I do feel I ought to apologise for my tardiness in posting since I returned from California, although as I mentioned in a reply to the reader who was kind enough to take the time to ask if I was still alive, I have come across a fairly obvious downside to studying for CFA whilst working full time at the bank (and looking around for a new role) - namely I never seem to have any spare time anymore.
On that note, I have made good on my promise and have made the big jump out of investment banking! No, no, no.. I have not 'seen the light' and decided to shave my head in readiness for a life of selfless devotion to others. Instead I have sold my soul to the devil with a sideways move into private banking - which is also a useful move further towards asset management.
I cannot say that I felt much regret as I sprung the news of my resignation on the Boss, just days after my bonus reached the safety of my account. He looked surprised initially - as if I had smacked him in the face, but then quickly a look of familiarity overcame him, it is not like he has not seen it all before. As I mentioned in my last entry way back in November, despite being amongst the world's most prestigious banks, my former employers have seen an exodus in recent months.
The irony is that having turned down a role for £50,000 more per annum back in March last year, I ended up snaring almost twice that with this move. Bonuses seem to have gone out of fashion, and it's all about the base.
Anyway going back to the lack of time, I wonder if that is why 99% of blogs do dry up after a year or two. Actually I suspect it is more running out of things to discuss. Of course, I've always got more than enough opinions to foist upon the unwilling world, but thought that I would devote this entry to a review of a fascinating couple of months for General Growth Properties, some comparative analysis into its current valuation, and a quick look at the recent report into the unwinding of the TARP programme and its impact upon the markets in 2010.
GGP - Into Double Digits (Briefly)
With the share price catapulting up by another 100% at its peak since my previous mail back in late November, it is worth reflecting on the underlying reasons. After all, continual reassessment is critical for the effective management of any portfolio.
Is the market being rational to value a company in bankruptcy at over $3 billion?
Key to the rises was the positive news regarding loan refinancing negotiations with secured creditors. That included the November 19 release that GGP had secured agreements in principle, followed by the filing of a Plan of Reorganization for some $9.7 billion of secured mortgage loans.
Adam Metz ensured that the propaganda machine was running at full capacity, with misrepresentative lines about GGP exiting Chapter 11 protection by the year end grabbing the headlines. It was always an unrealistic time frame, not to mention only a partial restructuring with a great deal of the important work still to do.
Having said that, a major part of General Growth Properties problems were a loss of confidence, and so instilling that in the markets once again is important - not least in the continuing creditor negotiations. By the time that aspect of the refinancing was approved by the court in mid-December, investors were partying, with myself no exception as my unrealised profits on the trade topped £1 million for the first time.
So it was with some amusement that I read through Hovde Capital's publication of a thesis that GGP shares were in fact horribly overvalued and that common stock would soon be worthless. The fact that the fund was short GGP, and the word on the street is that they are still sitting on some major losses, made it an enormous comedy. Obviously I bought into the plummet in the share price the day after it was published - but the damage to less sophisticated investors through such cynical market manipulation makes this more serious.
To say that Hovde's flawed analysis pissed off long investors more familiar than most with valuing the company might be an understatement. It is certainly rare to see two hedge funds like Pershing Square and Hovde Capital slugging it out in a war of presentations over the next fortnight, with other noteable commentators such as Whitney Tilson adding their voices to those denouncing Hovde's analysis for its fundamental flaws.
There is no point me summarising that whole saga now, as it was reported in so much detail elsewhere. This Marketfolly page is useful for giving the whole timeline and debate that raged during this period.
Ultimately though the markets are the real judge of these things, and while down from recent peaks, General Growth quickly recovered up to around $11/share. It has since of course fallen back to lows under $9/share, although remains firmly on the upward trend since filing for Chapter 11. I expect 52 week highs to be tested as additional court proceedings progress, and further unsecured creditors agree to the mass 5 year extension template that has been proposed.
GGP Valuation
As a mark of how long it has taken me to get around to completing this entry, I finished this comparative analysis of GGP versus its peer group several weeks ago, based upon an extract of sector FFO estimates using data from 21 Jan 2010.
As you can see, the all important price / FFO multiple estimates for General Growth Properties when its share price was $1.50 more than current are still the lowest in the entire sector. That is one of the key indicators of value, quid pro quo. Of course there are a multitude of other factors to take into account, but without going back over old ground and remaining on pure, technical analysis I am confident that General Growth remains the best hold in the sector at this time.
Unwinding TARP - Challenges & TALF
A key factor that will impact the markets in 2010 and beyond is the withdrawal of the quantitative easing policies that have buoyed the markets. I recommend taking a look at this report by the Congressional Oversight Panel as the section on TALF (page 106) conclusion is interesting - in summary that unwinding will have a minimal impact upon the commercial real estate market, and should provide comparatively few issues.
That's all for now campers, I'll do my best to get another entry together soon. Meantime I will be busy in Knightsbridge with my new colleagues, around the international travel that will apparently be making up a significant part of my role going forwards.
