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I am not following what you are trying to say?
Jon
Hey Jim,
I agree with your post and was going to say same thing. A couple of comments though:
1. Typical bank leverage is 8-12x, sustainable partially because of the flow business not in hedge funds, the deposit base, the ability to borrow at the FED and by regulatory controls, all of which do not exist at hedge funds. Go look at all the banks, S&L's etc. BDCs also typically have riskier borrowers.
2. Hedge fund leverage varies from none to 20-30x as do most of the SIVs and conduits and CDOs (leverage of 4-5 to 20-30x depending on instruments leveraged, with prime mortgages historically supporting the highest leverage due to low default rates and high recoveries inherent in that asset when structured properly - talking 60-80% CLTV with solid credit scores, debt coverage thresholds, etc.).
3. BAC and WB are looking at $1-3 B mark to market losses on sponsor PE business.
4. Credit losses in all parts of biz should rise - banks have been under-accruing as a result of misguided regulators and SEC (complains its smoothing of earnings).
5. WB and BAC are two of the better players though.
I prefer CSE.
Jon
It's not all that bad - just similar to buying the HYG (HY ETF) but with leverage in it and with a payout policy that extinguishes it after some number of years. Return of 5-7% for a bond fund is perfectly normal. I must say I am not impressed by the returns listed on that link I provided-a period of time with the biggest bull market for HY bonds in memory.
Jon
Best of luck!
How low do we go?
Jon
This fund is a leveraged fund with a certain amount of equity (from the shares owned by some on this board) and then debt in the form of pref shares. These pref shares have an interest rate which is set by monthly auctions (every 28 days) - actually has 4 different series with on resetting each week. As a result of the collapse of the CP market and as a result of fears about credit woes in HY land, the cost of leveraging the fund has just gone from 5 to 7%. This means they will likely have to cut the dividend or eat into principal to pay the dividend. Which they have been doing recently with nav down from 2.25 to 2.07 recently.
See http://www.etfconnect.com/select/fundpages/gen.asp?MFID=3811
for more info on various factors.
Leverage is roughly $130 MM with equity (at nav) of $210 MM. So modest leverage with assets/equity of 1.65x. So, assuming a 7% investment return and 5% funding cost and ignoring costs, the firm was probably earning a 11.5% on assets and paying out 3.5% in interest expense. This means it could have sustained an 8% yield with a flat nav ignoring costs. Adding in a 1.5% fee and dividend rate should have been 6.5%, hence to pay a 10% yield it had to eat into principal annually by 3.5%. With the recent turmoil in the markets NAV has fallen more recently due to losses on mark to market of bond principal.
With the increase to 7-7.5%, the cost in part above would now be 4.5%ish bringing the net after fees yield down to 5.5% for sustainable dividend. But since the NAV has reset lower due to higher yields in HY bonds, I expect the current yield is probably about 8-9% on assets. This results in 8%x1.65-4.5%-1.5%=mid 7% range. With need to pay a 9ish% yield if at a big discount, stock would likely trade to a 10ish% discount.
Jon
DRY (being bought though) and OTT.
Jon
Incyte is a funny cite for that article - got cash and market cap backwards. Trades at twice cash. And has $400 MM of debt. Folks always forget the debt.
Jon
Thomas,
If what you say is really true, then IDEV may be in trouble. Their replacement is probably 30% of their value and they need money soon (got 2 qtrs burn with the recent approval but still).
HK is finally cooling slightly. Does SE Asia mean Philippines, Singapore, Malaysia, Indonesia, or somewhere else? All too hot, too long for me.
Good luck.
Jon
I still find it odd that they will require QOL for RPRX and they DID NOT require such for IDEV. Yeah - new MOA for RPRX but from what I have read, probably (there is the rub - word probably) much safer while IDEV drug is simple change in administration of similar compound to those on market.
Jon
You might also go look at Dale Baker's portfolio over on SI. He has a weekly update - mix of international (some US but very little) growth and international income.
Jon
I did not find the Canadian list but I did find this site which you must FREE register to use (I always use a throwaway address). Do not have time to go in-depth but very interesting site. Even has info on some bankrupt prefs I am in (acquired for restructuring).
