m22au's journal

Chanos interview on Bloomberg

short Ag bank of China
http://finance.yahoo.com/q?s=1288.HK

My comment: other Chinese banks that may be good shorts are

http://finance.yahoo.com/quotes/128...08.hk,2356.hk,0998.hk,1988.hk,3328.hk,3968.hk

Of these, Bank of China is the closest to its 52-week low
http://finance.yahoo.com/q?s=3988.HK

Chanos:

H share market (Hong Kong listed) is liquid

http://topforeignstocks.com/2011/08/06/what-are-the-types-of-stocks-traded-in-china/

http://topforeignstocks.com/wp-content/uploads/2011/08/China-Stock-Types.png
 
Quote from Daal:

Seems that the Fed might be a bit late. XLF is down a lot from the highs, some of these banks will have a hard time raising capital and there is no backstop from TARP now. Large capital needs might take down the bank
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I agree

Quote from ralph00:

Tough luck. Whether they like it or not, capital raises are coming. A lot of the selling in financials was surely do to frontrunning this sort of scenario.
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I agree
 
Quote from Daal:

m22au,

I have some questions about your strategy of shorting very low priced stocks down to $0

-Have you have experiences of stocks doubling or tripling before going bust?What do you do when the stock goes significantly against you

-Do you use stops in these positions?

-These stocks seem to trade like options(Hence they go down a bit everyday like an OTM option getting close to expiration), so the trade seems to be a short gamma trade, aren't you afraid of a large loss that would eat up all the accumulated profits?

-Why you believe there is a risk premium in those situations?I understand that people sometimes will keep their hopes for too long but at the same time the stocks trade like options, people don't have to be right even close to 50% to be correct in buying the shares, why you believe these "options" are mispriced and there is a risk premium to be earned?

-Why the historical risk premium of 10% in stocks would not apply to these shares?
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Daal Are you thinking of any specific examples? It's hard to answer your questions without having a stock(s) to refer to.

To point out the obvious, low price does not necessarily equate to low market cap. eg. AMR is at about $1.65 but it still has a market cap of 550 million. So plenty of downside remains as it progresses towards bankruptcy.

ALU has a share price of $1.59 but has an even higher market cap of 3.43 billion. If it is heading to bankruptcy then it has even more downside.

When deciding upon position size, I keep the market cap of the company in mind. My short position in UAL DAL is larger than CLWR, because the latter could be acquired by Sprint at a high price. Whereas the chance of UAL DAL getting a buyout is close to zero.

Also as the stock price declines, the size of the position reduces automatically.

You are right that as these stocks approach zero, they start to act like a zero-strike-price call option. A lot of the time "investors" take the bet that "it can't go much lower, and if it does, I will only lose $x". If you have a lot of people doing that (look at MF for example) then I am often happy to take the other side.
 
Quote from m22au:

Daal Are you thinking of any specific examples? It's hard to answer your questions without having a stock(s) to refer to.

To point out the obvious, low price does not necessarily equate to low market cap. eg. AMR is at about $1.65 but it still has a market cap of 550 million. So plenty of downside remains as it progresses towards bankruptcy.

ALU has a share price of $1.59 but has an even higher market cap of 3.43 billion. If it is heading to bankruptcy then it has even more downside.

When deciding upon position size, I keep the market cap of the company in mind. My short position in UAL DAL is larger than CLWR, because the latter could be acquired by Sprint at a high price. Whereas the chance of UAL DAL getting a buyout is close to zero.

Also as the stock price declines, the size of the position reduces automatically.

You are right that as these stocks approach zero, they start to act like a zero-strike-price call option. A lot of the time "investors" take the bet that "it can't go much lower, and if it does, I will only lose $x". If you have a lot of people doing that (look at MF for example) then I am often happy to take the other side.
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The thing is, this 'lotto bias'(people wanting to make a lot by using a little) can be countered by fact that during panics and large declines, usually, the equity premium rises(VIX spikes historically have lead to market beating returns in the short-term)

So to me, its not entirely clear that there is some kind of edge here. To put another way, even though there is a decent market cap out there I'm not highly confident that market cap is mispriced. I'm not sure which of those 2 elements is stronger
 
Quote from Daal:

The thing is, this 'lotto bias'(people wanting to make a lot by using a little) can be countered by fact that during panics and large declines, usually, the equity premium rises(VIX spikes historically have lead to market beating returns in the short-term)

So to me, its not entirely clear that there is some kind of edge here. To put another way, even though there is a decent market cap out there I'm not highly confident that market cap is mispriced. I'm not sure which of those 2 elements is stronger
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I think it comes down the specifics of the individual situations.

