To all - some comments I made over on the Globalstar thread.
(Yes, this may be perceived by some as "off topic," but the "Wall Street stuff" might be useful to some who would not otherwise read the G* thread).
(And, I think it is a little closer to being "on topic" than the "Franken-fish" story).
************************
To: Jon Koplik who wrote (10130)
From: Jon Koplik
Monday, Feb 28 2000 1:40AM ET
Respond to Post # 10322 of 10322
My (belated) analysis of G* short seller Greg Hymowitz's comments on CNBC.
On 2/17/00, Greg Hymowitz of Entrust Capital was the "guest moron" on CNBC in the morning hours.
He apparently said a lot of things to "trash" Globalstar, and has publicly stated that his firm is short about 100,000 shares
of G* (apparently at around $24 a share, as per post # 10199 on this thread).
(Which means (since the trading range on G* lately has been roughly $23 to $53) that he has not had much satisfaction
from being short. (YET ... he would probably say)).
As stated in my post # 10130, I missed his comments that morning, and really wanted to hear what he said -- since I
think I have some knowledge of the "Wall Street stuff" that might be useful to try to "de-bunk" Mr. Hymowitz's thoughts.
(We have already established previously (I think) that Mr. Hymowitz does not have a good understanding of technology
concepts as they relate to G*, so I wanted to know if his negative bent on G* might be based on some faulty logic with
respect to "Wall Street stuff.")
Well, no one has (as of yet) posted a transcript of the 2/17/00 CNBC morning session that had the Greg Hymowitz
comments on G* (although YlangYlangBreeze did at least pass on one tidbit ...)
But -- when Bernie Schwartz was on CNBC on 2/22/00 (specifically to respond to Mr. Hymowitz's comments), CNBC
did replay one of Mr. Hymowitz's key points as to why he thinks Globalstar common stock is hugely over-priced at
anywhere near these current levels.
He (Greg Hymowitz) said something to the effect of :
<<Globalstar debt instruments are now trading at a yield to maturity of around 30%. This implies that the market
perceives the whole Globalstar venture to be profoundly risky.
The bondholders are so worried that they will never have their debt serviced as promised that the market-derived
equilibrium price for the bonds is incredibly low.
The stockholders, however, are so bullish on Globalstar that they have bid up the common stock of G* to a level which
implies lots of value to the business. Plenty of value to service the contractual obligations on the debt (interest and
principal), with money predicted to be left over for the stockholders.
The valuation levels (decided by the market) for the bonds and the stock are completely at odds with one another.
One of these will be wrong. We (at Entrust Capital) think the stockholders will be wrong, so we are short the stock.>>
Okay -- now that I know what he said, I will attempt to "rip to shreds" his reasoning !
I've got two points I want to make :
1. limited pool of buyers for obscure, wacko securities
2. examples of bonds indicating "near death" / common stock happily cruising along -- bonds DEAD WRONG
Regarding point # 1 -- many years ago, I read something somewhere that stated (in a totally convincing manner) that
Peruvian sovereign debt was then trading at an absurdly low price level, totally at odds with what was going on at the
time in Peru.
The debt instruments were quoted at something like 6 cents on the dollar. The analysis I read made the case that it was a
near certainty that the debt should be trading at around 20 cents on the dollar, possibly even higher.
(And this was just based on what was going on right then. If trends in South America and Peru continued to improve, it
was entirely reasonable to hope for a move to way above 20 cents on the dollar. But 6 cents was just ridiculous).
Okay. I am someone who is always open to interesting ideas on how to try to "extract some money" out of financial
markets.
Did I pick up the phone, call the equivalent of Charles Schwab & Co., and try to pick up a little Peruvian debt ?
No, I did not. Because it is incredibly difficult and unrealistic for someone like me (let alone -- people who are not regular
readers of the thing I read that discussed the whole valuation question regarding Peruvian debt) to be able to transact
something like Peruvian debt.
It is probably impossible.
(By the way, if anyone knows at what level Peruvian debt now trades -- please let me know. I bet it is a lot higher than 6
cents on the dollar).
Is this relevant to Globalstar debt ? Hell yes !
When I first heard that G* had some debt trading at a yield to maturity of around (at that time) 25%, my wife and I
decided (in about ten seconds) "Let's get at least a little bit. We already own the stock, so ... how afraid can we be of
being bondholders ?"
At the time, we were dealing with two brokerage firms (which shall remain nameless).
The first firm told us : we will not let you trade these securities under any circumstance; and we have no ability to even
get you a price quote on the bonds, in case you want one (it might affect our decision making process on the stock).
The second firm told us : IF you (before you attempt to place an order) send in an "unsolicited letter" (meaning : buying
G* debt was our idea, not anyone at the firm's idea) then we may be able to do the trade. We're not sure we can get you a
price quote. And, you may have to just "buy it at the market," and accept whatever price you get.
Our response : forget it. We'll just buy more G* stock.
Also, regarding point # 1 -- a common occurrence in securities markets is : some sector of the market (for example -
biotech stock mutual funds, risk arbitrage money, gold stock mutual funds, junk bond mutual funds) has, for whatever
reason, a serious diminution of interest from the people that ordinarily "foist" money into those particular areas.
What happens ? -- the price level of securities for that particular stuff will FALL. Period. Supply and demand.
This is what happened to the price of Gulf Oil stock (somewhere around 1984 or 1985), as its takeover at $80 was
nearing completion.
Gulf Oil suddenly plunged to about $62, even though NOTHING had changed regarding the probabilty of a successful
completion of the takeover shortly thereafter (which DID indeed occur at $80 without a "hitch").
It was just SUCH a large deal (for that time), that more or less ALL Wall Street risk arbitrage money available had already
been committed; and when the marginal seller of Gulf Oil came into the market, the buyers were really "tapped out" !
In summary (regarding point # 1) -- if Globalstar debt is priced cheap, that alone does not convince me of ANYTHING
(except -- there must be more sellers than buyers (for it) right now).
On to point # 2 (this should be quicker).
There were two instances I can specifically remember (during the past ten years) when Jim Grant (of Grant's Interest
Rate Observer) ( grantspub.com ) pointed out that a company's bonds indicated "this
sucker is going bankrupt more or less imminently," while the (it would have seemed) idiot stock buyers were pushing up
the share price of the common stock of the same company to levels indicating : "hey, no problem."
The two examples were : Northwest Airlines and The Equitable (the big insurance company).
Both (at the time) had bonds with a yield to maturity of around 45%.
Both companies survived fine. And, we all should have bought EITHER bonds or stock of both companies.
In summary -- DO NOT LET Greg Hymowitz "spook" you.
He may turn out to be correct, but NONE of his reasoning so far has impressed me.
Jon. |
