txlaw

Is he referring specifically to US wireless providers? At what point in the interview does he discuss?

Pretty cool website. I figure that many of you will be interested in perusing the moonshot projects. https://www.solveforx.com/

http://www.nationaljournal.com/daily/europe-to-america-we-want-your-gas-20140116

After the surge at the EOY, my returns for 2013 in my regular account were 81% (pre-tax, of course). As with last year, I feel very good about the IV of my portfolio. Loving the Fiat deal and am hoping that the market further re-asseses my energy companies. I continue to hold my financial companies for the long term and have big hopes for some of my telecom holdings.

67% YTD for me.

I thought your way was an iteration back on Eric's--shouldn't you use Eric's new way to calculate it? I don't think so. They way I do it makes the most intuitive sense for calculating leverage to me. I think if Eric's way is right, our cost of leverage should come out the same (plus or minus NPV effects). I think it might have to do with you guys using a compound interest rate. But my brain is fried at this point.

But why are there different results between y'alls way and my way of calculating leverage? Is it because the cost of leverage is a compound interest rate?

Honestly, it's very hard for me to follow this line of thinking. But perhaps the cost of leverage is different because of compound interest?

Would you mind posting a cost of leverage example with the dividend after you have thought about it? (Perhaps you already have). txlaw and I have come up with different costs for various dividend scenarios and are working that out at the moment. I'm curious to see if it matches the total return formula I derived earlier in the thread. I would think they would match or at least that they will be fairly similar. Let me see if I can sort of describe the way that I'm calculating cost of leverage for these GM warrants, which is to treat a warrant buy as a leveraged buy of the common, where the principal balance is completely forgiven in case of wipe out. Constructive criticism welcome. Strike price = $18.33 = Loan principal amount Common price = $40.27 = Economic rights bought today (minus div collection) Option price = $22.62 = Cash outlay today Intrinsic value = $21.94 = Cash outlay attributable as down payment Time premium = $ 0.68 = Cash outlay attributable as pre-paid interest for 5.5 year loan Div (possible) ~ $ 1.20 = Additional interest sweeped by the market on an annual basis The strike price is like the principal amount for a balloon payment loan. In 5.5 years or so, I can take full ownership of a share of GM common by making a cash outlay equal to the principal amount. The differential between the strike price and the common price today -- the intrinsic value of the option -- is equivalent to the cash down payment required for this non-recourse loan transaction. I have to outlay $21.94 today as down payment to get this leveraged deal. Additionally, I have to pay pre-paid interest (the time premium) of $0.68 today. In order to get the nominal interest rate associated with the pre-paid interest, I have to solve for a rate that generates annual coupon payments with an NPV equal to the total amount of the pre-paid interest. For simplicity's sake, let's say that comes out to 1% based on the discount rate I use. And that rate, btw, should be keyed off the loan principal amount, aka the strike price. BUT, additionally, the dividends that go along with my common ownership rights are swept away by the market, unlike if I simply use portfolio margin to buy the common. If the dividend starts next year at $1.20 (~3% yield), that's a $1.20 annual cost that must be assigned to the loan principal amount, aka the strike price. So I would get an additional interest rate of $1.2/$18.33, which equals approximately 6.5%. So my total cost of non-recourse leverage for $18.33 worth of borrowing (an LTV of 46%) is 6.5% + 1% = 7.5%. If the dividend ratchets up over five years, then my interest rate goes up. Of course, this does not take into account the "risk free" rate I could obtain for 5.5 years with that $18.33 worth of cash that I didn't have to outlay today, which somewhat mitigates the (potential) high interest rate. Bottom line is that the cost of leverage depends on the dividends that GM decides to go with over the next couple of years, as there is no dividend protection.

Correct, based on that 3% dividend assumption on today's market price. People are expecting the stock to go up 40% (or at least Kyle Bass is). That would put the dividend at $1.72 (at 3% dividend payout yield level), which is 9.55%cost from the lost dividend. So the total cost of leverage would be greater than 10% a year. So it depends on the dividend. I'd personally prefer the portfolio margin approach here, because I see the rising interest rate to be a lesser risk than the rising dividend. I think you're probably right about the potential downside risk (how ironic) to a really nice dividend being reinstated for the GM warrants. Most likely, I'll be switching to the common. Thank you for your posts on this subject of leverage.

Hmm, based on the discussion above, I think I may have been erroneously calculating the missed dividend effect on the cost of leverage. So taking into account a potential 3% GM dividend (based on current price), do people get that the GM warrants result in a cost of leverage somewhere around 7.3%?

farnamstreet is a staple in my RSS feed. Keep up the good work, Shane!

