Hangin’ with the Carnies

There is nothing like “living for the moment,” and I won’t begrudge the staunchest of my conservative reader base a splash in Fly’s Pool of Carney Delights,  over on his blog and in the incredibly exciting “User Notes” section of The PPT  .   Let me assure you, ladies and gentlemen, there be some astute trading minds throwing Kruggerands around in that room.

That said, I’m sure glad I’ve got the bulk of my holdings in the JCHP, my friends, because I’m not sure how much time is going to be left in this “bring your own lava lamp” filthy 70’s-era hot tub party.    I think I already see some unpleasant objects of questionable birth rising up amongst the bubbles.  

First, I’ll draw your attention to our friend, Mr. U.S. Dollar.   He’s pretty much in “do or die” territory here, and frankly, I’m thinking we’re in trouble whether he strengthens or not.    Lookee here — remember our faithful dollar proxy UUP?

Well, heck if he’s not banging around down at the same December 18th lows that set the timer going on our next market plunge (which occurred about two weeks after the dollar started to climb again).   And here’s what’s worse… the dollar can continue to go down here, but I’m not sure that’s going to benefit our stock markets much, either.  

Why?   Well because there’s another bit of business the dollar keeps low if it’s behaving, and that’s our Treasuries’ interest rates.   If we show relative strength in our dollar, then foreign investors are willing to keep our debt.   But if the dollar keeps getting mauled here… well, those same folks might not be so kind to our lovely treasury paper.   Remember back when we first advocated  TBT as a Jacksonian pick?  Here was the chart:

We were expecting a nice move up, and we sure got it — in spades.   However, now the rapid run up in rate must give us pause with regard to how much longer the music can play.   Look at how far we’ve come since that last posting:

Bang!  All the way above the 200-day EMA.   Now you know I’ve been selling calls against my position here, in anticipation of a pullback.  Well, even as I expect a pullback, I’m just as ready to take a loss on those calls if I see this thing launch anymore than it has.  

Remember, TBT is my “Stock of the Year” pick in Rajun’s annual contest, and I continue to believe TBT is going to be the play of the next three to five years, minimum, thanks to the unwinding that will have to happen in our long term bond rates.   That said, high interest rates eventually take a bite out of stock prices, so we are going to have to be even more synched than ever with the JCHP. 

Remain vigilant my friends, and make sure you attend to RGLD.   I believe it’s the harbinger of our gold holdings’ future.   The other PMs will follow it’s lead, but it will likely become the star of this Jacksonian portfolio in future.

UPDATE:  I added another 1,000 shares to my SSRI holdings today.   I will add another 1,000 if I see further weakness, and then I will likely be “full up” in this name.

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		26-May	% Change
ANDE		$   24.95	6.90%
GDX		41.84	-0.50%
GLD		93.76	-0.73%
IAG		10.56	-2.76%
MON		85.25	-1.57%
NRP		22.75	2.43%
PAAS		21.64	1.03%
RGLD		45.38	2.53%
SLV		14.42	-0.55%
SLW		9.49	1.61%
SSRI		20.82	-4.19%
TBT		55.07	2.80%
TC		8.73	1.04%
TSO		16.73	3.08%
Avg %			0.85%

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(Not to be boring, but I figured I’d repost this with the second chart included, showing the exit values)____________________________________________________________________________________

I figured I’d take an excursion outside the normal realm of stock advice to discuss a subject in a less liquid arena – that of private, closely held company mergers and acquisitions.  While publicly traded company M&A is certainly a key component in our every day trading analysis, many of you may not realize that the vast bulk of M&A transactions take place every day in what is generically called “the middle market” of smaller, private companies that comprise the backbone of our economy.  Increasingly, middle market entrepreneurs are discovering that the equity recapitalization is a great way to achieve liquidity without completely stepping away from the business they love. 

