Marc Lasry on Wall Street Week: "Huge Opportunities" in Energy Debt & Europe

Anthony Scaramucci and Gary Kaminsky this week on Wall Street Week interviewed Marc Lasry of Avenue Capital, which now has $14 billion in assets under management after initially starting with around $7 million.  Lasry likes to take fixed income risk but generate equity-like returns.


Lasry noted that he's been seeing "huge opportunities" in the energy sector, mainly due to the fact that oil's gone down.  He says you don't want to be an equity holder, but you want to be a senior debt holder.

He's also finding some investments in Europe as the banks over there are deleveraging.  Avenue is buying assets at 60-70 cents on the dollar from people who are required to sell due to regulatory pressure.

On what he looks for in an investment:  "We're trying to buy something we think is worth 100 cents for 60 cents on the dollar.  So you're always trying to buy something at a discount to what you think the asset value is.  And you can only do that when you're buying from non-economic sellers... someone who's nervous or somebody who has to sell.  So you need to have a lot of drama or issues around the world."

Embedded below is the video of Marc Lasry's appearance on Wall Street Week:



Be sure to check out previous Wall Street Week episodes like their interview with David Rubenstein as well as Steve Einhorn here.

Marc Lasry Long JC Penney Debt: Invest For Kids Chicago Presentation

Next up in our notes from Invest For Kids Chicago 2013 is Marc Lasry of Avenue Capital.  He pitched J.C. Penney (JCP) as a long at the event.


Marc Lasry's Presentation at Invest For Kids Chicago 2013

•    Reason all the risk in the system is that LIBOR is that 25 bps
•    Supposed to generate a 40x RFR for get 10% per annum. But isn’t there risk there?
•    Why is that risk?


•    Idea #1 is J.C. Penney Debt
o    Why JC Penney? Convince to go and shop
o    Everyone believes JCP will file for bankruptcy
o    Bonds mispriced based on that assumption
o    JCP operates in 49 states (no Hawaii)
o    Slowing retail environment and they get rid of old CEO and bring in Ron Johnson
o    Ron Johnson took a bunch of risk
o    Coupons and promotions here historical
o    Prior to new strategy $17 billion in sales $1.4 billion of EBITDA yet goes to -$500 million of EBITDA
o    Able to raise $2.2 billion of new debt to get to $3 billion of debt and $2.5 billion on unsecured – but that have $2 billion of cash
o    Interest payments are $250 million so hard to file of bankruptcy
o    JCP survives unless the value differential
o    Make ~25% return per year for 2 years in debt so you are making 80x RFR due to the believe that JCP will file bankruptcy
o    Same stores sales are flat to up
o    So you are creating the company
o    Majority is telling you “you are wrong”
o    “Nobody likes noise and don’t want to deal with it and that creates opportunity”

While Lasry's talking about debt, numerous other prominent hedge funds have been in and out of JCP equity and you can scroll through that link to follow the saga.


•    Idea #2: Connacher Oil & Gas Bonds at 70
 o    Worth par over a year to a year and a year and a half
o    Pure oil sands company in western Alberta
o    Crude is at $90 a barrel and the price of crude was $45 in 2012
o    Keystone pipeline was delayed and so shipping crude was expensive by rail and they have reduced arbitrage from $16 per barrel in operating margin to $32 (should still rise)
•    Buying investment at 43% discount to NAV because the market doesn’t understand what Connacher is doing and create something at a big discount to a proven value (as opposed to under comps) 


Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Are Newspapers a Dying Industry?

The recent news out of Sun-Times Media adds yet another name to the list of pre-bankruptcy/bankrupt newspaper chains. Not only are newspapers seeing decreased advertising revenue and decreased circulation, but many are trying to stave off crushing debt loads. Even newspapers who have relatively successfully navigated things thus far are showing some signs of weakness. The Wall Street Journal has benefited by providing focused, niche content and by recognizing the digital shift. As such, they began to provide digital content and immediately started monetizing it. But, although they've had relative success there, they are still fighting for readers as they offer a 75% discount. Undoubtedly, something will have to give and certain names in the industry will have to start selling off assets, go private, or morph/evolve into a non-profit or new media company.