Showing posts with label quantitative easing. Show all posts
Showing posts with label quantitative easing. Show all posts
Monday, February 15, 2010
Sunday, March 8, 2009
Is Quantitative Easing The Answer?
I have read a couple of interesting, contrasting views this week in the Telegraph on the subject of quantitative easing between Roger Bootle, the founder of Capital Economics, and Liam Halligan, the economics editor of the Telegraph.
Bootle's article in favour is here, whereas Halligan's exactly opposing viewpoint today is here. For the record, I am in favour of quantative easing, which for me has been highlighted starkly by the plight of General Growth Properties (GGP), and its urgent need for refinancing in order to service its debt load. As I have stated previously, GGP is a healthy company in terms of its asset base versus liabilities, and would be fine servicing its current debts before the credit crunch. Instead it is now left struggling to repay loans as they come due, because of the seizure of the CMBS market and a chronic loss of confidence in its financial viability.
Whilst Liam Halligan gives a useful perspective and balance to those calling for quantitative easing, I was left finishing his column still asking the question 'what precisely are we to do to ease the current credit crisis in that case?' He appears to suggest there is a rabid group of lobbyists suggesting any other viewpoint is held up as a heresy, which unless I am missing something is nonsense. Certainly it has become the consensus opinion amongst government and businesses, but I am quite open to alternatives if a convincing argument can be constructed.
The question is whether it is better to do nothing at all and to let banks and businesses all fail in order to avoid the spectre of inflation and short-term (significant) public debt.
Going back to the commercial real estate sector in the US, and Commercial Backed Mortgage Securities (CBMS) being near completely frozen as a going market. It would be like all banks suddenly refusing you when your fixed term mortgage deal expires, and instead demanding you sell your property at the worst possible moment in the economic cycle. It would lead to huge individual suffering for homeowners, and in the same way will see all manner of otherwise viable companies going to the wall throughout the economy - that means job losses, financial losses, and pain for many.
The US alone has a vast $200bn of such loans coming due in 2009/10 - without QE to fuel the TALF lending that will enable such businesses to refinance and ride out this period, they will simply go under. Why is that better than QE to buy those assets, and eventually sell them back onto the private sector as it thaws (and in effect 'undo' QE, reducing the money supply and trying to avoid inflation being controlled)? I fail to see why targeted action is not better than simply doing nothing.
It is one more week to go until GGP reaches its critical deadline for loan extensions on March 16 - this coincides with the repayment due to Rouse bondholders, who are a group owed money after GGP bought Rouse back in 2004. This ought to see some movement through meaningful announcements - the options being either GGP is forced to file for Chapter 11 due to Rouse bondholders, extensions being announced while TALF funding is still on the near horizon (the whole process is predictably dragging and will take months yet to take effect), asset sales ($400m has been offered for 3 properties on the market for example) to pay off key loans, or a GGP takeover/joint venture.
All are possible, to my mind all will benefit GGP's shareprice significantly. My only wish is that I had bought in now rather than in December, but I expect to see a huge improvement in my position on this trade in the next 6 weeks.
Bootle's article in favour is here, whereas Halligan's exactly opposing viewpoint today is here. For the record, I am in favour of quantative easing, which for me has been highlighted starkly by the plight of General Growth Properties (GGP), and its urgent need for refinancing in order to service its debt load. As I have stated previously, GGP is a healthy company in terms of its asset base versus liabilities, and would be fine servicing its current debts before the credit crunch. Instead it is now left struggling to repay loans as they come due, because of the seizure of the CMBS market and a chronic loss of confidence in its financial viability.
Whilst Liam Halligan gives a useful perspective and balance to those calling for quantitative easing, I was left finishing his column still asking the question 'what precisely are we to do to ease the current credit crisis in that case?' He appears to suggest there is a rabid group of lobbyists suggesting any other viewpoint is held up as a heresy, which unless I am missing something is nonsense. Certainly it has become the consensus opinion amongst government and businesses, but I am quite open to alternatives if a convincing argument can be constructed.
The question is whether it is better to do nothing at all and to let banks and businesses all fail in order to avoid the spectre of inflation and short-term (significant) public debt.
Going back to the commercial real estate sector in the US, and Commercial Backed Mortgage Securities (CBMS) being near completely frozen as a going market. It would be like all banks suddenly refusing you when your fixed term mortgage deal expires, and instead demanding you sell your property at the worst possible moment in the economic cycle. It would lead to huge individual suffering for homeowners, and in the same way will see all manner of otherwise viable companies going to the wall throughout the economy - that means job losses, financial losses, and pain for many.
The US alone has a vast $200bn of such loans coming due in 2009/10 - without QE to fuel the TALF lending that will enable such businesses to refinance and ride out this period, they will simply go under. Why is that better than QE to buy those assets, and eventually sell them back onto the private sector as it thaws (and in effect 'undo' QE, reducing the money supply and trying to avoid inflation being controlled)? I fail to see why targeted action is not better than simply doing nothing.
