I raised a little more cash today, selling half of my APC shares for a profit. My entry points were $61.60 and $64.06 each of equal batch size. So a nice 6-11% profit inside of a month.
My cash position stands north of 25%.

I’m going to be out most of this week, celebrating the birth of the greatest country on Earth with people I care about, and I want the peace of mind.

Now, I’m sick of you self-deprecating misanthropes treading on the US, just because She hasn’t always been perfectly straight and narrow. This is the 4th of July we’re talking about here, and I would appreciate it very much if you not muck it up for everyone around you.

Just remember in between one of your diatribes about the unjust warmongering ways of America, passionate defenses of the Iranians/Libyans/Iraqis/Afghanis/Whoever – “What would you do if someone was pushing into your business…?” – or enthralled critiques of the latest Nom Chomsky paper on sociological advantages that come with embracing cowardice in every tough situation you encounter in your life…nobody cares.

Even in decline, this country provides more opportunity for you pissants than anywhere else on Earth.

You think Europe is great with their precious social considerations and “feel-good” recreations?

You’re in the middle of watching their entire system implode.

You think China is going to overrun us?

The entire Chinese economy is built upon serving us.

You think this is the rise of South America?

Argentina. Venezuela. (I don’t even need to form sentences here)

Sure the US has its faults. We make mistakes. We get preoccupied and let the insane run the asylum, from time to time. We oversimplify complicated problems, first in negotiations and then by leveling entire countries.

But have a little faith that this country can revert to its former glory, this week, while you’re setting off micro explosives and chowing down some burgers.

Don’t sell us short. I may be down on markets and a few realities of the moment, but America Herself is the comeback king.

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You people are denser than concrete. “The Thickness” runs strong with you. It is your birthright, apparently – to be gullible as shit.

It is fascinating, trying to guess how many times announcing and re-announcing the same thing can get you suckers to throw your life savings at an ailing confidence scheme. For the entire second half of 2011, they just kept saying “EFSF” and every time, they managed to run the indices higher by a few percent at a time.

The damn thing isn’t even properly funded.

Question

If the EFSF is going to be used to bail out failing banks, then what’s going to be bailing out those failing countries?

I thought that’s what the EFSF was for? Now they’re using the few hundred billion they managed to gather (allegedly) to save their banking system? Oh, but this doesn’t impair their ability to backstop Spain at all.

Never mind that the only victory these clowns managed to secure in three years is about to become victim of “The Bank Run”.

And Lenny Dykstra is going to pay you that ten grand just as soon as the Gretzky house sells. And his mortgage. And his pilot. And his staff…

Face it. This fund was already overcommitted, and now it has another trillion or so of liabilities it needs to backstop. Can you pronounce “flaccid” for me?

But I know better than to fight. Just as soon as the morning lulls get out of the way, I’m out of ERY, to cash. I’ve already got my silver, and APC purchases. I’ll be 80% long inside of a few hours. Sure, I can play along. I can give you the breathing room and indifference to let you hang yourselves.

This is going to fail SPECTACULARLY. But your misplaced enthusiasm means that failure is months away again. Just like the LTRO convinced you to spend your life savings chasing sovereign yields that ultimately cost you dearly, your faith will buy you suffering once again.

But don’t worry. After the default, I’m sure Spain can make you whole again just as soon as the Gretzky house sells.

Bro.

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Late yesterday, at about 3:30, Associated Estates Realty Corporation (AEC) came out and announced that they were going to raise some money through a public offering of 5.5 million shares (comes out to about $76 million, or $14.40 per share).

Based on the market’s reaction, you would have thought they had announced that AEC was actually secretly a Chinese lumber company.

The stock immediately shed 2%, plummeting from $15.20 into the close. Last night was a bloodbath. It ended up opening today at $14.41. In a single night, AEC lost 5% of its market cap.

HOLY SHIT! They’re raising cash, so the market sets the company share price at what they’re getting from the underwriters?? Are you people high?

It seems we need to have a little discussion about raising money, and what it really implies.

But first, grab all those little books you have on capital raises, where savvy sounding professionals wearing douchebag-y clothing while waxing philosophical on the front cover, recite three hundred years worth of “rules of thumb”. Throw them into a pile, douse them in gasoline, and set them on fire. Then gather up the ashes, and ever so fastidiously, cram them up your ass.

That’s how many out-of-context Warren Buffet quotes I want to see in my comments section. You have been warned.

Rather than assuming that all capital raises are inherently bad, evil, dilutive things, let’s instead ask a simple question: when, exactly, do capital raises hurt outstanding investors?

Well, when they cut into a companies value. So anytime the shares sell for less than they’re worth. That’s bad.

Or when they cause the company to give away earnings to too many different places and suddenly any premium is overpriced and cash flow expectations are overpriced. That’s bad.

