Tuesday, June 30, 2009
Hedge fund jobs..
A few posts ago I wrote about the Distressed Debt Investing blog, where Hunter brought some real insights into the process. Hunter's at it again! He's starting a new blog titled 'How to get a Hedge fund job'. Here he will dwell on his own experience and his networks to give reader a comprehensive understanding on what it takes to land Hedge fund jobs. At a time where unemployment is rearing its ugly head, Hunter's blog is a welcome relief. As someone who is looking for a mentor, I hope he comes up with some quality content helping me and people like me in their search!
Wednesday, June 24, 2009
what WB said about inflation..
I fret every time a value guy talks about macroeconomic conditions, but here I am talking about inflation. Swarmed by the talking heads, I went up on the Himalayas (BRK shareholder letters) to get some real advice from the guru (Warren Buffett). 1978-1982 was a time where real inflation actually took place, before the then fed chairman Paul Volcker raised rates to as high as 21.5% (can you imagine that) to reign in inflation. Fortunately, we have WB's 1978-1982 shareholder letters to decipher the time and his strategy (which as always he just lists out!).
While you and I talk about commodities and real estate etc., he was still looking for businesses but with the following characteristics, " Such favored business must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital." Essentially, business like See's Candy. When talking about commodities, he favors the lowest cost producers. We want to watch the downside, we want to make sure we make money even if inflation does not take hold.
Any fixed income security is likely to produce real term loses in a high inflation environment. He was absolutely against long term bonds, and mostly looked for bonds with conversion rights or distressed securities. When talking about return on capital you have to figure the inflation effects and then the taxation effects. A 10% bond with 8% inflation and taxes would not make any real return! In case of equities, the corporations will be paying taxes on nominal income and not real income. Considering owners can only use real income, this means the corporations would pay taxes on deficits!
I can only say so much and not a fraction as good as WB, so I would highly recommend the Berkshire Hathaway shareholder letters from 1978-1981.
While you and I talk about commodities and real estate etc., he was still looking for businesses but with the following characteristics, " Such favored business must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital." Essentially, business like See's Candy. When talking about commodities, he favors the lowest cost producers. We want to watch the downside, we want to make sure we make money even if inflation does not take hold.
Any fixed income security is likely to produce real term loses in a high inflation environment. He was absolutely against long term bonds, and mostly looked for bonds with conversion rights or distressed securities. When talking about return on capital you have to figure the inflation effects and then the taxation effects. A 10% bond with 8% inflation and taxes would not make any real return! In case of equities, the corporations will be paying taxes on nominal income and not real income. Considering owners can only use real income, this means the corporations would pay taxes on deficits!
I can only say so much and not a fraction as good as WB, so I would highly recommend the Berkshire Hathaway shareholder letters from 1978-1981.
Thursday, May 28, 2009
What chu think about TicketMaster?
Past
TicketMaster (TKTM) is the world’s largest live entertainment ticketing and marketing company. The company is a primary and secondary ticketing (thru ticketsnow.com) retailer in theUS
You and I both have had experience with TicketMaster and loathe would be too nice a word to describe the feeling. They make way above the economic rate of returns and have successfully passed price increases to customers - something a monopoly can do. Ticketmaster secures its monopoly by goading the venues into multi-year agreements that empower Ticketmaster to act as their exclusive vendor. So what was a cost center for venues (ticketing) has become a steady source of income. They have been a monopoly ever since the early 1990's and have maintained and increased their position even after the advent of the Internet and increasing number of players. They are very Microsofteqe in their business practices and took/are taking a lot of heat for their monopolistic actions. It was spun off of IAC in mid-2008. In essence, TicketMaster is a toll booth.
In 2008, Tktm had revenues of $1.45B with an ebitda of $225 million for ebitda margins of 16%. The margins have however come down from the mid 20's over the past few years. TKTM is trading at $7.50 for an EV of $1060 million and an EV/EBITDA ratio of 4.7. It traded for as low as $3.50/share in March 2009.
Present
This is where things get convoluted. Live Nation, TicketMaster's biggest client fired TicketMaster and said they'll do their own ticketing (LYV brought 13% of revenue in 2008 for TKTM). Live Nation also intends to poach TKTM's clients. Live Nation operats on razor thin margins but has a large presence in the live entertainment business. TicketMaster then bought a majority interest in Frontline Management and brought Irving Azoff (someone you wanna read about) as CEO. With this TKTM controlled a lot of very high profile artists and became a threat to Live Nation. Live Nation and TicketMaster then decided to merge (50-50 share) and have all the intended approvals except the regulatory approvals (which might be tough to get!).
