Hybrid Vigor: Vol 4 Issue 9 "Hybrid Vigor on the Diamond"

Here we are in the middle of October, which means the heart of baseball’s post-season.  As you know, I’m always looking for connections between seemingly unrelated topics, using a core of financial derivatives including convertibles.  (I’ve made the case that convertibles represent the primary asset of corporate finance, with equity and debt as derivatives, but that’s another story). I started 25 years ago with my comparison of option sensitivities (Greeks, fitting for me given my interest in classical languages) and stages of a basketball game.  Today I’ll talk baseball.

What do the four remaining teams have in common? They share cores of talented young—extremely young in some cases—everyday players, with a veteran or two sprinkled in for stability. Then they stir in experienced pitchers.  The pitcher, of course, is by far the most important player on the field. Winning teams, then, possess a mix of explosive (favorably volatile) upside with defense (downside protection) at the center.

So do the best convertibles.  The essential structure is like a top starting pitcher. Even when the offense struggles, like a stock that can’t get out of its own way, the pitcher will keep the game close. Getting paid to wait, you might say.  In the games where the offense overpowers the other team, the pitching isn’t as important—you just need it to be decent. Similarly, when a convertible skyrockets on the back of a stock breakout, it’s important to maintain that lead. You do it by selling or hedging, just as a team with a big lead plays more cautiously, conceding a run here or there to avoid a big inning by the opposition.

They say that in a short series good pitching beats good hitting, and that’s holding true in most games this fall. The hometown Yankees, after all, have lost two games by identical 2-1 scores. That’s the way baseball is supposed to be played.  Pitching keeps you close, just as a convertible’s pull to par over time minimizes the damage of an underperforming stock. Disasters are still disasters:  a pitcher knocked out in the first inning, a company whose accounting proves, shall we say, faulty.  Avoid them and you stay in the game, and if you stay in the game long enough, you have an awfully good chance of winning.  And even when you lose, as the Yankees did twice in Houston, you’ve won in a bigger sense. You’ve played honorably and well, and you’ve given your fans—your investors—plenty of reasons to keep coming back.

One last thing—I mentioned classical languages and odd connections above. I hope you’ll get my new book, Latin, Greek and Money: What You Need to Know.  While you’re at it, get one for someone you know who’s beginning a career. I promise it will help them shine in job interviews.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).

Hybrid Vigor: Vol 4 Issue 8 "Sixteen Years Ago"

Sadly, it would be all too easy amidst a destructive hurricane season, the most ominous global nuclear-weapons situation in decades, and a painfully divided nation (especially post-Charlottesville) to overlook the 16th anniversary of the worst attack ever on our country.

We will never forget.

It’s hard to believe—or maybe it isn’t—that it was 16 years ago when my pregnant wife called from across downtown to tell me a plane had just crashed into the World Trade Center.  I shouted it out on my trading desk, which buzzed for a moment, then fell silent.  I told my wife to stay calm—perhaps the exact wrong advice. Thankfully, she had driven to work that day and was able to get to her car just after the second crash, making it uptown to safety. The second crash was loud and palpable.  Everyone on the desk crowded into the one office with a television. We watched replays of the second crash. My boss said, simply, “that was no mistake.”

I remember watching the first collapse from Bowery and Park Row, pausing in horror on my walk uptown.  I ran as fast as my slow legs and slower loafers would take me, at least for a couple of blocks, until I saw the plume of smoke was not heading north. Then I just put my head down and walked until I reached my grandmother’s apartment in Greenwich Village.

Early on the afternoon of September 11, 2001, my wife and I got a message from her doctor’s office. The ultrasound looked good. We were going to have a healthy daughter. On the most awful of days, we received the best news imaginable.

I think today of those who perished, including the young man who grew up in the Westchester house my wife and I had purchased several years earlier. Including the brilliant student I taught in a Yale seminar. Including the first person who ever offered me a job on Wall Street.

They say that despite the headlines, despite the preponderance of scary factoids, despite the flow of frightening information, the world is safer than ever. Or something like that. They may well be right. But today, we remember those who died on one of the most unsafe of days.  In honor of their memory, let us take nothing for granted, not next year, not next week, not tomorrow.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).

Hybrid Vigor: Vol 4 Issue 7 "When The Levee Breaks"

As we go to press information is coming out, via Donald Trump Jr., about emails from Russia. Will the market care for more than a few minutes?  In other words, is the possibility of malfeasance in the President’s immediate family enough to make corporate executives uneasy about decision making—or at least is it enough to make investors nervous about such decisions?

As Chairman Mao might have said, it is too soon to say.

The market’s resilience amidst slings and arrows such as these has been remarkable.  The main logic is, noise is noise, but where is the money going to go? With the Fed in a gradual tightening pattern, the question is, whom or what do you choose not to fight, the Fed or the tape?  Last week’s employment report seemed both strong and benign—lots of jobs, no wage pressures—giving the Fed plenty of latitude for its current program.  But how much of this good news is already priced in?

Whenever situations like this arise, as in all the time, the benefits of convertibles become more evident.  New issuance has slowed this year but is still at least somewhat encouraging.  If it keeps on rainin’, as the song goes, levee’s goin’ to break. Best to have a defensive place to stay when the lead balloon crashes. We don’t count CWB, an equity fund in drag. Neither should anyone else.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).

HYBRID VIGOR: VOL 4 ISSUE 6 "Starting Over"

Nobody told me there’d be days like these. Strange days indeed.- John Lennon

The executives over at erstwhile convertible-issuance machines Sirius Satellite and XM Radio (now combined, of course) knew what they were doing when they started a Beatles station last month. The timingcouldn’t have been much better, as the music and philosophy of JPG and R provide a welcome respite for the craziness, the unpleasantly surreal nature, of today’s world.

Anyway, welcome back to Hybrid Vigor. What do we have for you in this issue? Along with our usual statistical sections, which appear to contain a fairly strong warning about current market conditions quite apart from the geopolitical backdrop, we have writeups from Jeff Alton on small-cap shipper Costamare and Roman Terekhin on recent issuer RealPage.

We’ve been heartened to see the reasonably active new-issuance environment. If not now, when, we’d certainly ask.  Sure, some companies might say they’re waiting for clarity on tax reform, health-care changes, and so forth.  Sometimes good things come to those who wait, but so do missed opportunities, and we can’t help thinking companies sitting on the fence for raising capital will regret it if they don’t act now. 

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).


Now that we’ve gone to a monthly publishing schedule at Hybrid Vigor, our readers were spared my Kentucky Derby predictions. Those who use my selections as automatic throw-outs might have done well, as my pick, Irish War Cry, was the public’s second choice but finished 10th, far behind the actual favorite, Always Dreaming.

I would have told you why I liked Irish War Cry. I liked the fact that he finished remarkably well in his debut, suggesting that as distances got longer (the Kentucky Derby is usually about as long a race as its contestants will run) he would stick around nicely.  In fact, he didn’t—after spending most of the race in perfect striking position, he had nothing when it mattered most.

I would have told you that I liked Irish War Cry’s versatility—he won his first race from far behind but subsequently won three more races while leading all the way or coming from just off the pace. You need flexibility to win a wild race like the Derby. And while Irish War Cry and his rider, Rajiv Maragh, were ideally situated for most of the race, it didn’t end up helping.

I would have told you that I liked Irish War Cry’s trainer, the Englishman Graham Motion, who trained my best Derby pick ever, the 20-1 winner Animal Kingdom six years ago.  Patient, methodical, disciplined, Mr. Motion (what a great name, by the way) is the ideal horseman. None of that mattered when Irish War Cry came up empty.

What’s the point?

You can have everything seem right and still be wrong. It happens with horses and it happens with markets. Sometimes things work out. In 2011 Animal Kingdom won the Derby for Mr. Motion without having previously raced on dirt. That never happened before.  This time Irish War Cry had won one of the most traditional prep races, New York’s Wood Memorial. Secretariat and Seattle Slew both ran in it. And… nothing.

When you assess a market, you look at valuations. You compare them to where they’ve been to estimate where they might be going. Sometimes you get it right. Sometimes you don’t.  This market’s been confounding a lot of very smart and experienced followers.  It’s made them look as bad as Irish War Cry looked in the Derby’s last quarter-mile.

The difference is that Irish War Cry never gets to run in the Kentucky Derby again. The investors who’ve been getting the market wrong will get more chances. Most of them, anyway. Sometimes you lose so badly that you get shut down for good.

And that, I think, is the secret, the real war cry. Even if you lose the current battle, stay in the war and live to fight another day.  Current conditions, whatever they may be, won’t last forever.

Even Irish War Cry will probably win some more big races before he’s done. Just not this one. It’s not the end of the world.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).


Hybrid Vigor: Vol 4 Issue 4 "The Paper Chase"

In the white paper we published several weeks after November’s elections, we predicted that a substantial upturn in convertible issuance was coming. We’re heartened to have been proven right, as Kathy Schick details in The Month That Was.

What can we expect now?

The equity markets have been remarkably, astonishingly, resilient in recent days through events that a reasonable person might have thought would cause meaningful declines. There are, as always, at least two ways to look at this. One is to see a powerful tape that shouldn’t be fought. Backing that idea are the notions that a lot of cash somehow remains on the sidelines, having missed a historic bull market, and now looks to get in on any pullback. Perhaps. Another is to see the late stages of a long rally, with moves starting to get choppier.

Either way, but especially in the second view, it makes sense to look for a continued surge in issuance. A chief financial officer or treasurer who fails to cash in on the current market strength only to come up short on cash later this year in weaker conditions will have a hard time justifying keeping his or her job.

It will be interesting. You know where we stand at Hillside—raise money when you can, not when you have to. Otherwise you may find yourself chasing the paper too late on the way down.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).

Hybrid Vigor: Vol 4 Issue 3 "Choose Your Poison"

It’s been quite a run since the stunning election of four months ago. Four long months ago. It may have peaked with the President's address to Congress last week, which gave rise to a yuge relief rally based on the low, fearful expectations going in.

But that was almost a week ago. Ancient history in the calendar by which we live today. What do we do now?

For whatever it's worth, this observer is more short-term cautious—directionally bearish, if you will--than at any time in recent years.  Bullish on new convertible issuance, which is perhaps the biggest thing. Issuers are getting the hint at last. But concerned otherwise that a lot of good expectations may not play out.  We'll try to go as politics-light as possible here, which, as readers know, is not in our nature. But you get what we're saying.

We can't help noticing a pretty wide dispersion in the convertible-related mutual funds we track, given how early in the year it is.  The best performers are up nearly 6% so far (most funds seem clustered in the 3.5-4.5% range)--quite impressive since that's in line with the major stock indices. Both CWB and the HOCS 100 are doing somewhat better, as we discuss inside.  But some laggards are struggling to get beyond the 1-2% area. We suspect their interest-rate exposures may be nipping at their heels.

What should one do now? Playing cautious, on the surface, often means taking on rate exposure, a scary thing with a lot of action items and not a lot of talk about paying for them. Not sure if that's exactly the right move.  We have made no secret of our love for the biotech sector, a staple of convertible issuance that's been gradually righting itself after an awful stretch that began in late 2015.  It seems like a good place to be--even the President has expressed a favorable view toward new-product approvals, if not toward large-cap drug pricing.

Infrastructure is tricky. It should be one of the things everyone can root for. You don't have to drive very far to see how badly we need a big overhaul.  The explosive move in Dycom last week may be a harbinger of things to come. But Rome wasn't built in a day, nor will America be rebuilt in a year.

Whatever happens, there should be plenty of opportunities to express opinions, be it sector, name or direction. With rates and volatility rising, the long-hated strategy of convertible arbitrage looks ready for a big comeback. That may be one of the best choices anyone can make.

A Hillside principal has a position in Dycom securities.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).


Hybrid Vigor: Vol 4 Issue 2 "It's Now or Never"

This is the year for convertibles. Volatility, higher rates, the whole nine yards. But there’s one deal that absolutely must happen.

If you’ve been following my stuff in various media the last few years, you know I’ve been calling for Netflix to issue the biggest convertible of all time. Yes, I was early—three years early to be exact. Yes, the company has been on target holding off on an equity-linked financing all this time.

But all things come to an end—even if we can’t believe the Falcons’ lead last night was one of them. And now is the time for Netflix, at last, to do the mother of all convertibles.  These shows are great—and expensive. The company is burning cash and will burn even more. The stock is up, oh, nearly tenfold in the last five years.

More notably, even with the blowout subscriber growth in last month’s announcement, the stock really hasn’t made the kind of move you might have expected. A big short-covering burst, and then, kind of meh. Why? Even the bullish analysts think a lot of good is priced in, with a lot of cash burning to come.

Netflix could write its own ticket with a new convertible. But the market’s hunger won’t last forever. New paper is going to start coming. If you want to do a $5 billion deal, now is the time.  Now or never.  The world has never seen an issuer better suited to a huge convertible than Netflix.

You heard it first here.

Disclosure: A principal of Hillside Advisors has a position in Netflix securities.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).


A new year. A new president. Probably the same college football champion—tonight’s historic rematch will tell.

We’re in the midst of changes as well here at Hillside Advisors. One of note—Hybrid Vigor will no longer be a weekly publication.  We want to make every issue fresh and punchy and our resources are being pulled in many directions. So, our current plan is to go to a monthly product. Expect our next edition out in early February.

We thank everyone who has supported our weekly product. We published 135 editions.  The first couple of months we were publishing twice weekly, which we find hard to believe in retrospect.  We have been gratified by all the feedback and encouragement we have received. We are proud to have created innovative measures for analyzing convertibles and to have provided ongoing discussions of these measures along with fundamental research on many of the issuers.

We look forward to continuing as the voice of the convertible market.

All the best to all of you in 2017.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).


HYBRID VIGOR: VOL 3 ISSUE 47 "Time Machine"

Say what we will about the president-elect, the animal spirits seem to be jumping. At least that is what new issuance in the convertible market is saying. And it’s not just the seasonal rush. December issuance this year is nearly twice that of the previous two years combined. You have to go back to 2013, at the end of a huge year for stocks, to find comparable issuance.

Then again, going back to December 2013’s new issues might bring back some nasty memories. SunEdison brought a two-tranche deal then, and GT Advanced Technologies came to market with the second of its ill-fated issues. Remember them? We thought so. December 2013 also brought RPM’s 2.25%, an Ugly 20 stalwart. You might say that if it’s still on the Ugly 20 then the day of reckoning still hasn’t come, and you’d be right…sort of. The RPM convertible is essentially unchanged from the first issue of Hybrid Vigor in July 2014. So you’ve clipped a 2.25% coupon. Meanwhile the stock has gone up about 20% while paying a dividend comparable to the bond coupon. That’s pretty meager participation, we’d say.

Mark Twain said that history may not repeat itself, but it rhymes. Three years ago, we saw new issues from Finisar—a 0.5% coupon, no less—and from Zillow (sort of) via Trulia, which it acquired. Those two firms were back this month, with Finisar reprising its coupon. We like to say that the convertible business is a market of repeat offenders. Once companies make the effort to learn the asset class, they come back for more, and it’s easier because the market knows their stories.

We stand by our thesis that convertibles are beginning a major comeback as an important financing tool. The 10-year Treasury, even with a bit of a rally this morning, yields well above 2.50% as I write this. Our market has held that 3% is the magic number for convertible issuance, but even 2.50% is enough for an excellent start.

On that note we wrap up Hybrid Vigor for 2016. As always, we thank you, our loyal readers, for your interest and support. We wish you the happiest of holiday seasons and look forward to an exciting and prosperous new year.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).