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The Great Wall Street Marketing Machine: How To Protect Yourself From The Hype

Summary Wall Street firms, Research analysts, CNBC, Ratings agencies, and Brokerages have one job: Sell you, John / Jane Q public, overpriced stock just before its “best before” date. Sales efforts always intensify near major market inflection points, both to sell you stock, and keep you from selling your existing hyped stocks (before they do). The more they promote a stock as being “world changing”, “unlimited potential”, “new paradigm” and such terms, the faster you should run from investment. The later in an investment cycle we are (like today I believe), the more cautious you should be about all high valuation / beta / “future potential” stocks. Watching a group of high-beta leaders can provide an early window into future, broader “risk on” appetite. Canaries in the coal mine. “Those who tell; don’t know, those who know, don’t tell” Or maybe those who tell….are being purely deceptive. This article is a follow-up to my May Article, “What Wall Street Doesn’t Want You To Know: The Foolishness Of Chasing The Most Popular Themes”. I strongly encourage a review of that article at this time. In that article I led with the following points: Summary As Warren Buffett opines, in the short run, the market is a voting machine, and in the long run, it is a weighing machine. The analyst community and many investors who follow it are so often late to the party regarding a popular stock, and so are doomed to long-term underperformance. Wall Street is not a friend of the individual investor. Early-stage investors and insiders use aggressive Wall Street buy ratings to offload positions bought at an earlier stage. The best way to outperform – focus less on the popular theme and more on the next sector rotation in the market. Remember this Core Value: Wall Street firms, Research analysts, CNBC, Ratings agencies, and Brokerages; including the vast, vast majority of Financial Advisors have one job: Sell you, John / Jane Q public, overpriced stock, IPO’s, “special products”, and leveraged loans and debt offerings, all just before their “best before” date. They are not your friend and ally! Accept this fact and take personal responsibility for self-education, and you will avoid future large losses, accompanied by those infamous words “No one could have seen this coming”. Yeah, Right. In this article, we will examine case studies of various high-potential stocks, and how their story and performance have evolved, from the peak period of excitement to today. It is my goal to raise awareness of how the Wall Street marketing machine works, and how one can defend themselves against being swept up in the hype, through a skeptical eye, close focus on the integrity of management, and thorough, common-sense research. Note: Y Charts are not working. I’ll attempt to add later. CASE STUDY #1. GoPro (NASDAQ: GPRO ) GoPro went public in July 2014, first traded at $30.00 and rapidly rallied to over $95.00 by September. What is notable was the accompanying commentary and related world view on this company promoted as fact at that time; which is the purpose of these studies. Whenever at $80 – $90 and above questions came up about valuation for this mobile action camera maker, the answer was simple from the many promoters: “It’s not a camera maker – it’s a Digital Content Platform, acquiring high quality Video that can be Monetized for Billions of dollars by GoPro – therefore its growth potential is Unlimited and it Can’t be valued as a Camera Maker” It’s becoming a “movement” according to FBN , just prior to its highs. Along with a charming and “cool” CEO, note the exciting language often used by Wall Street: CEO has an awesome vision; Digital Content Platform; Content to be Monetized; Growth potential is Unlimited; Valuation metrics are different. (than everyone else) Sounds exciting, doesn’t it? Too bad the stock makes one want to shoot a GoPro horror movie. It is currently making post-IPO lows in the $28.00 area, with no support in sight. What’s FBN saying now about the stock? Still trying to suck you in. Think you should ever listen to FBN again? Makes you wonder what conflicts we may not know about. Others are throwing in the towel. Perhaps they have less conflicts, or have had enough embarrassment. Kind of late though isn’t it? Ironically after a large wave of downgrades, GoPro may be a better risk for those inclined, as the Wall Street hype machine…changes channels. Case Study #2. Shake Shak. (NYSE: SHAK ) Shake Shak is a New York-based burger chain that went public to amazing levels of hype, as if the