>Chris Hynes comment on flash trading
August 27, 2009
>Chris’s comments on this blog on August 7th appeared in the WSJ today on In Defense of Flash Trading. If you get a chance get onto the comments section of the journal. There is quite a buzz that Chris has created with his comments. Not that they were controversial but it sure is a subject of different opinions.
>Private Equity Environment for Middle Market
August 26, 2009
>Talked to some lower middle market private equity guys last week–they said they were having trouble borrowing more than 2 turns on anything–and that is based on recession-reduced EBITDA. They are considering doing deals, taking the 2 turns, praying for a refi opportunity within 12 months so they can keep the excess equity for additional deals. A private wealth sales guy confirms that he’s just not seeing new liquidity from business owners–they don’t want to sell to private equity firms at the low prices implied by the lack of financing.
In the boom years, the math was interesting. Guy sells a business for $20 million, pays $3 million to the US Treasury, puts $10 million in public equity and $7 million in munis or other bonds. P/E firm put up $7 million in equity, $13 million in debt. Result was more new debt issued than funded. Tody same biz might get $7 million in debt with same EBITDA, or less if cash flows down. Even with 50% equity, P/E firm has a better deal than last year if the growth resumes–same equity, less debt. This only works if current owner takes a haircut,and most of them can wait.
>Our Dallas presenter says MI Developments (NYSE:MIM) keeps rolling along. The stock is trading at a large discount to book value and near-term events could unlock significant value.
>This fall hostin Xmas shopping previews
August 24, 2009
>we are looking to walk malls in New York, Boston and San Francisco early in the Christmas season. We are hearing very lukewarm back to school is making this an even more important tim ethis year.
>China and Banks
August 21, 2009
>Looks like shortly we are going to get a better handle on the China markets. Starting with alternative energy, health devices and consummables and environmental products we are going to be working with a Chinese partner to offer experts on both sides of the pond to talk in these spaces. On a side note I talked to a banker last night who said after all the smoke and mirrors his bank is literally out of the auto and bank business. They were #3 or #4 in the state prior to last summer in both spaces. He said year over year they are doing a fraction(less than 10%) of what they did last year at this time. He was not including refinances which as he said”really distorts” total loan #s.
>Decoupling: Has the Time Come?
August 21, 2009
>Decoupling may have finally arrived, a little too late for the believers of two years ago. The “this time its different” crowd argued that the emerging markets could stand alone without the US and Europe. It didn’t work that way, and emerging market equities were hit even worse than those in the developed markets. Lately the Asian emerging markets have been moving up faster than the US market, but it also seem the economies are as well. And, funny thing, the Eurozone is growing faster than the US–at least for now. There should be concern for the Chinese market after the big rally–lots of IPOs, bank loans up at high rates, and maybe some of that money flooding into stocks. Global banks are considering listing in Shanghai and floating stock there. Of course, hot foreign markets are always the last place Wall Street goes to sell junk, when they’ve run out of locals who haven’t heard the news. While playing the Chinese market in the short term given the current liquidity bubble is not for the faint of heart, especially with the government warning against speculation and bank loans finally slowing, continued economic decoupling may lead to returns exceeding those in the developed markets over a longer horizon.
>Increase in SEC Enforcement Activity
August 14, 2009
>The SEC is increasing enforcement efforts due to the spate of Ponzi schemes. So effective August 11, SEC has made it easier for their staff attorneys to issue subpoenas. They will no longer need formal approvals, just an approval from their senior supervisor. This means investment managers might be more likely than in the past to get a subpoena. So while there might be less reason for alarm, still a good idea to bring in counsel before responding. This bodes well for commercial real estate, as those law firms will be hiring again…We need to get used to the new America, where it’s tougher to interrogate suspected terrorists and easier to question businesspeople.
The release authorizing this action can be found here: http://www.sec.gov/rules/final/2009/34-60448.pdf
>Mark to market
August 13, 2009
>Now that the government eliminated(albeit temporary) the mark to market rules how would they reinstitute right now? i thought they were going the other direction to get rid of mark to market
>Potential New FASB Mark-to-Market Rules
August 13, 2009
>FASB is looking at a further expansion of mark-to-market rules. One of the concepts being discussed is marking all loans to market. This seems like a very difficult task in the absence of much of a securitization market, which we’re all rather sour on anyway due to the moral hazard. When a bank makes a loan to the corner drugstore (if it still exists in the future) who else would want that loan the next day? So what would the loan be worth? If banks have capital accounts of about 10% of their assets (wishful thinking these days?), if the marked-to-market loan suffered a 10% drop in value the day after it was made, the imaginary capital assigned to that loan would be wiped out. Anyone care to own a community bank under these conditions?
In the past, if examiners “classified” a loan, there was a capital haircut. This facilitated small business lending. Imagine a bank has a niche in lending to these mythical corner drugstores, a long experience of loan-to-value, credit risk, etc. It’s a profitable business, and someone leaves the bank and starts to compete. Being new, corners are cut, rates are lowered and higher risks are taken. Yet the old bank loses some share but doesn’t relax it’s standards. When the new bank becomes illiquid and has to sell the loans, now the old bank may need to write theirs down to the distress price, even though their portfolio is higher quality. In the past, this sort of marking process was reserved for assets that traded, not all assets.
Now that the government owns stakes in big banks, it’s time to look for the moral hazard–a regulatory climate that subtly favors the government-owned enterprises. Big banks might actually be able to securitize loans and have a more favorable mark than an unsecuritized loan from a small bank. The financial products czar, who’s supposed to approve products, is another potential change in the environment. Upstarts typically compete on service or product innovation. If a product czar inhibits product innovation, doesn’t that bode well for branded service providers over the upstarts?
>Axcelis (ACLS) is another pick from our recent small cap forum in NY. This manufacturer of ion implantation equipment for the semiconductor space has been hurt by the severe downturn in the industry, but has signed several important deals in the recent months and its unique products are winning important new customers, particularly in Asia. The upside could reach 200% or more based on the value of assets. With the stock currently trading at cash, the downside appears to be limited. The presenter believes there is a fair chance the company could be acquired in the next 6-12 months.
The Collaborator 