I Bought BP During the Oil Spill

[UK]

https://www.wsj.com/articles/the-fed-is-settling-into-its-role-as-the-worlds-central-bank-11585732095

[meiroy]

 

 

For the USD - the benefit of being the reserve currency is a huge and persistent investment surplus that finances a huge and persistent trade deficit. So Americans as a whole can consume more than they produce because their biggest export is reserve currency status fiat money.

 

I would highly recommend reading (because I find it fascinating):

 

https://carnegieendowment.org/chinafinancialmarkets/56856

"The role of the U.S. dollar as the world’s global reserve currency has been regarded as a great advantage to the United States but actually it is a destabilizing burden rather than an “exorbitant privilege.”

 

and

 

https://carnegieendowment.org/chinafinancialmarkets/79641

"Taxing capital inflows is a far better way to balance trade than imposing tariffs. This would address the root causes of trade imbalances, improve the productive investment process, and shift most of the adjustment costs onto banks and speculators."

 

and

 

https://carnegieendowment.org/chinafinancialmarkets/77009

"A recent article by Joseph Stiglitz suggests that the United States runs a current account deficit because its people save too little to fund domestic investment. In fact, he may have it backwards: Americans may save too little precisely because the United States runs a current account deficit."

 

IMHO, Michael Pettis is one of the very few that is able to have a systemic view on the level of Soros and Druckenmiller.

 

"Michael began his career in 1987, joining Manufacturers Hanover (now JP Morgan) as a trader in the Sovereign Debt group. From 1996 to 2001, he was at Bear Stearns as a managing director-principal in Latin American capital markets. Pettis also served as an advisor to sovereign governments on topics regarding financial management, including Mexico, North Macedonia and South Korea"

 

What's great about him, is that he is able to simplify complex issues with the use of logic and accounting identities while avoiding political biases so many economists have.

 

 

 

 

[landstander]

Transact Technologies (TACT). Being correctly punished for being in casinos and in food service.

[jckund]

The context of the title is simple; a wee bit back I recall talking with a manager who recounted how he bet big on BP during the oil spill. I've heard countless times from folks who bought financials or real estate during the GFC. The is obviously a period cut from the same type of fundamental disruption fabric. So, for those willing to get their hands dirty, what names in the hospitality, restaurant, airline, cruise, entertainment biz are you looking at as the name you boast about buying during the coronavirus panic 5-10 years from now? If not a specific name, what investment are you making or looking to make? These are the scenarios where fortunes are made, if they arent lost first.

 

For me, I've been long a shareholder of the MSG entities. Ive regularly stated I planned to sell the entertainment company upon spin off. However, it is becoming apparent as the April 17 date approaches, that the spin off will get an abhorrent valuation despite having no debt and over $1B in cash. I am very much intending to hold my existing shares, and flirting with the idea of adding depending upon where things stand.

 

AERCAP

Parks Hotels and Resorts

Basket of Cruises

StoneCo

American Eagle

Urban Outfitters

Shopify

Tesla

Facebook

Heico

Transdigm

 

These are the stocks in general I found has an overhang of bankruptcy but can't see them being BK unless in a real draconian situation - and if that's the case we won't need money.

 

SO I've been looking a lot at Park (PK) this morning... collection of highly visible, valuable locations in major metropolitan areas (SF, NYC, Chicago) and vacation areas (Orlando, Hawaii). I get the sell-off rationale: hotels trending to zero occupancy for the next 3 months, liquidity constraints, likely dividend cut hurting REIT investors and triggering a fund sell-off there. But I did a few simple analyses on both liquidity and asset value. Maybe this warrants a longer post, or PM me, but here's my quick cals:

 

On liquidity, I assumed zero revenue for all of 2020 (and no variable costs associated with it). They have to be generating something this year, but let's be super conservative. $320M of cash + $1B revolver draw - $70M capex - $120M interest - $1B fixed cash expenses (assuming no cuts here) - $108M of Q1 dividend being paid is roughly flat. So they'd have no cash on hand, assuming they cut the dividend for the balance of the year. Not necessarily pretty, but this is a worst case and I presume they can either upsize the revolver or tap the capital markets (albeit expensively) if they should need more capital. Again, there's no way revenue/GM is $0 this year, and I'd be shocked if they haven't cut some degree of the fixed expenses (corporate/SG&A personnel).

