in bankruptcy) I make no claim as to being able to discern why the SEC does what it does, it just is...

BUT, as a member of the Board of General Growth, his activity as it relates to the stock would be reportable on a Form 4 filing. Because of that, if/when he does sell/buy actual shares, we will be notified ASAP as Form 4's must be promptly filed....

Interesting note his being back in McDonalds (MCD)....

Here is the filing:

pers2q09


Disclosure ("none" means no position):Long MCD, GGWPQ

Greenlight's Einhorn Buys S&P and GE Puts

It would appear Einhorn is not a believer in the recent rally as he added puts in the S&P (.INX) and GE (GE) to his portfolio in the last quarter.

Maybe this is why? From Bespoke

A P/E ratio rising from 10 to 18.35 is what happens when the S&P 500 rallies 50% (the P) while earnings (E) continue to decline. Below we provide a chart of the S&P 500 price to earnings ratio since the start of the 2002 bull market using trailing 12-month diluted earnings per share from continuing operations.

The S&P's P/E ratio reached its highest level since the end of 2004 earlier this week. While P/E expansion is not unusual during bull markets, investors will remember that the S&P 500's P/E actually declined from the start to the finish of the '02-'07 bull. This is because earnings grew even faster than stock prices. When looking at the chart below, you can see that the P/E did expand in the early days of the '02-'07 bull before earnings finally started to grow again in late 2003 and early 2004. Obviously if the current bull is going to have any sustainability at all, earnings will have to start growing again. But for now, as evidenced by the skyrocketing P/E ratio, investors are paying up on the hopes of future earnings growth.

Full Filing
greenlight13f_082009


Disclosure ("none" means no position):

Might Be Time To Invest in Real Estate

Brookfield Properties Corporation (BPO) is a North American commercial real estate company. The Company operates in two principal business segments: the ownership, development and management of commercial office properties in select cities in North America, and the development of residential land. As of December 31, 2008, the Company’s commercial property portfolio consisted of investment in 108 office comprising 74 million square feet in 12 United States and Canadian markets. The Company’s primary markets are the financial, energy and government center cities of New York, Boston, Washington, D.C., Houston, Los Angeles, Toronto, Calgary and Ottawa. Brookfield Properties is 50.2% owned by Brookfield Asset Management (BAM)

Q1 Results:

Brookfield Properties Corporation (BPO: NYSE, TSX) today announced that net income for the three months ended March 31, 2009 was $38 million or $0.10 per diluted share, compared to $23 million or $0.06 per diluted share during the same period in 2008.

Funds from operations ("FFO") was $127 million or $0.32 per diluted share for the three months ended March 31, 2009, compared with $126 million or $0.32 per diluted share during the same period in 2008.

Commercial property net operating income for the first quarter of 2009 was $327 million, compared to $340 million during the first quarter of 2008.

During the first quarter, Brookfield Properties leased 1.8 million square feet of space in its managed portfolio, improving the company's five-year lease expiry profile by 160 basis points. The company's managed-portfolio occupancy rate finished the quarter at 95.6%.

Q2 Results:

--Jul. 29, 2009-- Brookfield Properties Corporation (BPO: NYSE, TSX) today announced that net income for the three months ended June 30, 2009 was $60 million or $0.15 per diluted share, compared with $45 million or $0.11 per diluted share during the same period in 2008.
Funds from operations (“FFO”) was $148 million or $0.38 per diluted share for the three months ended June 30, 2009 compared with $157 million or $0.40 per diluted share during the same period in 2008.

Commercial property net operating income for the second quarter of 2009 was $338 million, compared with $341 million during the second quarter of 2008 as a result of the impact of a weaker Canadian dollar and a lower contribution from non-managed properties. Absent these items, commercial property net operating income increased 3% over the same period in the prior year.
During the second quarter, Brookfield Properties leased 725,000 square feet of space in its managed portfolio at an average net rent of $25 per square foot, which represents a 32% improvement versus the average expiring net rent of $19 on this space in the quarter.

Additionally, the company has improved its five-year lease rollover exposure by 240 basis points since the start of the year. Year-to-date leasing totals 2.5 million square feet. Brookfield’s managed portfolio occupancy rate finished the quarter at 95%

Here is what makes Brookfield so interesting to me at this time..

