Wednesday, March 31, 2010

Incompetent Bankers All Over The World

When bankers tell you they've fixed what ails their industry, it would be wise to wait until another shoe drops.  Irish banks are in more financial trouble:

Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse.
The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system.

How could bankers have missed these holes in their balance sheets?  Maybe they were trained by colleagues at other banks who can't tell the difference between assets and liabilities in their pension plans:

However, due to different accounting rules, some banks reported a net asset on their respective balance sheets for their plans in fiscal 2009, even though the plans were in a deficit position: the funded status of Bank of Montreal’s (BMO) plans was a deficit of CAD0.8 billion, but it reported a net asset of CAD0.6 billion; the funded status of UBS’s (UBS) plans was a deficit of CHF1.9 billion, whereas it reported them as a net asset of CHF2.6 billion; and the funded status of Mizuho Financial Group’s plans was a deficit of JPY158 billion, whereas it reported a net asset of JPY523 billion.

I used to peruse career sites for job listings with banks.  The jobs advertised invariably demanded applicants of the highest caliber with clearly defined qualifications.  It turns out that the people who fill these jobs have trouble discerning the difference between assets and liabilities . . . profits and losses . . . positive and negative numbers . . . numbers and letters . . . people and inanimate objects . . . and most importantly, truth and falsehood.

I have no such difficulties.  That's why HR managers and high-powered recruiters have screened me out as ineligible to work in a bank. 

Tuesday, March 30, 2010

Home Prices Getting More Realistic

The phantom recovery is finally peaking right about now.  Home price declines show the weakness of the housing market:

The market seems to have pulled the rug out from under housing industry hopes for a sustained early recovery.

After a five-month run-up in home prices starting last spring, prices have now fallen for four consecutive months, according to the S&P/Case-Shiller Home Price Index of 20 cities, a gauge of market values, released Tuesday.

Why is this good news?  It means renters like yours truly get closer to affording a house. 

Why is this bad news?  It makes existing homeowners more likely to default on their mortgages, thus pushing banks back to the brink of insolvency. 

On balance, it's mostly bad news.  It's funny how the Dow took this in stride and posted a tiny gain for today.  Program traders must be confident their algorithms will keep working as designed. 

Nota bene:  Anthony J. Alfidi is long puts against IYR at the time this post was published.

The Haiku of Finance for 03/30/10

Foreclosure fund cash
Just a drop in the bucket
Gee, thanks for nothing

Greece, Coming To A State Near You

I've never visited Greece, but it's always been someplace I've thought about traveling to see.  My problem is that I'm too cheap to pay for a vacation.  Well, I need worry no more.  It looks like Greek conditions have come to visit us:

California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.

Once these conditions become fully discounted by the bond markets, municipal issuers will face the same exorbitant costs that Greece now faces:

Greece continued to pay a stiff premium Monday to raise €5 billion ($6.71 billion) in its third syndicated bond offering of the year, a demonstration that the announcement last week of a possible European Union rescue package has done little to lower the troubled country's high cost of borrowing.

How did America get to become so much like Europe?  We don't have to look to conspiracy theories.  The inertia of material prosperity taught us for decades that we could live off the wealth accumulated by the hard work of our ancestors.  Now we realize too late that we learned a false lesson.  The only relevant question now is whether we can survive years of austerity without completely losing the American national character. 

Muni bond buyers, beware.  I own no California municipal bonds at this time. 

Monday, March 29, 2010

Why Are Most Stock Analysts So Dumb?

I've been asking the question above for most of 2009, and now the MSM is asking the same thing:

Judging from stock prices alone, one would think the economy was poised for a roaring comeback. But the federal government plans to unplug the economic life-support programs that stimulated production, kept interest rates low and placed a thick cushion under the real estate market.

Okay, they're not as explicit as I am, but they are giving a voice to a growing bearish chorus among analysts who had previously heralded the end of the Great Recession.  Some pros (like James Altucher of Formula Capital, whose negative assessment of a college education's value is an opinion I share) are still remarkably bullish.  Let's consider a big piece of contrary evidence.

Consumer spending is clearly not on a sustainable path.  Employment growth has not returned and recent growth in consumer spending is being funded by a massive dip in the savings rate rather than income growth.  Households are not repairing their balance sheets. 

Eventually you'll hear more of this from mainstream commentators.  By then it will be too late to capture whatever gains you've had in this rally. 

Sunday, March 28, 2010

The Limerick of Finance for 03/28/10

The Maestro warns debt costs will rise
A mea culpa, we can almost surmise
Though junk bonds wtill rally
Traders' gains, they do tally
A bond bubble burst will surprise

Ford Minus Volvo Equals Geely

Okay, maybe my math isn't perfect, but this match of a prized brand to an upcoming carmaker makes more sense:

Zhejiang Geely Holding Group signed a binding deal Sunday to buy Ford Motor Co.'s Volvo Cars unit for $1.8 billion, representing a coup for the independent Chinese automaker which is aiming to expand in Europe.