It is one more week to go until GGP reaches its critical deadline for loan extensions on March 16 - this coincides with the repayment due to Rouse bondholders, who are a group owed money after GGP bought Rouse back in 2004. This ought to see some movement through meaningful announcements - the options being either GGP is forced to file for Chapter 11 due to Rouse bondholders, extensions being announced while TALF funding is still on the near horizon (the whole process is predictably dragging and will take months yet to take effect), asset sales ($400m has been offered for 3 properties on the market for example) to pay off key loans, or a GGP takeover/joint venture.
All are possible, to my mind all will benefit GGP's shareprice significantly. My only wish is that I had bought in now rather than in December, but I expect to see a huge improvement in my position on this trade in the next 6 weeks.
Thursday, March 5, 2009
Calamity Chain(saw)
Like investors, banks so often make the mistake of under or overreacting to situations. In this case, the growing consensus at the bank is that this has been a level of cuts too far.
Suddenly all manner of tasks, from day to day tedium to vital projects, are facing significant delays. Trading, Operations and Support teams were left scrambling to try and fill the holes left by 'resources moving on', which is the amusingly non-descript corporate phrase being used to describe the practice of mercilessly firing bright, hard working employees who mostly have done nothing to deserve it. The most bizarre part is that countless teams are finding experienced experts who survived being randomly moved onto other teams that are in worse trouble. To my surprise the firm is managing to now also utilise fewer resources less efficiently.
Perhaps it's me, but the whole thing indicates a pea-brain level of decision making at the top. Presumably there is an inverse relationship between salary size and common sense.
As such my life has suddenly timewarped and gone from manageable back to an earlier time in my career, with far too much hands-on crap. I was busy working long hours before, but suddenly the lunchtime stroll I was regularly taking in the City to somewhere where I write this blog has become a luxury. I spent 6hrs solidly in meetings from 1pm yesterday for example. So much for work life balance anymore - our masters at the top appear to naively have expected us to simply deliver as much as before (perhaps because that was mostly possible in the previous round).
It is perhaps telling that Asset Management have already been given tacit approval to start hiring, which says everything you need to know about how close we are to reaching the bottom. I think we are there, but that is dependent on when the credit markets start to thaw.
On that subject, it is good to see that the UK and US governments are pushing on with policies to pump much-needed funds into the economy. I don't subscribe to the public hysteria about letting the banks rot, but that is hardly going to surprise anybody. What some people do not appreciate is that governments are not spending our money - they spend that and more before we pay taxes each year - but that due to circumstances, they are simply increasing a number in the computers at the Bank of England and Fed.
Quantatitive easing in this case is not really about printing money. In theory it will be about buying up assets that push money out to the credit markets and (in theory) encourage lending, and then selling those to the private sector once normality starts to return (paying off the money it has created). The issue is ensuring that the money is circulated rather than holed up. It is rather like if the government sent a £1000 cheque to everybody. Two years ago I would have been online to book a holiday within a minute, but today it is just as likely I might save that for the all-too-likely rainy day, thus making no actual improvement in the economic situation. Actually not in my case, I would just get on and invest it as I do most of my savings.
On that subject, GGP remains at historic lows in the 40 cent range right now. Indications are that asset sales are on the way, which should enable several loans to be paid off. There are currently fears circulating about GGP needing to dilute shares hugely through an issue to pay off additional debt next year - that is unfounded given that at these low levels the firm is worth a mere $100m, when its balance sheet indicates $3-4bn is more accurate. It would effectively hand the entire firm to a single creditor, which nobody would want. The creditor would want cash, not to inherit the mess GGP is in, and nor would it benefit significant shareholders currently negotiating such deals.
I am still optimistic that patience will see a resolution to the GGP refinancing impasse, and Chapter 11 remains a useful bargaining tool for the firm in securing fairer terms with its creditors. Having looked into this in more detail, I am starting to conclude that the UK needs to implement similar protection laws here, although hasten to add I am no expert so that is just an aside.
Finally, it was amusing to see Gordon Brown on the front page of the Metro on the way into work this morning. The caption read he was being greeted by congressmen, although as with most things relating to him, on closer inspection it was less impressive. Those eager, outstretched hands turned out to be teenage pages, who work for the senators there on secondments. Very impressive Gordon, I'm sure your vacuous speech will save the world (again) as well.
Suddenly all manner of tasks, from day to day tedium to vital projects, are facing significant delays. Trading, Operations and Support teams were left scrambling to try and fill the holes left by 'resources moving on', which is the amusingly non-descript corporate phrase being used to describe the practice of mercilessly firing bright, hard working employees who mostly have done nothing to deserve it. The most bizarre part is that countless teams are finding experienced experts who survived being randomly moved onto other teams that are in worse trouble. To my surprise the firm is managing to now also utilise fewer resources less efficiently.
Perhaps it's me, but the whole thing indicates a pea-brain level of decision making at the top. Presumably there is an inverse relationship between salary size and common sense.
