Monday, 31 August 2009

Marvellous m&a Monday

Two good sized M&A deals were announced today, which the Raven is going to be involved in, but for slightly different reasons;

1) BHI bidding BJS, paying 0.4shares + $2.69. BHI opens down 8% and BJS opens up 8% and you'd think there isn't much to do, however the Raven has put on a trading position. Although this doesn't look like a homerun in terms of annualised spread he just doesn't think that its enough of a premium, and neither does the market, its not like there aren't other potential buyers out there. He's doing his work on valuation etc, but he's happy enough to put a small clip on speculatively on the rough work he's done so far.

2) DIS buying MVL is perhaps a subtler trade, as DIS has said that their stock will make up no less than 40% of the merger agreement, hence will have to include more shares should they below $26.845, which gives the holder of the m&a spread a put option on DIS, which then gives a nice 20% IRR given a dec deal close (which is a little to optimisitc he thinks). So more work to do.

That means he's got to make a little room on the long side of the portfolio and hence is reducing a little of the CYCL to do so.

Friday, 28 August 2009

that updated house price p/e chart

some perspectives on long term yields

L: 74% S:85% G: 159% N: -11% ~ $D 0% $G 0% $V 0% $P 0.00%

Firstly a brief description of how the Raven came up with this chart. He uses a simplistic linear regression on log earnings to forecast future earnings applying this to historic data to come up with historic earnings forecasts, from this he calculates a quarterly earnings yield for the SPX500.

There are several interesting points for the Raven that come from this chart. First of all just looking at the most recent moves we can see that we've bounced off the lows in terms of both yields and equity prices. Secondly it appears that we might have turned a corner in terms of yields on financial assets, ie. that we might be starting to move towards a high yield environment, this would be associated with high inflation and a fall in asset prices. The Raven also notes that we're still at a relatively distended valuation gap between bonds and equity.

Inflation can have several causes, depending on your economic religion. The Raven fails to understand the monetarists that are arguing that quantitive easing is going to be the start of hyperinflation, QE is just a swapping of monetary aggregates hoping to increase the velocity of money, they also give zero weighting to the amount of wealth lost by households. He also fails to believe in wage inflation in Asia for some time yet, China has been adding capacity with its fiscal stimulus, there definitely is more capacity. For example the world's biggest shopping mall South China Mall in Dongguan is absolutely empty.

The way that he can imagine inflation coming about in the West would be to see a dramatic rise in Asian currencies. This would then increase import prices and perhaps trigger an increase in western wages, given the huge amount of public sector wages linked to inflation measures it wouldn't take much for that to increase dramatically. It certainley is the path of most pain for the world, the question is what would lead to that dramatic currency revaluation???

Now another question that is on the Raven's beak so to speak is why are UK houseprices rallying? Figures from the land registry show they have risen this month - that doesn't make a lot of sense to the Raven, but then that wouldn't be the first monthly price change in houseprices that he finds irrational and baffling in the UK. It would appear to the Raven that prices still have a decent amount to fall before we're looking at where house prices have bottomed before. The peak in the HBOS index of house prices was £199,612 a frankly insane price at a price to average earnings level of 5.8, house prices bottomed at a p/e of 3.1 after the comparatively small bubble of late 80s (which peaked at 5x). At that bottom multiple we'd see the index at £113,386 which is a peak to trough fall of 43%, or further 29% from here. Caveat Emptor!!!

Thursday, 27 August 2009

some new names

L: 91% S:77% G: 168% N: 13% ~ $D 0% $G 0% $V 0% $P 0.00%

The Raven has been looking at some more small caps and off the wall names, he's noticed that the worst value stocks have been really outperforming the last week, so he's been looking at the riskiest section of the investment universe for the most beat up names he can find, he's got a watch list to keep an eye on so far.

Of the riskier names that look interesting one which did catch his eye is SONG NO, Songa Offshore, now he's looked at this firm a long time ago and a firm that rejigs its capital structure as often as this always worries the Raven, however the last couple of quarters numbers look of, they managed to get some deleveraging done and they're not looking terrible value. Its also forming an interesting technical pattern on the chart so he's looking to start a small position.

He also looked over the M&A universe again, and looked particularly at a better estimate of risk/reward, sector adjusting his downside numbers for the deals he likes and then ranking them on this risk reward metric. He was initially surprised that WYE came out as the top contender given that the hedgefunds seem to be all over the name (Einhorn & Co), however its a huge deal and I doubt the arb community has the capital to close it to a fair level. A lot of the other names become very dependant on the time frame assumptions, a 12% IRR becomes a 6% IRR very quickly if a deal gets delayed by a month for the short end deals. Depending on what you think JAVA then looks pretty attractive, the Raven thinks the EU oks the deal when they are due to review it in September, and thinks the deal then gets wrapped up by the end of that month (there doesn't look like that much downside on a break given the sector performance). IPCR looks ok on that basis as well.