The price, which includes a $200 million note with the remainder to be paid out in cash, is far less than the $6.45 billion Ford paid for the Swedish automaker in 1999. The U.S. automaker has been trying to sell Volvo since late 2008 to focus its resources on managing its core Ford, Lincoln and Mercury brands.

Ford lost about $4.65B on Volvo, which they can amortize over several years to net out the tax liability on their current income.  Still, Ford's income tax expense last year was only $69mm, so it would take over 67 years to net the whole thing out at present earnings.  Given that Ford can't hope for much growth in a mature car market like the U.S., the tax loss benefits of this debacle are really very tiny. 

Geely comes out a big winner by grabbing a globally recognized brand for a song. 

Nota bene:  Anthony J. Alfidi has no position in the above-mentioned stocks at the time this post was published.

Saturday, March 27, 2010

Greenspan Singing Like a Canary, But Off-Key

The Maestro sounds off about treasury yields:

Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.

Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”

The problem is that he still hasn't owned up to his contribution to the federal government's insolvency.  His endorsement of Bush II's tax cuts and his own low interest rate policy made debt issuance into a mad scramble to see who among governments, banks, hedge funds, and homeowners could lever up the fastest.  Anyone who played that game turned out to be a big loser. 

Come on, Alan.  Think of how history will view you.  The least you can do now is admit that the U.S. government won't be able to pay its future bills because you allowed it to run up its credit card. 

China Admits It's In A Bubble

Well, now we've heard it from the horse's mouth.  Chinese leaders state that their economy has assumed bubble proportions:

“We have to closely monitor China’s asset bubbles,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said yesterday at a conference in Beijing. Property prices have changed “quite a lot in the past five years,” he said.

This is in the context of further policy restrictions on lending to real estate developers.  China is trying to let the air out of this bubble slowly.  Good luck with that.  I'm just glad I trimmed my FXI holdings this month. 

Nota bene:  Anthony J. Alfidi is long FXI (with covered calls) at the time this post was published. 

Friday, March 26, 2010

Frontline Shows Confidence By Issuing Bonds

Frontline Ltd. (FRO) is a shipper I follow primarily because of its ship leasing spinoff, Ship Finance International (SFL).  FRO thinks its future is bright enough to support a bond issue:

Frontline said the proceeds from the sale will be used for general corporate purposes, financing the remaining equity investments in the company's newbuilding program and also will improve its ability "to react to attractive market opportunities."

FRO has some justification for its confidence.  Its net income has increased three years in a row (from 2006-08, although '09 numbers aren't final yet), impressive in light of the recession in most advanced countries and the collapse in 2008 of the Baltic Dry Index.  Pricing power for most shippers has only recently returned. 

That line in the article about reacting to attractive market opportunities probably means they're in the hunt for acquisitions.  That's not a surprising sentiment given the problems facing other shippers, but there's plenty of risk for FRO if that's really their intent.  Their long-term debt load as of 2008 was over 3.69 times its net income, so increasing this debt may pose a serious problem for the company if the global economy lapses back into recession. 

Nota bene:  Anthony J. Alfidi holds no position in FRO or SFL at the time this post was published. 

Thursday, March 25, 2010

The No-Bailout Bailout

Is this a joke?  Do these Eurodudes really think this deal is going to work?

The joint eurozone and IMF bailout program comes with strict conditions and makes no money available right now.

It could be tapped only if Greece or other financially troubled eurozone members cannot raise funds from financial markets. It would require the unanimous agreement of the 16 eurozone countries to release the loan funds.

Requiring unanimous agreement is funny; Germany will probably still say no.  All this does is buy more time for remaining eurozone insiders to unwind any investments they have that will suffer when Greece collapses.  The markets have been put on warning that the EU is unable to force its members to abide by its criteria for membership. 

Playing "kick the can" must be a lot more fun when you can do it with other people's money.

My portfolio has no exposure to Europe at this time. 

Homeowner Mortgage Modification = FAIL

People shouldn't be surprised, but of course they are.  Modifying the payment schedules of people who never could afford to make mortgage payments anyway is having the expected result:

More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.

For every insoluable market-based problem, there's an unworkable government program designed to solve it:

A government watchdog is criticizing the Obama administration for establishing a "meaningless" goal for its flagship mortgage assistance program.

The report issued late Tuesday by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, says the Obama administration is measuring the performance of the program by a questionable standard.