As such my life has suddenly timewarped and gone from manageable back to an earlier time in my career, with far too much hands-on crap. I was busy working long hours before, but suddenly the lunchtime stroll I was regularly taking in the City to somewhere where I write this blog has become a luxury. I spent 6hrs solidly in meetings from 1pm yesterday for example. So much for work life balance anymore - our masters at the top appear to naively have expected us to simply deliver as much as before (perhaps because that was mostly possible in the previous round).
It is perhaps telling that Asset Management have already been given tacit approval to start hiring, which says everything you need to know about how close we are to reaching the bottom. I think we are there, but that is dependent on when the credit markets start to thaw.
On that subject, it is good to see that the UK and US governments are pushing on with policies to pump much-needed funds into the economy. I don't subscribe to the public hysteria about letting the banks rot, but that is hardly going to surprise anybody. What some people do not appreciate is that governments are not spending our money - they spend that and more before we pay taxes each year - but that due to circumstances, they are simply increasing a number in the computers at the Bank of England and Fed.
Quantatitive easing in this case is not really about printing money. In theory it will be about buying up assets that push money out to the credit markets and (in theory) encourage lending, and then selling those to the private sector once normality starts to return (paying off the money it has created). The issue is ensuring that the money is circulated rather than holed up. It is rather like if the government sent a £1000 cheque to everybody. Two years ago I would have been online to book a holiday within a minute, but today it is just as likely I might save that for the all-too-likely rainy day, thus making no actual improvement in the economic situation. Actually not in my case, I would just get on and invest it as I do most of my savings.
On that subject, GGP remains at historic lows in the 40 cent range right now. Indications are that asset sales are on the way, which should enable several loans to be paid off. There are currently fears circulating about GGP needing to dilute shares hugely through an issue to pay off additional debt next year - that is unfounded given that at these low levels the firm is worth a mere $100m, when its balance sheet indicates $3-4bn is more accurate. It would effectively hand the entire firm to a single creditor, which nobody would want. The creditor would want cash, not to inherit the mess GGP is in, and nor would it benefit significant shareholders currently negotiating such deals.
I am still optimistic that patience will see a resolution to the GGP refinancing impasse, and Chapter 11 remains a useful bargaining tool for the firm in securing fairer terms with its creditors. Having looked into this in more detail, I am starting to conclude that the UK needs to implement similar protection laws here, although hasten to add I am no expert so that is just an aside.
Finally, it was amusing to see Gordon Brown on the front page of the Metro on the way into work this morning. The caption read he was being greeted by congressmen, although as with most things relating to him, on closer inspection it was less impressive. Those eager, outstretched hands turned out to be teenage pages, who work for the senators there on secondments. Very impressive Gordon, I'm sure your vacuous speech will save the world (again) as well.
Tuesday, February 3, 2009
Investing for a Recession (Part II)
Having outlined how I have made some useful money from the recession to date, it would be worth now moving to my current main investment at present, so that there is some context when I update on this going forwards.
Apart from putting a proportion of my funds into a gold ETF, which is an excellent hedge both against recessionary worries, a devaluing dollar and future inflationary concerns from all the quantitive easing taking place, I have also placed a significant sum into something that is much less obvious in these turbulent times: US commercial property.
You might think that is insane, and is totally contrary to what everybody else is putting their money into at the moment. But part of investing is looking for value, and sometimes that means looking beyond the conventional wisdom. I have bought into something called a Real Estate Investment Trust (REIT) - these are essentially US commercial property companies, which by and large have plunged by enormous amounts in the last 6 months.
As such, several are rumoured to be on the verge of bankruptcy, and one in particular is down a staggering 97% since the summer of 2008. When you factor in a fall of that magnitude, you have to start looking at the price and ask why, and whether this is rational or fueled by other factors. The underlying reason is the credit crunch, combined with investor fear of a Chapter 11 bankruptcy filing.
To give some background here, REIT's have by and large used a previously acceptable business model, whereby they were highly leveraged and routinely took out large levels of debt to increase their asset base and buy up more property. They then serviced this debt, steadily paying it off while periodicially refinancing this - without problems in a normally functioning credit market. Of course, everybody now sees US property as having been in a huge bubble, and all associated loans as necessarily toxic. As such, suddenly some enormous commercial property companies are on the brink of bankruptcy - including the particular REIT I have invested in called General Growth Properties (GGP).
To put it into context, GGP is the second largest mall owner in the US. That is not an insignificant statistic in itself, and should it fold there would be enormous ramifications for the US retail sector, not to mention a political backlash. I would actually not mind if it did file for Chapter 11 within the next few weeks, for reasons summarised well in this Reuters article.
Estimates suggest that GGP's assets exceed liabilities on the balance sheet by several billion dollars already. Additionally it has no problems servicing its actual debts, just refinancing them. In effect the problems of GGP are not with solvency, as with normal bankruptcy risk, but liquidity - this is a direct result of the banks own liquidity issues that have made them more risk averse.