hamburger had been invented. It ran from its IPO range in the $40-50 area from February of this year all the way to – again – the $95 area, and has been selling off since, threatening now to break its post- IPO lows, not an uncommon theme these days. The problem with Shake Shak and many New York IPOs is, while due to the huge and dynamic population in the New York Metro area, there is room for many, many successful ideas of all kinds, that are not necessarily transferable at the same growth rate to Topeka, Kansas, or anywhere else. This is where the Wall Street hype machine gets into gear. Take a modest sized, wildly popular – partly because it’s “new”, and adventurous New Yorkers love new, cool things – NYC-based burger chain, extrapolate its growth rate and valuation per store. It was something in the area of $15 million, far, far greater than McDonald’s by many orders of magnitude – across the entire nation – and take it public! So with my family, I did some personal research. On my next trip to New York, I went to….Shake Shak. It’s a burger place. I was frankly underwhelmed when considering the quality in the context of the hype level. There are a lot of good burger joints. This stock I could see surviving, as I can GoPro, but both at much lower prices than today’s, as the hype machine fades in light of results typical of a…Burger joint! And ultimately…it should be valued as such. See folks, for every Chipotle (NYSE: CMG ) there are a hundred, a thousand busts. If turns into the next , I don’t need the hype to convince me. Their organic growth will prove it over time. The Street thinks SHAK is a great deal. Too bad, insiders don’t think so. This massive insider offering – at post-IPO low prices – is a massive red flag, ‘get out now’ signal. Not that Wall Street will ever tell you that. Their job is to “hold your hand” so you don’t sell! Do what I say, don’t watch what I do. Wall Street’s Motto. Case Study #3. Tesla (NASDAQ: TSLA ) Talk about a hype story! This stock is truly the king of them all. If you invest in Tesla at today’s valuations, even its bulls will tell you, you aren’t investing in a car company, at car-company valuations. The first trick Wall Street uses is simply change the label. It’s not a camera company, it’s a content provider. The stock isn’t valued on earnings!!! – it’s valued on “clicks”, “unique visitors” or some other metric, because the good old-fashioned GAAP (how quaint) earnings present so ugly. Notice nobody on TV wants to talk about GAAP earnings? Tesla isn’t a car company, although it sells cars. So, what is it? It’s a new technology company It’s a revolutionary energy company It’s an environmental savior It’s changing the world Its CEO, Elon Musk, is a hero and grand visionary The inference is, you should buy the stock after each one of Elon Musk’s tweets, and pay no attention to either the valuation, or risks of this investment. This is dangerous thinking. And the stock is starting to soften as the analyst community backs off of its all-in bullish stance, just a fraction . The risk on any growth stock, or potential growth stock, may well be expressed as an inverse relationship to the amount of hype expressed on that stock. The truth is – I’m not about to start a fundamental debate on Tesla, and we have a few of those on SA if you’ve noticed – is that perhaps Tesla will live up to all of those accolades I listed above. I think the Model S is an amazing car from all reports, and I commend Elon for shaking up the industry. But admiring the (first) car, admiring the vision, does not make the stock a great investment! These are 2 very, very different discussions, and when risking hard-earned capital, pure vision is far from enough. The bottom line is Tesla is a car company. It is a young, disruptive, energizing car company, but with enormous financial risks, looking out 3 or 4 years. And so, it is only even considerable as an investment candidate, if it is valued as a car company, and carefully weighing all factors – the risks alongside the potential. There are dozens of examples, folks. The risks are high and everyone is rooting to discover the next Apple (NASDAQ: AAPL ) or Microsoft (NASDAQ: MSFT ), but truthfully they don’t come around too often. I trust this post will help evaluate the hype and story through a different lens, and help filter the noise around different opportunities we are all presented with. It’s all so much about expectation levels, and identifying when those are too high, for our chosen investment ideas. If we can do this, we can decrease portfolio risks and increase long-term results. Best wishes to all investors.

Did GLD Just Enter A Bull Market?