At the program's launch in February 2009, Obama officials said it would help 3 million to 4 million homeowners. But with only 170,000 borrowers completing the program so far, administration officials now emphasize that the plan's goal is to merely offer help to those millions.

I'll spare you the rest of that sad story.  This mortgage assistance program was designed by the same geniuses who've just delivered us health care reform.  Perhaps the new standard for determining the effectiveness of health care reform will be the number of patients doctors thought about treating but had to turn away.

Wednesday, March 24, 2010

DOT Spills The Beans On Transportation Stimulus

My faithful readers (yeah, all three of you) know my interest in transportation stocks.  Some modes of transport are more energy efficient than others when measured in fuel expended per ton-mile.  The U.S. Dept. of Transportation weighs in on how it prefers to spend stimulus money:

The Department of Transportation’s second-highest official told senators that DOT’s preference for freight shipping is keep goods on waterways and rail as much as possible, getting them away from trucks except for the final delivery.

Committee Chairman Barbara Boxer, D-Calif., asked Porcari whether the concept of DOT’s discretionary “TIGER” grant program could work in the next multi-year surface transportation bill. That $1.5 billion pool of stimulus funds allowed DOT to send grants to multi-modal projects that cross state lines, instead of disbursing money under state-allocation formulas or for specific transport modes.

This preference isn't just a matter of achieving energy security by reducing America's dependence on foreign oil  This has implications for transportation companies as stimulus money spent on infrastructure acts as an indirect subsidy to rail and waterway carriers at the expense of long-haul truckers.

I'm watching these stocks:  Kirby Inland Marine (KEX) and Landstar System (LSTR).  KEX is one of the nation's leading inland barge operators.  LSTR has a huge netork of local intermodal connections that give it more flexibility than a typical trucking firm.  I bolded a line in the excerpt above because intermodal, multi-state operators will benefit mightily from transportation infrastructure spending.  Read my blog in the coming weeks and you'll hear more of what I have to say about these two stocks. 

The Haiku of Finance for 03/24/10

Wall Street divorces
Tie up preppie cash and stock
Time to lawyer up

Wall Street Bonuses Tied Up In Divorce

This makes me smile.  Preppies and trust fund babies (is there really a difference?) are finding that their ridiculous Wall Street bonuses are being clawed back after all - in divorce court:

Restrictions on U.S. executives’ bonuses are complicating divorce settlements, increasing legal bills and raising the prospect that some may have to transfer children out of private schools or sell second homes.

Glenn Liebman, a certified public accountant in Woodbury, New York, said his clients used to be paid base salaries of $250,000 with cash bonuses from $3 million to $6 million, which went toward alimony and child support payments in a divorce. Those executives now may receive only a portion of their bonuses in cash and the remainder in stock that’s tied to share performance that may not vest for up to five years, Liebman said.

“Changes to compensation are creating a horror show when dealing with the other spouse’s budget and support package for children,” said Liebman, a partner at Klein Liebman & Gresen, LLC, which values businesses and assets.

Somebody call a waaaaaambulance!  Prissy little miss has to drop out of St. Alban's Prep and enroll in P.S. #139 because Mommy can't get her manicured paws on Daddy's bonus.  I have no sympathy for these dweebs because karma is finding a way to stick it to all of them for their arrogance.  Hey preppies, I'll be happy to buy your country club membership from you for a buck fifty if you're that hard up for cash. 

Forget Greece, Here Comes Portugal

The EU and Germany haven't even finished wrangling over Greece (although that endgame is rapidly approaching), and now the next shoe drops in Portugal:

European stocks were little changed near an 18-month high as Fitch Ratings downgraded Portugal’s credit rating, offsetting growth in the region’s service and manufacturing industries and German business confidence.

Everybody who thinks the EU (specifically its strongest economy, Germany) has the willingness or wherewithal to bail out two bankrupt countries, raise your hands.  Okay, now all of you with your hands up go buy some euros or shares of EFA.  I will do neither of those things, which is why I'm not shorting puts under EFA anymore. 

Tuesday, March 23, 2010

Rising Trade Tide Lifts Shippers

There's not much evidence for recovery in the U.S., but the global economy is starting to tell a different story.  APL is expanding its container capacity by chartering more vessles.  CMA CGM is booting its freight rates on several lines, and Hapag-Lloyd is raising its shipping rates on lines to the Indian subcontinent.  Dissecting these lines reveals that trade among emerging markets looks a lot healthier than among the U.S. and other OECD nations.