In this business, the main parts of the puzzle are: (1) Artists (2) Promotors (3) Venues (4) Ticketing and (5) the Fan. Live Nation is the worlds biggest promoter, has control over various venues and artists (because they can pay them more than anybody else, given the scale). TicketMaster has ticketing and venues (thru exclusivity arrangements) and now artists thru Frontline. Combining these two business would vertically integrate an industry and crush the competition, but I don't think a stockholder would complain.
Future?
The files are with the Justice Department and they along with the states are taking a deep hard look at the merger. I'd say there is a 50-50 chance. They do have a case when they say touring is the main source of income for the artists and the record label model is broken with the illegal downloads etc. They might be asked to divest certain assets like ticketsnow.com for the merger to pass.
If the merger does not happen that is where things become uncertain. A couple of scenarios:
1) Live Nation comes back to Tktm for ticketing and they Frontline works with Live Nation, in essence they collude (kinda)- will they be able to pull this off?
2) Live Nation does not come back. TicketMaster decides to go into the live event promotion business (with Frontline managing artists) and these two operate in a duopoly - can they?
3) TicketMaster faces increased competition from Live Nation in the ticketing business. TicketMasters market share decreases - but by how much? Can Live Nation severely damage their moat?
They exposed themselves by announcing a merger. I watched the senate hearing on the TicketMaster/Live Nation merger and it was well worth watching. There is information on the history, business practices, competitors, future etc. etc. Now TKTM is cheap (given market position, margins, ROC), it might get cheaper but given all the uncertainties is it safe? what chu think?
TicketMaster (TKTM) is the world’s largest live entertainment ticketing and marketing company. The company is a primary and secondary ticketing (thru ticketsnow.com) retailer in the
You and I both have had experience with TicketMaster and loathe would be too nice a word to describe the feeling. They make way above the economic rate of returns and have successfully passed price increases to customers - something a monopoly can do. Ticketmaster secures its monopoly by goading the venues into multi-year agreements that empower Ticketmaster to act as their exclusive vendor. So what was a cost center for venues (ticketing) has become a steady source of income. They have been a monopoly ever since the early 1990's and have maintained and increased their position even after the advent of the Internet and increasing number of players. They are very Microsofteqe in their business practices and took/are taking a lot of heat for their monopolistic actions. It was spun off of IAC in mid-2008. In essence, TicketMaster is a toll booth.
In 2008, Tktm had revenues of $1.45B with an ebitda of $225 million for ebitda margins of 16%. The margins have however come down from the mid 20's over the past few years. TKTM is trading at $7.50 for an EV of $1060 million and an EV/EBITDA ratio of 4.7. It traded for as low as $3.50/share in March 2009.
Present
This is where things get convoluted. Live Nation, TicketMaster's biggest client fired TicketMaster and said they'll do their own ticketing (LYV brought 13% of revenue in 2008 for TKTM). Live Nation also intends to poach TKTM's clients. Live Nation operats on razor thin margins but has a large presence in the live entertainment business. TicketMaster then bought a majority interest in Frontline Management and brought Irving Azoff (someone you wanna read about) as CEO. With this TKTM controlled a lot of very high profile artists and became a threat to Live Nation. Live Nation and TicketMaster then decided to merge (50-50 share) and have all the intended approvals except the regulatory approvals (which might be tough to get!).
In this business, the main parts of the puzzle are: (1) Artists (2) Promotors (3) Venues (4) Ticketing and (5) the Fan. Live Nation is the worlds biggest promoter, has control over various venues and artists (because they can pay them more than anybody else, given the scale). TicketMaster has ticketing and venues (thru exclusivity arrangements) and now artists thru Frontline. Combining these two business would vertically integrate an industry and crush the competition, but I don't think a stockholder would complain.
Future?
The files are with the Justice Department and they along with the states are taking a deep hard look at the merger. I'd say there is a 50-50 chance. They do have a case when they say touring is the main source of income for the artists and the record label model is broken with the illegal downloads etc. They might be asked to divest certain assets like ticketsnow.com for the merger to pass.
If the merger does not happen that is where things become uncertain. A couple of scenarios:
1) Live Nation comes back to Tktm for ticketing and they Frontline works with Live Nation, in essence they collude (kinda)- will they be able to pull this off?
2) Live Nation does not come back. TicketMaster decides to go into the live event promotion business (with Frontline managing artists) and these two operate in a duopoly - can they?
3) TicketMaster faces increased competition from Live Nation in the ticketing business. TicketMasters market share decreases - but by how much? Can Live Nation severely damage their moat?