Or when the new capital has rights or priviledges that undermines the rights of existing shareholders, and sidelines them into an unfair position. That’s bad too.

Or perhaps when the capital raise is smoke tipping off something that’s very wrong with the company. All bad.

Or maybe when there’s some kind of fraud going on, because the company isn’t being honest about how many investors are really oustanding, and the sale is actually a red flag that your company is managed by criminals. That’s really bad.

So let me ask you; what’s the big fucking deal?

It’s not like AEC is desperate for cash, on Death’s door with the harpies flying overhead. They’re a $700 million dollar entity sitting on $6-13 million. They have annual expenses of $140 million, revenues of $172 million, and are modestly leveraged with debt equal to 70% of their total assets (all at insanely cheap rates, courtesy of the Fed). And they’ve secured enough credit lines to weather their debt load for several years.

Oh yeah, and AEC is a cash cow. While reporting that they’re losing money, their operations are generating a cool $50 million a year in untaxable cash flow. So they’re doing what any sensible company with deep pockets and record low prices would do – they’re buying everything they can. In fact, because they’re running with the black hole-budget accounting methods that are depreciation adjustments in a real estate centered environment, their net cash flow is up 70% inside of four years.

All of that money is going straight back into the company. In fact, they generated surplus revenue from also refinancing/closing/restructuring their debt. All of that $50 million a year right now is going out, buying up properties, and building AEC into a steadily larger, more competitive organization.

Which brings us back to the idea of capital raises. Why are you such a squirly little bitch?

Let’s say I have a company – we’ll call them Opportunistic Co. – that has a book value worth $900 million with 900 million shares outstanding, or $1 a share of value, including too little cash to really do anything with. Now let’s say an awesome investing opportunity comes along; the price tag is another $100 million. Opportunistic Co. has a choice to make – they can pay up for that opportunity (which based on Associated Esta – oops, I mean Opportunistic Co.’s – track record would generate a cool 16% ROI annually before taking into account any debt extinguishment or unrealized property appreciation), or they can puss out and go home.

So let’s say Opportunistic Co. decides, “hey, I want to take advantage of this” and they raise that $100 million by selling shares for $2.00 a pop.

Oh God! No! dilution…!

They take that $100 million that they raised by selling 50 million shares on the open market and put it on their books. And low and behold, they now have a $1 billion value, with 950 million oustanding shareholders.

And shares worth $1.05 apiece.

That’s right, miscreants. If you did the math, Opportunistic Co. just raised their book value, because the people who bought into the idea, and thereby their company, did so at a premium.

Now, I know this isn’t fail safe. Lots of companies trade at big premiums to their value, because people are banking on high growth rates. Capital raises can be a real threat to them, because if that money isn’t applied correctly and doesn’t generate enough funds to pull its own weight, suddenly those growth rates aren’t enough to justify the high price.

DOES AN REIT COMING OUT OF A HOUSING RECESSION SOUND LIKE A FUCKING GROWTH STOCK TO YOU?

AEC’s shares are trading very reasonably, just a little greater than their net worth. Their price to earnings is low. They’re operating income and revenues, from sky high occupancy rates and increasing rents, are running higher. They are a stealth-growth company trading like a utility.

And besides, both Opportunistic Co., and in real life AEC, already know what they’re going to do with the God-damned money. They already have the investment lined up, people. AEC said right when they were raising the cash, “hey, same shit…”. They have been killing it. Why should I be worried, without evidence, that they’ve suddenly forgotten how to manage a real estate company?

And if at any point, some or all of these properties start to actually go up in price…well then taking the time to raise the money, and make the call, will be a boon to ALL the company’s shareholders, probably better than if they hadn’t made the purchase at all.

So excuse me for thinking that MAYBE sometime between now and the end of time, we might just have a real-estate recovery.

But here’s what really bothers me.

Let’s have another little example. Let’s say there’s this other company – Superstar-Bullshit-Celebrity Managers Enterprise – who are also worth $900 million, with 900 million shares outstanding. And let’s say, for the humor of it, that a third group of investors beats both companies to the draw and acquires the opportunity first.

This third group raises the $100 million (raising capital, incidentally) by soliciting what happens to be $2 a share from an underwriter and forms the new corporatation – Sucker’s Buy Co. – which has 50 million shareholders

Now a not-meaningful amount of time passes, and the super smart SBC Enterprise managers decide, “hey, you know what, we’d like to have that property owned by Sucker’s Buy. I think we should buy it.” Never mind that Sucker’s Buy has been in business for like, a month, and has already given away all their revenue in the form of special dividends. So they get the paper work in order, and start the M&A process.

But of course, we can’t just buy Sucker’s Buy at market price – how would Sucker’s Buy’s investors be rewarded for their precious month of time? No, we need to run a leveraged buyout on these fuckers, giving them $2.50 a share. It’ll all be worth it later on, after all. SBC Co. can leverage SB Co’s operation to optimize synergies, and shit…

So SBC purchases the same thing – exactly, identically, the same thing – for an extra $25 million than it’s listed. And all financed, naturally.