 

Demographics are driving much of the M&A market today, with many baby boomers entering what we in the business call “the gray zone” of their careers, typically beginning in their early fifties.  Most successful entrepreneurs have put their very lives into their businesses – working sometimes seven days a week and very long hours for a period of twenty five to thirty years to build them.   By their early fifties many owners come to the realization that a) they are vesting the majority of their net worth in a single, illiquid concentrated asset and b) they are not going to live forever.   Therefore, a combination of conservatism and a desire for estate planning will drive even the most dedicated of entrepreneurs to contemplate liquidity through sale of his/her company. 

 

In the past, when an owner chose to sell his company, the universe of buyers was largely restricted to “strategic acquirors” — a euphemism for his direct or indirect competitors.   Today, thanks to the success of pioneers in the world of financial purchasers like Henry Kravis of KKR and Ted Forstmann of Forstmann Little, “the financial buyer” alternative has become a driving force in the world of private M&A.  My colleagues and I have estimated there are now as many as 5,000 private equity vehicles extant, in the form of specific venture and private equity funds, family offices, special purpose pools, and even “one off” executives-for-hire.   Thanks to this well developed private capital market, equity recapitalizations have replaced 100% buyouts as the most attractive alternative to the liquidity seeking entrepreneur. 

 

The equity recapitalization is attractive because it allows the entrepreneur to take a large amount of his equity risk off the table, while retaining a material part of his company as an investment going forward.   This alternative is naturally most attractive to those owners who seek to stay with their company for some period after a liquidity transaction.   Because private equity capital usually requires that an acquisition’s management team be retained (as they do not, as a rule, like to operate their portfolio companies), this form of transaction is among their most desired as well.   Not only do they retain the management that has created the company and made it so attractive to purchase, but they keep management incented via the shared risk of a continuing equity investment. 

 

Let me lay it out in a simple example (see below).    An entrepreneur seeks to sell his company, and through a negotiated auction process (JakeGint assisted, one hopes) arrives at an agreed upon purchase price with a private equity firm of his choosing.    On the day of close, the assets of the company are sold to a “Newco” structure established by the private equity firm for $100 million.  Newco will then be “recapitalized” with a new balance sheet that will be leveraged according to the agreed upon comfort of both parties.  In my example, I use a 40% equity and 60% debt structure (this ratio will vary according to the riskiness of the company, it’s history, prospects, and the state of the debt markets).     

 

As the debt will be funded by the private equity providers’ partners (usually a combination of bank and/or mezzanine funds), only the 40% — or $40 million—in equity is required to complete this financing.   In my example I posit that the selling owners will wish to retain 30% of the company going forward.  They must therefore take from their selling proceeds ($100mm after tax) 30% of $40 mm, or $12 million to fund their retained equity in the company.    Even after taxes, they have reduced their net worth exposure to around 20% of the ongoing company, while retaining 30% and a partner who will most likely seek to maximize that asset through additional acquisitions, growth, etc.  

 

Recapitalization Illustration			(dollars in millions)
(Assumption: Company sold for 5x Cash flow of $20 mm)
				Equity		Debt
Original Company Sale Price		$   100.0		$ 100.0		$           –
Capital Gains Taxes		20.0
Net to Owners		$   80.00
				Equity		Debt
Newco Recapitalization		$ 100.00		$   40.0		$        60.0
Equity Group Investment		70%		28.0
Selling Owner’s Invesment		30%		12.0
Selling owner’s Net Gain		$     68.0

This method not only allows our entrepreneur to continue with his company, along with an equity (and board) interest in the enterprise, but it also allows the selling owner to take what is in effect “a second bite at the apple.”   This is because within three to seven years (typically) that private equity firm will be seeking to either “recap” company again (via debt incursion and dividend to equity holders), or to sell out to a strategic or financial buyer completely.   Keep in mind that if all the company does is pay down the debt incurred before selling itself again and sells at the same price as “the first bite,” the owners will have nearly tripled their original investment ($12mm becomes $30mm).   If the company manages to grow organically in that period, more is the better (again see the examples given of exit prices and IRR’s).  