Summary Both GLD and the HUI looked like they were on the verge of one big final drop, then on October 2, the U.S. nonfarm payrolls data for September was released. There are some bearish hurdles that suggest this rally might soon run out of steam. Possible rotation out of the market and into gold is one bullish aspect to consider right now. When you look at the big picture, the chart of the HUI doesn’t show a huge move over the last few months. I started to buy in big on October 2, as I anticipated a run to at least that level given what gold did that day. In June of this year, I turned very bearish on the precious metals sector, as the HUI was starting to break down. Long-term, I’m extremely bullish on gold, and this is where I plan to be invested heavily over the next several years. But the sector needed to put in a final bottom first, and four months ago it began that process. Since that time, the price action in the HUI was playing out almost exactly as I described it would. At the beginning of this month, we were set up perfectly for a final decline in October/November. And then a “curveball” came. As I said in a previous article : “Besides, I simply don’t have a crystal ball. I can’t be 100% sure where the exact bottom is at. Rarely do things in the market go EXACTLY as you expect them to. There will probably be some curveballs along the way.” So what do we make of this latest rally in the SPDR Gold Trust ETF (NYSEARCA: GLD ), as well as the strong rebound in the gold and silver stock indexes such as the HUI and XAU? Is this the start of a new bull market, or is this just one last bear market rally before the final lows are hit? Does this curveball (meaning the HUI deciding to break higher, not lower) change the outlook? Well, I’m certainly still very cautious right now, but I have moved back to neutral until we get more clarity on a few things. Both GLD and the HUI looked like they were on the verge of one big final drop, and then on October 2, the U.S. nonfarm payrolls data for September was released. The report said the U.S. economy created only 142,000 jobs in September, economists were expecting 203,000 new jobs for the month. And the data from August was revised downward to 136,000, from the first reported 173,000 figure. (Source: CNBC ) Investors interpreted this miss as further proof that the Fed would most likely hold off even longer when it came to raising rates, and gold spiked as a result. You can see the huge move in price and the massive volume that occurred just after the jobs report was released at 8:30 a.m. EST. (Source: Business Insider ) GLD has added to its gains over the last week or so, as have the precious metal companies. Many gold stocks have had strong percent increases during that time – climbing 25% or more. Hurdles To Overcome Given the rebound that has taken place this month, or maybe I should say stick save, some would argue that the lows are in. But there are some bearish hurdles that suggest this rally might soon run out of steam. These would need to be overcome before we could start to talk about a new bull market. The first hurdle is we didn’t see a capitulation type event in gold and silver, but one could make the argument that we did in the HUI. GLD had a slight downdraft in June and July, which amounted to only about a 9% decrease during those months. The HUI on the other hand, dropped 40%. Gold and silver stocks have a lot more leverage than GLD, but the massive carnage in the miners seemed to be suggesting that GLD was about to drop further. It didn’t though, instead, GLD rebounded and now it’s only down about 2.5% from where it was at the start of June. The HUI, on the other hand, is still down 21%. There is a big divergence occurring, and the gold stocks are still predicating more downside. Unless they can get back in line with the price of gold very soon, then GLD is going to decline once again. It almost feels like an incomplete bottom. Had GLD moved down a lot further, then it would be easier to say the lows are in. But that is not what has happened. Gold would need to move above $1,200, or 115 on GLD, for this rally to have some real momentum behind it. Until that happens, it’s too early to say the bear market is officially over. The short-term trend might be up, but the long-term trend isn’t yet. The second hurdle is, given that the mining stocks are down significantly for the year, they could start to be hit with tax-loss selling. The recent rebound has “painted some lipstick on these pigs,” as the losses were a lot worse just a scant 2 weeks ago. But the vast majority of these gold and silver miners are still showing hefty declines YTD. Goldcorp (NYSE: GG ) is down 21.7%; it was down 35% YTD at the beginning of this month. The rest listed below are still lower by a sizable percentage. There has been a major improvement since October 2, but as you can see the losses are still there. It’s possible that the rally continues and most of these are erased, but if it doesn’t, then tax-loss selling can feed on any stagnation or further decline in the HUI and XAU. (Source: YCharts) The third hurdle is the Fed still hasn’t waived the white flag. It delayed hiking rates, but in no way has it suggested they are completely off the table for this year – even if economic data is weak. The temper tantrum that the stock market threw in August was the main reasoning the Fed has pushed back its timing for the first rate increase. But the market is now assuming that the Fed will wait until 2016, or possibly even later, before it raises rates. I’m not convinced that is going to happen. The Fed stands to lose a lot of credibility if it doesn’t begin to increase the Fed Funds rate this year. It might come as a shock to some investors, but the Fed has been implying for the last 3 years that it would raise rates during 2015. It hasn’t deviated at all from that plan. If you look below, you will see that the latest meeting in September showed a large majority of Fed members/participants believe that policy tightening should happen in 2015. That has been a consistent message since September 2012. Imagine how