 

On asset valuation, just looking at book value (which always undervalues older properties on the books) gives me a $18.68 NAV per share, which incorporates the cash/debt position contemplated above... $9.6B of property (they own most of the land too!) + $0 cash - $5.1B of debt = $4.5B... ~240m shares outstanding.

 

This thing is teading around $7 per share, which seems like more than enough cushion. What am I missing??

[thepupil]

corporate debt: $1.4 billion + whatever they need to borrow to get through this

market cap : $1.7 billion

 

$3.1 billion + for the corporate entity

$2.4 billion of asset level debt, of which $1.2 billion is Hilton Hawaiian Village.

they seem to own about 30,000 rooms at share (that is a very rough calc done with my eyeballs trying to account for JV's).

On a consolidated basis the EV is about $5.5 billion or $180K per room.

 

About 7000 of their 30,000 rooms ahve asset level leverage.

 

So another way to view it is to look at the corporate EV of $3 billion and assume they have to hand back the keys, so $3 billion for 23,000 rooms.

 

That's $130K per room, but I'd point out that it looks like some of their most valuable assets are the ones that are encumbered, including their top 2 in Hawaii/SF

 

Pre-corona Revpar is about $277.

Host Hotels top 40 assets do about $227 (2/3 of EBITDA) the whole company does about $184 revpar. althought "total revpar" is more for HST. I'm not sure what number is apples to apples. HST has a bifurcated portfolio with some huge assets that are very valuable (the three hyatt hotels bought for $700K / room, the south beach bought for $1.4 million / room, the Don Cesar, etc.) on a weighted average basis it's lower quality (maybe) than Park, but that's because of huge scale and its ownership of some more mid range stuff, which from a data/importance to the franchisors standpoint is a small positive.

 

Host trades for $200K / room, but just drew down their revolver completely, so they have a $2.8 billion cash horde, virtually no asset level leverage and the cleanest balance sheet int the space.

 

I think what you may be missing is that HST is potentially a better risk reward. Although I did all of that on the fly and I could hear an argument for Park in that someone like HST could buy Park. No one will buy HST because it's the big kahuna.

 

On a mark to market consolidated basis, Park has 70% debt 30% equity balance sheet (again all this was quickly done). On a mark to market casis HST has a $7 billion market cap and $2.5 billion of net debt or so (so more like 70/30).

 

 

 

 

 

 

 

[jckund]

EDIT, moved to PK.

[vinod1]

 

 

For the USD - the benefit of being the reserve currency is a huge and persistent investment surplus that finances a huge and persistent trade deficit. So Americans as a whole can consume more than they produce because their biggest export is reserve currency status fiat money.

 

I would highly recommend reading (because I find it fascinating):

 

https://carnegieendowment.org/chinafinancialmarkets/56856

"The role of the U.S. dollar as the world’s global reserve currency has been regarded as a great advantage to the United States but actually it is a destabilizing burden rather than an “exorbitant privilege.”

 

and

 

https://carnegieendowment.org/chinafinancialmarkets/79641

"Taxing capital inflows is a far better way to balance trade than imposing tariffs. This would address the root causes of trade imbalances, improve the productive investment process, and shift most of the adjustment costs onto banks and speculators."

 

and

 

https://carnegieendowment.org/chinafinancialmarkets/77009

"A recent article by Joseph Stiglitz suggests that the United States runs a current account deficit because its people save too little to fund domestic investment. In fact, he may have it backwards: Americans may save too little precisely because the United States runs a current account deficit."

 

IMHO, Michael Pettis is one of the very few that is able to have a systemic view on the level of Soros and Druckenmiller.

 

"Michael began his career in 1987, joining Manufacturers Hanover (now JP Morgan) as a trader in the Sovereign Debt group. From 1996 to 2001, he was at Bear Stearns as a managing director-principal in Latin American capital markets. Pettis also served as an advisor to sovereign governments on topics regarding financial management, including Mexico, North Macedonia and South Korea"

 

What's great about him, is that he is able to simplify complex issues with the use of logic and accounting identities while avoiding political biases so many economists have.

 

+1

 

I highly recommend reading anything from Michael Pettis. By far the most intellectually honest economist that I know.

 

Most economists slot themselves to theories. Pettis is the only one that I know says something like "Under these certain set of conditions" this theory is likely applicable. And if the theory is "true" then we should expect "these things to happen/not happen". Damn few economists think like that.