“Second Bite”  Closing Sale Illustration
(Assumption: Company sells again for 5x cash flow)
Scenario 1:	Cash flow constant, Debt paid off in year 5
Year 5 CF	$     20.0		Proceeds to:
CF Mult	5.0	x	PE firm	Owners
Sale price	$   100.0		$      70.0	$     30.0
5 Year IRR			20.1%	20.1%
Scenario 2:	Cash flow increases 5% per year,  Debt paid off in year 5
Year 5 CF	$     25.5		Proceeds to:
CF Mult	5.0	x	PE firm	Owners
Sale price	$   127.6		$      89.3	$     38.3
5 Year IRR			26.1%	26.1%
Scenario 3:	CF increases 5% per year,  Debt paid off in year 5, 6x Mult.
Year 5 CF	$     32.2		Proceeds to:
CF Mult	6.0	x	PE firm	Owners
Sale price	$   193.3		$    135.3	$     58.0
5 Year IRR			37.0%	37.0%

 

You can see, therefore, why a hard driving boomer who is perhaps not quite ready to lay down his hammer, but who is seeking the risk modification a certain amount of liquidity brings to one’s later years, might see the equity recapitalization as the perfect solution to his portfolio concerns.   From both an emotional and financial standpoint, it’s an excellent fit.

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Not to be disparaging, but I’ve felt I’ve spent the week with a squadron of flying goats.   There you are flitting from tree to tree looking for the best green shoots, ears up and horns out,  “baaaaahhhing” it up to beat the band.   

Chips stocks!  Cancer stocks!  Lenny Dykstra Car Wash franchise stocks!  Get ’em while they’re hot from the chute!

But why must you make your lives so difficult?  There’s no reason to search for rare buds in the top branches of the acacia tree when there’s plenty of bull grass right here on the ground.   Come down from there and take a look at the freshly scythed alfalfa I have gathered for you, my yellow-eyed friends. 

Remember our weekly $HUI chart from last week?

Well, look what’s happened this week…. Pop!

Can anything be more promising than that little green bud out of the consolidation zone?    And yes, we’re a little overbought here, and should be coming into some more resistance around 400 or so, but we should welcome that opportunity.  

After all my boy, it is a bull market — and maybe the only one you’ll see for years to come.  So relax some, take a load off, and get your nets ready.   It’s almost harvest time again.

This week’s Jackson Core Holdings Portfolio results were very pleasing, especially as measured against the indexes.   So have some nice goat cheese this weekend, and maybe try to pause a second whilst hoisting that relaxing beverage to remember those who have served, and especially those who have fallen in order that you could enjoy this great country.    Be well.

Name	5/8/2009	5/15/2009	∆	5/22/2009	∆
ANDE	$    21.50	$      21.31	-0.88%	$    23.34	9.53%
GDX	37.46	37.65	0.51%	42.05	11.69%
GLD	89.98	91.55	1.74%	94.45	3.17%
IAG	9.92	9.83	-0.91%	10.86	10.48%
MON	86.42	89.95	4.08%	86.61	-3.71%
NRP	23.39	21.29	-8.98%	22.21	4.32%
PAAS	19.35	18.66	-3.57%	21.42	14.79%
RGLD	39.90	39.97	0.18%	44.26	10.73%
SLV	13.79	13.77	-0.15%	14.50	5.30%
SLW	8.91	8.58	-3.70%	9.34	8.86%
SSRI	20.06	19.06	-4.99%	21.73	14.01%
TBT	52.24	49.13	-5.95%	53.57	9.04%
TC	7.98	7.65	-4.14%	8.64	12.94%
TSO	16.72	16.60	-0.72%	16.23	-2.23%
		AVG	-1.96%		7.78%
Name	5/8/2009	5/15/2009	∆	5/22/2009	∆
SPY	$    92.98	$      88.71	-4.59%	$    89.02	0.35%
QQQQ	34.23	33.37	-2.51%	33.54	0.51%
DIA	85.47	82.78	-3.15%	82.87	0.11%
NDX	1,394.16	1,355.11	-2.80%	1,363.17	0.59%
RUT	511.82	475.84	-7.03%	477.62	0.37%
		AVG	-4.02%		0.39%

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Naw, it’s not that bad, yet,  but Detroit is getting there.   Let’s see what a couple of years of a U.A.W. -driven Chrysler do to it.