it would look if all of the sudden they flipped. (Source: Federal Reserve) After the September meeting concluded, Fed Chair Janet Yellen said at the news conference that followed: “The recovery from the Great Recession has advanced sufficiently far, and domestic spending is sufficiently robust, that an argument can be made for a rise in interest rates at this time. We discussed this possibility at our meeting. However, in light of the heightened uncertainty abroad, and the slightly softer expected path of inflation, the committee judged it appropriate to wait for more evidence including some further improvement in the labor market to bolster its confidence that inflation will rise to 2 percent in the medium term.” “Now, I do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook.” “The economy has been performing well. And we expect it to continue to do so.” Yellen further made it clear that the crash in the Chinese market, as well as the severe decline here in the U.S, was the reasoning for the delay in rate hikes: “The Fed should not be responding to the ups and downs of the markets and it is certainly not our policy to do so. But when there are significant financial developments, it’s incumbent on us to ask ourselves what is causing them. And of course while we can’t know for sure, it seemed to us as though concerns about the global economic outlook were drivers of those financial developments.” “And so they have concerned us in part because they take us to the global outlook and how that will affect us.” Even though the disappointing September jobs report was released a few weeks after Yellen’s news conference, it should have no major influence on the decision of when to hike rates, as Yellen stated at the time: “As I noted earlier, it remains the case that the timing of the initial increase in the federal funds rate will depend on the committee’s assessment of the implications of incoming information for the economic outlook. To be clear, our decision will not hinge on any particular data release or on day-to-day movements in financial markets. Instead, the decision will depend on a wide range of economic and financial indicators and our assessment of their cumulative implications for actual and expected progress toward our objectives.” The Fed is looking at the big picture, not single pieces of economic news. Major declines in global stock markets are really the only thing that would probably give the Fed a good reason to pause. The economy is in decent shape, and the Fed isn’t going to wait until things look peachy either, as per Yellen: “If we waited until inflation is back to 2 (percent), and that will probably mean that unemployment had declined well below our estimates of the natural rate, and only then did we start to begin to … diminish the extraordinary degree of accommodation for monetary policy, we would likely overshoot substantially our 2-percent objective and we might be faced with then having to tighten monetary policy in a way that could be disruptive to the real economy. And I don’t think that is a desirable way to conduct monetary policy.” Even Stanley Fischer, vice chairman of the Federal Reserve, said in August that officials: “would not be able to postpone a decision until all doubts were resolved.” “When the case is overwhelming,” he said, “if you wait that long, then you’ve waited too long.” The statements from the Fed, as well as their consistent expectations over the last few years for policy tightening starting during 2015, seem to strongly suggest that we will see at least a 25 basis point move at either the October or December meeting (most likely December). Investors should recall that just two years ago, the expectation was for the Fed to announce at its September 2013 meeting that it was going to taper its bond purchases. The stock market, and in particular the bond market, started acting up in May of that year in anticipation of this major change in policy. The Fed decided to hold off at the September meeting, as it wanted to give the market a little more time to adjust. It finally started to taper in December of that year. We could see a repeat when it comes to the first rate hike, sometimes the market just needs a bit more time. So I believe that rate hikes are still on the table, and this should be clear at the conclusion of the next Fed meeting in a few weeks. If this occurs, then gold could come under pressure again. But it will be short-lived, I’m looking for a “sell the rumor, buy the news” event. One Bullish Aspect In Play If I had to point to one positive development for gold, it would be the decline we have seen in the major U.S. indices. Some readers might recall that I have always said the main competition for gold over the last several years has been the stock market, not the USD. Gold is always going to increase over time, no matter what the U.S. dollar is doing. What has taken the shine off of gold over the last few years has been the gargantuan rally in stocks. The concept of investors chasing returns is a familiar one, and with the run that the Nasdaq, S&P, and DJIA have had since 2011, it shouldn’t come as a shock that the gold market was suffering from lack of attention and investor dollars. (Source: StockCharts.com) It has been my argument that only when the market finally peaked and started to roll over, that gold would bottom out. Since this time last year, I have expressed my belief that not much in the way of gains would be seen in the stock market during 2015. In an article this past June, before the market started to collapse, I said the following: “The stock market has had an incredible run over the last 31/2 years. While they don’t ring a bell at the top of a bull market, I would say this is either close to being over or is over. That doesn’t mean we can’t keep hitting marginally higher highs during the next 6 months or so, just like we have been doing since the beginning of the year….There is always the possibility for a blow-off top to occur as well, but either way the easy money has been made and the stock market is very unappealing right now.” I was expecting a big