If you have been following our twitter updates, you would have seen us shorting New York Times (NYT) back at $7.70 and covering down at $4. Currently, we are not involved and figured it would be prudent to survey the macro landscape as it relates to the industry. Then, in a future post, we'll survey the NYT in particular (which we've highlighted before due to the ownership presence of hedge fund Harbinger Capital Partners and Mexican billionaire Carlos Slim). We want to focus on them due to the fact that their current status is very representative of many other industry players. Their battle with monetization and various business plans is well documented so far. Undoubtedly, something will have to give and certain names in the industry will have to start selling off assets, go private, or morph/evolve into a non-profit or new media company.

The industry itself is facing a few key issues including crushing debtloads, decreasing revenues/circulation/readership, a secular shift, and a battle with their kryptonite: monetization. We want to start by pointing out the excellent article out of Slate last week on this very topic. Basically, Daniel Gross lays out the facts that the newspapers filing for bankruptcy are ones that have been stockpiled with debt and/or idiotic management decisions. He highlights great points that many have analysts have brushed aside. But, he also admits that some industry players (mainly smaller ones) are in trouble. The core of the problem here is the debtload many newspapers face. It doesn't help that they've been hit with the perfect storm of debt loads, decreasing revenues, decreasing circulation/readership, and the worst economic situation since the great depression. We're in the eye of the storm and this hurricane has simply taken their problems and magnified them tenfold.

The problem though, is what will they do when things stabilize and return to 'normal'? If the economy were to recover tomorrow, then advertising revenues would pick back up (which would help their cash cushion and delay their debt-duel a little bit longer). But, they still have the problem of decreasing circulation and/or readership. Readers are trading physical papers in favor of online media. And, if this truly is a secular trend, then newspapers have a much larger problem at hand. How can they monetize things besides advertising? The New York Times' struggle is the perfect example of this very problem. Do they charge for some content? All content? Who knows? It's a tough sell in an environment where information becomes freer by the day.

Newspapers are fighting three concurrent battles that are all a function of each other. They can't truly fix their business woes until they find a way to increase revenues and monetize their digital content. Cash infusions are merely a quick fix and most likely do not solve their long-term problems. Newspapers are like drug addicts because that quick ‘hit’ of cash feels good, but they are still left wanting and needing more. Assuming the trend plays out, more and more readers will shift to digital and they have to find a way to make money from that. This brings us to the second battle: monetization. This in and of itself will probably be the trickiest for them. They can shift with the trends and give readers what they want, but can they make money off of it? The answer thus far is: not really. We'll simply have to wait and watch this giant tug of war of trial and error before we can gain more insight. Lastly, you have the battle with readership and circulation. Circulation for the most part is down, and readers/subscribers of print versions are down. To compensate for this, they've ramped up their digital content, staying in line with the trend. But, this reverts back to their problem of truly monetizing the digital content through various (thus far ineffective) business models. Not to mention, they are trying to do so in an modern-day world where information is everywhere and more often than not, it is free.

The uphill battle they face is depicted (ironically enough) by the NYT. Below, you'll see their illustration of changes in circulation and revenues across the country:

(click to enlarge)

Go here if the graphic is still too small to read after enlarging. Obviously, the industry has a lot of headwinds and the fact that stubborn majority owners control many of them doesn't seem to be helping things (if you're a shareholder). While companies like the NYT have made strides in raising cash to fight off near term maturities, they are seemingly just drawing out the inevitable battle with their debt destiny.

Simply put, it is way too early to gauge if newspapers are a dying industry. And, those attempting to proclaim their death prematurely are oblivious to the daily evolution of all forms of media. We do not think that newspapers as an entire industry will succumb to this economic quicksand. Don't get us wrong though, we're bearish on the industry longer-term and feel they are battling a rising secular trend without a concrete gameplan. As many traders say, "The trend is your friend." Until it's not.