 

Vinod

[vinod1]

To answer the original question of things that are going to make us gazillionaries:

 

To me it looks like it is going to be heavily influenced by the shape of the recovery (a) a quick dip down and back to normal by say end of this year (b) a quick dip down and slow/long recovery (1-2 years) and © a deep dip down and a slow/long recovery (3-4 years).

 

The opportunities, especially the ones that go up 3x, 5x or 10x in each of the cases are going to be very different.

 

Cruise lines for example in case © would likely be in restructuring or heavily diluted. If it is case (a) and even if people take a very long time to come back to current levels, then at current prices they are a bargain. So I think you need to have a view of how things are going to play out if looking at multi-baggers.

 

Vinod

 

 

 

[rb]

I will say this as an economist. The rule is that before you think that Joe Stiglitz got it wrong it's time to triple check your work. If after that it checks out you find the nearest church and pray that you are right. I'm not saying this about mortals like me. Really, really smart economists follow that rule, the kind with Swedish medals.

[Spekulatius]

I'm hardly a forex expert, but to some degree have always assumed our "reserve currency" status is not so much related to our genius politicians/system but to the fact that we have the best businesses in the world calling US home. That again seems to be apparent when we look to COVID leadership. It was companies who took the lead, not politicians.

 

It's mostly due to historic reasons (WWI -> WWII -> Bretton Woods) and the fact that at least so far the USA is willing to cover the costs of having a reserve currency (the benefits are mostly political).

 

There is no alternative in sight. There's no other country that would accept this burden. Same with foreign countries buying USA debt.

 

Having the dominant reserve currency is a blessing and a curse at the same time. In a time of Crisis, it is a huge blessing. I am quite concerned about a few countries defaulting if the liabilities form the COVID-19 crisis get too expensive ( Italy, Mexico?  Brazil). We in the US can borrow almost as much as we want, without any problems, at least no in the short run.

[Cigarbutt]

^Mr. Stiglitz has a lot to 'teach', especially about market failures but he's known to be unable to consider his own, assuming nobody's perfect. He's a laureate but was also an admirer of Hugo Chavez and his economic 'model'. Both 'economists' mostly agree on the trade topics and on the disproportionate burden of having the USD as an international reserve currency. As typical for uni-dimensional specialists, they simply each tend to focus on opposite ends of the spectrum when considering the trade or capital component of the Account when, maybe, the reality is somewhere in between, as two dependent variables, in terms of a 'causation' discussion.

 

A few years ago, Mr. Pettis wrote something about unsustainable distortions (The Great Rebalancing). He seemed to imply that unsustainable imbalances were about to correct. He should have heeded one of his introductory quotes (and be more patient): "The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought." (Rudiger Dornbusch) For those interested about inequality, Mr. Pettis' assertions have become more relevant since 2011, with saving rates going up, but more and more concentrated in the top of the pyramid while a growing portion of the pie increasingly lives from paycheck to paycheck. I guess his next book could be titled: The Great Redistribution.

[meiroy]

^Mr. Stiglitz has a lot to 'teach', especially about market failures but he's known to be unable to consider his own, assuming nobody's perfect. He's a laureate but was also an admirer of Hugo Chavez and his economic 'model'. Both 'economists' mostly agree on the trade topics and on the disproportionate burden of having the USD as an international reserve currency. As typical for uni-dimensional specialists, they simply each tend to focus on opposite ends of the spectrum when considering the trade or capital component of the Account when, maybe, the reality is somewhere in between, as two dependent variables, in terms of a 'causation' discussion.

 

A few years ago, Mr. Pettis wrote something about unsustainable distortions (The Great Rebalancing). He seemed to imply that unsustainable imbalances were about to correct. He should have heeded one of his introductory quotes (and be more patient): "The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought." (Rudiger Dornbusch) For those interested about inequality, Mr. Pettis' assertions have become more relevant since 2011, with saving rates going up, but more and more concentrated in the top of the pyramid while a growing portion of the pie increasingly lives from paycheck to paycheck. I guess his next book could be titled: The Great Redistribution.

