(And why they understate the downturn.) Thanks, Michael Monahan, for the link. In part:

For the past year, newspapers, including the [Arizona] Republic, have run repeated articles that make two points: the housing inventory (supply) has seen a dramatic rise (from 3,000 units to over 35,000 units in Phoenix) while median housing prices have not fallen or even have continued to rise. The front page of the Republic’s Real Estate Section now has a box that is entitled ‘How much has your home appreciated?’–and it is shown in median home prices by zip code. Yet, with a couple of minor exceptions, there has been scant attempt to explain this apparent contradiction of the law of supply and demand–that is, prices are supposed to fall, not rise, when supply goes up. This shrugging of shoulders is particularly curious because the explanation is not a difficult one.


Our Aldabra warrants (ALBAW) closed at $1.32 last night. I guess the warrant will keep going up (if the underlying stock doesn’t fall) until people think the premium is too rich.

The warrant gives you the right to buy the underlying stock at $5 any time until February 2009. With the stock at $5.79 yesterday, the ‘intrinsic’ value of the warrant was 79 cents. The extra 53 cents people were paying ($1.32 minus 79 cents = 53 cents) was the premium.

Just what the premium ‘should’ be is hard to say.

When we were buying the warrants at 70 cents and at 38 cents earlier this year, the premium was ridiculously low – indeed, nonexistent at one point. (Who ever heard of a 33-month option on a speculative stock selling for no premium?! It was a rare opportunity.)

Today, at 53 cents – or a little less than 10% of the value of the underlying stock – the premium, still strikes me as somewhat low. Because . . . well, think about it: Say you owned 1,000 shares of ALBA, the underlying stock, right now. These are shares you purchased, one assumes, because you thought the stock would go up. (It’s a speculative that pays no dividend – why else would you have bought it?)

Well, if you think the stock is going to go up, would you rather own the stock or the warrants?

If that were me, I would probably sell those 1,000 shares at $5.79, for a total of $5,790, and buy perhaps 1,000 warrants instead – or even 2,000 or 3,000 or 4,000 of them – and still have a little cash left over.

It all depends on how much risk you want to take and the probabilities your gut tells you to assign to different scenarios. But let’s say you sold your 1,000 shares of the stock for $5,790 and bought 2,000 warrants for $2,640. That would free up $3,650 in cash for you to do something else with. But leaving aside whatever use that money might be to you, look what happens with your $2,640:

If the stock went down $3 or $4 from here over the next couple of years, you’d lose ‘only’ that $2,640, not the $3,000 or $4,000 you would have lost on the stock. And if the stock went up $3 or $4, you’d make $4,940 or $6,940 instead of $3,000 or $4,000.

(Where you’d get hurt would be if the stock didn’t move much either way. Say, for example, it had edged down to $5 by February of 2009. If you had just held the stock, you would have lost $790 . . . versus a total wipeout of your $2,640 on the warrants [mitigated by whatever gain you might have made from the $3,650 you freed up when you made the switch from stock to warrants].)

The point of all this is that right now, with the warrants bearing a premium of 53 cents over their intrinsic value, people who like the stock may not buy it. They may buy the warrants instead. That does nothing to push up the price of the stock.

Only when the warrants seem expensive will speculators who like the stock buy the stock.

So there’s a little tail-chasing going on here. People buy the warrants because they hope the stock will go up. But the stock will go up only if people buy the stock. Which they won’t do if the warrants are attractive.

Just where the equilibrium point will be . . . where someone like me would really have to stew over whether to buy the stock or the warrants, I don’t know.

And not everyone is like me – people have different risk tolerances and time horizons and differing opinions about the prospects for the dredging industry in general and Aldabra in particular.

Maybe we’re at a rough equilibrium now, and the premium will not widen further. (Eventually, of course, as expiration draws near, it will narrow and ultimately disappear.)

My hunch is we’re not there yet. If I were new to this situation and got excited about Aldabra, I think I’d still buy the warrants and not the stock . . . but I’d at least think twice, where before, when there was little or no premium, it was a no-brainer. But I’d not yet stew. When I’d stew, I’ll know that – for me, at least – equilibrium had been reached and the stock might start going up.

One important final note to cut through all the above: Aldabra is risky. If you can afford the risk, I think it’s a good one to take. But stock market risks are real. The rich get richer because they can afford to take good risks. It is nuts to take risks – even good ones – you can’t afford. You could suffer real hardship . . . and even if you don’t, even if the risk ultimately pays off big, you could suffer many sleepless nights along the way, which – as anyone who’s been through this knows – is a high cost all by itself.

I’m not selling my warrants, and have high hopes for a good long-term gain. But I am prepared for the possibility that they could wind up worthless, because there is always that risk.


This is not a request for help, because my hope is that the next version of Microsoft Office will miraculously solve the problem. But just so you know:

I use Word 2003 to write these things. I try hard to make them look – well, if not ‘good,’ at least consistent. For example, all ‘my’ text is meant to be 12-point Times New Roman. The Subheads, like ‘WHY THESE COLUMNS LOOK MESSY’ above, are meant to be bold face in blue (except once in a while a different color for effect – on Earthday they might be green). Passages I excerpt are meant to be indented, brown, 10-point Verdana. And so on.

Yet . . . when I cut and paste a newly-written column from the gigantic Word file that contains all my columns – including the one I’m typing now – into its own separate little Word file (which I then post on my site), all the Times New Roman gets changed to a thing called Unicode. Why does Microsoft do that? All I did was cut and paste it.

I change it back before saving the little file as a web page. At that point, Microsoft adds an unbelievably voluminous, kloodgy set of HTML tags to my text – wildly more complicated than it needs to be – but generally, even so, the column pops up on my browser, looking right.

But for those of you who get the column delivered with Quickbrowse (the button at the bottom of the column) – or who view it with different browsers – sometimes the type fonts, colors, and paragraph breaks take on minds of their own.

I started doing these 2,666 columns ago, before there were blogging tools. And I don’t see changing my little system anytime soon, because if it works (more or less), I just don’t have time to fix it. But I did want to explain that in my mind’s eye, at least, and on my screen, these things look reasonably neat and tidy. If that’s not the case for you, I have to ask you to read them with your eyes closed and just pretend.

Tomorrow: Is It Cold in Here Or Am I Getting . . .


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