If I read in an article that the company's bonds are yielding xx%, then it is rarely consistent with a company having a $xxx market cap. ie, if you "believe" in the company you should buy the debt and not the equity.

Often the best-case scenario for equity investors is a dilutive capital raising. That's what happened with YRCW. A whole lot of overly-optimistic "investors" buying the stock, when they were weeks or months away from suffering 98% dilution.
 
Quote from m22au:

I think it comes down the specifics of the individual situations.

If I read in an article that the company's bonds are yielding xx%, then it is rarely consistent with a company having a $xxx market cap. ie, if you "believe" in the company you should buy the debt and not the equity.

Often the best-case scenario for equity investors is a dilutive capital raising. That's what happened with YRCW. A whole lot of overly-optimistic "investors" buying the stock, when they were weeks or months away from suffering 98% dilution.
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The thing is, if these investors were counting on a 10x return if the company did not go bankrupt they would only have to be right 9% of the time to have a positive expectation trade

What I'm saying is that when all the headlines are bad and people are bearish on the stock usually the equity premium rises(Ala BP last year), low priced stocks also draw these gamblers. These gamblers might be bad investors but their silly plays could actually be correct sometimes

My instinct tells me the gambling bias is larger in very low priced stocks when bankruptcy is likely but I don't think is there kind of massive edge. It only takes one GGP type loss to wipe out dozens of gains

That said I'm talking about these situations IN GENERAL. I'm speculating whether a long-term index of low priced stocks near bankruptcy would have positive returns or not.
In terms of specific plays I'm sure a trader can find some stocks that are so likely to be bankrupt that the common investors are wrong(Specially if buyouts are unlikely). But in that case the trader is earning excess returns because an edge he has doing his analysis of financial statements against other market participants not because there is an particular edge in this play in general
 
Quote from Daal:


That said I'm talking about these situations IN GENERAL. I'm speculating whether a long-term index of low priced stocks near bankruptcy would have positive returns or not.
In terms of specific plays I'm sure a trader can find some stocks that are so likely to be bankrupt that the common investors are wrong(Specially if buyouts are unlikely). But in that case the trader is earning excess returns because an edge he has doing his analysis of financial statements against other market participants not because there is an particular edge in this play in general
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At the risk of being immodest - I think I have that edge.

Of the top of my head from recent months: AIB (or AIBYY), IRE, YRCW, MF. But there have been others as well.

Edited to add: I did not short GGP in the weeks leading up to its bankruptcy (can't remember why). However those types of situations / recoveries are rare. Also the stock didn't go from $0.30 to $17.45 in one day. It took 21 months for that climb to happen. There would have been plenty of opportunities for anyone short the stock (with a bankruptcy thesis) to get out before it reached double digits.
 
Quote from m22au:

At the risk of being immodest - I think I have that edge.

Of the top of my head from recent months: AIB (or AIBYY), IRE, YRCW, MF. But there have been others as well.
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What is your opinion on the likely long-term return of a index of low priced stocks that the bonds indicate have a decent chance of going bankrupt?
 
Quote from Daal:

What is your opinion on the likely long-term return of a index of low priced stocks that the bonds indicate have a decent chance of going bankrupt?
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very high, especially if you buy the corporate debt as a hedge.

Look at AAR and AMR. You get a $1.96875 coupon from AAR (yield 22%), and people want to buy the stock for over $1.60 ?

Just crazy.
 
Quote from m22au:

very high, especially if you buy the corporate debt as a hedge.

Look at AAR and AMR. You get a $1.96875 coupon from AAR (yield 22%), and people want to buy the stock for over $1.60 ?

Just crazy.
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Not sure what you mean. I was referring to the return of being long that index
 
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