From the BPO Press Release:

Brookfield Asset Management Inc. (NYSE/TSX/Euronext: BAM) and Brookfield Properties Corporation (NYSE/TSX: BPO) (collectively, “Brookfield”) today announced the formation of a US$4 billion Investor Consortium dedicated to investing in under-performing real estate. The Consortium will invest in equity and debt in under-valued real estate companies or real estate portfolios where value can be created for stakeholders in a variety of ways, including financial and operational restructuring, strategic direction or sponsorship, portfolio repositioning, redevelopment or other active asset management. Investments will be targeted at corporate property restructurings with a minimum US$500 million equity commitment, and pursued on a global basis, but with a focus on North America, Europe and Australasia.

In addition to Brookfield, the participants in the Consortium consist of a number of institutional real estate investors who have each allocated between US$300 million and US$1 billion to the Consortium. Brookfield has allocated US$1 billion to the Consortium with opportunities in the office sector being funded by Brookfield Properties, at its option, and opportunities in other sectors being funded by Brookfield Asset Management. The Consortium participants have expertise in investing across different geographies and property types and this expertise will be pooled together to maximum advantage in individual investment opportunities.

“This is the next step in our global property growth plan, as it combines our strength as one of the world’s leading real estate operating companies with our extensive expertise in corporate restructurings and strategic acquisitions,” said Ric Clark, CEO of Brookfield Properties.

Brookfield Properties and Brookfield Asset Management will each own 25% of the fund.

So we know based on results these guys know how to buy property that will hold up during the worst of times. So, when we are in the worst of times, doesn't it make sense to go with the guys that have near $5B to pick up the pieces?

BUT, the big fear on any real estate company is their debt. Can they roll it/pay it or will it undo them? Here is Brookfield immediate picture:

Leases you say?

Lease expiration schedule:

The beauty of investing in real estate this way is that you get the benefit of these folks expertise which, based on results, is tops in the industry. You also get a global opportunity and the patience they have to execute the right deals at the right time.

So, armed with $4.9B to invest (which is, by the way, more than the current market cap of the company) I think folks looking into real estate would have a hard time going wrong here...

Full Report:
bpo

Here is their current portfolio Q2, 2009 (XLS)

Link to SEDAR documents (Canadian version of SEC)


Disclosure ("none" means no position):None

Wall St. Media 8/12

Talking about Stocktwits and General Growth Properties (GGWPQ)




Disclosure ("none" means no position):Long GGWPQ

AutoNation's Maroone: "On Acquisition Hunt"

From "considering acquisitions" to "on the hunt" in a month. Great news

Here is the appplicable portion of the interview:

Because of the significant improvements from the financial turmoil that befell the U.S. financial markets last year, and AutoNation's ability to weather this most recent downturn, the company has begun to ramp up its orders for new cars and trucks .....AutoNation is also "on the acquisition hunt".

The conditions for opportunity are beginning to outweigh the recent "risk environment" for the company, Mike Maroone concludes, ....consequently, AutoNation will be moving forward.

Mike Maroone on NBC 8-12-09 from http://marccannon.vox.com/

AutoNation has already gobbled up market share where it does business and acquisitions will multiply that effect. Note, this may not translate into dramatically more "metal moved" but will mean better pricing (although one has to expect more than 2008). When you couple that with the cost cuts already enacted, that is a very good recipe for earnings growth....


Disclosure ("none" means no position):Long AN

More on Ackman/Target....Since When Is 3.5% < 3.3%??

Am I missing something here? After reading the headlines yesterday one would believe Bill Ackman reduced his ownership stake in Target. I don't see it. Let's look...

Here is the applicable portion of his SEC filing:

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.

So, what seems to be the issue is the type of ownership he had/has.

To help put this into context wee need to look at Target's (TGT) case against him in this spring's proxy battle:

Target made apparently a compelling (I say so because he lost the proxy battle, not because I believe it) case that since much of Ackman's ownership consisted on "call options", that he truly was not a long term investor.

The options are not "ownership" per se but an interest in the outcome of the stock price. Because of that the interest in those shares cannot be voted and it was this structure that Target harped on to diminish Ackman's plans as "short term". The options mentioned above were stock settled. So, he did not sell them for cash but essentially converted them to stock.

Based on this, while the % of shares he holds an interest of some sort in has fallen, his monetary interest probably is not all that unchanged or likely has risen. Look at this example. I buy 2 $40 call options for Target and pay $100 each for them. I have an economic interest in 200 shares (each option =100 shares) but ownership of none. Then, at expiration, I convert 1 of the 2 options into shares. The cost of doing that would be $4000 for the stock based on the price of it. In this case, the "economic interest" I have based on the number of shares in the stock has fallen but my monetary interest has risen, considerably.

