November 14, 2009

Liquidity made me do it

The rationale for the market rally since March 09 has been liquidity pumped by the Fed. The interesting point is that the market decline from summer 2008 to March 2009 has been also explained by the disappearance of liquidity. The disappearance of liquidity was caused by over levered banks.

I am not going to agree or disagree about the causes of the market rally because I can't. I distinguish between causation and correlation. The latter is easy to detect by statistical methods, however the former is almost impossible to prove. So arguing that point is irrelevant. One suffice to note is liquidity can disappear overnight but can't appear in same speed. It takes time.

Most investors, as evident by the decline and rally of the market, value liquidity. They attach a premium to it making liquid assets somewhat expensive to illiquid ones. I am agnostic to liquidity therefore I am not willing to bid more for it. However price is more important. I was a willing buyer from October till May, although in retrospect, regrettably, not enough. Now I am not. Back then the cyclically adjusted PE was around 10, now it is 19, above the long term average of 17. See chart courtesy of Dr. Robert Schiller.
At these levels I am more risk averse. I have sold several positions over the past few weeks for a summary see here and here. I have also wrote calls in American Express (AXP) at $40 which should take out of that position by it expiration next week. Moreover, Burlington BNI have been taken over by Berkshire which should close by early next year. So my cash position is rising so what to do.

In an fair valued or overvalued market I concentrate exclusively on event driven positions, like takeovers, spinoffs, bankruptcies and reorganization and liquidations. My favorite is spin-offs. Some of the opportunities I am looking at:
  • AOL spinoff from Time Warner
  • Madison Square Garden (MSG) spinoff from Cablevision
  • Cloud Peak Energy coal spinoff from metals giant Rio Tinto
  • Pharmaceutical Product Development, Inc. (PPDI) Spinoff of Compound Partnering Business.
  • SixFlags post bankruptcy equity
  • Lear Corp post bankruptcy equity
In an over valued market where you look can be different than an undervalued one, where businesses sell far below their normal earning power value.


Tony F. said...

AOL could be interesting. Recent SEC filling states that holder of 11 TWX will be get 1 AOL. My personal feeling that many current TWX holders will treat AOL as a toxic waste and dump it without economic reason. TWX is also a member of S&P100 and S&P500, those index funds will join sellers as well.

How do u play post-bankruptcy equities?

Sami said...

that is exactly what i am thinking about AOL. it is going to be hated so much that it will be sold to death.

the post bankruptcy equity works the same way as spin off. creditors and CLO funds are left with an equity stake as a result of the proposal that they will eventually dump because it is not in their charter to hold equity or outside their investment objective.

Now there are lockup period on the sale but CLO and bond funds get exemption so they will be sellers not due any economic reasons but because of institutional constraints.

Lear is seeking listing of their equity on AMEX and I am assuming sixflags will do the same once it exits.

Lear has a huge market share and its debt was due a legacy division that was sold to Wilbur Ross. six flags bankruptcy did not affect its brand so it could be an interesting position.

Anonymous said...


What do you think of MBS/GMNA/CMBS bond fund?

Sami said...

I think the train has left awhile ago. Although cmbs still is suffering so I will look into cmbs first as I think they are the most under stress.

Res has somewhat rallied , it was good bargin earlier in the year.

Anonymous said...

Agreed. I was thinking of an income fund that invests in ARMs as soon the govt will stop buying the fannie/freddie issues. Thoughts? Are you aware of any good funds to investigate?

Anonymous said...


Interesting AOL spinoff is getting some mainstream media attention like Barron's over the weekend. Would you wait until after Dec 9th when it IPOs or buy it right now? Also, Six Flags and Lear is getting some favorable press too. Are you still considering those as buying opportunities?

Sami said...

AOL: I will wait after its IPO and buy. if it follows a typical spin off scenario, AOL will sell off hard in the first week or 10 days. it is 11 to 1 spin off so most will dump it because it is a smaller holding. All index funds will sell because it not a member of any index while Time warner is a member of all major indecies. so you will have a lot of selling and pressure on the stock that will be more than the "when issued" market. I will be a buyer within a week or 10 days of its IPO.

six flags: after bankruptcy exit. I am not going to buy it now, we still do not have any approved plan yet.