 

+1

 

Yes, indeed he gets the timing wrong, just like Soros did about the big bubble popping.  Both he and Soros were also wrong about the timing for China to hit its debt ceiling, but the underlying reasoning seems correct.  And, funnily, just how Soros got the European outcome wrong because of the human factor (reaction to immigrants) so did Pettis about China and the USA (see his article about Trump, a rare opinion about politics). Both, however, had their day of reckoning and have adjusted their point of view about the world. Something a lot of economists with a big-hammer are unable to do.

 

 

 

I'd like to point out that a lot of what Pettis is saying when it comes to imbalances is based on simple accounting identities. As it's unintuitive it might be hard for people to comprehend especially as these days the imbalances are mostly due to the flow of capital and less due to the actual export/import of goods (e.g. the futility of goods tariffs as a fix for the trade deficit, also because it simply moves through a third country). You can see how on this thread people mix the idea of reserve currency with something else.

 

Mind you, The Great Rebalancing is mostly about China.

 

 

 

 

[Cigarbutt]

Yes, indeed he gets the timing wrong, just like Soros did about the big bubble popping.  Both he and Soros were also wrong about the timing for China to hit its debt ceiling, but the underlying reasoning seems correct.  And, funnily, just how Soros got the European outcome wrong because of the human factor (reaction to immigrants) so did Pettis about China and the USA (see his article about Trump, a rare opinion about politics). Both, however, had their day of reckoning and have adjusted their point of view about the world. Something a lot of economists with a big-hammer are unable to do.

 

I'd like to point out that a lot of what Pettis is saying when it comes to imbalances is based on simple accounting identities. As it's unintuitive it might be hard for people to comprehend especially as these days the imbalances are mostly due to the flow of capital and less due to the actual export/import of goods (e.g. the futility of goods tariffs as a fix for the trade deficit, also because it simply moves through a third country). You can see how on this thread people mix the idea of reserve currency with something else.

 

Mind you, The Great Rebalancing is mostly about China.

However, the USD is also the global funding currency. For some time, it seems that the world has been looking for USD liquidity and last week, the IMF announced that they had received demands for USD by 80 (!) countries (mostly emerging) and the Fed (as the head of the virtual but global central bank) has recently expanded the swap lines to emerging partners (who happen to have a lot of debt denominated in the appreciating currency {ouch}), not to China however..

Above, Spekulatius suggested to consider buying at the periphery of damage, something I did when the housing bubble deflated (ie soundly financed manufacturers of carpets, building products, paints etc) but this strategy implies that one has to assume how easy (or hard) it may be to hide and to assess the degree and effectiveness of various bailouts.

Linking back to the BP spill, there may have been ways to play that but a possible relevant exercise was to consider that the Deep Horizon disaster was first and foremost the result of an imbalance between expediency and caution.

https://mitsloan.mit.edu/LearningEdge/CaseDocs/10%20110%20BP%20Deepwater%20Horizon%20Locke.Review.pdf

[meiroy]

Yes, indeed he gets the timing wrong, just like Soros did about the big bubble popping.  Both he and Soros were also wrong about the timing for China to hit its debt ceiling, but the underlying reasoning seems correct.  And, funnily, just how Soros got the European outcome wrong because of the human factor (reaction to immigrants) so did Pettis about China and the USA (see his article about Trump, a rare opinion about politics). Both, however, had their day of reckoning and have adjusted their point of view about the world. Something a lot of economists with a big-hammer are unable to do.

 

I'd like to point out that a lot of what Pettis is saying when it comes to imbalances is based on simple accounting identities. As it's unintuitive it might be hard for people to comprehend especially as these days the imbalances are mostly due to the flow of capital and less due to the actual export/import of goods (e.g. the futility of goods tariffs as a fix for the trade deficit, also because it simply moves through a third country). You can see how on this thread people mix the idea of reserve currency with something else.

 

Mind you, The Great Rebalancing is mostly about China.

However, the USD is also the global funding currency. For some time, it seems that the world has been looking for USD liquidity and last week, the IMF announced that they had received demands for USD by 80 (!) countries (mostly emerging) and the Fed (as the head of the virtual but global central bank) has recently expanded the swap lines to emerging partners (who happen to have a lot of debt denominated in the appreciating currency {ouch}), not to China however..

Above, Spekulatius suggested to consider buying at the periphery of damage, something I did when the housing bubble deflated (ie soundly financed manufacturers of carpets, building products, paints etc) but this strategy implies that one has to assume how easy (or hard) it may be to hide and to assess the degree and effectiveness of various bailouts.