They exposed themselves by announcing a merger. I watched the senate hearing on the TicketMaster/Live Nation merger and it was well worth watching. There is information on the history, business practices, competitors, future etc. etc. Now TKTM is cheap (given market position, margins, ROC), it might get cheaper but given all the uncertainties is it safe? what chu think?
Sunday, May 10, 2009
Dimon and the Letter
Most of what I've know has come as a result of 'hop' reading, which essentially means reading something, finding something interesting and hoping on to read about this something interesting. So when Warren Buffett at the AGM recommended Jamie Dimon's letter, I had to read it! Needless to say it is a wonderful letter. I second Tom Brown when he says this is the type of stuff we expect from Warren Buffett (the AGM fills in some holes). It is a must read..
It is becoming apparent that an equity investor doesn't just need a good understanding of the industry but also needs to comprehend the credit markets and value the political risks. WB famously said that even if Alan Greenspan (the then fed chairman) told him what his next move will be, it will not effect how WB invests. This makes sense because as value investors we look for under priced securities with a margin of safety and it is as simple as that. But on the other hand, I reckon, some awareness of the macro conditions is an absolute must and being 'street smart' important. JPM shareholder's letters gives a good summary of past mistakes, present challenges and a recommendation (not just a complain) on future reform.
It is becoming apparent that an equity investor doesn't just need a good understanding of the industry but also needs to comprehend the credit markets and value the political risks. WB famously said that even if Alan Greenspan (the then fed chairman) told him what his next move will be, it will not effect how WB invests. This makes sense because as value investors we look for under priced securities with a margin of safety and it is as simple as that. But on the other hand, I reckon, some awareness of the macro conditions is an absolute must and being 'street smart' important. JPM shareholder's letters gives a good summary of past mistakes, present challenges and a recommendation (not just a complain) on future reform.
Thursday, April 16, 2009
Unconventional Gas
This is not about a particular stock, but about the natural gas sector in general and an analysis of the unconventional reserves. This would be a good starting point if an investor wants to establish a position in the natural gas sector. Also, it explains the success of unconventional e&p companies.
Natural Gas
Natural gas is one of the cleanest burning hydrocarbons and an essential energy source. The depletion rates for natural gas in the U.S. for the fields put into production in 1990 were down 17% after the first year, those put into production today deplete more than 30% during their first year of operation. Demand for natural gas in the United States has more than doubled over the past two decades. However, since 1996, domestic production of natural gas has grown at an annual rate of well below one percent. This slow increase is due to a number of factors, a primary one being that currently producing gas fields are maturing and producing less gas. Overall Canadian production is projected to remain relatively flat and exports to the United States, after factoring in expanding Canadian use, are expected to decline. Canada is expected to use more natural gas to heat buildings and to produce unconventional oil from tar sands, which uses heat from natural gas.
At present, more than 25% of daily U.S. gas production is recovered from tight and unconventional reservoirs which have become an increasingly important part of the equation in meeting natural gas demand. These unconventional gas properties usually have low risk F&D costs less than $2.00/mcfe which are further decreasing over time as efficiencies increase and shale gas reservoir knowledge improves. The unconventional gas reserves are usually tapped using horizontal well technologies, which have depletion rates of upto 70% in the first year of production and require continuous drilling to meet demand. Notably, the overall marginal cost of natural gas supply, including finding, development and operational costs is around $6.50/mcf. Another positive factor effecting natural gas is the potential Cap and Trade system as natural gas is a clean burning fuel. The European experience shows, as carbon prices increase (>$25/ton), the marginal cost of an inefficient coal-fired vs. an efficient natural gas-fired plant will cause a partial switch towards natural gas.
The current situation is that about 45% (from 1,606 to 884) of U.S. rigs have been shut since September 2008. Drillers need to add more than 3.5 bcf/day to offset declines and this means that the gas production going forward will decrease, at a faster pace than demand. This will naturally in due time, lead to higher natural gas prices. Natural gas futures for delivery in January 2010 are trading at a 49% premium to the April contract.
Unconventional Resources
In order to analyze the upside it is important to decipher the unconventional natural gas resource play. These resources could be in the form of tight gas, shale to name a few. Tight gas is typified by large volumes of low quality rock, moderate porosity (ratio of the volume of openings to the total volume of material) and ultra low permeability (measure of the ease with which fluids will flow). fields. The complexities of the depositional setting influences both porosity and permeability in the region, resulting in rapid variation of rock quality over short distances. Most tight reservoirs have to be fractured before they will flow gas at commercial rates.