Speaking of the U.S., Arrow Trucking's bankruptcy filing reveals just how little its creditors will be able to recover.  I blogged about YRCW's troubles recently.  We can expect more pain for U.S. truckers as the price of diesel fuel continues to rise

Monday, March 22, 2010

Updating The Alpha-D for March 2010

This month's options expiration date brought some good news for yours truly.  ANV rose through the strike price ($15) of the covered calls I'd written.  It sold away at a nice long-term capital gain.  I have decided not to repurchase ANV until I have perfected my valuation model for mining stocks; I had treated ANV like a startup by betting on its management but I think I can increase my margin of safety with a closer look at a miner's numbers.  The short puts I had under ANV expired as well. 

True to my word in one of my posts yesterday, I've sold some of my FXI to reduce my exposure to China's short-term bubble.  I wrote calls on the remainder with at-the-money strikes.  China still has long-term growth potential, but that country looks seriously overheated.  I am not selling any puts under FXI this month to further limit my exposure to any pending downturn in China's economy. 

My other updates . . .

Sold short puts under KEX at 35 (renewed position due to options expiration).

Sold short puts under TDW at 45 (renewed position due to options expiration).

Sold short straddle on GDX. 

Also, my short puts under EFA expired and I'm not renewing them.  Yeah, I know, this is a huge hole in the index strrategy of my portfolio, but frankly I don't care.  Market valuations as a whole are way too rich to risk being forced to buy anything except the two stocks I've identified above (yeah, I'm still writing the reports on KEX and TDW because I want them to look pretty, so quit bugging me).

Sunday, March 21, 2010

A Tale Of Two Empires, Declining

We are watching history unfold as two empires decline, one European, the other American.

The European empire is unable to reach a meaningful agreement on saving Greece's welfare state.  Its ability to hold itself together is very much in doubt as a result.  The liquidation of its member states' debts will be painful, public, and possibly quite sudden. 

The American empire, by contrast, has over two hundred years' experience in the peaceable resolution of internal conflicts, with the Civil War an unpleasant interregnum.  This empire is about to enact a huge stealth tax on its bourgeoisie disguised as reform of its private-sector health care system.  The reform is a big, messy package that will extract more revenue from citizens, cut services paid by Medicare, and ration the underwriting of future care by emasculating the insurance industry.  This reform is in fact a small, marginally effective step in curtailing America's unfunded entitlements.  Its genius lies in the disguise:  The Left actually thinks its constituencies are getting a great deal.  Suckers. 

Both empires are on track to relegation as global has-beens.  The difference is that America's path will be less bumpy than Europe's.  Buckle up for the ride. 

Chinese Trade Deficit Could Sink Its GDP Growth

Over the past couple of months I've blogged about many negative headwinds facing the Chinese economy:  bubbles in property prices; plans for the government to throttle back on underwriting local lending; etc.  Now here's a huge warning sign that China won't be able to continue its phenomenal export-led growth:

China's trade balance could turn to a deficit in March, commerce minister Chen Deming said on Sunday, adding that adjustments to the yuan's value would not by itself resolve global trade imbalances.

There is no assurance that growth in Chinese domestic consumption is sufficient to replace what China is probably losing in exports, especially given the stated intent of Chinese leaders to put the brakes on inflationary forces like wild lending.  I've been long-term bullish on China since 2008, but the country's miraculous bounce back from the credit crisis may be about to expire.  I'm going to pare back the China portion of my portfolio (an ETF trading as FXI) when the U.S. markets open tomorrow.

Friday, March 19, 2010

Icahn Bids For Lions Gate, Offering Potential For Special Situation Play

Carl Icahn is taking a calculated risk in going after Lions Gate:

Icahn is offering $6 a share, unchanged from his partial tender offer for 13.2 million shares, according to an e-mailed statement today. He extended the deadline for tendering to April 30. As of Feb. 1, the company had 117.8 million shares outstanding, according to Bloomberg data.

The move coincides with today’s bidding deadline for Metro- Goldwyn-Mayer Inc., which has fallen behind on interest payments. Lions Gate, run from Santa Monica, California, and based in Vancouver, is among the suitors, people close to the situation said last month. Icahn, Lions Gate’s second-largest shareholder with about 19 percent, opposes the acquisition.

He's offering $6 per share in the hope that Lions Gate (LGF) shareholders will force their management to back away from their proposed buyout of Metro-Goldwyn-Mayer, which we should note is not the same company as casino operator MGM Mirage.  Icahn doesn't want MGM Studios and doesn't want to pay the $12 per share that purchasing a combined Lions Gate-MGM would probably require . 

Betting against a buyout king like Carl Icahn is hard to do, but for now I'll pass.  The deal isn't a sure thing and given LGF's rejection of Icahn's last offer they're likely to put up a good fight.  The deal bears watching, but that's all I'm doing until I see some certainty.