Jon
http://www.quantumonline.com/
Slower growth? No just kidding - they seem to be more income oriented as are stock investors everywhere else in world except Japan. Dividend yields in Europe and Asia tend to be 3-5% with dividends ratcheting up and down with earnings. I will look for a Canadian source.
On waiting for B&G, go look at a chart of a few of the different guys on your lists and mine (I am thinking ACAS, CSE, Centerplate) and look at the spikes into the last lows. Centerplate cratered to 11 and back to 14ish in 1-2 days. CSE spiked to 15ish and back to 17, ACAS did 35 back to 42. Amazing stuff!
Jon
You ever look at the US Income Deposit Securities? The attached site lists 3-4 with descriptions (note DRY is being acquired in an LBO) which is surprising as the exit from its last LBO was this IDS security given a lack of buyers.
http://stockpickr.com/port/Income-Deposit-Securities-Pick-up-some-high-dividend-yields/
Did you compile those yourself? Nice job.
On the quote referencing Greenspan saying he would have cut rates already, I disagree. Go back to 1998 and note he only cut rates after LTCM had been bailed out by the banks. Crisis started in August with swap spreads moving out 10s of bps, HY moving out modestly (much less than today), mortgages (prime only back then) moving out 20-30 bps, etc. It continued into September with fed cut in late September or October (forget which).
Move to today. In late July/early August, all the same spreads exploded out (HY move was sharper initially and from similar levels to 1998) although I would point out that EM spreads have moved much less today (trigger of that crisis) while prime mortgages probably much more (this year's trigger along with LBOs - don't have data but with jumbos out by 150 bps . . . ) while HY back then moved less than now but eventual move was 300-400 bps back then (vs. 100-150 bps now that HY has somewhat stabilized in front of a massive mountain of deals). Also, the quoted changes in yield spreads are being exacerbated by reduced Treasury yields (same as in 1998 when yields were first approaching 5%, now below as they have been for most of intervening years) and some changes refer to derivative index changes (where violent hedging is taking place) as opposed to cash market - HYG is only down from 106 to 100/101, implying only 100 bps or so of yield pick-up while HY derivative indexes have moved 150 bps and initially as much as 300 bps.
I also find it ironic LTCM was bailed out in 1998 because of worries about the banking sytem (loss per bank would have been $150-200 MM or so) vs. today with $350 B of LBO debt sitting on bank balance sheets either funded or committed and a likely 5-10% haircut needed to clear the paper - implies losses of $20ish BILLION among 10 key banks or about $2 BILLION of losses per bank. Magnitude of issue today is probably bigger, even accounting for growth and consolidation, especially when one adds subprime.
Jon
I would add ACAS (American Capital Group) - just below 10% but similar to CSE without the mortgage portfolio as well as HCD - a fund which is supposed to be good at restructurings run by Highland Capital. I would also for reference add HYG (high 7s, low 8s) as it is an ETF of larger, more liquid HY bond issuers.
Jon
I have seen numbers in the tens of thousands as to how many are helped by this move. No nanny state here - just pretend.
Jon
Seems a meeting has been scheduled for another similar drug and since the committee will be together - at least that is what the Company is telling people. Claim FDA is well into label discussions.
Jon
That one made me take pause also. I disagree with writing overall but wanted to make folks aware of the new agency.
Jon
http://online.wsj.com/article/SB118843412251712953.html?mod=todays_us_opinion
The War on (Expensive) Drugs
By SCOTT GOTTLIEB
August 30, 2007; Page A11
On the surface, it makes perfect sense. Prescriptions for hormone-replacement therapy to treat the symptoms of menopause plummeted after interim results from a big government study of the drugs showed they were causing heart attacks. But beneath the surface is another, lesser known story. In the five years since federal researchers first unveiled their results, a series of follow-up studies calculated off the same government data found that many of the initial conclusions were premature, indefinite or just plain wrong.
The $725 million Women's Health Initiative was rooted in some good intentions, but was set against a backdrop of fiscal and political bickering over the efficacy of the costly drugs. Unfortunately, this influenced not only how the findings were computed but also how they were received. As this newspaper's Tara Parker-Pope first reported in July, when initial results confirmed populist refrains that the drugs were being overused, the data were rushed to print with a carefully orchestrated PR blitz, while subsequent efforts to test the initial conclusions were sluggish.