But let’s put all that aside and talk about the invisibility of this gold bull, shall we?  I mean, my astute buddies over in the estimable PPT — that Powerful Profit Taj– (have you signed up yet??)… even those gentlemen seem to be walking around that trading room like zombies in the Night of the Living Dead, completely oblivious to the blooming precious metal bull that is erupting around them.  

 Why, just today, one of our estimable patrons sold our featured “pocket rocket” junior miner (see below) as if it were one of CA’s 30 second Viagra Vehicles.   Let me tell you, I was aghast!  Mortified!

But let me assure you, Jacksonians, this odd behaviour (sic) only inures to our collective benefit.   The longer the general public (and let me make clear that the PPT community is NOT the “General Public,” they are at least “English Beat” or barring that “Fine Young Cannibals”– ) remains ignorant of the stealth bull in the precious metal miners, the better it is for our accumulation purposes.   

For, my friends  (come, gather close so I may whisper it to you) — we shall be as the most miserable pinch penny miser on Ebenezer Scrooge’s third shift staff, sparingly sifting our gold and silver specie into dark musty lock boxes while others pass the punch with knowing glee and manly aplomb.  Let them have their japes and their ales and their merry tunes played upon a three stringed fiddle, for we shall act quietly here below, rebuilding the foundation of a hackneyed and eroding financial system for our children and their’s.   It is weary work, but God smiles upon us, and there shall be reward.

That said, I dont’ have much time to dwell on the blindness of the common man, so let’s take a quick look at what they’re missing. 

Remember this chart of the AMEX Gold Bugs Index from a week or so back?

Pretty nice looking chart, no?  Maybe some of you got long after looking at it?  Maybe some of you ran out and bought some gold stocks the next day, too.   (Heh) 

 Let’s see if that was the smart thing to do, from the perspective of a week later:

Well peel me naked and slather me with mornay sauce, whaddaya know?  A breakout just like we expected.   And look at all that free air we’ve got to go.   Hmmmm…  and what was  in that Index again?  Oh yeah, a lot of juicy big cap gold and silver stocks.   

Think maybe that break into the free zone will have some effect on our junior miners?   Heck, let’s see:

 

 This is your golden burrito for tomorrow and for the summer, my friends.  We shall share recipes for further tasty treats as time allows, but for now, know that outside the Jacksonian Core*, I am also purchasing and/or considering the purchase of the following precious metal mining hardies:  [[GG]], [[EGO]], [[AUY]], [[EXK]], [[NGD]], [[NXG]], [[NG]] and of course [[AGQ]].    

Keep in mind also, that there was a pretty bearish candle on the TLT today, boys and girls.  If that bond group and the Ten-Year Starting breaking down, it’ll likely be sayonora for the large part of this market.   Except maybe one part.

Caveat:  If you follow me into the purchase of any of the above named precious metal plays, your children will be stolen by Hobgoblins and traded to dwarves for shiny strips of tin foil and moldy bacon. 

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 ANDE — $22.20  (-2.42%)

GDX — $41.24 (+1.90%)

GLD — $93.85  (+1.73)

IAG – $10.23 (+0..69%) 

PAAS — $21.19 (+0.95%)

RGLD – $44.90 (+4.98%)

SLV — $14.34  (+1.69%)

SLW — $9.41  (-0.53%)

SSRI — $22.17  (+0.77%)

TBT — $52.43 (+4.96%)

TC — $8.46 (-7.44%)

TSO — $16.53 (-4.40%)

Daily Average: –0.25%

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UPDATE: I sold the calls on TBT again, here @ $53.58.   I think TBT is a bit parabolic here, and TLT looks like it’s ready to bounce.

See caveats above.

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Sometimes watching the Pelosi controlled Congress is like watching a late season filler on“The CW. “  You know the sort– base, corn comedy, most of it recycled from better stuff in the past, but mildly entertaining as filler for the beer and cheeze doodle half hour.   Unfortunately, this is real life, and the stuff  Congress is producing these days isn’t mindless entertainment for the subliterate masses, but toxic fiats that will kill off whatever fluttering hopes our economy might still retain after this recent hideous downturn.