Trust The Government, Destroy Your Credit

Government policies intended to alleviate suffering invariably have unintended consequences:

Some homeowners who sign up for the government's mortgage assistance program are getting a nasty surprise: Lower credit scores.

For borrowers who are making their payments on time but are on the verge of default, the Obama administration's loan modification program can reduce their credit score as much as 100 points. That makes it harder to get a loan and can present a problem when applying for a new job.

A sustained recovery depends very much on consumers who are able to obtain credit and jobs.  Participating in this trial home mortgage modification program harms both of those objectives, at least in the short term. 

Gomer Pyle might have said it best:  "Surprise, surprise!" 

Thursday, March 18, 2010

North Korea "Takes Aim" At Inflation

Well, here's one way to hold finance officials accountable for their policy errors:

North Korea executed the former head of finance of its Workers’ Party after last year’s currency revaluation triggered unrest in the communist nation, Yonhap News reported, citing people it didn’t identify.

Fortunately we in the enlightened West don't do that to our financial scions when their policies do measurable harm.  See, when our Treasury secretaries redirect billions of TARP dollars from middle-class taxpayers to rich bankers for bonus payouts, we celebrate them as saviors of the economy.  Alan Greenspan got a Medal of Freedom for the policies he authored as Fed Chairman that spawned a housing bubble and erased traillions of dollars worth of household wealth. 

We have the added benefit of a private sector that subscribes to the theory of "screw up and move up," whereby Harvard and Wharton MBAs who can't manage risk get to run big hedge funds after they lose money on prop trading desks at i-banks.  Rich preppies don't face firing squards here in the good old U.S. of A.  That's un-American and offensive to good sense and decency. 

It sure pays to be civilized.  (Sarcasm filter off.)

Germany Points Greece to IMF

Germany is trying to be an amicable member of the Eurozone by pointing out how Greece can get help without making any specific commitment of its own: 

Greece should turn to the International Monetary Fund if it needs aid, the chief finance spokesman for German Chancellor Angela Merkel’s party said, in a reversal that signals a rift with European leaders Jean-Claude Trichet, Jean-Claude Juncker and Nicolas Sarkozy.

The German shift underscores Merkel’s attempts to steer clear of any commitment to a Greek bailout and risks scuttling European Union efforts to establish a contingency plan for the debt-strapped nation.

Kudos to Germany for at least attempting to make the international system work as designed.  Here's a more compelling reason why Germany can't bail out Greece - it can't realistically afford to do it, and neither can many other European countries:

European Union member states are being dangerously optimistic in their forecasts of economic growth and risk missing their budget targets as a result, the bloc's executive warned Wednesday in a report on 14 states, including its largest ones. EU states have spent lavishly to keep their economies from meltdown over the last year, racking up massive budget surpluses in the process. They are now trying to bring spending back under control, amidst fears for their long-term financial stability.

A direct bailout of Greece would ruin most of Europe's own prospects for recovery. 

Wednesday, March 17, 2010

The Haiku of Finance for 03/17/10

Small truckers exit
Big truckers may buy them up
Don't get run over

LTL Shakeout Ahead?

I continue to be intrigued by the long haul trucking industry.  LTL trucking in particular is a commoditized industry, with carriers increasingly forced to compete on price.  Smaller carriers have a tough time competing against the big truckers:

The owners of one in four truckload carriers say they may sell their company and leave the industry over the next 18 months, according to a survey by Transport Capital Partners.

Larger truckload carriers are on the lookout for companies to acquire, the survey found. That would increase their own trucking capacity without adding to overall industry capacity.

So who among the big carriers might be looking to acquire?  Probably not YRC Worldwide (YRCW), as they are preoccupied with mere survival given their ongoing losses

How about Arkansas Best Corporation (ABFS)?  That would be a big stretch right now.  They'll have a lot more flexibility if the Teamsters agree to modify their National Master Freight Agreement with their ABF Freight System subsidiary, and they'll need that legroom if they continue to lose money (net income was negative $128mm in 2009).

I've still got my eye on Landstar (LSTR).  They've got $85mm in cash on the balance sheet, enough to buy smaller carriers, but with their stock near its 52-week high an all-stock acquisition would make sense. 

Nota bene:  Anthony J. Alfid has no positions in YRCW, ABFS, or LSTR at this time. 

Tuesday, March 16, 2010

Junk Bonds And U.S. Debt: What's The Difference?

My past few posts have beaten up on U.S. government debt for one reason or another, and I'd like to thank my commentors for taking note.  I see no need to quit while I'm ahead, so let's bash U.S. sovereign debt some more.  First, let's check out the coming bolus in high-yield debt (a.k.a. junk bonds) that needs to be rolled:

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014.