And after goodwill gets rectified, SBC’s shares will be worth only $0.97.

But you and I both know, in this situation, SBC’s bullshit stock would rally.

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Spain’s behavior this weekend has created the remarkable opportunity – yet again – to discuss the fine points of complex, non-linear systems, and what happens when myopic retards fuck with them.

I was really worried that my selloff would not materialize. For all I knew, Spain had given the market just enough of what it wanted to hear to usher in another cocaine induced rally; maybe it would ultimately prove faulty, but does that help me if it can sustain itself for 6 months and 2,000 DOW points, like the last one?

But then, as if it were their intention, Spain fucked up so thoroughly that everything they thought they had accomplished was unwrought right before their stupid, socialist eyes.

I would have assumed they had learned their lesson after Greece. Greece tried this same bullshit, you’ll remember. They attempted to circumvent the terms of their credit default swaps; the result was pandemonium.

Without the specter of principle protection, there was no reason to be caught holding Greek bonds. That same week, their bonds sold off hard, making it more or less impossible for them to continue on without direct support from the EU.

They lost literally billions, trying to screw markets out of a few million worth of protection – and increased the likelihood that a multi-billion hit to their banks would ensue.

This weekend, Spain did the same thing. By working the terms of their bailout to give the rescue fund preferred treatment, they have reminded markets – again – that there is no security in loaning money to these people. What’s the point of the usual protections of sovereign bonds if unlimited government money can find its way to the front of the line?

There’s no safety there. Each bailout is a bigger threatening haircut to any bond restructuring you may have to take.

So at that moment, Spain and the EU, trying to ensure that their precious little bailout money was extra safe, undermined the entire bond market. Now, people are fleeing their notes en mass. In an attempt to make $100 billion inviolable, now Spain gets to worry about its entire fucking debt load.

It’s Greece, part deux. Brilliant move, Spain. Well done ladies and gentlemen.

The best part is, once again, the entire purpose of the ESM/EFSF mechanisms have been undermined in trying to screw over the other market makers. The only reason they wanted to bail out the PIIGS with these funds, rather than direct monetary intervention, was to appease Germany’s hardcore stance of avoiding any and all inflation.

The point of the ESM and EFSF was to encourage people to lend money to over indebted countries. But by giving them preferential treatment, they’ve actually succeeded in driving investors away further.

Now, all money that comes to Spanish debt, just like Greek debt, will come from the ECB. And so, the EU gets to enjoy stagnate lending, a budget crisis, AND more horrific inflation levels. Germany will be pissed. Manufacturing will continue to contract continent wide. And negotiations between countries will be tougher than ever.

All because Spain decided one gay weekend to act unilaterally and screw the pooch.

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For the record, it’s about time we got back to having intelligent corporate raiders sacking lazy, do nothing boards of directors who are holed up in their comfortable “annuity-for-life” jobs like castle keeps and it’s the Hundred Years War.

Who the hell thought it was a good idea to let the CEO compete directly against his own company?

Best wishes to mister Icahn, as he persists in kicking ass and taking names.

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I’m standing hunched over the desk in my 9th floor office, chewing lightly on a light Mediterranean salad, which is giving off slight aromatic aromas mingled with the sharp hint of vinegar, and a side of tender chicken while I work. In between taking bites, I can’t help but feel my lips purse into smirks.

Looking over my shoulder; WTI is now toppling into the $82-83 range. Yet, SCO is also falling, as is ERY, and reliably, TVIX is inside of $10 again (that product is useless).

What funniness!

I can’t say I blame anyone because the horizon is murky. So all products are being sold off together. Only cash is king today.

My expectation is that by the POMO meeting towards the end of June, policy makers will have already yielded some form of accommodative support to markets. However, it could come later. This is a big gamble, so having plenty of cash and feeling secure and confident about one’s book is critically important.

I was somewhat suspect of holding products like ETFs into today, because I figured they could sell off, much like last Friday. Being wary of the potential for intervention over the weekend, I sold SCO yesterday; missing out on big gains this morning.

However, that is the price of safety sometimes.

I’ve decided to hold ERY through the weekend – I’m going to trust that, if something big is announced this weekend, I’ll be able to get out with the herd on Monday. It’s a risk, but worst case, ERY opens down ~10% and it does 2-3% of damage to my portfolio.

At that point, I would theoretically deploy some of my – by then larger – cash position.

I yearn to buy more silver; but I cannot do so here. Lower; I need lower prices.

I’ll be preoccupied with some work for the remainder of the day. It’s my intention to stop back periodically and to finalize my strategy before the closing bell. If I do not get the chance, let me take this moment to wish you a fine weekend.

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