Wednesday, January 26, 2011

#350 and Whac-a-Mole

We bought our 350th TRE auction this morning. Of that number, 293 have been re-paid to date.

We have now bought auctions offered by 71 Sellers including invoices due from 162 Account Debtors.

The Sellers break down as follows, by type of business:

Service 39%
Manufacturing 32%
Staffing 13%
Technology 10%
Trade 6%

The Account Debtors break down as follows, by ownership structure:

Public Companies 37% (including subsidiaries and divisions)
Privately-Owned Companies 63%

Two auctions were sold this morning before we bought #350 that we WOULD have bought based on our view of the Seller, the Account Debtor(s), the transaction history and the pricing available. Neither of those became #350 because they were bought before we could see them.

I mean that literally.

I was at my desk, watching the activity, ready to bid. As soon as these auctions appeared I moved to pull up the bidding screen. Before the screen loaded, buy-out bids had been recorded.

For the past several weeks it’s become a “Whac-a-Mole” market.

The Buyer with the fastest internet connection and processor gets first chance at the auction.

That’s troublesome on many levels.

First, I’ve got to upgrade my tech capacity. But that’s just a symptom, really.

The real problem continues to be excess liquidity in the market. And that excess liquidity does not just drive down pricing. It also alters both Buyer and Seller behavior.

As I write, there are more live auctions on the TRE screen than there have been at this time of day for quite a while. But that’s the exception.

The rule has been that Buyers have been so motivated to deploy funds that they’ve been willing to accept ever lower returns with less and less evidence of deal quality.

A couple of days ago a deal offered by a first-time Seller, involving an invoice from a first-time Debtor, sold very quickly at a pricing level that would normally reflect a well-known Seller with a substantial amount of transaction experience with the Debtor.

That deal might well work out just fine. But sooner or later the odds favor disappointment from that sort of bidding.

And now it’s confession time:

I bought deal #348 yesterday morning. It was only the third time in 350 purchases when I said immediately afterward: “Damn, that was a mistake!”

It wasn’t a mistake because of the Seller. I’d actually been waiting for that Seller to post an auction for some time. I’ve bought quite a few of their auctions, I like them and they hadn’t posted an auction for sale in over a month.

It wasn’t a mistake because of the Debtors. I have had good experience with all of them.

And it wasn’t even a mistake because of the terms of sale. The price represented a much lower return than that Seller had offered in the past, but in the current climate I was prepared for that.

It was a mistake because I acted too quickly. I got into the Whac-a-Mole game.

I saw the Seller that I’d been looking for. I saw Debtors that I knew. I saw pricing that was marginal but at least it was marginal. And I acted.

Only after I “won” the auction and looked more closely at the invoice terms did I realize that the likely duration was too short to reasonably support the pricing parameters. The TRE fees were going to eat up much more of the gross return than was acceptable.

I had succumbed to the Whac-a-Mole motivation and in doing so I missed the duration issue that I’ve written about on a number of occasions.

To make matters worse, as I was berating myself for being so dumb, the same Seller posted another auction at the same pricing but with a likely duration that WAS reasonable and I couldn’t get to it fast enough to try to mitigate my error. It was gone before I could load the page.

In the end, I have every expectation that the auction will be paid properly. And it was small. I’ll make a little money and that one auction does no significant or lasting damage. Unless I don’t learn from it.

So, I acknowledge this dumb mistake publicly because the motivation to avoid another such public confession is stronger than the motivation to win at Whac-a-Mole!

Friday, January 14, 2011

Dear Anonymous

I appreciate your most recent comment and, as has been the case with some other comments, I think you make some points that add to the conversation and should be given an airing. However, you bury those points in what I consider clearly expressions of unsupported hostile opinion.

I'm not against the expression of opinion, even anonymous opinion, even negative opinion; but when you include unsupported assertions that are hostile and serious, without identifying yourself, you force me to block the entire comment.

Unfortunately, in doing that, we lose the opportunity to hear and consider the fact-based issues that you quite reasonably raise.

Because I cannot respond to you privately, since you've given me no means to do so, I am writing to you publicly to suggest: a) that you give me some way to respond to you so that I can tell you more specifically what I find inappropriate for general posting (I'm not going to make your points public for you by identifying them), b) to assure you that I will honor your anonymity if you choose to identify yourself privately, and c) to invite you to re-post if you'd like on the specific issue of advertising content that you raise.

Thanks. I do appreciate the time and effort evident in your comments.


