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Sep 4

Week 9 Portfolio Update: Par!

Well almost.

I am $300 from being back to even.  Considering that the portfolio was created at the beginning of July, and that since that time the market has been somewhat horrendous, I do not think this is too bad of a result.

But it would be nice to start making money again.

There was not much action in my portfolio this week.  I sold a bit of Arcan, a bit of Coastal, and a bit of Lydian International.  In all 3 cases my selling had nothing to do with the company performance and everything to do with Europe.  Its unfortunate that I have to make investment decisions based on Europe.  I would much rather just pick stocks.

It is an interesting to think of what my portfolio would look like if Europe wasn’t on the verge of implosion.  I think it would look quite different.  First, I would own much more of Coastal Energy, and some more of Arcan Resources.  I would also own a decent position in Second Wave Petroleum.  I would likely have held on to Leader Energy Services.  And I don’t expect gold would be going through the roof, so while I would probably still own Jaguar, OceanaGold and Lydian, and Argonaut, but I would have smaller positions in all 3.  These stocks would not be as enticing if gold was still at $1200/oz, which I expect it would be ex-Europe.

The real upside in the gold stocks is the upward revaluation to reflect something closer to spot, along with the ever present possibility (as long as Europe is still the EU that is) that spot will continue to go higher.  If Europe was just being Europe (dull 1% growth), I would likely prefer to own other commodities that were leveraged to emerging world growth.  But alas, Europe has taken on the mask Faust, choosing a devil’s bargain over boringly flat GDP, and the outcome looks to be much the same, with the EU being on its way to hell on earth.  So gold stocks it is.

Sep 3

Goldman Research Note to Hedge Funds

Goldman Sachs published a research note a couple weeks ago that did a very good job summarizing what is frightening about the  state of the world economy right now, and why I have reduced my exposure to everything but gold stocks and a few special situation oil stocks and banks.

The research not is discussed on FT here:

And the actual powerpoint was posted by ZeroHedge here:

While the powerpoint focuses on 3 distinct items (the US economy, the European debt problems and China’s potential credit collapse) I think the most important points for us investors are made with regard to Europe.

Europe’s problems have the potential to evolve into something really bad, it could happen really quickly, and the outcome would be widespread among all stocks.   Its the sort of situation where we will wake up one morning and the world will have made a dramatic change for the worse.

So those problems need to be at the forefront of every investment decision right now.

I have snipped 3 slides that I thought were particularly poignant.

First, this slide demonstrates how leveraged the European banks have become.  They have grown assets well in excess of deposit growth.

To cover the gap between deposits and assets, the banks increased their wholesale borrowing.

The problem is that wholesale borrowing is short term.  A “bank run” is much easier to precipitate when your funding is made up of overnight, 7 day and month long durations.  If you ask me, this is a recipe for a nasty storm.  High leverage to likely insolvent assets that have been bought with funds that can be pulled away in an instant?  Yikes!

Last slide I’ll post.  PIIGS debt.  Whether or not the German courts and German government agrees to EFSF, you have to remember that the size of the EFSF is not big enough to handle Italy and Spain.  I have a feeling that if the market gets euphoric next week when the EFSF gets the head nod from Germany, it won’t last long.

So obviously, Italy and Spain are the keys here.   Further signs of stress in those countries is a sign to get out.  And ominously, Italian and Spanish bonds are rising again…
Italy:
 
Spain:

Sep 2

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Gamblers Intuition

On friday I wrote that after having sold Gramercy Capital a couple of days before, I had decided I couldn’t stay away from the stock and had bought it back (some 20cents higher).  Call it gamblers intuition, or call it luck, I just had a feeling that a settlement of their Realty loans was around the corner.

Well that’s not strictly true.  There were signs.  The stock was rising in a falling market.  Volume was up.  A call to the company by a poster on Investors Hub returned an answer that they were getting closer to a settlement.

Last night after the market closed Gramercy announced that they had settled their mezzanine loan with Goldman, KBS, and Citigroup.

The terms of the deal look quite reasonable.  The company basically hands over their Realty division (less 58 encumbered properties that Gramercy will continue to hold).  In return they get a $10M per year management fee with incentive structure that will provide a  minimum of $3.5M per year.

Gramercy has about 50M shares outstanding, so the fees they will receive from Realty management going forward are around 25 cents per share.  That isn’t small potatoes for a stock trading at $2.80.

More importantly though, the overhang of the unknown is over and investors can begin to value Gramercy on their remaining assets.  Going a long way towards that will be that Gramercy is now able to file its 10-K’s and 10-Q’s.

I expect that the financial statements will show a company with net asset value of $5+ per share.

The sale also leaves a company that is ripe for takeover.  From Bloomberg:

“What remains of Gramercy may be an attractive acquisition target both for buyers of discounted financial assets and someone looking to acquire a public real estate platform,” Ben Thypin, director of market analysis for New York-based Real Capital, said in a telephone interview. “The company may be an appealing target for private-equity firms with dry powder committed to real estate that they need to deploy.”

I am very glad I bought back on Friday.  If it wasn’t for what I perceive as some serious problems in Europe on the horizon, I would probably buy more this morning.

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