That's the wrench in this whole equation: trends and innovation. Newspaper companies could come out tomorrow and completely revolutionize and revitalize readership and their streams of income with some new amazing "thing" that no one could have ever predicted. It’s not likely, but stranger things have happened. We would be inclined to present an alternative outcome for the industry. While the physical newspaper itself may in turn slowly die, the industry as a whole will be forced to morph and evolve into a new means of distribution, a new medium/platform, and a new business model. If they don't, and the debt finally crushes them, then they'll die. That's the catch. Everyone is on the lookout for the death of the industry, when they instead should be focusing on who will morph and evolve, and who won't. There will be survivors, but they most likely won't be a 'newspaper' in the true sense of the word.

With this we arrive at no firm conclusions and a lot of "we'll wait and see." This is mainly because media in and of itself is constantly evolving and changing. The ball is in their court and we have to wait for their move before declaring death to their industry. We like to look at it as more of an evolution and metamorphosis with hints of Darwinism. The physical newspaper itself may die, but the industry players will be forced to morph into some new iteration of a media player. We've already begun to see the big push in terms of digital content. But, what's next? Those who figure it out will survive. In the end, it's all about the numbers: their debtload, the number of readers, and how much revenue they can generate. However, one cannot overlook the non-numerical input: secular shifts & trends. And, right now, the trend is most definitely not their friend.

Consumer Savings Rate to Rise

The Economist has a great piece out about how the overleveraged American Consumer of recent memory is going to quietly take a backseat to the saving oriented consumer of decades past. Why? Well, because they will have to. The recession obviously has a negative impact on spending power and we've written numerous times about this current/upcoming phenomenon. Firstly, the decline in housing prices and the increase in the unemployment rate will obviously have a negative effect on the economy and in turn the consumer. Visa's consumer trends have already started to show this. Secondly, as these consumers find themselves struggling to get by, we'll notice that credit card debt will rise and we'll get a credit card squeeze. This, along with a ton of auto loan exposure has been the macro thesis behind shorting Capital One (COF). Add in the fact that they are continually seeing rising charge-offs and delinquencies and it's not a pretty picture. Lastly, add in the fact that many Americans have suffered from the destruction of wealth due to a horrible year in the stock markets.

All of the above plays right into our theme of shorting discretionary retailers and going long the "cheapest of the cheap" in consumer plays. The only retailers we want to be long in this environment are McDonald's (MCD) and Walmart (WMT). MCD makes sense because they provide cheap and easy food. When people are short on cash, that dollar menu goes a long way. WMT benefits from a similar thesis. When you're buying groceries, toiletries, you name it... Walmart has it and at the cheapest prices. Not to mention, they've got the Sam's club warehouse as well, playing right into our 'cheap' theme. As far as shorting discretionary retail goes, you can really take your pick. Whether it be casual dining chains, jewelry stores, or any leveraged consumer play, you have plenty of options. Or, you could just short the RTH retail index and then go long a select few retailers as a hedge. Consumers are/will be in a pinch for a few months to come and that's how you play it.

Now, take all the aforementioned facts and then add in this commentary from The Economist and you'll notice that a shift is coming. They write,

"On average, consumers from 1950 to 1985 saved 9% of their disposable income. That saving rate then steadily declined, to around zero earlier this year (see chart). At the same time, consumer and mortgage debts rose to 127% of disposable income, from 77% in 1990. Those forces have now reversed. The stockmarket has fallen to the levels of a decade ago. House values have fallen 18% since their peak in 2006. Banks and other lenders have tightened lending standards on all types of consumer loans. As a consequence, consumer spending fell at a 3.1% annual rate in the third quarter (in part because tax rebates boosted spending in the second), the steepest since the second quarter of 1980 when Jimmy Carter briefly imposed credit controls. More such declines are likely to follow. Richard Berner of Morgan Stanley projects that in the 12 months up to the second quarter of next year real consumer spending will fall by 1.6%—a post-war record. “The golden age of spending for the American consumer has ended and a new age of thrift likely has begun,” he says."