Private debtors won't be the only ones to face higher interest rates and declining ability to pay in the next couple of years.  Uncle Sam isn't far behind them, and the article above notes the huge U.S. sovereign debt load that has to be rolled in the same time frame as all of those junk bonds - all while the economy remains weak and on the cusp of a double-dip recession.  My recent posts examined the threats facing U.S. taxpayers and Treasury bondholders.  Foreign bondholders are increasingly moving to minimize the risks they may face:

China and Japan, the two biggest foreign holders of Treasuries, reduced their positions of U.S. government debt in January as a measure of demand for American financial assets fell to a six-month low.

How is all of the U.S.'s debt - sovereign, corporate investment-grade, and high-yield - going to be rolled at a time when the largest customers for our lowest-risk debt are slowly backing away?  That's anyone's guess.  I'd prefer not to guess, which is why I'm not buying any bonds at all for the foreseeable future.

Monday, March 15, 2010

Anglo-West Debt Inches Closer To Event Horizon

My super-intelligent readers will have no problem deciphering this post's title.  Read what I posted yesterday about Social Security and then check out this article:

The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

The portion of tax revenue that goes to service U.S. debt is only going to climb as the U.S. will have to issue even more debt to replenish what was spent from the Social Security trust fund. 

Anyone buying U.S. Treasury bonds now is asking for trouble.  Any academic arguing that the U.S. 10-year bond's interest rate is a "risk-free rate" needs to revise their theories.  Perhaps we can replace it with another risk-free rate for debt denominated in a more stable currency, like the Swiss franc. 

Sunday, March 14, 2010

The Haiku of Finance for 03/14/10

Baby Boom bust-out
SocSec about to go broke
Call the whaaaambulance

I.O.U.? More Like "You Owe You" By Way of Social Security

The slow-motion decline of the United States continues and no one among the masses appears to be the wiser.  Social Security is about to provoke a funding crisis for the federal government:

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

There is no way to close the gap between what is owed to Social Security recipients and what Uncle Sam is able to pay without some combination of the following:  curtailing benefits, raising taxes, or decoupling annual increases from the Consumer Price Index.  All of these actions will directly impact the Baby Boomer generation, which happens to be the least-prepared generation in American history to face retirement. 

The street protests we've seen in Greece for the past few weeks will soon explode here.  The difference will be the ages of the protestors.  Our Baby Boomers, coddled and indulged since birth, are completely unable to contemplate austerity.  They took to the streets in the 1960s because they were unwilling to make a civic sacrifice for the Vietnam War.  They will take to the streets in their golden years, in walkers and wheelchairs.  This will have a very ugly effect on American culture and politics in 2012 and beyond.

Perhaps that's why the Mayan calendar doesn't run past 2012.  It must have been designed by a Mayan Baby Boomer who didn't want to face retirement. 

Nota bene:  Anthony J. Alfidi is not a Baby Boomer but is preparing for retirement without relying upon Social Security. 

Saturday, March 13, 2010

Dumb Money Chasing Retail Buyouts

Private equity firms used to have a reputation as being the smartest folks around.  I think we can now take issue with that, based on their stated desire to pursue buyouts among retailers:

Private-equity firms looking to buy retail and consumer companies said they’re now able to finance deals and pay reasonable prices after the credit crisis and global recession triggered a buyout slump.

These folks are salivating over . . . what exactly?  Consumer credit card debt is at an all-time high, so any increases in retail activity from more consumer indebtedness will be difficult to impossible to realize.  Data on actual consumer behavior is mixed at best, with consumers both spending more on retail and worried more about their ability to sustain future spending. 

Maybe the private equity folks weren't so smart after all.  Maybe they were just adroit with leverage while the stock market bubble inflated in the last decade. 

Friday, March 12, 2010

U.S.A.'s Credit Rating at Risk From Future Foreclosures

We're going to hear more warnings like this from S+P due to Uncle Sam's debt load:

The U.S. dollar is still the most important world currency, Standard & Poor's said on Thursday, but added that rising levels of U.S. debt and dependence on foreigners to finance much of pose risks to the currency's primacy. 

Without a credible plan to rein in fiscal spending, the agency said external creditors could reduce dollar holdings, which could put pressure on the United States' 'AAA' credit rating, which keeps government borrowing costs low.

Why worry?  After all, aren't we Number One?  Well, we're certainly tops in rosy assumptions about home foreclosures:
The Federal Housing Administration will need taxpayer money because it failed to properly project how borrowers with FHA-backed loans are affected by job losses and diminished equity in their homes, New York University professor Andrew Caplin told a House panel Thursday.
Wait a minute, why would the FHA need a bailout?  What do you mean they haven't realistically modeled future loss estimates?  Isn't the housing crisis over?  Nah, of course it's not over, in fact it's probably just getting its second wind:
The housing market is facing swelling ranks of homeowners who are seriously delinquent but have yet to lose their homes, and this is threatening a new wave of foreclosures that could hit just as the real estate market has begun to stabilize.
The funny part is that on PBS's NewsHour today the anchors were talking up the end of the recession.  Baloney.  No way is this over.