Federal researchers refused to share bottom-line results, even with outside academics or the companies that manufactured the drugs. This allowed them to closely guard their monopoly over the original data and therefore the prerogative to publish follow-up findings. It's a sure bet if the data had been more widely shared, important analyses that debunked some of the initial conclusions would have come to light much sooner.
And unless something is done to make sure that data is shared, there will be many similarly flawed government studies to test the efficacy of drug treatments, especially the politically popular "comparative" studies that pit expensive new medicines against older, cheaper alternatives with the aim of cutting health-care spending.
The reauthorization of the State Children's Health Insurance Program (Schip), created in 1997 to cover children from lower-income families who make too much to qualify for Medicaid, is up for renewal this fall. Tucked into page 414, section 904 of the House bill is a provision to spend more than $300 million to establish a new federal "Center for Comparative Effectiveness" to conduct government-run studies of the economic considerations that go into drug choices.
The center will initially be funded through Medicare but will soon get its own "trust fund." The aim is to arm government actuaries with data that proponents hope will provide "scientific" proof that expensive new drugs are no better than their older alternatives. The trick is to maintain just enough credibility around the conduct of these trials to justify unpopular decisions not to pay for newer medicines.
While there's nothing inherently wrong with this sort of fiscally minded clinical research, Medicare is no ordinary payer: It dictates decisions made in the private market. So as the government begins tying its own payment decisions to the results of its own studies, there's a great temptation to selectively interpret data and arbitrarily release results. Clearly, this obvious conflict of interest demands even more outside scrutiny and transparency than has been the usual fare when it comes to government research.
The inherent complexity and limitations of conducting these sorts of "comparative" drug trials also need to be carefully considered before policy makers rush to tie sweeping payment choices to results of single studies. If not, there's a real risk that faux science and limited findings will be used to set rigid payment policies that will arbitrate access to new treatments for the entire health-care market.
In the case of the hormone-replacement study, although the government initially said the findings applied to all women -- regardless of age or health status -- subsequent studies using the same data show that the age of a woman and the timing of hormone use dramatically change the risk and benefits. In fact, the findings of these studies seem to directly contradict some of the government's initial conclusions.
For example, women in their 50s who took a combination of estrogen and progestin or estrogen alone had a 30% lower risk of dying than women who didn't take hormones. Also, women in their 50s who regularly use estrogen alone show a 60% lower risk for severe coronary artery calcium, a risk factor for heart attack.
The Women's Health Initiative is hardly the first study to affirm that medical advancement and government cost minimization often make uncomfortable bedfellows. The $135 million, federally run Antihypertensive and Lipid-Lowering Treatment to Prevent Heart Attack Trial (Allhat) was designed in part to test whether older, less expensive blood pressure pills were as good as newer, costlier drugs. No surprise, the study showed they were, a selective interpretation of results that has subsequently been called into question by many leading experts, including Dr. Michael A. Weber, professor of medicine and associate dean for research at the State University of New York, who was on the original team of Allhat investigators.
Meanwhile, the $40 million federally funded Clinical Antipsychotic Trials in Intervention Effectiveness (Catie) trial "found" that older and less expensive schizophrenia medications were just as good as newer, more expensive ( and many believe far more tolerable) "atypical" anti-psychotic drugs. This result, however, has made little impact on real world medical practice -- because few physicians believe the study was credible.
Like the Women's Health Initiative, bottom-line data from Allhat and Catie were subject to parochial secrecy. Catie's complete safety data are only being released this September, almost four years after the study was completed. Moreover, the drugs involved in these studies were for conditions where one expects a great deal of individual variation in how people might respond. The studies didn't take measure of that.
Now the government is sponsoring a poorly designed trial to test whether Avastin, a drug that is meant for injection into the veins to treat cancer, can also -- when injected directly into the eye -- treat macular degeneration, a leading cause of blindness. Never mind that Avastin's manufacturer, Genentech, developed a completely new drug called Lucentis, which is specifically designed to be injected into the eye and is better adapted to treat blindness.