The Raven is now in full position size with CYCL, he'd have to adjust his risk limits to be able to take more and he doesn't think making that sort of exception for something will so little transparency is a wise idea. Especially as he gets the feeling that he's not going to be the first grape on the vine to hear if this deal breaks. The downside doesn't look that horrendous though.

He's tempted to sell out of his IP2IPO position as its small and takes up way too much time to monitor it given the potential upside. However at 50p he still thinks its pretty cheap and transaction costs make it silly to trade this actively. With 12p per share of cash and some residual values in the businesses they own you'd think there is limited downside below 40p, with a book value of 90p then it fits his risk reward preference.

Also "interesting" and by interesting he actually means totally effing insane that Turner at the FSA is proposing Tobin taxes, this guy is a chump, thats why he's working for the government. If the financial sector is destabilising the UK real economy he's been smoking crack, the Raven would love to see the Labour champagne twits balance the budget without 20% of their tax revenue contributed by a few hundred thousand workers, go figure. It does make one wonder where the FSA finds these idiots, after all if he proposes tax increases on trading of shares and bonds, who does he think is going to invest in UK businesses, how much are pension funds going to pay out in more taxes and who in their right mind is going to buy gilts? uhm the BOE can't finance that hole all by itself without THAT becoming a huge destabilising force. Truly some of the most foolish and populist posturing he's heard this year.

Wednesday, 26 August 2009

stopped out

Obama made a very good decision and the Raven applauds his non-partisan reappointment of Bernanke, there really isn't even a question in his mind that it was by FAR the best choice he could have made. Lets hope that Volker and Summers keep their lips buttoned from here.

Long: 74% Short:67% Gross: 141% Net: 7% ~ $Delta 0% $Gamma 0% $Vega 0% $Premium 0.00%

It certainley felt like a stop out yesterday, given that his SNDK short was stopped out and so was his PUB LN short almost immediately - both by the price action rather than hitting predetermined stop levels. He still doesn't like these businesses and their fundamentals, if the market is getting excited in Punch because the company says its going to be likely that it meets its targets for the year then he doesn't understand why it doesn't want to think about the probability that Punch has to come back to the market for some more fund raising? Its balance sheet is terrible and the Raven really doesn't think that commercial property is going anywhere other than south, he also doesn't feel that Punch's assets are marked at the correct level on their balance sheet, if they were marked at where he thinks they should be then perhaps we'd be talking about recovery levels on their debt rather than a p/e of the stock!

He's taken a little profit on AI/ LN, Aero Inventories, a small cap long that he put on last week, he's now 2/3s of what could be called full size in the position. On a valuation basis it still looks very attractive, at 0.6 x book and a p/e of 4.3 he thinks that you're compensated for the risk of such a small firm (he's yet to kick the tires on who their biggest customers are, etc. but the price action and valuation make it an interesting punt).

He's going to look to increase his position in IPCR - he likes the sector in general, this play has a deal spread that annualises to a rather small 12% however he's not shorting VR against it so is happy to accept that spread as a kicker to owning the player in the sector. Given the last three days price action however he's cautious that we may break the strong uptrend, in which case he's going to watch carefully today.

Chanos has made some interesting comments about the healthcare sector and if there is time this week the Raven would like to have a look and at least draw up a watch list of stocks he's like to short if they begin to break down.

He's also put a tiny long in Nedbank, it looks pretty attractive and looks to have broken out of a sideways range, he's still doing his work before potentially scaling in.

Tuesday, 25 August 2009

tinkering tuesday

L: 105% S:105% G: 210% N: 1% ~ $D 0% $G 0% $V 0% $P 0.00%

Some interesting comment today out of PUB LN that they are on course to hit year end targets caused the Raven to review his numbers on the company. He understands partially why its trading where it is, it does represet an option on the underlying assets. This doesn't mean however that the option is in the money or should be trading at anywhere near the level that it is. A 10% fall in the value of their property assets and writing off their goodwill and its book value is zero, its still very levered ~9x which doesn't given them too much comfort room if the EBITDA doesn't match up to their targets. The Raven had been in and out of this as a short, well with the 10% pop in the stock today, he's getting short again, looking to scale into the position on the close.

He's also been playing around with simple valuations for the market as whole, on a mid p/e and using his earnings model the market does look fair, however if one does take into consideration the low treasury yield then its pretty easy to come up with a much higher valuation. Obviously QE and investor risk aversion make government bonds overvalued to stocks; the question that is still to be answered is what is going to happen to inflation/deflation, to answer that is far more tricky given how opaque chinese figures are and the amount of capacity that they have potentially added. In very simple terms the Raven belives that China has added a large amount of capacity and stock piled a lot of commodities, this should be a large deflationary force, he also doesn't believe that the monetary and fiscal stimilus are sufficient to create inflation given the vast reduction in money supply and velocity in general from the crisis. The curious question is what effect will deflation have on stock prices? and what about the USD?