sell-off in the stock market towards the end of this year or early 2016. Well, the time-table got pushed up, as investors started to liquidate in August. This market now officially looks broken, and I don’t believe we are going to see new highs anytime soon, especially not with the Fed looming in the background. So one could make the argument that the smart money knows the bull market in stocks is over, and it’s time to look for assets that are undervalued and have underperformed everything else since 2011-2012. The most logical place to rotate into would be the precious metals sector. Unless the stock market can have one final hurrah and stage a decent rally over the next few months, this rotation could continue, and that would put a firm bid under the price of gold. Below is a chart that I created using historical data points for the S&P, Gold, M2, and the USD. I showed this chart in a previous article a few months ago when I talked about this eventual rotation out of the stock market and back into gold. Unless you are in some type of hyperinflationary environment, when gold does well, the stock market will underperform, and vice versa. This inverse correlation was very apparent in the 1970s, and has been since that time. Keep in mind we are talking long-term trends here, as gold and the stock market can rise and fall in tandem for months at a time. But when you compare long-term performances over many years, they just don’t have their respective bull markets occurring during the same dates. As you can see, gold and the S&P continually move higher with the money supply. But gold and the S&P usually move inverse to one another and oscillate around M2, as it increases in quantity. So when the S&P is in a long-term bull market (such as from 1980-2000), gold is in a bear market, and vice versa. This will eventually reverse course again, and it could be starting now. If that is the case, then over the next few years, the gold line will start to trend above the red one, and the blue line will trend below it. Over the long-term, the direction of the USD is irrelevant. Source: Ycharts.com/author/FRED As the saying goes, “never fight the Fed.” The stock market has had an incredible run over the last several years; it’s going to take a monumental effort to keep that going if rates are about to increase. Money is rushing out of stocks a little sooner than I anticipated, and this “hot money” needs to find a home somewhere. Gold is the most logically choice. So possible rotation out of the market and into gold is one bullish aspect to consider right now. If This Is The Start, It’s Still Very Early In The Game There is a lot of anxiousness and confusion right now in the precious metal sector. Everybody wants to time this perfectly, or maybe I should say those on the sidelines that are calling for lower lows. This is a great opportunity and investors want to maximize their gains. But most that are familiar with this sector know just how volatile it can be, and they know that the gold stocks can be down 30-40% in a heart beat. Nobody wants to step in front of this train if there is even the remote possibility for more downside. The gold sector hasn’t been kind to many portfolios over the last few years. But while it would be extremely rewarding to nail the lows in gold and the precious metal stocks, it’s not necessary. The sector was massively undervalued to begin with, and still is, even considering the money that has been made since early October. When you look at the big picture, does the chart below reflect a huge move in the HUI over the last few months? No, it doesn’t, it looks like a blip on the screen. Even at 250, the index would appear to be just barely off the mat. If this is in fact the start of a new bull market, and I’m not suggesting it is yet, then it’s very early in the game. Heck, we are just at the “singing of the national anthem stage,” the game hasn’t really even begun yet. Of course the chart below also supports the bearish argument that there simply isn’t enough evidence yet to call a bottom. (Source: StockCharts.com) It’s important to keep perspective here. So if you are still on the sidelines, know that if this is the start of a new bull market, then we have a long-long way to go. If you are even paying attention to this sector right now then you are at a big advantage compared to everybody else. My Updated Plan Of Action As I mentioned at the start of this article, I have been very bearish on gold since the beginning of June. However, as I told readers in early August, I was hedging my bets. The HUI was extremely oversold at the time, and at minimum, I expected some sort of rebound. I wasn’t convinced that the lows in August were the final lows, but if they were then I would at least have a decent size build-up of precious metal shares. It was a very low risk opportunity at the time given the incredible pricing of the gold and silver stocks, and I felt that it was imperative to take advantage of it. I didn’t jump all in, but I did establish many positions. The plan since then has been to get in heavily, if the HUI breaks above 130; that was the key level to be taken out for me to get a lot more constructive in the short term. But I started to buy in big on October 2, as I anticipated a run to at least that level given what gold did that day. I’m not acquiring these stocks on the notion that the bear market is officially over, rather I always just follow major support and resistance (as well as my gut). It has allowed me to avoid losing money in this sector, and is the reason I’m up for 2015 even though the precious metal complex is showing losses – sizable ones for many of the stocks. I’m now neutral on the sector, given the recent gains. I’m going to hold for a bit and see what happens. I have some good profits so I don’t think I’m taking a big risk. Should this short-term move peter out, then I will look to book some of those. The real tests still lie ahead, until those are passed, we can’t label this a bull market yet. For now, let’s see how this rally plays out and what the Fed says at the conclusion of its October meeting.