What is most interesting with GGP is also that the balance sheet is not fully marked to market, which means that if its assets are valued at today's prices instead of when purchased there will be a change. Many properties on its books were bought years ago and have never been revalued, so it is reasonable to expect many will be worth more than marked, even with the current woes of the US property market. As such, assuming GGP were to go bust, what does that mean for ordinary shareholders? Normally it is a disaster and means no money, but in this case it should mean that the US courts would order the banks to agree refinancing terms, after which GGP would emerge out on the other side without that perceived stigma. Meantime the shares will continue trading on the stock exchange.
Since the Reuters article, all indications are that GGP will not file for Chapter 11 however, with its banking consortium of lenders bending over to give multiple loan extensions (including one over the weekend through to mid-March). There are many factors at play in whether full refinancing of the loans due in 2009 will take place - that is what would remove the market risk of bankruptcy that has so severely depressed the share price.
The main sticking point for lenders is several billion dollars of loans that are currently unsecured (i.e. have no assets backing them up), which are due for refinancing. Understandably the banks want assurances they would have some collateral to offset should GGP go under at a later date, and at present the unsecured loans are not acceptable to them. As such GGP is looking to either sell assets to pay those off, or negotiate terms. Both are possibilities, but at this stage it is unclear which is the more likely.
Another factor is the recent extension of uses for the Troubled Asset Relief Program (TARP) by Barack Obama, to now explicitly include money for Commercial Real Estate. This bill has passed through congress, and the campaign is continuing - again it provides political pressure on the banks to lend and not push under a company as significant as GGP.
Once terms are agreed, or GGP manages to sell off a number of assets to enable refinancing, I expect there to be significant upwards movement on the stock price. I have gradually increased my long position on GGP from $1.61 down to $1.03 in the last 2 months, although it is worth adding that a recent sell off last week on fears ahead of the loan deadline (prior to extension again) lead to a sharp fall back to around 55 cents a share. As of yesterday, GGP's share price bounced up 30% on the news of the loan extension, and is now currently at around 80 cents a share as I type.
So I am sitting on an unrealised loss at present. Since I bought into this REIT in December, the share price has risen by 80% at its peak, and fallen by 50% from where I entered at its lows. I turned down the chance to cash in a £50k profit in early January because I am more interested in the bigger picture here. That's how trading works - I have a strategy which does not include day trading this stock, because I do not know when the news will be announced that will make the crucial difference.
To give you an idea of the potential rewards at stake here, if the share price were to rise back to just $3.50, where it was in October, I would make in the region of £150k from the trade.
I should add a cautionary note that this is considered a speculative play. I am speculating on the most likely outcome based on extensive research - what makes this unusual is that there appears to be significant upside regardless of whether GGP files for bankruptcy protection or not. To me the share price of GGP is significantly undervalued, and at some point the market is going to realise that.
Most people are not prepared to accept this level of risk, and that is entirely right, although it is worth pointing out that you can take a zero off the figures and it could easily be you making (or losing) these amounts. In my case, if everything goes as well as I expect, I could make over £1 million from the trade. Admittedly that is unlikely and would require me holding for a couple of years. I am looking at cashing in £250k as a more realistic profit, but it gives you an idea of how risk vs reward works in the markets.
I will keep you updated on the progress of this particular hot potato in the coming months. Anyway back to work.
Apart from putting a proportion of my funds into a gold ETF, which is an excellent hedge both against recessionary worries, a devaluing dollar and future inflationary concerns from all the quantitive easing taking place, I have also placed a significant sum into something that is much less obvious in these turbulent times: US commercial property.
You might think that is insane, and is totally contrary to what everybody else is putting their money into at the moment. But part of investing is looking for value, and sometimes that means looking beyond the conventional wisdom. I have bought into something called a Real Estate Investment Trust (REIT) - these are essentially US commercial property companies, which by and large have plunged by enormous amounts in the last 6 months.
As such, several are rumoured to be on the verge of bankruptcy, and one in particular is down a staggering 97% since the summer of 2008. When you factor in a fall of that magnitude, you have to start looking at the price and ask why, and whether this is rational or fueled by other factors. The underlying reason is the credit crunch, combined with investor fear of a Chapter 11 bankruptcy filing.
To give some background here, REIT's have by and large used a previously acceptable business model, whereby they were highly leveraged and routinely took out large levels of debt to increase their asset base and buy up more property. They then serviced this debt, steadily paying it off while periodicially refinancing this - without problems in a normally functioning credit market. Of course, everybody now sees US property as having been in a huge bubble, and all associated loans as necessarily toxic. As such, suddenly some enormous commercial property companies are on the brink of bankruptcy - including the particular REIT I have invested in called General Growth Properties (GGP).
To put it into context, GGP is the second largest mall owner in the US. That is not an insignificant statistic in itself, and should it fold there would be enormous ramifications for the US retail sector, not to mention a political backlash. I would actually not mind if it did file for Chapter 11 within the next few weeks, for reasons summarised well in this Reuters article.
Estimates suggest that GGP's assets exceed liabilities on the balance sheet by several billion dollars already. Additionally it has no problems servicing its actual debts, just refinancing them. In effect the problems of GGP are not with solvency, as with normal bankruptcy risk, but liquidity - this is a direct result of the banks own liquidity issues that have made them more risk averse.