A few posts above your question on this thread was info on where the author might have been looking for his numbers... I haven't read this guy's report, but if he's referring to the 10-K non-guarantor subsidiary breakdown, then he is including more than just Sears Re, and he's including intercompany receivables. So that basically makes me think I shouldn't be wasting my time on this report.

my wife has made a few of those types of presentations--there's some special software for it I think. I'll ask her for some names. Sweet, thanks.

That was a good presentation. Does anybody know what software he might have used for the 2 minute video presentation? If it's free/inexpensive, I'd like to play around with it.

This was a fantastic interview. Thanks for posting.

I don't recall seeing anything on this on the board: http://www.bloomberg.com/news/2013-11-18/china-reshapes-landscape-for-firms-from-alibaba-to-gm.html Bloomberg gives a bullish shout out to Nestle (better than KO?) and GM, among others.

So for this option, there's also some variability in terms of upside for the prefs depending on how the Newcos are capitalized. What if the government says, we are not going to help recapitalize Newco with cash + secs at par value. Instead, we'll give you $0.30 on the dollar in cash + secs, with the remaining $0.70 being exchanged for the operating assets. That gets us to roughly $10.4 billion of cash and securities contributed by the government in order to resolve the litigation and set into play a restructuring of the entire mortgage market. Newcos will also get additional capital from the proposed rights offering. Because Newcos will definitely be smaller than as proposed, there will need to be a number of other MBS insurers that are lined up to ensure that all securitizations from the common securitization platform can be insured. The key is that the $10.4 billion cash outflow by the gov is really in exchange to resolve the restructuring of the mortgage market on an expedited basis. And it's more than covered by the divs, cash sweep, and cash generated from the run-off portfolio. Makes sense to me, but will the politics of all this work out? ---------- In addition to F&F secs, it seems to me there are a number of ways to play this changing market. AIG is one way, as they could have UGC participate as an MBS insurer. And then spinoff, perhaps? MBI is another. MBIA Insurance stands for mortgage bond insurance (instead of municipal bond insurance) after being recapitalized as a JV between MBIA Corp and someone else (maybe Warburg Pincus). ORI and other MI providers could be another way to go depending on how the PMI market evolves in the wake of F&F dismantling.

I would agree with this line of thinking. The preferreds have preference in any sort of liquidation/transformation event, but given that the company is probably worth either zero or bucketfuls to the stockholders (depending on the legal outcome), the fact that the preferreds have a bounded upper payout and the common does not may make the bet better, probabilistically. It sounds like this isn't a big holding for Ackman, and is probably best compared to his purchase of GGP in bankruptcy that had a chance for a very high potential payout (that just happened to occur, in that case), and probably a very real risk of being worthless. Well, one thing to consider is that when there are legal battles like this, with sophisticated parties on each side, there tends to be an outcome that is not binary in nature (i.e., win or loss). Instead, there usually are ongoing negotiations where some deal is reached. Take the MBI/BAC ordeal, for example. So, to the extent you believe the government has some reason to negotiate rather than see this out, then it's a question of how much the private owners will benefit from the deal. Has anyone run the numbers on how the common would benefit from the run-off ops profit sharing option?

Fully invested. Still see opportunities.

Does anyone remember how Chanos was saying to short XOM because it's a liquidating trust? I wonder if he's still negative on XOM's prospects.

Interesting to see Ackman build 10% positions in both Freddie and Fannie common stock. He was buying heavy at $3 at least in Fannie. http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm To me, it seems pretty risky to be going into the common. The preferred clearly has risks as well, but the common . . . I mean, do people really expect that there will be full payoff on the preferred? I can see a preferred asset swap occurring, but I don't see why the government would actually capitalize the new companies with cash. Maybe it's just a starting point bid, where the hedgies don't really expect cash to be contributed?

Bill Ackman getting in the mix: http://www.businessinsider.com/bill-ackmans-pershing-square-reports-98-stake-in-freddie-mac-2013-11

Good job, Gio. :)

This is very interesting. It does seem like one of the problems is the way that the education of individuals is driven off earlier assessments of their ability or skills. The fact of the matter is that people learn at different speeds and have different results based on the educational environment. If an individual hasn't mastered the basics on which to build their more advanced knowledge, but the education system (and curriculum) has moved, then there is a danger of a negative snowball effect. Khan Academy has an interesting approach to mastery based learning. I think that the emphasis on early identification of "gifted" kids might eventually be seen as a blunt instrument that was implemented in the stone age of education (current years) to protect some kids from being dragged down by the non-optimal approach of moving kids along in a lock-step fashion.