Case in point, this latest howler from  FLORIDA Democrat Representative Alan Grayson  (word to my boys Chivas, TC and Cash n’ Guns, whatsupwitdat?).   Congressman Grayson claims that what we need to “stimulate the economy” again, this time with  mandatory paid vacations.   Read the whole article here.

Yeah, in this economy I could see strapped businesses being all for paying their employees to hit the beach, Rep. Grayson.   I can just hear the small business owner now:

“Mandatory vacation?   Hmmmm… let me think a second.   I tell ya what… why don’t you just take the rest of the year off?”  

You just earned my Asshat of the Month, Congressman. 

Following is an excerpt from the article (hat tip to The Politico): 

Congressman: We’re going to Disney By: Erika Lovley May 21, 2009 04:28 AM EST

Rep. Alan Grayson was standing in the middle of Disney World when it hit him: What Americans really need is a week of paid vacation.So on Thursday, the Florida Democrat will introduce the Paid Vacation Act — legislation that would be the first to make paid vacation time a requirement under federal law.The bill would require companies with more than 100 employees to offer a week of paid vacation for both full-time and part-time employees after they’ve put in a year on the job. Three years after the effective date of the law, those same companies would be required to provide two weeks of paid vacation, and companies with 50 or more employees would have to provide one week.The idea: More vacation will stimulate the economy through fewer sick days, better productivity and happier employees.“There’s a reason why Disney World is the happiest place on Earth: The people who go there are on vacation,” said Grayson, a freshman who counts Orlando as part of his home district. “Honestly, as much as I appreciate this job and as much as I enjoy it, the best days of my life are and always have been the days I’m on vacation.”According to the Center for Economic and Policy Research, 28 million Americans — or about a quarter of the work force — don’t get any paid vacation. The center says that a lack of vacation causes stress and workplace burnout and that those evil twins cost the economy more than $300 billion each year. One more if-you’re-reading-this-then-you’re-probably-not-on-vacation fact: The United States is dead last among 21 industrial countries when it comes to mandatory R&R. France currently requires employers to provide 30 days of paid leave. ____________________

Maybe next we can have full country truck strikes like they have in France, too, huh Congressman?   Asshat!

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Why now this crying, this cringing, this fear?

What ‘ports of market disaster come near?

Come,  there’s no trembling, no reason to hide.

For this day, Brave ‘Drew Jackson, the Dude, will abide.  

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Have you good silver and gold in supply?

Use you green paper instead for your chai?

Best keep this warning in back of your mind,

Fed Notes like those will soon buff your behind!

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Silver Wheaton, Pan American and S-S-R-I

With bright silver trumpets the thieves they descry!

And their fellows in golden and anthracite hue,

(Gold, Royal Gold, NRP name this crew)

Like friends made in foxholes– they will always stay true.

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And in our travels, let’s not forget “farmer’s friend:”

Stout “Mr. Anderson” forges an uprising trend.

And those thinking  now of their grandkiddies needs,

Must never disdain Sir Monsanto’s brave seeds.

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“Molybdenum’s” fun just to say, if you ask me,

But “TC” is  the name of the stock that will task me. 

Especially when earl and gas spreads ‘come dear,

And Tesoro’s my ‘folios’ sole quit-claiming cheer.

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What’s left to us then, in the Jacksonian Core?

But to brandish the bane of that Great Federal Whore?

Yes Ben Bernake, I speak now to thee…

And like a cross to a vampire, hold high TBT!

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 ANDE — $22.75  (+0.57%)

GDX — $40.47 (+5.31%)

GLD — $92.25  (+1.42)

IAG – $10.16 (+2.83%) 

MON — $91.83 (+2.49)

 

NRP — $23.37 (+3.41%)

PAAS — $20.99 (+6.33%)

RGLD – $42.77 (+5.19%)

SLV — $14.10  (+0.86%)

SLW — $9.46  (+3.61%)

SSRI — $22.00  (+5.47%)

TBT — $49.95  (-2.14%)

TC — $9.14 (+1.56%)

TSO — $17.29 (+0.41%)

Daily Average:  +2.69 %

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