Lottery Tickets and Calculated Risk

I was very disappointed in my lottery tickets the past few days.  I haven’t talked about them simply because I didn’t want to encourage anyone else to risk their money on this long shot.

On the other hand, I’ve been upfront with my calculated risk, and today it looks like it might be paying off.

Further discussion of the two stocks after the break.

Calculated Risk:

Elan just announced its earnings in Ireland, and they are in line with my expectations.  They seem to be above the market’s expectations.  $82 million in adjusted EBITDA for the first half of 2010 traces out a good trajectory.

Pre-market is often misleading.  Pre-market in ADR’s can be even worse.  Still, the ADR’s in Elan have the Irish market already open to guide their trades, and today’s bid/offer in Elan ADR’s is shown at %5.20 bid / $5.30 asked.  That’s a substantial increase over the $4.50 or so the stock was trading at two weeks ago.

I’ll be selling some August or September $5 calls on about half my position once the options market opens, and actually hoping those shares get called away.  It will lower the extreme concentration I have in that one name.

Lottery Ticket:

My shares of Anthracite’s Preferred stock are plunging toward zero.  I had bought enough shares that a dollar a share payoff would cover a couple of years of living expenses under the theory that the stated book value of the company equity prior to the Chapter 7 filing might be anywhere near reality.

The fact is that there are several layers of the capital structure ranked above the preferred.  Under Chapter 7 (liquidation), as opposed to Chapter 11 (workout), distressed market prices can be made permanent through the sale of assets, and payoff is in strict priority, rather than a negotiated sharing of pain.

I went into this with my eyes open, but knowing a similar experience in the same subsector paid off nicely in the past.

Back in 1998, when AHR had not even deployed its IPO money, the granddaddy of the commercial real estate structured mREITs  (Criimi Mae) was suffering from an attempted vivisection at the hands of Wall Street repo lenders.  That was in response to the LTCM crisis, and had nothing to do with the commercial real estate first-loss pieces they owned.

AHR actually benefited from the 1998 crisis, by getting the opportunity to buy Criimi bonds and also some of the bonds Mike Vranos unloaded on Columbus Day of 1998.  What a great way to start a company!  AAA bonds that sold for par were selling for 80 cents on the dollar.  Eventually they made their way back to par, and even higher.

There is still some sliver of hope for Anthracite, because the valuations the repo lenders used need to be looked at very closely.  Criimi also had very low valuations applied, and margin calls they couldn’t meet.  Those valuations proved to be much too low, as evidence built that Criimi’s collateral was being valued by much more hostile assumptions than those dealers were valuing their own inventory and other customer holdings.  That’s a no-no, and every repo lender to Criimi settled for substantially less than they initially demanded.

Criimi survived, and I made some good money when they emerged from Chapter 11 five years later.

That’s not going to happen here, but the swing from substantial positive shareholder equity to a large negative just doesn’t pass the smell test.  It seems (without having any kind of detailed information) that something was wrong with either the pre- or the post-filing pricing, or maybe both.

Mentally I’m writing both my common and preferred stock to zero.

So there it is, today’s good news and bad news.



One Response to Lottery Tickets and Calculated Risk

  1. Kevin says:

    Still holding 8,000 shares of Elan. I can’t see m to move on. I believe in the science. This position is down from 20,000 shares back in 2008.



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