So, in Ackman's case, if he intends on making another run at the board next year, what matters more than anything is not the total economic interest he has through swaps/options/ownership but simply his outright ownership of shares. That structure will eliminate the argument from management and bolster the ideas he has for the company. For this reason, if he eliminated all the option and swap contracts he has and simply owned 3.5% to 4% of the common shares, based on recent results, this would be a more meaningful position in the company in the eyes of shareholders vs the 7.7% he had through the above mentioned agreements.

Because of this the headlines out to have been "Ackman Increases Target Ownership" as Pershing had a "net increase" in shares directly held.


Disclosure ("none" means no position):None

Jean-Marie Eveillard:

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):

Wall St. Media 8/11

Talking about Compass Diversified (CODI), Heckman (HEK) and China with Doug on Wall St. Media




Disclosure ("none" means no position):

General Growth Properties Wins Key SPE ruling

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.

Gropper/GGP SPE Ruling



Disclosure ("none" means no position):Long GGWPQ

Buying My Broker.......

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):

The Only Actual Positive Residential Real Estate Sign I Have Seen

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):

Ackman Sells Options, Buys Target Shares

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.

Link to trading data


Disclosure ("none" means no position):nONE

Heckman Files 10Q...Progress

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.

Heckman 10Q Q2 2009


Disclosure ("none" means no position):

Compass Diversified Q2 Results & Earning Call Notes

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:

• Also any acquisition will be immediately accredive to earnings.
• It is reasonable for one to think an acquisition will be done in 2009 or early 2010...
• Regarding bid/ask spread, the "ask" price is coming down either from more realistic expectations or urgency on the part of the seller.
• Expect employment trends to move to 4.5%-5% contract labor. Will have a huge effect on staffing industry

Listen to the earnings call here

CODI News 2009-8-10 General



Disclosure ("none" means no position):Long CODI

Davidson: Why did REIT's "Melt Up"?

"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):

Recent Dow Chemical Debt Offering Saves Dow Ag.

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:

• DOW took yet another step (the 7th one since their acquisition of ROH) towards their de-leveraging goal, this time with the issuance of $2.75 billion of debt securities, and is now well ahead of their original debt reduction targets
• This debt issuance along with the roughly $2.8 billion of proceeds from all of the pending asset sales essentially eliminates all of DOW’s near-term maturities ($4.1 billion on the bridge loans and $1.9 billion of legacy DOW debt coming due) and increases the company’s financial flexibility
• DOW has dramatically improved its B/S since the ROH acquisition by reducing its risk tied to near-term maturities and now has greater financial flexibility for ongoing investments in its core business
• There are also further catalysts in DOW’s horizon including the monetizing of the old K-DOW assets and/or Styron

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

Use Your iPhone or Blackberry to Buy a Car?

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.
When browsing the web from a mobile device, such as an iPhone, Blackberry, Palm or Android,
today’s consumer wants an experience similar to that obtained on their computer. We meet that
need. Our Mobile Platform also enables updates to be made in real-time to your mobile site as
changes are made to your main website -- with no strain on your internal IT resources.

Disclosure ("none" means no position):Long AN

Bull Case for Natural Gas..

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

RHI Reports Q2

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 earing apart the investing thesis and starting order to see if we come to a different conclusion.


Disclosure ("none" means no position):Long RHI

Compass Diversified CEO on FOX Biz..

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

AAA CMBS Market has Been Rallying

Thought you folks might want to know this because, you know, it has been ignored by just about everyone.

From GlobeSt.com:

Spreads on AAA-rated CMBS have narrowed by 100 to 150 basis points as a rally in these securities continues for the second straight month, particularly in five-year triple-A paper, according to a new report from Trepp. Predictably, the spreads have narrowed more on loans backed by stronger collateral, Trepp says. The narrowing has occurred even amid what the CMBS information provider calls "continued negative headlines."
Tom Fink, SVP at Trepp, tells GlobeSt.com that "the pricing is tightening up because people see that there’s an opportunity for doing a profitable trade by buying the bonds and then securing financing through the Federal Reserve’s TALF loan facility. That should provide a fairly stable underpinning for the five-year spread at least through the end of the year, which is how long the program is currently scheduled to last. If at the end of that, people start to see a good tone in the market and the performance of commercial real estate stops deteriorating, it could become permanent."

Still to come are deals on new CMBS through TALF, but Fink says "the market’s fully expecting that there will be new issue on the TALF program between now and the end of the year. You have a number of large institutions that have talked to the Fed and they expect to pursue deals with the Fed. There’s plenty of folks down in Washington who are suggesting that it be continued a lot longer."