Linking back to the BP spill, there may have been ways to play that but a possible relevant exercise was to consider that the Deep Horizon disaster was first and foremost the result of an imbalance between expediency and caution.

https://mitsloan.mit.edu/LearningEdge/CaseDocs/10%20110%20BP%20Deepwater%20Horizon%20Locke.Review.pdf

 

I'm not sure why you wrote "however". If a currency is not something like a reserve currency and is not freely traded in large quantities it won't be the global "funding currency".

 

There's no doubt there is risk avoidance and high demand for money, hence the FED's increase in liquidity.  It happened in 2008 and QE was quite effective.  So, what is the net economic benefit to the USA here exactly that everyone wants USD?

 

As for your example, the known example is of selling shovels to miners on a gold rush.

 

Buying beaten-down stocks when there's blood on the street, or just under their feet, and the risk: reward is good is indeed the way to go.  Haven't we all been doing that lately.

 

Specifically, about BP, my only experience with this sector is SD, which Gregmal was kind enough to remind me about.

 

 

 

[Cigarbutt]

Yes, indeed he gets the timing wrong, just like Soros did about the big bubble popping.  Both he and Soros were also wrong about the timing for China to hit its debt ceiling, but the underlying reasoning seems correct.  And, funnily, just how Soros got the European outcome wrong because of the human factor (reaction to immigrants) so did Pettis about China and the USA (see his article about Trump, a rare opinion about politics). Both, however, had their day of reckoning and have adjusted their point of view about the world. Something a lot of economists with a big-hammer are unable to do.

I'd like to point out that a lot of what Pettis is saying when it comes to imbalances is based on simple accounting identities. As it's unintuitive it might be hard for people to comprehend especially as these days the imbalances are mostly due to the flow of capital and less due to the actual export/import of goods (e.g. the futility of goods tariffs as a fix for the trade deficit, also because it simply moves through a third country). You can see how on this thread people mix the idea of reserve currency with something else.

Mind you, The Great Rebalancing is mostly about China.

However, the USD is also the global funding currency. For some time, it seems that the world has been looking for USD liquidity and last week, the IMF announced that they had received demands for USD by 80 (!) countries (mostly emerging) and the Fed (as the head of the virtual but global central bank) has recently expanded the swap lines to emerging partners (who happen to have a lot of debt denominated in the appreciating currency {ouch}), not to China however..

Above, Spekulatius suggested to consider buying at the periphery of damage, something I did when the housing bubble deflated (ie soundly financed manufacturers of carpets, building products, paints etc) but this strategy implies that one has to assume how easy (or hard) it may be to hide and to assess the degree and effectiveness of various bailouts.

Linking back to the BP spill, there may have been ways to play that but a possible relevant exercise was to consider that the Deep Horizon disaster was first and foremost the result of an imbalance between expediency and caution.

https://mitsloan.mit.edu/LearningEdge/CaseDocs/10%20110%20BP%20Deepwater%20Horizon%20Locke.Review.pdf

I'm not sure why you wrote "however". If a currency is not something like a reserve currency and is not freely traded in large quantities it won't be the global "funding currency".

There's no doubt there is risk avoidance and high demand for money, hence the FED's increase in liquidity.  It happened in 2008 and QE was quite effective.  So, what is the net economic benefit to the USA here exactly that everyone wants USD?

As for your example, the known example is of selling shovels to miners on a gold rush.

Buying beaten-down stocks when there's blood on the street, or just under their feet, and the risk: reward is good is indeed the way to go.  Haven't we all been doing that lately.

Specifically, about BP, my only experience with this sector is SD, which Gregmal was kind enough to remind me about.

If interested in the 'BP spill', you may want to watch the movie:

https://en.wikipedia.org/wiki/Deepwater_Horizon_(film)

I'd say the movie is well done and entertaining. It's basically the story of people in charge desperately (for profit) trying to get liquidity (oil) to the market despite a less than ideal set up. It's also a story about human nature with people in charge thinking that they can always control complex systems with little or no margin of safety, who are very slow to react to clear stress signals and to reconsider their assumptions and who realize their foolishness only when the floating rig is in flames.

[meiroy]

Wow, it even has 80%+ on rottentomatoes.  Thanks! Will definitely watch it.

 

Edit: Quite a good action movie.  Knowing it was based on actual tragic events I can't say it was enjoyable to watch but it's definitely recommended.