Wednesday, January 12, 2011

An Interesting Snapshot

I was doing a little long-overdue organizing yesterday and one of the stacks of paper that I happened upon contained the printout of daily TRE auction results from this time last year. In fact, it contained the record of auctions closed on 1/11/10.

Since I came across it on 1/11/11 I thought I’d look at the two days, exactly one year apart, and see what I might find. The comparison was quite interesting.

Here are some highlights of the “snapshot” look at history:

1. There were 3.5 times as many auctions closed on 1/11/11 as on 1/11/10.

2. The value of the auctions closed yesterday was 2.6 times that of the closed auctions a year ago.

3. The average auction size yesterday was 75% of that in the 1/11/10 list. (From day to day, though, that number can bounce around quite a bit. The actual average auction size increased by about 50% over the course of 2010.)

4. Fully half of the Sellers that closed auctions on 1/10/10 are no longer active on TRE, which says something about the difficulty of the sell-side job for TRE. Churn is a real issue and net gains in volume mask the actual efforts required of the Seller-attraction team.

5. Interestingly, for our purposes, there was one Seller common to both days. That is, this Seller closed an auction on both 1/11/10 and 1/11/11.

Analyzing the year-apart auctions of that one common Seller we find:

• In both auctions, the Account Debtors were of good quality and had established payment records on TRE,

• The auction that closed yesterday was larger than the one that closed in 2010 but both were very close to the average auction size for the period in which they were closed,

• Both would be expected to have a duration somewhat longer than average.

• Our calculations of the likely returns to the Buyer of these two auctions suggests that the auction that closed yesterday would yield the Buyer a net annualized return of just over half (actually about 55%) of that expected of the year-ago auction.

Now, as we’ve written, we’re in a period of excess liquidity in the TRE market and a portion of the decrease in return to the Buyer can be attributed to that excess liquidity.

A portion of the decrease in return can be attributed to the fact that the Seller has continued, over the course of the past year, to sell auctions that have performed well.

And a portion of the decrease might be attributable to the maturation of the Exchange itself and a reduction in perceived platform-level risk.

But a (roughly) 50% drop in yield is a lot!

As one who believes that average yields are too low currently I’m quite interested to see how Sellers and auction pricing respond if and when we begin to move back toward a more balanced market liquidity position.

Wednesday, January 5, 2011

The Moderator Moderates

I’ve been quiet lately. Mostly that’s because I haven’t had much to say that I thought would be of value.

Volume growth on TRE has been sluggish.

Buy-side liquidity growth has not been.

I’ve been commenting since last September on the erosion in average yields. That trend accelerated into year end.

I’ve also commented on the increasing percentage of auctions being sold at buy-out pricing and at the speed of auction closings. Those trends also accelerated into year-end.

One has to ask if we truly have an “auction” market if the principal competitive issue seems to be who can hit the “Buy-out” button most quickly.

But there’s no mystery here.

The supply of Buyer money has increased more quickly than the supply of Seller auctions.

The cause of that can be debated. It’s clear that TRE is well aware of the issue. It’s clear, to me in any case, that TRE is taking steps to address the issue.

Time will tell if those steps are adequate to resolve the problem.

It’s also clear, though, that the situation is causing concern and consternation among the Buyers. My guess is that the earlier Buyers will be the most affected, having seen dramatic changes in both the pricing and the dynamic of auction activity.

Which brings me to the real point of this post.

As owner and moderator of this blog I have the option to screen responses to my posts before allowing them to become public and a part of the permanent record of the discussion.

I’ve gotten a few responses recently from anonymous readers that reflect frustration with the changed character of the auction dynamic.

I have no issue with the expression of such frustration: I share it.

But comments have been made and opinions offered that I am not willing to allow to be posted here without the writer identifying him or herself.

It’s not for me to provide a forum for anonymous TRE-bashing.

So here’s the deal.

I’m not going to allow egregious bashing to be posted—full stop.

I have no problem with reasonably-supported and civilly-voiced opinion, whether that’s positive or negative.

I have no problem with criticism, suggestion for improvement, the pointing out of weaknesses, etc.

But as moderator I reserve the right to set a price for a seat at the table. And that price, at my option, can be the waiver of anonymity.

I have no problem with anonymous responses, per se.

But if you want to “sound off” you’ve got to be willing to identify yourself.

We’re all professionals here and ought to be willing to own the opinions we voice.

So if you’ve sent in a reply to one of my posts recently and you don’t see it on the blog, I invite you to write or call me to discuss the reason why I haven’t allowed your reply to be posted.