Fink says he doesn’t expect the prospect of further actions by ratings agencies to discourage would-be buyers of CMBS paper. "The ratings agencies have taken their actions," he says. "Now it’s a matter of the agencies moving through whatever watch lists they’ve put out. So regarding the uncertainty caused by people asking ‘what are the rating agencies going to do?’ well, now they’ve already done it, and it’s priced into the market at this point."

At the same time, Trepp predicted that the delinquency rate on CMBS loans could double before 2009 is over. Given the decline in property values and drought of capital, "I don’t think it’s out of the question to predict that it could hit 6% to 7% by the end of the year"” says Fink.

Historically, he says, CMBS delinquency rates have lagged the economy by 12 to 18 months. "The Bureau of Economic Research said the recession started in the fourth quarter of 2007, and we saw delinquencies start to climb dramatically in the first quarter of ’09. We’ve got another nine months of rising delinquencies before that lag effect starts to work itself out."

However, this will not deter investors’ interest in the paper. "You’ve got plenty of research out there talking about which loans are going to go bad and what the losses will be," says Fink. "A lot of that information has already been absorbed by the market and is reflected in the prices."

Now, when you couple this with the recent debt offering from Simon Property Group (SPG) one has to think the rumors of CRE's demise are well overstated. Hat Tip @bobbrinker for that

Commercial real estate investment trust Simon Property Group (SPG.N) on Thursday added $500 million to its 6.75 percent senior notes due 2014, said IFR, a Thomson
Reuters service.

The size of the deal was increased from an originally planned $250 million.

The total amount is now outstanding is $1.1 billion. Citigroup, Deutsche Bank, Goldman Sachs, and UBS were the joint bookrunning managers for the sale.

BORROWER: SIMON PROPERTY GROUP
AMT $500 MLN* COUPON 6.75 PCT MATURITY 5/15/2014
TYPE REOPENING ISS PRICE 105.029 FIRST PAY 11/15/2009
MOODY'S A3 YIELD 5.476 PCT SETTLEMENT 8/11/2009
S&P A-MINUS SPREAD 275 BPS PAY FREQ SEMI-ANNUAL
FITCH A-MINUS MORE THAN TREAS MAKE-WHOLE CALL 50 BPS
*TOTAL AMOUNT NOW OUTSTANDING $1.1 BILLION

What appears to be happening is we are going to have a classic flight to quality assets. We will of course see pictures scattered across the TV of strip malls going out of business because, well, there are just too damn many of them out there. We will also be inundated with constant reminder of how many "billions of CRE debt is now in default" but won't be told there is trillions of it out there (some perspective is needed). But what we will not see are the high quality regional malls going under. They will grow stronger as overall retail space declines and will then regain much of the pricing power recently lost.


Disclosure ("none" means no position):none

General Growth Properties Reports Strong Q2

When we are looking at REIT's and wondering how to value them it all comes down to NOI. With that in mind, lets look at Q2 for GGP:

NOI for the second quarter of 2009 was $615.8 million, a decrease of approximately 2.1% from the $629.1 million reported in the second quarter of 2008. Minimum rents (including temporary tenant revenues), overage rents and other revenues (including sponsorship, vending, parking and advertising) in the second quarter of 2009 declined as compared to the same period of 2008 due to the continued weakness in the economy and occupancy declines. In addition, we sold three office buildings in 2008, as discussed above, which also contributed to the decrease in NOI. Weaknesses in certain of our tenants’ businesses also led to a $3.9 million increase in our provision for doubtful accounts in the second quarter of 2009 as compared to the second quarter of 2008.

Note: For GGP one must ignore the headline numbers for now as they will be skewed heavily by restructuring costs. We are simply looking at the health of the underlying operating businesses, not the final accounting number.

A 2.1% drop in this environment is simply outstanding. If we are talking about a cap rate to value GGP at, if we take a look at recent CRE deals, we see the current market for grocery anchored strip malls are selling for 8.5%-9% cap rates. Based on that and based on GGP's results, if one would assume a 8% cap rate for GGP, that would be very reasonable. It also would not be unreasonable based on the historical averages to stretch it to 7.5% but we ought to stick with 8% to be conservative.

Using this we will based some assumptions on Pershing's valuation table of GGP common post Chapter 11 under certain dilution scenarios. As we move down the Cap scale we find that the value of the common dramatically increases.