Lastly, take a look at this powerful chart. Personal savings has been in a steady downtrend ever since the '90s. Household debt, on the other hand, has almost doubled since the '90s. Something's got to give.

(click to enlarge)

Source: The Economist

Rationale Behind Shorting Treasuries

For all intents and purposes, U.S. Treasuries are setting up to be a great short opportunity. Last week, I laid out a basic thesis for shorting treasuries. We may be early in this call, but present and future actions are sending us signals we simply cannot ignore. The presently increasing and future supply of treasuries is simply too large. As Martin Hutchinson over at Money Morning has highlighted,

"The U.S. Treasury Department announced Nov. 3 that it intended to borrow a record $550 billion in the fourth quarter. That represents a staggering $408 billion increase over Treasury's borrowing estimate from early August and includes $260 billion for the recapitalization of U.S. banks. Make no mistake about it: There will be enough U.S. Treasury bonds to choke on, as the government tries to finance this debt."

All signs point to this trend continuing. In the quarter prior, the government borrowed $530 billion. Now, with the recent news out that they will borrow an additional $550 billion, the question becomes, when does it end? The current flooding of the market with treasuries is reason enough to get short them. But, with the impending tsunami of future government borrowing still to hit, it just makes the bet that much sweeter. Hutchinson goes on to say that,

"Inevitably $800 billion to $900 billion of additional money flowing from domestic investors into Treasury bonds will do three things:

• It will drive up interest rates on Treasury bonds.
• It will tend to crowd out other financings, making finance difficult to obtain for medium-sized and smaller companies and more expensive even for the behemoths.
• And finally, it will increase inflation, as the Fed is forced to expand money supply to give investors enough money to buy all the Treasuries."

So, we can see that the consequences of their actions definitely plays right into our shorting thesis. The main point we're focused on here is the fact that interest rates on Treasury bonds will rise. When the yields increase, prices will drop, thus benefiting our short position. And, the case can easily be made that the longer dated treasuries will suffer the most. After all, do you want to loan the government money for 20 years at a paltry interest rate? We didn't think so.

Warren Buffett was even out mentioning the under-performance of cash equivalents in his latest comments. He wrote,

"Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts."

Now, although Warren was using that argument to make the case for buying equities in his piece, his point is that cash and cash equivalents will underperform and are thus not desireable. And, a basic principle of investing is to go long outperformers and short underperformers. Cash and cash equivalents (treasuries) are set to underperform and thus make a delicious short for you to sink your teeth into.

The actions of the government not only lay out the premise for shorting treasuries, but also the US Dollar. As inflationary pressures will weigh heavily on the Dollar in the future, eventually something has to give. The only problem here is that other forces are at work on the US dollar as the world continues to deleverage and hedge funds are forced to sell assets and continue to face redemptions. So, this play could ultimately take even longer to play out. But, we will address shorting the US Dollar in a separate post further devoted to that rationale.

The main thing to take away here is that the government has demonstrated that they have and will continue to borrow money by the hundreds of billions. As yields on treasuries rise, prices will drop, especially on longer-dated treasuries. Now, the question becomes how exactly do we play this? Not everyone has access to shorting the 10 year and 20 year treasuries outright, so I am here to offer some other alternatives. As I laid out in my first post on shorting treasuries, there are a few vehicles in the stock market that one can turn to, such as tickers PST and TBT.

PST is the ETF for UltraShort the 7-10 year treasury. An Ultrashort ETF seeks twice the daily inverse of the underlying security. So, buying PST gives you twice the inverse of the performance of the 7-10 year treasury (effectively a double-short). Additionally, TBT is the ETF for UltraShort the 20+ year treasury. This ETF seeks twice the inverse daily performance of the 20+ year treasury (also a double-short). So, those are two very easy ways for people to get short treasuries by buying those tickers in the stock market. Additionally, Hutchinson suggests the Rydex Inverse Government Long Bond Strategy (Juno) Fund, ticker RYJUX as another way to play it. That fund takes various short positions in treasury bond futures and thus will also rise as treasury prices decline.

