Bill Ackman Trying To Make REIT Move w/ Target (Historical Valuation Comparables, CMBX.AAA Index, Commercial Real Estate Price Index)



Bill Ackman comes up with some interesting ideas and this time he's trying to unlock value at Target ($TGT). He manages the billion dollar hedge fund Pershing Square Capital Management (SEC filings) which owns close to 10% of the company. I embedded a video of him on Charlie Rose a few days ago here. He's trying to unlock the value of Target's illiquid real estate by spinning off <20% into a real estate investment trust (TIP REIT) at a discount. The plan would be to spin off the rest to shareholders at a later date. He believes Target would realize the real estate value by allowing this new entity to trade freely alongside REIT and "Big Box Ground Lease" EV/EBITDA multiples on the market. Which makes sense.



Also from his presentation he believes Target would realize higher free cash flows by a) shifting land capex to the REIT and b) writing off the after tax rent expense since Target would be paying rent to this newly formed entity. Which would save he believes about $888 million.



The revised transaction webcast w/ slides from 11/19/2008 can be found here. If that doesn't come up try here which has links to both of his webcasts and slide pdf files. Here is the revised transaction pdf file. Hopefully the links still work in the future.

It would be an interesting new high yield instrument with a very clean balance sheet. Plus he also points out that the REIT's dividend would rise with inflation or consumer price index (CPI). But if the full transaction went through would retail sales turn around in time to help out with the new rent (ebitda) payout? Look what happened to Mervyns!

1. Developers Diversified Realty and Macquarie DDR Trust Announce Acquisition of Mervyns Real Estate Portfolio,

2. Inland Western Announces Acquisition of 25 Mervyns Properties.

3. Macquarie DDR Trust - Mervyns announces restructure

4. Mervyns files for Chapter 11 bankruptcy


Ackman explained in the presentation that Target had enough EBITDAR coverage to withstand a big retail sales squeeze. Plus Target is obviously a better discount retailer than Mervyns. He also talked about selling off credit card receivables to raise even more cash to pay down debt. Their 53% ownership (other half owned by JP Morgan) of the receivables could yield a $4.4 Billion book value. Listen to his webcast and look at the presentation. So would Target be better off collecting income from risky, yet favorable spreads or raising cash to pay down debt? Plus the Fed is about to extend credit to consumers. Bill Ackman did say it could be tough for this type of transaction to take place during this market environment.

Meteor Streaks Across Canadian Sky, It Could Be a Market Signal..

Alright I had to put this video up even though it's not market related. But it could be a sign from the index futures gods that either our planet is about to blow up, it's time to get long the $CAD, or we're nearing a bottom on the Dow, without Auto/XHB bankruptcies of course ("Home Builders Make Plea for Federal Aid" WSJ). Anyway this meteor sighting was very cool I thought.




"SASKATOON, Saskatchewan - Scientists say they hope to find remnants of a meteor that brilliantly lit up the sky before falling to earth in western Canada. University of Calgary planetary scientist Alan Hildebrand called it one of the largest meteors visible in the country in the last decade. Widely broadcast video images showed what appeared to be a speeding fireball Thursday night over Saskatoon that became larger and brighter before disappearing as it neared the ground." MSNBC


Dow Futures Contract for March 2009 (Source: Barchart.com)

Tim Sykes: Closing The Deal, Wall Street Warriors, Season #1, Episode #2

Wall Street Warriors is an interesting reality TV show about Wall Street. During episode #2 (23:31) "Tim Sykes enjoys the commute from his bedroom to his living room, where he runs a successful hedge fund". Tim's whole strategy is shorting small and micro-cap stocks and he's outperformed many successful hedge fund managers this year on a % basis. Look at his covestor profile which tracks his moves. The dude is up 3,175.39% since inception (11/2007). The episode also features the day of a portfolio manager, a deal maker and a specialist on the exchange. Enjoy.