European Monetary Fund? Not With These Problems

My haiku below was inspired by an apparently leaked story about a preliminary Eurozone deal to bail Greece out of its debt problems. Germany feels more comfortable doing so within the context of a Eurpoean Monetary Fund, an as-yet unborn financial mechanism that would purportedly contain future financial contagions within the Eurozone.  The EMF is a cute idea but will be a long time in coming. 

Meanwhile, the likely recipient list for such a fund's assistance is long and growing.  Even if we assume a bailout of Greece's short-term debt load, its future unfunded liabilities will continue to grow as a result of its pension promises:

Greece’s patchwork system of early retirement has contributed to the out-of-control state spending that has led to Europe’s sovereign debt crisis. Its pension promises will grow sharply in coming years, and investors can see the country has not set aside enough to cover those costs, making it harder for Greece to borrow at a reasonable rate.

Meanwhile, Italy's municipal governments have something in common with their U.S. counterparts.  They committed themselves to derivatives bets they didn't understand:

Financial markets are gripped by the role derivatives have played in Greece's debt crisis, but Italy also has a derivatives time bomb, and hundreds of cities are in the 24 billion euro blast zone.

Almost 500 small and large Italian cities are facing mark-to-market losses of 2.5 billion euros on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up.

Last but not least, Spain's effort to consolidate its equivalent of failed savings and loan institutions, the "cajas," is paralyzed:

The government created a bailout fund last year to help cover the costs of consolidation. Administered by the Bank of Spain, the fund has initial capital of EUR9 billion, expandable to EUR99 billion, that it can offer to help strong institutions take over weak ones. 

But the fund has yet to act because merger talks between cajas keep stalling. And experts warn that without consolidation in the sector, the squeeze on credit could tighten still further, making one of the developed world's sharpest recessions even worse.

EMF or no EMF, Europe faces daunting challenges in keeping its financial house in order. 

Nota bene:  Anthony J. Alfidi holds short puts under EFA at the time this post was published. 

The Haiku of Finance for 03/12/10

EU bails out Greece?
Sounds like contingent finance
If Greece cuts spending

Thursday, March 11, 2010

YRC Worldwide Still Trucking Despite Rough Financial Roads

YRC Worldwide (YRCW) is a big trucker hitting some rough patches.  Their recent debt-for-equity swap has helped delay a bankruptcy filing but has diluted YRCW shares to the point where they are now trading as a penny stock, risking de-listing from NASDAQEven their CEO admits they still face significant challenges: 

YRC Worldwide cut its payroll 34.5 percent last year and a further 5.5 percent so far in 2010, reducing its workforce from 55,000 to 34,000 employees.

The nation's largest trucking operator eliminated 2,000 jobs since the end of 2009, and the cuts probably aren't over, Chairman and CEO William D. Zollars said.

YRCW's problems in returning to profitability would be less burdensome with cooperation from their unionized drivers.  Unfortunately, not all of their drivers want to play along for the sake of the company's health:
Teamster employees at YRC Worldwide subsidiary Reddaway this week turned down a proposed contract that included wage and benefits cuts.
The Teamsters union confirmed its members at Reddaway rejected the proposed contract in a vote that began March 1 and was tallied March 8.
It was the second time Reddaway Teamsters rejected the 15 percent wage cut negotiated by the International Brotherhood of Teamsters and YRC Worldwide last year to help save the nation's largest trucking operator.

The intransigence of Reddaway's Teamsters makes more payroll cuts likely at YRCW.  The entire trucking industry is being hurt by slack demand for LTL hauling and high fuel costs.  The last thing YRCW needs to worry about are union demands that add uncertainty to its projected payroll expenses. 
Nota bene:  Anthony J. Alfidi has no position in YRCW at this time.

Wednesday, March 10, 2010

Have Budget Deficits? Just Sue Somebody

Connecticut is suing the big rating agencies:

Connecticut's attorney general sued Moody's Investors Service and Standard & Poor's over ratings the agencies issued on risky investments.

In the civil lawsuit filed Wednesday, Attorney General Richard Blumenthal alleged Moody's and S&P knowingly assigned false ratings to complex investments that pushed the country into recession.

I'm not sure whether they have standing to pursue a class action on behalf of states whose pension plans bought toxic assets.  Connecticut is having budget woes of its own, so this suit is certainly a novel way to try to close the deficit.  Maybe I could take a page out of this playbook and sue some previous employers who promised me I'd be earning beaucoup bucks by now. 

