Moneyball without the ball

Posts from the ‘MBIA’ Category

As I mentioned in my June update, I was away on vacation for a couple of weeks and at the same time the city I live in was hit with the flood of a century, and these two events transpired to put some delays on the posting all the details of the monthly portfolio update that I put out.

In subsequent posts I have talked about the two major theme changes that I made in June, with those being that I sold all of my gold mining stocks with the only exception being Midas Gold (the decision to sell is looking rather prescient right now) and that I had bought a number of REIT’s that I believed were being sold off indiscriminately by investors lumping together all REITs into a single bucket (maybe not quite as prescient as the gold miner sell but I’m doing okay on this one so far).

There were, however, a couple of other portfolio changes that I made in the month of June that I didn’t get a chance to mention. I want to use this post to do some house-cleaning, talking about the remaining portfolio changes I made in June. Read more

This last week has been jam packed full of news, earnings and outsized moves. I don’t think I have ever had as many 10%+ days for stocks that I own (or have recently owned but unfortunately sold) as I did in the last week. While some of these moves do not seem attributable to any specific news (such as First Mariner and Atlantic Coast Financial) most of them do. And while I have not had time to fully digest all of the news (I haven’t had time to review what announced spin-off for IDT and so therefore won’t be touching on that) I did want to discuss the stocks that I have reviewed and can comment on in the paragraphs below:

MBIA (MBI)

I sold out of MBIA in all but one account about two weeks ago, which is unfortunate timing given what has transpired. Nevertheless I had my reasons, they remain valid, and you gain little by looking back at bad luck. When the stock dipped into the $13’s on the day of the announcement I was really surprised, I mean the Bank of America deal was what we had all been waiting for, but I took advantage of the opportunity and loaded up the truck with stock. Therefore MBIA is a large position for me right now – it seemed very close to a sure bet in the mid-13’s and so I bought 11% position, going on some margin to do so.

At some point shortly I am going to have to reduce that position (I’m uncomfortable with it being this large) but I am waiting for at least the conference call tomorrow to do that. And what I do with my shares will really depend on what is said – in particular what management says about structured unit on call. They may come out and say that they have commuted the worst exposure, the unit isn’t going to regulator, and they expect to realize ABV of $10 from it. In that case maybe MBIA is worth quite a bit more than National alone. We shall see. Read more

Portfolio Performance

Update

Since my last update I exited Radian Group, Arkansas Best and MBIA. The sales reflect a desire to redeploy cash in other opportunities as well as some lingering concerns about each company.

With Arkansas Best, its my uncertainty about the outcome of union negotiations. The negotiations were extended this week for a second time. An escalation to a strike does not seem out of the question. If a strike occurs the stock price may or may not get hit; while a positive resolution could be quite good for the stock in the long-run (see my original post about how Arkansas Best would benefit from a contract structured in a similar manner to the one that YRC Worldwide operates with) the uncertainty may drive panic selling. I’ve decided to wait this one out for a few weeks and see how it plays out. Read more

Portfolio Performance

See the end of the post for Portfolio Composition and weekly trades.

A week of Significant Gains from RDN, MTG, MBIA

The last seven days have been extremely good ones for my portfolio. This has been primarily due to the price appreciation of MGIC, Radian Group and MBIA. As regards MGIC and Radian, I have written so much about these two names, done so much work trying to understand the business (and trying to understand how other people were trying to understand the business), that it is quite rewarding to see it play out the way that it has.

It is amazing to me that MGIC has more than doubled (from a $2.40 low to a $6.10 high) during 5 days when the only notable disclosure was that the company had the ability to raise capital. Someone with an interest in market psychology should really write a piece on MGIC – you could call it the Existential Security.

I reduced my position in both Radian and MGIC by a little more than half during the early part of this week. My sales of MGIC occurred around $5.20 while those with Radian were at a little over $10. I don’t have plans on selling any more of either.