Paulson, Soros, Simons, Falcone and Griffin Testify Before Congress; Ackman On Charlie Rose

The top hedge fund managers testified about federal regulation of financial markets, operation of hedge funds, and the recent global financial crisis. The hearing focused on several issues including executive compensation, proposed regulations and tax reforms, and the nature of risk within financial markets. It featured George Soros of Soros Fund Management, James Simons of Renaissance Technologies, John Paulson of Paulson & Co., Philip Falcone of Harbinger Capital Partners, and Kenneth Griffin of Citadel Investment Group. Each of these managers made over a billion dollars in 2007.

GM Liquidity Facility Could Prevent Bankruptcy Or Buy Them Some Time (HGM technicals - GM options and Volatility)

I'm going to look at the chart of GM's unsecured notes (HGM) along with volatility and put/call ratios of the common before news hits the wire. The unsecured 7.375% notes are yielding 48% which is pricing in bankruptcy at this point. The automakers are pressing for billions in bail out money. Treasury Secretary Henry Paulson even mentioned at a hearing today that a liquidity facility supporting GMs AAA paper was not out of the question. This would prevent a chapter 11 bankruptcy or at least buy them some time to restructure. Bob Parker of Credit Suisse Asset Management also backed the idea in the video below. Not only would a GM bankruptcy disrupt main street it would also trigger billions of credit default swap exchanges which would prolong the credit market disaster. Cash is dwindling away on GMs balance sheet and they desperately need an infusion of capital or a large asset sale to keep operating.
"If we were to implement the program we're working on with the Fed where we put a small amount of money into a Fed liquidity facility, that facility could provide support for AAA auto paper, so that is one option that's being looked at" Treasury Secretary Henry Paulson (congressional hearing)


Parker Sees Fed Buying GM-Issued Commercial Paper
Bloomberg.com (Video Link)


"Automakers' credit spreads widened Monday as lawmakers debated whether to use taxpayer money to bail out General Motors Corp., Ford Motor Corp. and Chrysler LLC. General Motors Corp.'s (GM) five-year CDS also gained Monday, trading at 7,124 basis points from 6,424 basis points Friday. GM's spreads have swelled to more than nine times their year-ago levels. One basis point is 1/100th of a percentage point." Marketwatch.com

Basically buying stock or unsecured notes at this point is like flipping a coin. Even though the notes are more senior to equity they are still unsecured and could fetch zero to pennies on the dollar if GM went under. Here's a look at the technicals of HGM as well as option and volatility analysis of GMs common. Implied volatility vs. historical is obviously pricing in a big move ahead. What's interesting is the put/call volume ratio, open interest and short interest have all declined during the past month. Either there's a big reversal coming for shorts and puts or traders are gradually taking off short positions in anticipation of a bail out. Still a bail out might not even fix the situation. But with gas prices at $1.89 and hedge fund manager John Paulson starting to nibble at mortgage assets you have to wonder....

GM Rushed to Hospital After Q3 Results, Dissecting Cash Flows, Balance Sheet and Analyst Notes

General Motors was rushed to the hospital after reporting it's 3rd quarter earnings ending September 30, 2008. They reported an adjusted net loss of $(4.2) Billion which excluded non-operational items related to UAW VEBA, the salaried health care plan, Delphi and GMAC impairments which would’ve amounted to a net loss of $(2.5) Billion. Total revenues year over year declined 13% to $37.9B. The auto market is horrible along with credit conditions so these declines are no surprise. The major issue right now is liquidity so they can pay interest on their debt and pay bills to suppliers, employees, etc… Continued below.




On 9/30/2008 GM had $16.2B of liquidity, a $(4.8)B decrease from $21B last quarter and a $(13.8)B decrease from $30B on 9/30/2007. Gross cash netting out debt netted to $(27.1)B. Adjusted operating cash flows (less financing/insurance/taxes) totaled $(6.9)B which was affected by the operating loss, net outflow of cash from the ∆ in working capital and a one time Pension/OPEB charge of $(3.9)B. Add in special charges and the net inflow of cash from debt and you arrive at the $(4.8)B decrease in liquidity. For the 4th quarter GM expects adjusted OCF to be more in line with the cash burn they saw in the 1st and 2nd quarter of 2008 $(3.4)B due to changes in sales allowance reserves, timing of interest payments, production cuts in Europe reversing inventories, and one time charges in Q3. All of these numbers and explanations can be found in the Q3 earnings presentation and earnings call transcript. Take it what you will.