Advances in technology, principally the Horizontal well technologies with multiple fractures have allowed the unconventional resources to produce at very economic rates. Although no two unconventional resources are alike; tight gas sands and shales have been found and developed for decades. E&P companies (I would suggest, at a minimum to go thru their latest presentations) like Chesapeake Energy, XTO energy and more recently PetroBank among others have used advancing technologies to economically extract resources from unconventional reserves. Economics per well dictate returns of 25-100+% with horizontal wells depending on the natural gas prices.
My research suggests that most of the unconventional gas resources (tight sand or shale) economically speaking are similar in the sense that they are (as management states) long life, repeatable, low risk, large reserve, natural gas resources. Technological improvements have increasing made it possible to economically extract resources from such resources. The recovery factor in these resources usually ranges from 20-30%. The difference economically arises from the development costs. Therefore, factors such as technology, spacing between wells, frac positioning and drilling costs are central and will affect the rate of returns. The challenge is to maximize the flow rate for the lowest cost.
At a time, where most of the integrated oil and gas companies are struggling to add reserves, these unconventional E&P companies can be a good opportunity to add long term, low risk reserves.
Natural Gas
Natural gas is one of the cleanest burning hydrocarbons and an essential energy source. The depletion rates for natural gas in the U.S. for the fields put into production in 1990 were down 17% after the first year, those put into production today deplete more than 30% during their first year of operation. Demand for natural gas in the United States has more than doubled over the past two decades. However, since 1996, domestic production of natural gas has grown at an annual rate of well below one percent. This slow increase is due to a number of factors, a primary one being that currently producing gas fields are maturing and producing less gas. Overall Canadian production is projected to remain relatively flat and exports to the United States, after factoring in expanding Canadian use, are expected to decline. Canada is expected to use more natural gas to heat buildings and to produce unconventional oil from tar sands, which uses heat from natural gas.
At present, more than 25% of daily U.S. gas production is recovered from tight and unconventional reservoirs which have become an increasingly important part of the equation in meeting natural gas demand. These unconventional gas properties usually have low risk F&D costs less than $2.00/mcfe which are further decreasing over time as efficiencies increase and shale gas reservoir knowledge improves. The unconventional gas reserves are usually tapped using horizontal well technologies, which have depletion rates of upto 70% in the first year of production and require continuous drilling to meet demand. Notably, the overall marginal cost of natural gas supply, including finding, development and operational costs is around $6.50/mcf. Another positive factor effecting natural gas is the potential Cap and Trade system as natural gas is a clean burning fuel. The European experience shows, as carbon prices increase (>$25/ton), the marginal cost of an inefficient coal-fired vs. an efficient natural gas-fired plant will cause a partial switch towards natural gas.
The current situation is that about 45% (from 1,606 to 884) of U.S. rigs have been shut since September 2008. Drillers need to add more than 3.5 bcf/day to offset declines and this means that the gas production going forward will decrease, at a faster pace than demand. This will naturally in due time, lead to higher natural gas prices. Natural gas futures for delivery in January 2010 are trading at a 49% premium to the April contract.
Unconventional Resources
In order to analyze the upside it is important to decipher the unconventional natural gas resource play. These resources could be in the form of tight gas, shale to name a few. Tight gas is typified by large volumes of low quality rock, moderate porosity (ratio of the volume of openings to the total volume of material) and ultra low permeability (measure of the ease with which fluids will flow). fields. The complexities of the depositional setting influences both porosity and permeability in the region, resulting in rapid variation of rock quality over short distances. Most tight reservoirs have to be fractured before they will flow gas at commercial rates.
Advances in technology, principally the Horizontal well technologies with multiple fractures have allowed the unconventional resources to produce at very economic rates. Although no two unconventional resources are alike; tight gas sands and shales have been found and developed for decades. E&P companies (I would suggest, at a minimum to go thru their latest presentations) like Chesapeake Energy, XTO energy and more recently PetroBank among others have used advancing technologies to economically extract resources from unconventional reserves. Economics per well dictate returns of 25-100+% with horizontal wells depending on the natural gas prices.
My research suggests that most of the unconventional gas resources (tight sand or shale) economically speaking are similar in the sense that they are (as management states) long life, repeatable, low risk, large reserve, natural gas resources. Technological improvements have increasing made it possible to economically extract resources from such resources. The recovery factor in these resources usually ranges from 20-30%. The difference economically arises from the development costs. Therefore, factors such as technology, spacing between wells, frac positioning and drilling costs are central and will affect the rate of returns. The challenge is to maximize the flow rate for the lowest cost.
At a time, where most of the integrated oil and gas companies are struggling to add reserves, these unconventional E&P companies can be a good opportunity to add long term, low risk reserves.