What is most interesting with GGP is also that the balance sheet is not fully marked to market, which means that if its assets are valued at today's prices instead of when purchased there will be a change. Many properties on its books were bought years ago and have never been revalued, so it is reasonable to expect many will be worth more than marked, even with the current woes of the US property market. As such, assuming GGP were to go bust, what does that mean for ordinary shareholders? Normally it is a disaster and means no money, but in this case it should mean that the US courts would order the banks to agree refinancing terms, after which GGP would emerge out on the other side without that perceived stigma. Meantime the shares will continue trading on the stock exchange.
Since the Reuters article, all indications are that GGP will not file for Chapter 11 however, with its banking consortium of lenders bending over to give multiple loan extensions (including one over the weekend through to mid-March). There are many factors at play in whether full refinancing of the loans due in 2009 will take place - that is what would remove the market risk of bankruptcy that has so severely depressed the share price.
The main sticking point for lenders is several billion dollars of loans that are currently unsecured (i.e. have no assets backing them up), which are due for refinancing. Understandably the banks want assurances they would have some collateral to offset should GGP go under at a later date, and at present the unsecured loans are not acceptable to them. As such GGP is looking to either sell assets to pay those off, or negotiate terms. Both are possibilities, but at this stage it is unclear which is the more likely.
Another factor is the recent extension of uses for the Troubled Asset Relief Program (TARP) by Barack Obama, to now explicitly include money for Commercial Real Estate. This bill has passed through congress, and the campaign is continuing - again it provides political pressure on the banks to lend and not push under a company as significant as GGP.
Once terms are agreed, or GGP manages to sell off a number of assets to enable refinancing, I expect there to be significant upwards movement on the stock price. I have gradually increased my long position on GGP from $1.61 down to $1.03 in the last 2 months, although it is worth adding that a recent sell off last week on fears ahead of the loan deadline (prior to extension again) lead to a sharp fall back to around 55 cents a share. As of yesterday, GGP's share price bounced up 30% on the news of the loan extension, and is now currently at around 80 cents a share as I type.
So I am sitting on an unrealised loss at present. Since I bought into this REIT in December, the share price has risen by 80% at its peak, and fallen by 50% from where I entered at its lows. I turned down the chance to cash in a £50k profit in early January because I am more interested in the bigger picture here. That's how trading works - I have a strategy which does not include day trading this stock, because I do not know when the news will be announced that will make the crucial difference.
To give you an idea of the potential rewards at stake here, if the share price were to rise back to just $3.50, where it was in October, I would make in the region of £150k from the trade.
I should add a cautionary note that this is considered a speculative play. I am speculating on the most likely outcome based on extensive research - what makes this unusual is that there appears to be significant upside regardless of whether GGP files for bankruptcy protection or not. To me the share price of GGP is significantly undervalued, and at some point the market is going to realise that.
Most people are not prepared to accept this level of risk, and that is entirely right, although it is worth pointing out that you can take a zero off the figures and it could easily be you making (or losing) these amounts. In my case, if everything goes as well as I expect, I could make over £1 million from the trade. Admittedly that is unlikely and would require me holding for a couple of years. I am looking at cashing in £250k as a more realistic profit, but it gives you an idea of how risk vs reward works in the markets.
I will keep you updated on the progress of this particular hot potato in the coming months. Anyway back to work.
Saturday, January 31, 2009
Investing for a Recession (Part I)
One of the key rules of investing at any time is to be flexible in your approach, and not assume that whatever has worked well in the past will necessarily continue to do so in the future.
I am not going to lie: I failed to call the timing of the stock market downturn, but did see it coming. In fact, I called it too early, as after the effective collapse and nationalisation of Bear Stearns in mid-2007, my constant research through economic forecasts was enough to lead me to conclude that storm clouds were gathering and a major correction was coming. So I liquidated all my positions, and sat on mostly cash in my trading account - earning zero interest as I needed it available at short notice in case trading opportunities came up.
Another key investing rule is patience - one that amateur investors all too frequently fail to show as they get excited by a short term fluctuation in a stock price. I was patient for 6 months, as I sat there watching global indicies continue their inexorable rise upwards, and eventually I snapped and made a couple of investments in March 2008. I won't go into details of those as they are not important, but suffice to say that given the unrelenting speed of the market falls from May onwards, I am sitting on losses from those in excess of £50k.
You might whince, but another key to investing is to only invest what you can afford to lose, and while I am not happy about it, it makes no material difference - and I am happy with them both as long holds. More importantly, I have learned a very important lesson for future investing. Learning from your mistakes is the single biggest investing rule of all - and in this case it was that when all the logic points to something happening, it will do.
So by October, when all the fun had kicked off with Lehman Brothers, rather than joining the collective panic gripping many of my peers at the banks, I realised we had reached a wonderful opportunity to start making a large amount of money back from this crisis. Shorting is one, much maligned means of doing this, which is not what I do. On that note, let me say that shorting is needed for valid trading strategies (e.g. hedging), despite the criticism about naked short selling of the banks, which is for nothing other than the pursuit of speculative profit - that is an area more difficult to justify.