Terraform Power Can And Should Purchase Projects In 2016

Moody’s Report Provides Clarity. Invenergy Private Warehouse Will Provide Greater Clarity. Up to 4.5 billion in Purchases Possible. Yesterday’s Moody’s report for Terraform Power should help shape TERP’s financial decisions next year. Although Moody’s reaffirmed the corporate rating at Ba3, the outlook was cut from positive to stable and Moody’s said a rating upgrade is unlikely anytime soon. Terraform most certainly would like to obtain an investment grade rating. TERP has a better credit profile than many MLP’s that are investment grade, yet the nascent yieldco business model will need a lot more time to mature in Moody’s opinion. The most interesting line of the report was “TPO’s rating could be downgraded if there is a change in financial policy causing the company to target materially higher levels of leverage with a consolidated Debt/EBITDA greater than 6.5-7x.” Source: (BMP) Moody’s affirms TerraForm Power Operating’s Ba3 rating; ch anges rating outlook to stable from positive What this line implies is that TERP can go up to 6.5 to 7x leverage and not put in jeopardy the Ba3 rating. Because there is no clear path to an investment grade rating anytime soon and TERP can lever up some more without jeopardizing the Ba3 rating, TERP can and should move to higher leverage ratios. And the way to do this is project level debt with no or little unsecured offerings. Moody’s disagrees with the way TERP calculates debt to ebitda and calculates the number a little higher than TERP yet there still is ample room for TERP to issue project level debt. TERP in the July financing update shows a proforma 2016 view 2.952 billion in debt and 567 in ebitda creating a 5.2 debt/ebitda metric. TERP can comfortably take that number up to 6.2 without creating a ratings downgrade. That would allow 3 billion more in debt. How are they going to do that? With project level finance and the Invenergy Warehouse should pave the way. The Invenergy Warehouse With a high stock price, TERP management got aggressive with the Invenergy purchase. Paying 7.1% unlevered yield was steep and quite frankly sloppy. It was yet another example of sloppy aggressive purchasing by Sunedison and/or Terraform this year. The good news is that the Invenergy assets have a AA counterparty and a 19 year PPA so the contract there is about as strong as you are going to get. Abengoa, the most troubled renewable developer of all, recently priced 19 year amortizing bonds backed by a couple 50 megawatt solar(thermal) plants in Spain at 3.75% coupon. The bonds were rated BBB. Yields are lower in Europe but still that is attractive spread financing. Solarcity’s asset backed loans have investment grade ratings and priced sub 5%. For many renewable projects, if the project has a base debt service coverage ratio up close to 1.5 and a good counterparty, the ratings agencies have assigned investment grade ratings to the project finance bonds. Even recently, the NRG Alta bonds which dropped to 1.09 debt service kept an investment grade rating since S&P assumed normal wind patterns would resume and bring the debt service coverage back up to a 1.4 range. It is kind of ironic that the rating agencies will assign investment grade ratings to project finance with debt service coverage around 1.4 or so but TERP has a pro forma ebitda to interest expense over 3 with a more diverse set of projects than specific project financing yet has high yield ratings. This is strange and it leads to disconnects in the market. The insurance and pension funds buying project debt at 5% or so yields really ought to just buy the unsecured debt of yieldcos but they are probably restricted due to the need to invest in investment grade securities. So what will the Invenergy warehouse price at? BBB investment grade utility bonds are about 5% for 20 years and project finance although mostly amortizing has been pricing in that range. Since there likely will be a TERP call option associated, 6% debt may be an appropriate number for 70% of the proceeds. And then perhaps a 9% or so equity return for the remaining 30%. That would get to a cost of capital just below 7% and the unlevered yield of 7.1% covers the warehouse with TERP not having to put up cash (though there is a decent chance TERP is going to buying some of the equity portion of this warehouse). We don’t know what the debt on the Invenergy warehouse will price at but if it does price in line with other project finance debt, it sets a strong precedent for TERP going forward in the project finance market. 