The Raven has been keeping pretty close to shore and still taken a fairly heavy beating on his MCO short, he'd been covering it slowly over the last week, eating a lot of the pain on the way up, last nights price action indicated that perhaps its due a reversal and so he put a unit of risk back on the table, although he does remain cautious. He also put a unit of risk back in the EMC/SNDK pair trade - yes he does know that they're not really a hedge, but at least they're in the same index and have a reasonable correlation.

He's also looking a lot more at the M&A universe again, he reviewed the bottlers PAS and PBG, no dice.
JAVA - no dice there either, although he's hoping for a french exotics firm head if this deal does close before year end - in fact there would be nothing sweeter than picking off a 'granny robber' trying to make clever fat prices on exotics.

He also increased his CYCL position and is yet to understand why its trading where it is, even though it appears to be drifiting more like a true deal spread these days.

The Raven has also cast his eye back to MIR and NRG as they've drifted lower in this rally, they could get very interesting if they fall back a bit further.

Thursday, 20 August 2009

back from a break.

Its been a while since the Raven felt in need of posting, however yesterday's market action reminded him of the need for the discipline that marshalling of thoughts in a daily post brings.

He's increased his MCO short position, technically it appears the stock is bouncing off the 23's level for the third time, but rallying by smaller amounts, usually this is a good indicator that the stock will break that resistance level. He's felt a bit of pain from being too agressive too early and fighting the trend, which he's been really trying to avoid with his other trades. He's also a bit annoyed at that mistake with MCO, hence the public confession for making that stupid mistake and a resolve to correct it and be more rational going forward.

On the long side of the book he put on a new position in CYCL, which is being aquired by AT&T. It appears that the stock has sold off on the belief that this deal takes even longer to complete or that T decides it wants to renegociate for a lower deal price - which he doesn't think they'd get away with doing. He bought the stock down ~10% from its deal price, which would give a 20% IRR in a 6month deal completion (which he'd wager will happen, or it'll at least have broken).

He's added a couple of UK small caps to the watch list but is pretty far away from being able to pull the trigger.

Other longs in the book are some of the catastrophy reinsurers, they look to be pretty cheaply priced vs other financials, they've also been looking to consolidate as an added kicker, hence the Raven adding IPCR. (small positions in PTP and Aspen as well). He's also looking at some of the emerging market banks - specifically Turkey, although he's done a comp. with SA banks, which are pretty tightly priced given all their risks.

Macro thoughts otherwise remain limited, FX momentum continues to be a weak trade. He still thinks we'll see deflationary forces for a long time to come due to the huge excess capacity that is left in the system and the rebuilding of the consumer balance sheet constraining any bounce back in consumption - hence the feeling that the huge bounce in China is perhaps a little overdone. He's placing a small bet that libor spreads rise in the UK while remaining in the long US 10yr treasuries, although thats a micro sized trade.

L: 150% S:145% G: 295% N: 5% ~ $D 25% $G -7% $V 0% $P -1.09%

He's also sold some short term downside puts, the 1000 level seems to be a magnet for the market, he doesn't expect it to go anywhere for a while and is happy to try and make some money collecting theta, he also thinks that his longs will have very little beta on the downside whereas the beta on his shorts could very well explode if there is a sell off.

Tuesday, 4 August 2009

taking some profit

L: 24% S:99% G: 124% N: -75% ~ $D -4% $P 0.35%

The Raven sold out of most of his long positions yesterday, it was just too tempting and too much of an easy trade to take profits. NRG has had a great little run and its sitting at the top of its channel, he still thinks its massively undervalued but it runs a much larger risk of a pull back from the 28.6 level he sold at.

He increased his short substantially in MCO during the day, only to have to cover that increased size at a higher price unfortunately, even after that its now the biggest position in the portfolio.

The Raven's still in catch-up mode but also trying to open his eyes to some new ideas, themes and trends. He also looked backed at his 10 predictions from the start of the year, well lets just say he's pleased he doesn't have to trade on a 6 monthly time frame as 3.5/10 is something he'd almost bet against.

Monday, 3 August 2009

3% well spent

well not really, the Raven's 'oliday was relaxed and profitable even after spunking 3% of the portfolio on insurance. Good moves in NRG and a nice drop in MCO meant another good week. He closed his MCO position on Thursday night to lock in a gain until he was back in the office to do some proper work, he'd also broken a fundamental rule earlier in the week increasing that short position.

He's rejigged a few positions today and is busy updating models with last weeks data, plenty of reading and looking at a few results, its been a good first day back even if he feels he's not achieved too much.

L: 134% S:129% G: 263% N: 6% ~ $D -3% $G xx% $V xx% $P 0.04%