Instead I have been much more traditional in my approach - taking long positions (buying) stocks at a lows, and then selling them soon afterwards. The key is that what panic brings to the markets is enormous volatility. I assessed the reality of the fall out by giving it some context. Nothing like this had happened in our lifetimes - it was a cataclysmic shock that would obviously lead to enormous falls in the markets. Therefore key was to not be remotely optimistic and instead look at your worst case scenario expectations on prices and exceed them.
I recall listening on a tedious conference call at work, while idly watching the share prices of all the major banks in freefall. The two of particular interest were Morgan Stanley and Goldman Sachs at that time, due to their status as investment banks. The markets were voting with their wallets in their lack of confidence in this particular business model, and both had fallen a staggering amount in recent days. But no downturn is smooth with stocks, and in this case I had already watched GS hit a floor at $120/share and rally back upwards sharply for a couple of days, before rapidly plunging again.
As such, I watched as GS breached the psychologically important $100 mark and decided it was clearly about to drop off a cliff, despite it already being down 20% on the day. Sure enough, a moment of panic ensued as it moved down below $90/share, and I set a limit order to buy $150,000 of stock at $79/share. The stock suddenly plunged and touched a low of $77/share before spiking upwards above $90/share by the end of the day. I had an unrealised profit of $20,000 in 10 minutes. I also reasoned that based on previous rallies, all those shorting the stock would now be rushing to cover their positions, which creates a short squeeze that drives upward pressure.
Sure enough the next day, GS rose up above $120/share as I had expected, and I immediately sold out. And as I expected, the stock hovered there for a couple of days before plunging and I believe eventually hit a low in the $50/share range - it is somewhere around about $80/share as I type. It is worth noting that as I realised that £40k profit, I liquidated a bad investment from several years ago. Rather than panic or give up on it, I decided to hold and turn a negative into a positive - in this case it became a useful offset against my gains by reducing the amount I will have to pay in capital gains tax. In effect, I had recovered a large percentage of my losses from the market.
I repeated that trade further down with one of the other banks soon afterwards, and then stopped trading in them because I no longer had a strong view on what direction prices were moving and whether or not the downward trend was ending. My considered opinion was that they had further to go when later quarterly results were reported, and so it seems to have panned out as after rallies before Christmas they have plunged again.
However when you cannot decide where you think a stock is going to move, it important to not trade in it. I locked in my gains, and by December had turned £60,000 of spare change into £140,000. Where am I investing now? Two places. Most important was that I had deliberately chosen to trade in US banks throughout the process, because I had known from various research that historically Sterling was overvalued and long-overdue a downward correction.
My analysis concluded that an imminent recession in the UK would eventually fuel a correction in the GBP-USD exchange rate, especially given that the US was ahead in the economic cycle and already in a recession. Sure enough, with money tied up in dollars during the trades, I made considerable sums from the fall in the pound from October to December with so much money held in dollars. I then decided that since I was no longer sure about the direction of banking stocks (or most others), from researching likely directions of currencies in 2009, both sterling and the dollar were likely to continue their falls against other currencies.
As such, with a new policy of 'quantitive easing' on the horizon (aka governments printing money), that meant it was an easy decision to take a large stake in a gold ETF (exchange traded fund) in December 2008. This is effectively like buying shares that are linked to the price of gold in USD. Sure enough, with the pound falling further, I am currently sitting up 35% on my investment to date, and recommend that anybody debating what to do with their money for 2009 use the current minor sterling rally versus the dollar (as I type we are at around $1.43 to £1) and buy into a gold ETF on the London Stock Exchange for 2009.
When governments start printing money in the way they effectively are with all this debt, it will eventually stoke inflation later this year. That should lead to an increase in the price of gold, and makes it a good play until later in the year when it will be worth exiting.
You might be starting to get a taste for what investing is all about from the above outline of my investing activities since October. It is about completing your own analysis, taking into account historical statistics to give perspective, and looking ahead to do your best to assess what is logically going to happen next. If you don't know then do not do anything, but if you do think something is going to happen (such as house prices falling another 20% in the UK) then why sit around holding it?
Next time I will explain what I am doing with the majority of my money in 2009 at present.
I am not going to lie: I failed to call the timing of the stock market downturn, but did see it coming. In fact, I called it too early, as after the effective collapse and nationalisation of Bear Stearns in mid-2007, my constant research through economic forecasts was enough to lead me to conclude that storm clouds were gathering and a major correction was coming. So I liquidated all my positions, and sat on mostly cash in my trading account - earning zero interest as I needed it available at short notice in case trading opportunities came up.
Another key investing rule is patience - one that amateur investors all too frequently fail to show as they get excited by a short term fluctuation in a stock price. I was patient for 6 months, as I sat there watching global indicies continue their inexorable rise upwards, and eventually I snapped and made a couple of investments in March 2008. I won't go into details of those as they are not important, but suffice to say that given the unrelenting speed of the market falls from May onwards, I am sitting on losses from those in excess of £50k.