Lear I am still researching it but it did not list as far as I know , or is it on when issued basis?
can you pass me links to press articles about Lear?

Tony F. said...

Here is a write up from the

It way out of my league, but just in case if you haven't read it.

At which market cap would you consider AOL as bargain?

Anonymous said...


Here's the LEAR article in Barrons. I don't think the

Also, the announcment of its NYSE shares (LEA) beginning in November. It looks like it has been having some pretty robust trading activity.

SOUTHFIELD, Mich., Nov. 9 /PRNewswire-FirstCall/ -- Lear Corporation, a leading global supplier of automotive seating systems, electrical distribution systems and electronic products, announced today that it has successfully emerged from its court-supervised financial reorganization with a strong and flexible balance sheet, positive operating results in the Third Quarter, a growing sales backlog and a robust competitive profile.

The Company also announced that its new common stock will be listed on the New York Stock Exchange under its historical NYSE stock symbol "LEA" and will begin trading on a "when issued" basis (LEA WI) today. The Company expects its common shares to begin "regular way" trading within several days thereafter.

"We have moved through the financial restructuring process without missing a beat operationally. We have continued to win new business globally, strengthened our industry-leading global capabilities and the spirit of the Lear team has never been more positive," said Bob Rossiter, Lear's Chairman, Chief Executive Officer and President. "Our customer relationships remain the best in the industry, allowing us to continue winning new business in every region of the world."

Lear said its present net sales backlog totals $1.4 billion for 2010 to 2012, which is approximately 25% higher than the prior status, despite lower industry production levels. The new backlog also represents continued diversification of Lear's sales, with 40% in its Seating business and 60% in its growing Electrical and Electronic business. Moreover, more than half of Lear's new business comes from outside North America.

As a result of the financial reorganization, Lear has reduced its debt obligations by approximately $2.8 billion and emerged with a strong and flexible balance sheet. With over $1 billion in cash, Lear has available liquidity to support its global operating needs and growth plans. Upon exit, Lear has less than $1 billion of debt at competitive interest rates and no near-term maturities.

"Moving forward, we are committed to maintaining a disciplined financial profile and an investment grade focus that will enable us to continue investing in new products and technologies globally, as well as growth in emerging markets," Mr. Rossiter said.

"As a result of our multi-year business transformation, we have streamlined our global cost footprint and improved our operating efficiency in every region of the world. Going forward, we have a focused overall plan to drive further sales growth and improved margins."

Mr. Rossiter concluded, "Thanks to the hard work and dedication of our employees, we moved through our financial restructuring expeditiously and without compromising the fundamentals that make Lear a global industry leader - our unrelenting focus on quality, our unwavering commitment to customer satisfaction, and the most talented team in the business. When you add to that our strong balance sheet, competitive cost structure, and focused growth strategy, we are ideally positioned to continue our business momentum and to benefit from an industry recovery."

Sami said...


AOL operating cash flow generation is about $1 b to $900 million. It is expected to trade at $2.5 billion mcap right now. It is a good deal right now. even if you model a decline in revenue you would still have a huge gap between DCF valuation and current market cap.

but of course I expect that the market cap will go down further. it may go down by 20% or so to 2B in market cap.

Thanks for the links about Lear.

Anonymous said...


AOL went down upon trading yesterday, but has been going up. Are you still tracking it or did you buy already? I was going to wait until next week to initiate a position. Thoughts?

Sami said...

I waiting for next week. so far there is no selling pressure you got to believe it is coming

Anonymous said...

Happy New Year! Did you buy AOL yet? I am still waiting for the stock price to come down a bit. Let me know.

Anonymous said...


happy new year to you too hopefully 2010 will be a good one.

No I still have not bought any. like you I waiting for the price to come down. I valuing it based on advertising revenue only as ISP revenue going to disappear sooner than later.

Also they did a good job of floating near the holidays and bumping the stock with the supposed sale of their ICQ business, which so far nothing came of it.

I will wait for a price drop.

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