Tuesday, April 14, 2009
Distressed Debt Investing
This blog was meant to present my ideas and opinions, but there is something very interesting going on at the Distressed Debt Investing Blog. This is a topic that really interests me and for anyone who is interested in detailed distressed debt analysis this blog is a must.
I've been really busy and therefore have not posted as much as I'd like; having said that I'll try to post regularly from now on...
I've been really busy and therefore have not posted as much as I'd like; having said that I'll try to post regularly from now on...
Friday, February 20, 2009
flation - In or De?
"I don't know" is where I will begin (and end). But in between, let me present some differing views. Everyone (and I mean everyone) is convinced that Fed's actions will produce massive inflation going forward. I am sure you have seen the charts showing money supply a year ago and today and the chart is off the charts. The popular view is that we'll face some deflation and then massive inflation. OK, but my problem here is that when everyone is convinced something will happen, it usually doesn't!
Barron's recently interviewed Ray Dalio of Bridgewater Associates (excellent interview) and asked him the inflation question. He said, "A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years." So no inflationary worries there! Furthermore, a Matin Wolf article in the Financial Times (another excellent article) compared the current recession to Japan's and drew some lessons. He is more worried about deflation, than about inflation. The argument here is that this is balance sheet recession (similar to Ray's point) and these ones (a) take time (b) inflict pain (c) are not easy to tackle. But again, no inflationaly worries..
On the other hand a handful of very respected value investors including Seth Klarman, David Einhorn and Mohnish Pabrai are really worried about inflation and are putting their money where their mouth is! Seth Klarman as I mentioned in a previous post said, "We think inflation could become out of control in 3 to 5 years. Yet, we might not wait for that position. Hence, perhaps early, we have a large inflation hedge. We don't own gold as a commodity. We won't disclose our inflation hedge, yet with enough work, you can find true inflation hedges." David Einhorn of Greenlight Capital in his latest shareholder letter said, "Our current chairman of the Federal Reserve, Ben Bernanke, is an "inflationist". When times were good, he supported an easy money policy. Even when the Fed raised rates...bubble formation...money printing...Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed. Our instinct is that Gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself." Mohnish Pabrai in this annual letter to his investors went a step further and gave his macro view on the economy going forward. I mean this is an ardent Buffett follower and hes talking about the macro view and the massive inflation and high interest rates in the future. He has geared his portfolio towards hard assets like low cost barrels in the ground, low cost iron ore reserve etc. Said another way - hes buying commodities!
Only time will tell what will happen. This is a time when many wonderful business are selling for way below their intrinsic values. The challenge in this market is to identify and buy the safest and the cheapest stock (or debt). The macro world can change very fast; are you agile enough? As a value investor if you are overly worried about the macro view, a smart hedge I can understand, a core holding - not so much!
Barron's recently interviewed Ray Dalio of Bridgewater Associates (excellent interview) and asked him the inflation question. He said, "A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years." So no inflationary worries there! Furthermore, a Matin Wolf article in the Financial Times (another excellent article) compared the current recession to Japan's and drew some lessons. He is more worried about deflation, than about inflation. The argument here is that this is balance sheet recession (similar to Ray's point) and these ones (a) take time (b) inflict pain (c) are not easy to tackle. But again, no inflationaly worries..
On the other hand a handful of very respected value investors including Seth Klarman, David Einhorn and Mohnish Pabrai are really worried about inflation and are putting their money where their mouth is! Seth Klarman as I mentioned in a previous post said, "We think inflation could become out of control in 3 to 5 years. Yet, we might not wait for that position. Hence, perhaps early, we have a large inflation hedge. We don't own gold as a commodity. We won't disclose our inflation hedge, yet with enough work, you can find true inflation hedges." David Einhorn of Greenlight Capital in his latest shareholder letter said, "Our current chairman of the Federal Reserve, Ben Bernanke, is an "inflationist". When times were good, he supported an easy money policy. Even when the Fed raised rates...bubble formation...money printing...Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed. Our instinct is that Gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself." Mohnish Pabrai in this annual letter to his investors went a step further and gave his macro view on the economy going forward. I mean this is an ardent Buffett follower and hes talking about the macro view and the massive inflation and high interest rates in the future. He has geared his portfolio towards hard assets like low cost barrels in the ground, low cost iron ore reserve etc. Said another way - hes buying commodities!
Only time will tell what will happen. This is a time when many wonderful business are selling for way below their intrinsic values. The challenge in this market is to identify and buy the safest and the cheapest stock (or debt). The macro world can change very fast; are you agile enough? As a value investor if you are overly worried about the macro view, a smart hedge I can understand, a core holding - not so much!
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