You might whince, but another key to investing is to only invest what you can afford to lose, and while I am not happy about it, it makes no material difference - and I am happy with them both as long holds. More importantly, I have learned a very important lesson for future investing. Learning from your mistakes is the single biggest investing rule of all - and in this case it was that when all the logic points to something happening, it will do.
So by October, when all the fun had kicked off with Lehman Brothers, rather than joining the collective panic gripping many of my peers at the banks, I realised we had reached a wonderful opportunity to start making a large amount of money back from this crisis. Shorting is one, much maligned means of doing this, which is not what I do. On that note, let me say that shorting is needed for valid trading strategies (e.g. hedging), despite the criticism about naked short selling of the banks, which is for nothing other than the pursuit of speculative profit - that is an area more difficult to justify.
Instead I have been much more traditional in my approach - taking long positions (buying) stocks at a lows, and then selling them soon afterwards. The key is that what panic brings to the markets is enormous volatility. I assessed the reality of the fall out by giving it some context. Nothing like this had happened in our lifetimes - it was a cataclysmic shock that would obviously lead to enormous falls in the markets. Therefore key was to not be remotely optimistic and instead look at your worst case scenario expectations on prices and exceed them.
I recall listening on a tedious conference call at work, while idly watching the share prices of all the major banks in freefall. The two of particular interest were Morgan Stanley and Goldman Sachs at that time, due to their status as investment banks. The markets were voting with their wallets in their lack of confidence in this particular business model, and both had fallen a staggering amount in recent days. But no downturn is smooth with stocks, and in this case I had already watched GS hit a floor at $120/share and rally back upwards sharply for a couple of days, before rapidly plunging again.
As such, I watched as GS breached the psychologically important $100 mark and decided it was clearly about to drop off a cliff, despite it already being down 20% on the day. Sure enough, a moment of panic ensued as it moved down below $90/share, and I set a limit order to buy $150,000 of stock at $79/share. The stock suddenly plunged and touched a low of $77/share before spiking upwards above $90/share by the end of the day. I had an unrealised profit of $20,000 in 10 minutes. I also reasoned that based on previous rallies, all those shorting the stock would now be rushing to cover their positions, which creates a short squeeze that drives upward pressure.
Sure enough the next day, GS rose up above $120/share as I had expected, and I immediately sold out. And as I expected, the stock hovered there for a couple of days before plunging and I believe eventually hit a low in the $50/share range - it is somewhere around about $80/share as I type. It is worth noting that as I realised that £40k profit, I liquidated a bad investment from several years ago. Rather than panic or give up on it, I decided to hold and turn a negative into a positive - in this case it became a useful offset against my gains by reducing the amount I will have to pay in capital gains tax. In effect, I had recovered a large percentage of my losses from the market.
I repeated that trade further down with one of the other banks soon afterwards, and then stopped trading in them because I no longer had a strong view on what direction prices were moving and whether or not the downward trend was ending. My considered opinion was that they had further to go when later quarterly results were reported, and so it seems to have panned out as after rallies before Christmas they have plunged again.
However when you cannot decide where you think a stock is going to move, it important to not trade in it. I locked in my gains, and by December had turned £60,000 of spare change into £140,000. Where am I investing now? Two places. Most important was that I had deliberately chosen to trade in US banks throughout the process, because I had known from various research that historically Sterling was overvalued and long-overdue a downward correction.
My analysis concluded that an imminent recession in the UK would eventually fuel a correction in the GBP-USD exchange rate, especially given that the US was ahead in the economic cycle and already in a recession. Sure enough, with money tied up in dollars during the trades, I made considerable sums from the fall in the pound from October to December with so much money held in dollars. I then decided that since I was no longer sure about the direction of banking stocks (or most others), from researching likely directions of currencies in 2009, both sterling and the dollar were likely to continue their falls against other currencies.
As such, with a new policy of 'quantitive easing' on the horizon (aka governments printing money), that meant it was an easy decision to take a large stake in a gold ETF (exchange traded fund) in December 2008. This is effectively like buying shares that are linked to the price of gold in USD. Sure enough, with the pound falling further, I am currently sitting up 35% on my investment to date, and recommend that anybody debating what to do with their money for 2009 use the current minor sterling rally versus the dollar (as I type we are at around $1.43 to £1) and buy into a gold ETF on the London Stock Exchange for 2009.
When governments start printing money in the way they effectively are with all this debt, it will eventually stoke inflation later this year. That should lead to an increase in the price of gold, and makes it a good play until later in the year when it will be worth exiting.
You might be starting to get a taste for what investing is all about from the above outline of my investing activities since October. It is about completing your own analysis, taking into account historical statistics to give perspective, and looking ahead to do your best to assess what is logically going to happen next. If you don't know then do not do anything, but if you do think something is going to happen (such as house prices falling another 20% in the UK) then why sit around holding it?
Next time I will explain what I am doing with the majority of my money in 2009 at present.
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