4.5 billion in purchases in 2016? It is highly unlikely but I will lay out a scenario that is not too far fetched. Since there is no chance of TERP becoming investment grade anytime soon and Moody’s stated TERP could lever up to 6.5 to 7x without creating a downgrade that is exactly what TERP should do if project finance permits. 8.5% unlevered yields on projects are out there for purchase. The Sunedison First Reserve and Goldman warehouses seem to have cost of capital somewhere around 8.5% so much better to have TERP calling projects from those warehouses at 8.5% than projects staying in the warehouses (JP Morgan warehouse seems to be much better than those two). If SUNE projects are 10% IRR projects than still 17-18% gross margins for SUNE on 8.5% unlevered calls by TERP from project warehouses. But if TERP is going to acquire 8.5% unlevered projects it needs a cost of capital close to 7.5%. That isn’t going to happen with 50/50 unsecured debt/equity these days. If TERP were to package existing projects and/or built call right projects into project finance bonds, there is a good chance a 5.5% debt rate could be had, at least for amortizing bonds. If 5.5% project debt can be used for 65% of projects, then the 35% equity portion needs to be at 11.2% to generate a 7.5% WACC. If TERP were to acquire 4.5 billion of projects with 65% project debt/ 35% equity all at 8.5% unlevered yields, debt would rise to almost 6 billion. 382 of unlevered CAFD would be added. Debt service would be .055 x 3 billion so 165 million. Probably makes sense to assume about 10 million of extra expense to cover backfilling amortizing portion of debt with higher cost debt and perhaps to cover extra various fees. 382 million of unlevered CAFD minus 165 million of interest and 10 million extra expense leaves 207 million levered CAFD(assuming no taxes here which perhaps there should be an assumption for some). 207 divided by 1.5 billion of equity issuance is 13.8% equity yield, certainly accretive. Levered CAFD of 207 million would actually be growth of about 60% on the 320 million of pro forma CAFD that TERP is projecting for 2016. 320 million plus 207 million leads to 527 million of CAFD. Assuming 1.5 billion of equity comes at a $20 stock price (8.75% 2016 dividend) that is 75 million more shares to add to the 140 million outstanding. 527 million CAFD * .85 is 448 million CAFD to distribute. Even with IDR’s, a 15% dividend increase from $1.75 would be possible for 2017. Do I think that scenario is going to play out? No, I don’t. But I do think the private project finance numbers out there do support something more than a dead in the water TERP in 2016. TERP needs to move into the project finance market in a big way. And some less than ideal equity issuances may make sense to give investors confidence dividend growth is still alive. With added confidence that TERP can grow its dividend in difficult times, the dividend yield should move lower and allow for more even debt to equity funding in future years. One may question with a movement to project finance in the renewables space vs. corporate level finance why Sunedison would even try to feed a yieldco vs. creating its own project finance vehicles to keep ownership. A yieldco was supposed to allow corporate level finance in addition to project level finance so finance could be attacked from all angles at reasonable rates. Although not ideal, TERP still has better funding characteristics than SUNE. No projects are going to be 100% debt financed and even with suppressed yieldco equity prices, I do believe a yieldco has a better chance of consistently raising even small amounts of equity at reasonable prices vs. Sunedison. Plus, there may be a need to do small unsecured corporate level debt issuances and that is still better done at TERP than SUNE. In addition, it is very possible the yieldco market does improve with maturity and yieldcos can once again finance at the corporate level with attractive rates. Besides, TERP has a call right list so Sunedison has to offer projects to TERP. TERP paying even a little lower than what others will pay still makes sense for Sunedison due to IDR’s and residual ownership value. However, Sunedison won’t sell projects from the warehouses much lower to TERP than to the private market so TERP needs to quickly establish project finance initiatives. Management of TERP and SUNE has touted their creative finance ability in the past and it is time for TERP management to do just that in a difficult 2016. Playing dead and hoping the market improves to once again issue significant amounts of corporate equity and unsecured debt is not good enough management and equity owners deserve better. I am long SUNE and short covered calls. The firm I work for is long GLBL and TERP.