As GGP continues to post strong results, the assumption has to be that there will be more left for shareholders post Chapter 11. Occupancy, while up slightly was essentially unchanged at 91% giving credence to the strength and desireability of GGP's locations.

Remember, GGP need not file a reorg plan until April, 2010. So, if you think the economy will continue a steady albeit slow rebound, then the numbers we see now ought to improve even further by then. If that is true, then the prospects for current shareholfders will improve with it.

Full Report
GGP Q2



Disclosure ("none" means no position):

Dow Ag Sale Update

Thankfully this is looking far less likely every time the subject comes up.....


From the Q2 earnings call:

Don Carson - UBS

Thank you. Andrew, question on Dow AgroSciences. You mentioned that, you are now thinking that you, because of its growth, it should be an ongoing part of the Dow portfolio. Is that really reflect the fact that you are not able to get the kind of strategic premium that you think the business is worth?

Andrew Liveris

Don, we have obviously always carefully positioned ourselves here on Dow AgroSciences and that continues on this call. Dow AgroSciences is a very, I would say valuable property to everyone we’ve talked to and of course that includes, how we view Dow AgroSciences and we were very, very deep into a full divest process, because frankly, there was no choice a few months ago.

During that period of time, we had to make a lot of decisions about how much of that process would go all the way versus our alternatives. As we undertook that process, it was clear there were buyers out there that viewed this property with the same value that we viewed it, but obviously, negotiations didn’t get down to an exclusive. We believed that, if it went that far, that we would definitely realize a good valuation on Dow AgroSciences.

The key question really, is would that be good for Dow’s shareholders and when I say that, the EBITDA potential of Dow AgroSciences demonstrated and into the future feeds our income stream and our ability to be an earnings growth company and helps us on our gross debt-to-EBITDA ratios. So, it’s counterintuitive to sell it at anything less than a full premium and I think that’s really the mindset we are in right now.

We are still having ongoing discussions. They include part monetizations and they include strategic alliance with key players in the sector and we are still maintaining full optionality on that unit and at this point in time, though as I said on the remarks, my personal preference is to retain it in the portfolio and seek enhanced collaborations with others.

Don Carson - UBS

As a follow-up, do you think if you retain it in the portfolio that it will be properly valued in what’s really not obviously in Ag portfolio or is that why you also consider options like a partial monetization, partial IPO?

Andrew Liveris

Yes, I think your question answered your question. I mean, in essence the way you phrased the answer is exactly the way we think about it, Don.

Here are my thoughts from the May when the initial possibility of selling Dow Ag was announced.

Bottom line, it cannot and will not be sold even at "full value". Right now the only scenario I see that may happen is a partial IPO. I would be a buyer of that IPO as the products in Dow Ag's pipeline are simply awesome and will propel earnings for years. That is a scenario I could live with, it is not ideal, but I could stomach it as long as I could participate in the IPO.


Disclosure ("none" means no position):Long DOW

AutoNation Beats: Notes from A Conversation With CEO Jackson

The news:

AutoNation, Inc. (NYSE: AN), America’s largest automotive retailer, today reported 2009 second quarter net income from continuing operations of $55 million or $0.31 per share, compared to year-ago net income from continuing operations of $56 million or $0.31 per share. After adjusting for certain items disclosed in the attached financial tables, net income from continuing operations for the 2009 second quarter was $51 million or $0.29 per share, compared to $59 million or $0.33 per share in the prior year.

Second quarter 2009 revenue totaled $2.6 billion, compared to $3.7 billion in the year-ago period. The decrease was driven primarily by lower new vehicle sales. In the second quarter, total U.S. industry retail new vehicle sales declined 40% compared to last year, based on CNW Research data. In comparison, in the second quarter AutoNation’s new vehicle unit sales declined 38%.

Commenting on the second quarter, Mike Jackson, Chairman and Chief Executive Officer, said, “Despite extraordinarily difficult industry conditions, AutoNation delivered solid profitability, driven by cost reduction, lower interest expense, and our disciplined operating model and inventory management. The second quarter was a pivotal moment for the automotive industry. Long-awaited volume stabilization, the successful government-led restructuring of General Motors and Chrysler, and significant dealer consolidations were accomplished. The industry is now positioned for a healthy rebound when macroeconomic conditions, particularly consumer credit, improve.” Mr. Jackson also noted, “Our continued disciplined inventories led to a year-over-year improvement in gross profit per vehicle retailed and lower floor plan expense.”