I sold the positions down because they were getting very large (particularly in the case of MGIC) and because my thesis, that these companies would be able to survive, has now played out. What is going to drive the stocks going forward is the long-term potential of the mortgage insurance business and how well each company can capitalize on it. Read more

Portfolio Performance

Summary

I am going to try to keep to a shorter update but given my track record with brevity we will see how that pans out. The reason I want to keep it brief is that I am attempting to write a Visual Basic program this weekend that will allow me to paste my transactions into an excel spreadsheet and automatically spit out a list of the closed positions, the open positions, and the relevant transaction parameters. I want a better solution than a snapshot of the RBC Practice Account portfolio holdings page; I have no ability to come up with graphs and charts of performance with my current snipit method, the practice account summary has a bug that screws up the book value and gain/loss numbers every time you make a partial sale of a position, which is a real pain, and I want to be able to post a consolidated list of all my closed positions along with their gain and loss, something that is not possible from the practice account (my current method, which has been to post every one of my updates on my portfolio page, is getting to be a little too long).

On the Cliff

The market was a real yo-yo over the last couple weeks but I didn’t really panic much. I have been known to do violent purges in the midst of chaos, but not this time. I was pretty confident that something would get done, either at the deadline or as a result of the steep fall that would occur after it was passed. As it was, things turned out just about in-line with my expectations. Read more

I decided to re-establish my original position in MBIA Inc. I did so after the drop Tuesday and Wednesday that was precipitated by Bank of America’s offer to buy MBIA holding company indentures.

I don’t want to rehash the background of Bank of America and MBIA in this space. For background on the MBIA consent solicitation and the tender offer by Bank of America in response I would recommend this article by Christian Herzeca, this Bloomberg article, and this blog post by analyst firm BTIG for background.

What I want to focus on is why I decided to add my position. I could have just as easily cut my losses and run. The market sucks this week and I am losing money. My instinct right now is to cut my losses (and in most places keep my profits) and sell. Moreover, I do not often add to a losing position, which is what I am doing with MBIA. I try to make a habit of doing less of what doesn’t work, and while MBIA has been profitable for me through most of the time I have held it, it recently has not been.

Yet I decided to add. Why?

I decided to add to the position because I believe that the market has unfairly priced in an increased chance of an NYDFS takeover of the securitization subsidiary (MBIA Corp.) that would lead to a bankruptcy of the holding company (MBIA Inc.), and has decided to ignore a number of the potential positive catalysts that could occur over the next couple of months. It just seems to me like a case where the market got the wrong news at the wrong time and panicked a bit too much.

Positive catalysts for the stock in the near term

The positive catalysts include:

A positive ruling on the Article 78 proceedings (this is a verdict on the legality of MBIA severing its municipal insurance business from its securitization business. It is being contested by Bank of America. It has been on the desk of Judge Kapnick for over 5 months now)

A positive summary judgment on the fraud and breach of contract lawsuit that MBIA has against Bank of America. There was a recent article on the summary judgment here.

Perhaps a bit more nebulously, the response of MBIA to Bank of America.

To expand on that third point, I find it hard to believe that MBIA did not consider the potential that Bank of America may respond this way. By issuing the consent solicitation, MBIA was effectively backing Bank of America into a corner. The holding company wanted to remove the remaining necessary ties to the securitization business by redefining the holding company bonds so that they would no longer have the ability to be accelerated in the event of a default at the securitization subsidiary. All of Bank of America’s claims reside in the securitization sub and much of them are subordinated in the event of a bankruptcy. Thus MBIA was really about to cut Bank of America off at the knees. So Bank of America responded in kind.

MBIA Counter-measures

There are a few different counter measures that MBIA could respond with. I can’t take credit for these ideas. I got them from some of the very astute tweeters that follow MBIA (hat tip to @cherzeca, @thenotablecallsand@alex_ryer)

A consortium of largest holders of the common stock combine to put together a better offer for the bond indentures. The idea was put forth by BTIG in this article, where they said “we would not be surprised to see an announcement that some of MBIA’s deep-pocketed friends had formed a limited-liability corporation (LLC) that they would use to top BAC’s offer and buy up the 50% of the 5.7% Notes that would be needed to push a consent solicitation over the top.”