At the rate they are burning through cash, GM might be forced to file for bankruptcy in the next couple months if they can’t get bank covenant and trade credit extensions. Here are some interesting quotes regarding the potential bankruptcy from the AP article “GM may run out of gas before Obama arrives
“Worse yet, some suppliers could simply stop shipping parts unless they are paid cash on delivery, said Douglas Baird, a professor who specializes in bankruptcy at the University of Chicago Law School. "That's the nightmare scenario they're worried about, and we don't know how far off that day is," he said. Without parts, GM can't build vehicles, make money and pay its creditors. Eventually some creditors might try to push the automaker into bankruptcy. "According to the bankruptcy code, it only takes three creditors to go into court and say this company is bankrupt in an involuntary manner. General Motors must have 25,000 to 35,000 creditors who could do that," said Harlan Platt, who teaches finance and corporate turnarounds at Northeastern University in Boston. What's more likely than bankruptcy, according to Baird, is that GM would come to some kind of agreement with its creditors that would buy some time -- enough time, perhaps, for Obama to take office and change the odds of a government bailout. "I can guarantee you they are having those conversations now," Baird said.”

You can see their situation visually by looking at their current ratio which measures the ability to meet short term obligations (current assets/current liabilities). Looking at the snapshot below they have a ratio of 0.72 which is not healthy. Typically current assets should be 2x current liabilities. The ratio was at 0.88 at 9/30/2007 and 0.85 at 12/31/2007 so current liquidity keeps getting squeezed every quarter mainly because of the cash burn. This snapshot was cut from the Q3 2008 Financial Review, click photo to enlarge.




Of course GM is doing all they can to boost liquidity by cutting costs, laying off employees, slowing cash outflows from working capital and liquidating inventories. Quoted from their earnings call (full transcript at seekingalpha.com).

T. Boone's Energy Plan & Most Recent 13F Filing (Daily Show/Bloomberg)

T.Boone Pickens was on the Daily Show with Jon Stewart the other day talking about our country's energy situation. "He wants to use our resources in America to end our dependence on foreign oil." This was shown on November 12, 2008.





He has an energy fund BP Capital Management L.P. which had a value of $1.2 Billion on 9/30/2008. Here are the holdings in his fund filed in the most recent 13F at SEC.gov. Major holdings included Occidental Petroleum Corp valued at $141.7 million, Transocean Inc valued at $120 million and Suncor Energy valued at $106.5 million. T. Boone recently started PickensPlan.com to get the message out about his alternative energy plan (wind, solar, hydro, etc). The oilman is still long oil even after the big correction recently!! Oil prices tanked to $58 after reaching $147 this summer. I like what he's doing and hopefully he makes some dough.

Mark Zuckerberg of Facebook Speaks at Web 2.0 Summit (11/5/2008)

With GM possibly going BK in the next few months, I thought I'd bring up atleast something doing well. Here is a recent interview with Mark Zuckerberg, the founder of Facebook, at the Web 2.0 Summit on November 5, 2008. He addresses the Microsoft partnership, advertising, product development (Facebook Connect), closed vs. open systems, going public, user trends, revenues, and international growth. John Batelle also asked him about page monetization and Twitter. It will be interesting to see what happens next with Facebook.