Since a single cancer infusion of Avastin contains a large volume of the drug, breaking that same dose down into the small aliquots needed for the eye injections is literally pennies on the dollar, making the government's study of it -- when it was clearly not designed for eye treatments -- a matter of cost containment. Surely if Avastin ends up harming those eyes -- a plausible consequence of this off-label, if not illegally "compounded" use -- it won't be Uncle Sam on the hook with product liability lawyers, but Genentech.
Not all government-funded studies have speckled histories. Many uncover significant advances. Problems arise when the government pursues studies to achieve its own economic goals, where political motivations seem to intrude on the design and conduct of the trials and bias not only how results are interpreted, but more especially, how they are reported.
The difficult nature of these "comparative" drug studies, the sort contemplated in Schip, requires more care, not less. These studies are hard to execute by their nature, a fact given short shrift by policy makers who believe the conclusions gleaned from the research will provide immediate cost savings.
For one thing, as the Allhat study proved, detecting small clinical differences between two active drugs, such as whether one pill lowers blood pressure more than another, requires very large studies that often fail to capture all of the patient preferences and characteristics that go into real world medical decisions. And once the study is completed, determining whether small differences are clinically meaningful can take years of follow up.
When the trials are under-funded and too small, or are poorly designed or conducted, important differences are not detected, which supports the theory that older drugs are as good as newer ones even if that is not true. This flawed science seems just fine with those who support these trials largely for cost purposes.
The proposal for a "comparative effectiveness" center has become a seductively simple idea that few are willing to challenge in Washington, making it almost inevitable, save a veto of Schip altogether. If the government does start generating this data, it should at least make bottom-line results public so others can test the government's conclusions. Medicare routinely makes its raw medical-claims data -- which are far more politically sensitive -- available to qualified experts for health research purposes.
The political cover offered by government-directed research will surely help when it comes time to impose unpopular limits on prescribing. That's about the only certainty in this legislative gambit, and maybe the only one that mattered when it was drafted. For many, these proposals weren't about medical discovery but bean counting. What Medicare hasn't achieved in policy circles, it's hoping to impose through the fiat of "science."
Dr. Gottlieb, a physician and resident fellow at the American Enterprise Institute, was a former senior official at the Food and Drug Administration and the Centers for Medicare and Medicaid Services.
Some have argued that the Fed could have changed margin requirements making speculation much more expensive and thereby reducing demand./i
I think this would have the effect of driving business overseas, which the US cannot afford. I agree it would have a great impact. I've advocated, for example, restricting biying and seeling of oil contracts to those who actually produce and distribute oil as a way to avoid speculation-driven price gains. The flaw in that idea is it would simply shift the market elsewhere.
With derivatives market being where it is (listed options and private notes and derivatives markets), I am not sure this policy intrument even works any more. Meanwhile the issues are in the debt markets more so than here, and how do you regulate a private debt supplier? And its terms?
Dew,
Nice article. I was agreeing with the article as I read through it but still concerned about the safety net aspect and then boom, at the end, there it was.
I have to say that I have never understood why we need to subsidize healthcare for the older, better off generation as a class. They generally did not pay all that much for healthcare for their elders (much of the payments are new and have been in place for only a few decades), they generally paid lower taxes than most of the younger generation (shifting a bit now with the much lower rates since Reagan although this too will shift with coming tax increases which are inevitable), and they seem to at times, over-consume healthcare (last year of life argument). I don't mind the over-consumption (I have a sense I will spend whatever I can to extend my life unless too painful) but I mind others paying for it.
The main problem is the young do not vote and our representatives are generally old. I don't see a good compromise personally.
Jon
PS Having paid something on order of 50-100K for Medicare over my life (big range because sensitive info), I have a hard time seeing how I will ever get what I paid back out when factoring in time value of money. Not that I need to, but just another point.
Not likely at least for time being as the main policy function of Chinese govt is to keep the population from getting restless as the urbanization move continues. For that they need jobs. For the jobs, they need exports. For the exports, they need US consumer stable. If anything, I have heard talk that the Chinese should perhaps prop up the securitization markets.