MBIA buys the indentures back themselves. The bond issue that Bank of America is going after are callable by MBIA. It wouldn’t be cheap, I read that the price to call the bonds is par plus future interest payments. MBIA would have to pay for the re-purchase through a new private placement which also would be more expensive than the existing indentures. But it would effectively allow MBIA to pressure Bank of America with the leverage that if Bank of America does not pay a reasonable settlement, the MBIA holding company could put the MBIA Inc. insurance subsidiary into bankruptcy with no consequence to the holding company.

The third option that MBIA has is to let Bank of America buy up the indentures. Now I haven’t heard this from anyone else so maybe I’m off-base here, but it seems to me that it is significant that Bank of America is buying the bonds because they don’t want the holding company to have the option of throwing securitization sub into bankruptcy without consequence to the holding company. But by buying bonds of the holding company that are contingent on the viability of securitization sub it becomes even more in Bank of America’s interest to not see the insurance subsidiary go into bankruptcy.

By allowing Bank of America to buy the bonds, MBIA is raising the probability that the worst case outcome in their dispute is that the MBIAwalks away without a bankrutpcy, and with the municipal insurer National intact. The National franchise is worth maybe $20 per share, so that outcome is extremely accreditive to the current share price. If we could end this all today with this outcome I would take the consequences.

Liquidity

The final piece of the puzzle is the company’s liquidity, which is the other element that has the market spooked. The securitization subsidiary has a limited amount of liquidity to pay claims. While the overall statutory surplus at the securitization subsidary is $1.1 billion, a little less than $500 million of this is invested in common stock. What the common stock refers to is the interest the securitization sub has in its subsidiaries, primarily in UK Holdings, which does business in Europe, and makes up about $450 million of that common stock number. This $450 million is based on the statutory capital available at UK Holding, which is not immediately available to MBIA.

If you remove the common stock from the equation, MBIA Inc. has $386 million in cash and liquid assets, and another $250 million or so that is in bonds. While the company has been non-committal about how long this cash will last them, the consensus is that it is more than enough to get them through the first half of next year.

While I see how the securitization sub will eventually be pushed into liquidity problems if nothing changes, I think that it is far enough off that I can discount it for now. My re-established position in the stock is based on much shorter term factors that should play out before year-end. I am willing to wait this out a month or two, and see how it plays out.

Portfolio Performance

Portfolio Composition

Portfolio Summary

I have reluctantly added some risk over the last couple of weeks My cash position is down to $27,839 from $35,893 two weeks ago, which is a drop to 23% of total assets in my tracking portfolio.

The stocks I have bought have been added because I believe they are cheap. I think that there is a reasonable chance that they will be worth significantly more over time. But I do not add them with complete conviction.

The problem remains Europe. And I remain wary of when the next shoe will drop. Until Friday, the market had forgotten about Europe for the time being, but we have seen this happen before, and always with the same ending. Europe comes back and again trumps all else. With Spanish yields rising to a new high on Friday (7.267%) I am already questioning whether I have made a mistake by purchasing rather than selling stock. I have already considered an about face.

You can see just how skittish I am by looking at how many trades I am second guessing myself on. Three times in the last two weeks I bought a position only to sell it later the same day. These weren’t planned “trades”. I don’t play the day-trade game. These were cases where I took the position and couldn’t handle the weight of it, and decided to sell instead of worrying about whether I had made a mistake by buying.

I am typically not so wishy-washy. That the market has me going through convulsions speaks volumes to the uncertainty that exists at the moment.

As for the stocks I bought, those that I kept that is, I am confident that I got them at a decent price which, in the absence of more macro-malaise, will lead to eventual profits. More on the individual position updates in the post below: