Hybrid Vigor: Volume 1 Issue 21 "Hurts So Good"

Dear Friends,

It’s been ugly out there. And not just for Hillside’s Ugly 20.

Frankly, even though there’s been plenty of pain to go around, we think this ugliness comes with an unusually large silver lining. The richness of the convertible market has been no secret. With a substantial amount of overvaluation wrung out of the market, we think things can proceed on a much healthier basis from here. There is still plenty of froth in the market, but it’s been reduced significantly. Hopefully the positive new issuance trend will continue but at levels and sizes the market can handle more comfortably.

As a self-appointed spokesman for our asset class, I felt—especially based on inquiries and comments I was getting from industry contacts last week—that a worthwhile project would be to examine recent flows and put some thought into what they meant. We all know that convertibles make a lot of sense for traditional fixed-income investors who are looking to minimize their duration and add some potential return to their low-yielding portfolios. What we don’t know is how those investors will react when, new to converts, they start seeing the kinds of quick losses you simply don’t get with straight bonds.

To get a feel for this, we reviewed most of the major convertible mutual funds, analyzing their asset changes in 2014. What we came up with may—or may not—be pause for concern.  One clear result is that some rapidly growing funds have substantially better year-to-date results than do their average investors.  What this means for possible future redemptions, of course, is anyone’s guess.

Those of us who’ve been in convertibles for a while have seen investors, with some regularity, put money in and take it out at the worst possible times.  Clearly the first nine months of 2014 were not the best period for putting fresh cash into converts. Will that lead to a redemption wave that gets overextended? We doubt it. But the data inside are worth your review.

We also discuss the recent selloff qualitatively, and add a few thoughts to our recent comments on the GTAT debacle. Finally, we update our summer comments on DryShips and provide a quick note on a small recent issue.

Bill

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Hybrid Vigor: Vol 1 Issue 20 "Of Mice, Men and Sapphire"

Dear Friends,

Twenty-four hours ago I thought I’d probably remember Monday, October 06, 2014, best for putting out an issue of Hybrid Vigor while in the afterfog of a redeye. Last week’s California trip was a huge success, both in terms of growing our business and in connecting with friends old and new in the state I grew up in.  In order to get a little extra time in my new favorite place in California, Fresno—you read that right—I planned on the redeye.  By the time I got to Phoenix it was almost 9 pm, and by the time I got back to my Westchester office it was 7:30 today. As I said, I figured I’d remember today for that non-CRM cloud you get after such a trip.

Well, I may remember that too, but today will live in the annals of convertible infamy as GTAT flash bankruptcy day.  While I’m not sure how much we can really add at this point given the circumstances and clarity, or lack thereof, we’ll at least try to put things in some kind of context.  We did, after all, discuss the name last week. What a difference a week makes.

Before we do that, we’ll talk a little bit about a couple of new solar names. Solar was GTAT’s area until it made the move that seemed brilliant, betting the company on sapphire. If you owned GTAT you’re pretty depressed right now—you understand why perhaps the most famous author ever from California, and certainly the one most associated with the Great Depression, stole a line from a Robert Burns poem about a mouse to describe how things can go horribly wrong. If Steinbeck were still alive, I’d try to get him to write a short story about GTAT and its convertibles.

As is our habit, we’ll begin with the Hillside Ugly 20, which reflects a continued cheapening—or, rather, anti-richening—in our market.  Perhaps readers will go out tonight and nurse their GTAT wounds—a terrible swift sword of bankruptcy indeed--with a copy of the Ugly 20 and a bottle or two of the vintage that the grapes of wrath have stored.

Bill

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Hybrid Vigor: Vol 1 Issue 19 "California, Here We Come"

Dear Friends,

We send you this letter just before I get on a plane to my home—if not native—state to visit with readers, prospects, students, advisors and friends this week. It will be hectic, hardly a laid-back time, but it should be fun. Don’t let Oracle Week, the debut of Bloomberg’s San Francisco radio station, or the presence (at least for now) of four California teams in the baseball postseason fool you. The Golden State is really focusing on the return of Hillside Advisors’ prodigal son. Hillside is, after all, named for my elementary school in Berkeley.

Ok, enough of that. This week’s edition features Kent Bailey’s insights on the recent Tesaro issue, Jeff Alton’s comments on GTAT’s upcoming report, and some comments from me on Molina Healthcare. Contrary to some rumors, Molina was not named for one of the lesser-known songs of the world’s greatest Bay Area swamp rock band. That’s right—John Fogerty and I are from the same town. (Billy Martin, too, since this is a big baseball week).

We also do a mini-retrospective on the first two-plus months of HARP. Without patting ourselves too much on the back, we’ll just say that you should find the results interesting, and we think they’ll encourage you to keep a closer eye on the Ugly 20.

Have a great week—go Giants and A’s!

Bill

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