* 1/12/09 Author's note: Please be advised that since publication, we have further researched the PST and TBT trading vehicles are are NO LONGER recommending them as proper vehicles for shorting longer-dated treasuries due to their poor correlation to their underlying indexes over time. Instead, we are recommending a straight short of TLT. Expect a follow-up post soon.

Credit Card Squeeze

I wanted to post up an excerpt from a piece in Fortune a while back which discussed the next Credit Crunch. In it, Geoff Colvin hints at what could be a difficult time for credit card companies. Some of this information sets up a broad backstory as to why one might short the likes of Capital One (COF), American Express (AXP), Discover Financial (DFS), or even banks like Citigroup (C) who have large credit card businesses.

Here's an excerpt from the article,

"Last year, just as the subprime crisis happened, credit card debt took off. The home-equity ATM had been shut down, so people turned to the last source of easy money they had left, the most expensive debt on the menu, credit card borrowing.

Since credit card debt has been growing much faster than the economy - more than 8% in last year's third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Thus, for the past year or so we have still maintained the standard-of-living illusion.

But a big crunch is coming - and here's why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it's getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can't offload as much of the debt as before, they'll have less money to lend to cardholders.

The squeeze has already started, which is why Congress is in the process of passing the Credit Cardholders' Bill of Rights, which would prevent issuers from changing rates and terms without warning, among many other provisions. But bottom line, the credit card money window is going to start closing - and soon.

So now what? It's hard to see where consumers can turn next. Home prices seem highly unlikely to start rising again soon. Stocks? You never know, but the Great Bull Market looks like a once-in-a-lifetime event. Homes and stocks are households' biggest asset classes by far. There isn't much else to borrow against.

It may be that the standard-of-living bubble finally has to deflate. Sustainable increases in living standards have to be earned, not borrowed, and that means performing ever higher value work that can't be outsourced. We haven't been meeting that challenge very well; doing so will probably require much more and better education for millions of Americans, which takes time and money."

I agree with the overall theme of this article and truly believe that the strapped consumer is going to be facing larger headwinds than anyone anticipates (which I partly touched on here). Credit card debt is piling up for the average American, and many are having a very hard time paying it off. This simple concept was illustrated in a nice graph I posted earlier, showing how delinquencies are rising. Capital One (COF) is the perfect example of a company being impacted by this. It has been piling up each quarter and their most recent earnings/conference call gave us a further glimpse, as noted by Forbes' Melinda Peer, who writes

"Credit card and banking company Capital One (COF) said its net charge-off rate, or measure of soured loans, for its U.S. card business jumped to 6.34% in September, from 5.96% in August. Internationally, charge-offs rose to a rate of 5.87%, from 5.31%, in the same period.

Delinquencies, considered signs of troubled accounts, were also on the rise in the U.S. and abroad during September. Domestically the McLean, Va.-based company's 30-day delinquency rate inched up to 4.20%, from 4.07%, in August, and internationally the rate inched up to 5.24%, from 5.15%."

Calculated Risk also took the liberty of transcribing key comments from the conference call, which you can read here. Basically, the company is taking positive steps to reduce credit lines and try to limit their risk. But, they still won't be able to completely protect themselves from the impending tsunami.

Additionally, this WSJ article seems to imply that credit card companies and banks are going to face historic headwinds in the credit card arena. Overall, I truly believe this is going to be an over-arching theme that stems from the current crisis as things continue to bleed over to main street. The ultimate question becomes, how much of this is already priced into banking and credit card equities, if at all?


Full disclosure: At the time of publication, MarketFolly was short COF
Source: Fortune

Chart Candy

(click to enlarge)

Some chart candy from the Financial Times. Especially take note of household debt rising nearly as much as financial sector debt as a % of GDP (as seen in the graph on the top left).

Source: FT