Revisiting the 1987 Stock Market Crash!! (NBR, FNN Videos)

Weekend financial entertainment continued. Here are some videos I found on youtube of the 1987 stock market crash. The first 3 videos are parts from the 10/19/1987 Nightly Business Report (w/ Neil Cavuto). The fourth video checks out what was going on at the CBOE with Ron Insana and the last video is a Dan Rather's story about how the crash woke up a generation. Market data was also mentioned in the second video. The market fell 508 points to 1738 (-22.6%) and the only two big movers to the upside were Newmont Gold +3 3/8 and Callahan Mining +2 1/4. It was also interesting that the 8 7/8% 2017 (30 year) U.S Treasury Bonds were yielding 9.96% and the Fed Funds Rate closed at 7 5/8%. All of these rates from 1987 are making me think bonds will soon be dumped.....

Credit Default Swaps and Derivatives Explained (60 Minutes, CSPAN videos)

I came across some videos from 60 Minutes discussing credit default swaps and derivatives and thought I'd present them on this blog. These contracts have had a huge role in today's financial crisis and were directly responsible for AIG's fall.

The first video was aired on 10/26/2008 where Steve Kroft of 60 Minutes had interviews including Eric Dinallo, the insurance superintendent for the state of New York, who I remember spoke at a CSPAN hearing on 10/14/2008 that addressed the role of derivatives in the current financial crisis. I was able to embed that video below which was very informative since he was at a Senate committee hearing under oath. The second video is interesting, it's a video from 7/23/1995 where Steve Kroft investigated stock derivatives and the dangers they posed to investors. He was right about them "bringing down the world banking system"! So hope you enjoy some weekend Distressed Volatility financial entertainment. More to come tomorrow.

Bank Of America Bullish on AUD/JPY

The Australian Dollar/Japanese Yen pair is currently at 64.96 @ 12:51am Central. It hit a high of 70.53 recently when carry trades bounced, however it corrected 10% to 63.36 before seeing some relief today. The question is will the AUD/JPY carry trade see sustained strength going forward? 64-65 is a critical support level and looking at the chart there could be a reverse head and shoulders in the making, which sometimes predicts a reversal. However this is still a very risky trade because Australian Dollars funded in Japanese Yen could still unwind if global economic turmoil continues. Plus the U.S non-farm payrolls number coming out tomorrow will probably be a carry trade catalyst, so watch out (CNBC-Jobs Report 'Is Going to Be Pretty Ugly').

On a bullish note, today Bank Of America's head of global currency strategy, Robert Sinche, predicted a climb of 20% to 80 Yen. He thinks Australia will keep rates above 4% with a potential for 2% real growth, and with a global environment of negative real GDP growth and lower interest rates he feels it is currency supportive. Here's the article: Australian Dollar May Rise 20% Versus Yen, Bank of America Says.



AUD/JPY Chart (Source: FXstreet.com Live Charts)

CNN Debuts Election-Night Hologram Technology, Beams Correspondent

This is crazy, it reminds me of the movie Total Recall.

"CNN "beamed" a correspondent from Chicago to its New York studios Tuesday. Jessica Yellin appeared to be standing before anchor Wolf Blitzer, who queried her. The trick was done with a round green-screen room and 35 high-def video cameras." CNN/Technology

Global Markets Rolling Over After Obama's Win

The market is getting back to reality after Obama's win. Bad news is hitting the wire globally which is smothering any possible reappearance of risk appetite. There was a brief rally in the global equity markets and carry trades leading up to Barack Obama's win, however the markets are now rolling over. Could we test the previous lows? We could, especially if 4th quarter earnings come in worse than expected and unemployment rises dramatically.
Nov. 6 (Bloomberg) -- Analysts are slicing profit forecasts for U.S. companies in the fourth quarter and 2009 as third- period results miss projections at the highest rate in almost 11 years. ``Estimates have been coming down with a vengeance,'' said Dirk van Dijk, director of research at Zacks Investment Research Inc. in Chicago. ``It's just plain ugly out there.'' (Source: Bloomberg)