Mike Jackson added, “The stabilization of the SAAR in the second quarter is the first step to a gradual recovery and marks the first time since the end of 2007 that we did not see a significant sequential decline in industry new vehicle sales. We also expect the ‘Cash for Clunkers’ program to stimulate new vehicle sales. Going forward, we expect a gradual improvement of new vehicle sales beginning in the second half of 2009 and intend to increase our inventory of vehicles in a disciplined manner to meet demand. Having weathered the storm, AutoNation remains in an excellent position to capitalize on dealer consolidation and the gradual recovery in industry volumes. We will continue to benefit from our $200 million structural cost reduction program.”

At the end of the second quarter, AutoNation had nearly $450 million in liquidity, including cash of $129 million and remained well within the limits of the financial covenants in our debt agreements.

AutoNation has three operating segments: Domestic, Import, and Premium Luxury. The Domestic segment is comprised of stores that sell vehicles manufactured by General Motors, Ford, and Chrysler; the Import segment is comprised of stores that sell vehicles manufactured primarily by Toyota, Honda, and Nissan; and the Premium Luxury segment is comprised of stores that sell vehicles manufactured primarily by Mercedes, BMW, and Lexus. 

• Domestic —Domestic segment income for the second quarter of 2009 was $26 million compared to year-ago segment income of $33 million. Second quarter Domestic retail new vehicle unit sales declined 34%.

• Import —Import segment income for the second quarter of 2009 was $42 million compared to year-ago segment income of $57 million. Second quarter Import retail new vehicle unit sales declined 41%.

• Premium Luxury —Premium Luxury segment income for the second quarter of 2009 was $43 million compared to year-ago segment income of $52 million. Second quarter Premium Luxury retail new vehicle unit sales declined 34%.

For the six-month period ended June 30, 2009, the Company reported net income from continuing operations of $108 million or $0.61 per share compared to $111 million or $0.62 per share in the prior year. After adjusting for certain items as disclosed in the attached financial tables, net income from continuing operations for the six-month period ended June 30, 2009 was $91 million or $0.51 per share, compared to $114 million or $0.63 per share. The Company’s revenue for the six-month period ended June 30, 2009 totaled $5.0 billion, down 32% compared to $7.4 billion in the prior year.

CEO Jackson on the morning shows:


Mike Jackson on CNBC 7-31-2009 from http://marccannon.vox.com/



Mike Jackson on Bloomberg 7-31-2009 from http://marccannon.vox.com/

I spoke with Jackson and Maroone after earnings were released and there were a few comments worth sharing:

• The $1 billion (as of last Friday) spent on cash for clunkers did more to stimulate the economy than "the entire previous $750 billion" according to Jackson
• For the first time in over a year, Jackson appears open to the idea of making an acquisition
• Dealership closures nationally are "about 80% done"
• He is now satisfied with having domestic dealership make up 30% of his portfolio after the changes the companies have gone through
• Given a choice, Ford (F) is now the clear favorite among the domestic automakers with customers due to their lack of a bailout
• Banks are beginning to lend again although they are requiring larger down payments
• Speculation that families are downsizing the number of vehicles they own is temporary and not a trend
• The decision to let Lehman go under "was a catastrophic failure"
• The industry bottomed in February and will continue a slow climb out

This is a great company that is really well run. In every category their declines are less than the industry as a whole and any positive increases they are seeing exceed the industry as a whole. Their market share continues to increase and the new business model at the auto maker level is going to increase pricing power.

Jacskon said he thinks the days of 16 million units a year are gone for a while but that with the new pricing power dealerships will have, they will not need anywhere near that number in order to post very strong profits.

Here is the Q2 earnings call transcript


Disclosure ("none" means no position):Long AN, none

ValuePlays on Vacation

Posting will be sporadic this week as we enjoy Upstate NY



Disclosure ("none" means no position):

Weekend Reading: CRE in 2009

I love reading stuff like this a while after it happened. By doing it this way we can get a modestly accurate gauge their predictions based on what has already happened vs what they though would happen. This "Round Table" has been very accurate up to this point. It appears to be from early 2009. There is a great line there regarding what will happen to CRE in 2009, "Business will pick up in 2009. It has to. You can’t get lower than nothing". Classic...

All agreed in January that 2009 was going to be "worse than 2008" and to this point it has. All were looking forward to 2010 as they though much of the current dislocation will have passed. This isn't to say 2010 will be an easy year, but that the stronger players will begin to see the market ease for them as opposed to 2009's mass oppression.

This is worth the read...

Real Estate Outlook 2009


Disclosure ("none" means no position):