Jon
It is a combination of stuff and is leveraged, but the leverage should be helping with funding costs coming down. But your point is taken, the 3% decrease is likely partially related to leverage (assets likely down 2% or x 1.5) and the assets are down more than some others due to mix of IG and non-IG.
Jon
My closed end muni bond fund has fallen about 3% in its NAV component after being moderately stable for 6-12 months. Was high 8.20s with drift to 8.20 and now 7.90 or so.
Jon
Postponement is what you do if your phone/letter correspondence is not giving you the answers you want perhaps? I honestly do not know but delay with small companies often happens when they are trying to convince someone of something (new contracts, accounting, bureaucrats, etc.).
Jon
Another factor to consider: While RPRX has been coming off a bit more, IDEV suddenly popped 20-30 cents midday Thursday. Back into its range. Most of its value being attributed to its long acting T. Looks like someone (not instl judging from volumes) bought one and sold (short) the other?
Jon
Thanks very much.
Jon
No one mentions it but the situation in London/UK is even worse in terms of most mortgages being interest-only, amount of borrowings vs. income being much higher, percentage of income spent on housing being much higher and amounts of equity in new homes. They have not faced a negative outcome YET because their housing market just WILL NOT go DOWN.
Jon
PS Hearing anecdotally of similar problems in New Zealand. Australia seems to be okay. Here in HK, high end stuff is nuts but lending remains conservative - mainly Chinese buying with their newfound wealth. Main bubble here is the main Hang Sang index going from 19000 and change last Friday toward 23,000 over this week.
The CFC deal is actually pretty ugly when analyzed for reality as opposed to hype (not accusing anywhere here of that as this area is not our specialty but accusing the reporters). Here is how the deal shrinks when analyzed:
1. Preferred deal. BoA gets money first.
2. Coupon. BoA gets paid to wait.
3. Discount. Most converts sold at a premium, this one comes down 20%, near recent lows.
4. Optionality. BoA has a right of first refusal on a takeover of CFC. This decreases CFC opportunity set.
Far from a bullish move on mortgages, this looks like a strategic move packaged as a vulture hedge fund trade, not something a strategic move usually looks like. NO PREMIUM and LIKELY REDUCED PREMIUM in any takeover (given negative incentive of the right of first refusal for other bidders. Just my 2 cents. I would probably short IMB on all of this.
Jon
What high yielding vehicles are you using/looking at these days? TIA.
Jon
This is really the only course they could have taken in my opinion. Too many people would have tried their luck otherwise with doctors in vans signing them up.
Jon
WX (Wuxi Pharmatech) is a competitor and just went public in US with a big market cap, backed by Fidelity and a few other US-known VCs. They have all big pharma as clients, and VRTX is the biggest client with Hep C the target. It is based in Shanghai, and is up 50% from IPO.
Jon
I match your bottom graph using extrapolate function (do not know real name) on Excel. I do notice in Baraclude that it seemed to gain steam above 300.
Jon
Probably one of several bio short targets of the quant black box funds run purely by computers as it would screen poorly on price to sales and PE. Those funds were unwinding leverage last week and hence several small cap bios got nice pops. Key question is if they come back and short more. Not saying its rationale but IMHO it is part of reason bios have not participated in latest bull mkt other than the largest profitable guys going through the growth spurt (does not include biggies DNA or AMGN given bad screening on value for the first and growth for the second over last few years - DNA probably now screening better).
Jon
This is the reason the Ph IIIs may be more complicated from what I understand. Nebido didn't have to do QOL because it has same mechanism as already-approved drugs. For Androxal, the different mechanism MAY lead to need for other measurements.
Jon
PS I own both.
Reading it. Key issue is my data sources are waning as my access to some first call materials has been pulled. I will check around and see what I can find.
Jon
I knew NVS had opt-in rights here but any idea if the terms are pre-specified and if so, what they are? Also if not, what happens?
Jon
WYE -
Hope that doesn't mean anything for the ELN collaboration other than more important. Hope WYE's luck changes in other words.
Jon
This reminds me a bit of ICOS to be honest. So expect the "JV" to move toward breakeven over next few years and once profits start, bye-bye IDIX in $4-7 range. They do need to control burn if they can.
Jon