Today the Dow closed at 9139/-5.05%, S&P at 952.77/-5.27%, and Nasdaq at 1681/-5.53%. Right now at 1:00am, Japan's Nikkei Index is at 8899/-6.53% and China's Hang Seng trades at 13,889/-6.41%. Dow Futures are at 9098/-.08% and S&P futures are at 948.80/-0.9%. So it looks like there could be some weakness going forward in the indices, but lets hope for positive economic numbers. Here's a 3 month chart of the Dow Jones Industrial Average provided free at stockcharts.com


Source: Stockcharts.com


Tonights Bloomberg Headlines:
S&P 500 Profit Estimates Slashed After Third-Quarter Misses
Citigroup, Goldman Said to Begin Firing Staff as Economy Slows
ADP Says U.S. Companies Reduced Payrolls by 157,000
BOJ Helpless as Yen Rises on Carry, UBS, Barclays Say (Update1)
Asian Stocks Fall on Earnings Concerns; News Corp., Isuzu Drop
U.S. Luxury Retailers Face Grimmest Holiday Season (Update2)
Credit Card Bond Sales at Zero, First Time Since 1993 (Update1)
Euro Falls on Speculation ECB Will Cut Rates to Bolster Economy

Thinkorswim Group Valuation, Numbers Look Good But Can They Stick?

I didn't know much about this company until it flooded the internet with online advertising, as well as appeared on the CNBC Portfolio Challenge. They are an online brokerage with award winning software and technology, an investor education unit and even a social networking site. Plus it is run by ex CBOE and investment house traders. So it's an interesting online brokerage company without the quasi-banking problems that E*Trade is facing. I feel a thinkorswim/twitter/stocktwits.com relationship would be very cool if they could be embedded inside the the trading software. The company has also taken advantage of the growing interest in options. Thinkorswim was ranked the best for options traders in Barron's on 3/5/2007.

Sad Day For Ethanol, VeraSun Goes Bust On Corn Futures Implosion


This was a story waiting to happen. Yesterday VeraSun Energy Corp., one of the largest ethanol producers, accounting for 13% of production, went bankrupt. They placed wrong way bets on corn futures, which provided them fixed costs during the 3rd quarter, which eventually put them underwater when corn and ethanol prices crashed. Corn is the underlying component of (corn based) ethanol. VeraSun was already dealing with tight margins, a large amount of debt to service, and competition from lower oil prices. Look at the crash in corn and ethanol prices during the past six months, as well as VeraSun's stock chart. Here is their press release. It's crazy how bubbles just pop out of nowhere. Hopefully oil prices will go back up again so the ethanol bulls can still ride the wave.

Corn Futures (Source: CBOT)

Ethanol Futures (Source: CBOT)


VeraSun Energy Corp. Stock Chart (Source: Stockcharts.com)

Zimbabwe Inflation Rate Hits 231 Million Percent, In Crisis

I think everyone should know about the destructiveness of runaway inflation as it gains momentum. It ruins the value of life! Zimbabwe currently is dealing with a 231 million percent inflation rate, just imagine if that happened to the US. This is the reason why Peter Schiff, Jim Rogers and the gold bugs are bringing up the inflation issue. Below is an excerpt from the 10/10/2008 telegraph.co.uk article about Zimbabwe's 231 million% inflation rate, as well as videos I found on youtube about the growing inflation problem and a man's thoughts on a gold coin solution.

"Zimbabwe inflation hits 231 million per cent: Zimbabwe's inflation has rocketed to an astronomical 231 million per cent, Harare has admitted – an advance of more than 200 million per cent on the previous figure. In June the statistic stood at 11.2 million per cent a year, but the state-owned Herald newspaper said that in July it was more than 20 times higher. Monthly inflation was 2,600.2 per cent, it added. A loaf of bread, which cost Z$500 at the beginning of August, now costs between Z$7,000 and Z$10,000, even when it can be found. The root cause of the country's hyperinflation is the government's policy of printing ever more money to meet its own needs, which has the effect of destroying the Zimbabwe dollar's value in terms of hard currency, sending the cost of anything imported soaring....(telegraph.co.uk)