Tuesday, March 09, 2010

The Haiku of Finance for 03/09/10

Old, run-down city
Tear down junky housing stock
Farms look much nicer

There's Money To Be Made In Downsizing A City

Detroit's leaders see the handwriting on the wall even if some community activists are wilfully blind.  The city is preparing to downsize itself to a sustainable scale:

Detroit, the very symbol of American industrial might for most of the 20th century, is drawing up a radical renewal plan that calls for turning large swaths of this now-blighted, rusted-out city back into the fields and farmland that existed before the automobile.

There is money to be made in deconstruction.  Homes, roads, and infrastructure cost money to be demolished, but fortunately those involve low-skill jobs that anyone can do.  Putting people to work razing old neighborhoods won't be hard and lots of jobless people will line up to do the work.  These same people can be new urban farmers on the empty plots that remain.  A little training in permaculture and aquaponics, plus some capital from microloans, can make them self-sufficient rather quickly. 

I wrote last year about the pressing need to unbuild much of the suburban waste left after the housing bubble.  This is a moral imperative and will become a trend all across America very soon.  Consolidating residents into compact, sustainable communities is embarrassing in the short term but absolutely necessary if cities are to remain economically and aesthetically viable.  Detroit can show us the way if its citizens embrace the economics of resilient communities. 

Nota bene:  Anthony J. Alfidi is long puts against IYR at the time this post was published. 

Unprepared Americans Face Economic Annihilation

Too many Americans - particularly Baby Boomers - have saved very little capital for their retirement years:

The prolonged recession is making it harder for many workers to set aside money for retirement.

A new survey released Tuesday by the Employee Benefit Research Institute shows the percentage of workers who say they've saved for retirement slid to 69 percent in January, down from 75 percent in 2009.

Perhaps more alarming is the increasing number of workers who say they have little or no retirement savings.

More than a quarter of those surveyed said they have less than $1,000 set aside. That's less than a mortgage payment for many homeowners.

I can think of several factors that contribute to this predicament.  Yes, we all know the stock market has hurt the balances of most investors' 401(k)s and IRAs.  A larger contributing factor is probably the psychology of the Baby Boomer generation.  Their mantra in the 1960s was "live for today" with no thought for tomorrow.  Tomorrow has now arrived and former hippies find themselves unprepared.  Maybe the money they spent on pot and acid in the early 1970s should have gone into the stock market. 

There's another force hurting Americans:  their mortgage payments.  Check out the hint in the article that $1000 is less than many homeowners' monthly mortgage payment.  The so-called dream of homeownership - sold to naive Americans by an army of realtors, homebuilders, and bank loan departments hunting for commissions - has enticed people to buy houses that were larger and more expensive than they could afford.  Money they should have saved for retirement instead turned into negative equity on homes destined for foreclosure. 

A final contributor to the impoverishment of many soon-to-be-seniors is the boodoggle known as Social Security.  The massive unfunded liabilities in that entitelment program are well documented, but the damage it has done and will do to America go far beyond actuarial results.  The mere existence of this program for three generations has subtly taught many Americans that they don't have to rely upon themselves for financial security.  Instead, they chose to rely on empty promises from a government program that will be insolvent just when they need it most. 

I have relied on myself throughout my working life, even at those times when I was a hostage to the whims of incompetent supervisors and derelict employers.  I now have enough of a pile to survive indefinitely as long as I don't go into debt or do something stupid.  There's a lesson there somewhere.  What could that be?  Oh, yeah, I know:  save and invest as much of your income as possible starting on the first day of your working life. 

Monday, March 08, 2010

Terra Industries Buyout Approaching Endgame

Terra Industries (TRA) has been a takeover target since last fall when CF Industries (CF) made its initial offer of $24.50 (net of a proposed special dividend) per share.  That offer was later superseded by an offer from Norway's Yara for about $41.10 per share.  CF raised its offer last week to the equivalent of over $47 per share in what appears to be its final play for TRA

The best time to execute a merger arb trade on TRA would have been last week before CF's latest offer.  Now TRA trades at over $45 on speculation that they will abandon their agreement with Yara and seriously consider the new CF offer.  That is unlikely, as the appeal of CF's bid is contingent on CF's stock remaining high (one tenth of a CF share is part of the offer for each TRA share).  IMHO the speculation on a new deal is unfounded.  TRA will likely go with the "bird in hand" and stick with its agreement to sell itself to Yara.  Any investor buying TRA over 41 is probably throwing money away. 

Nota bene:  Anthony J. Alfidi has no holdings in TRA, CF, or Yara at this time.

Pushing Pension Plans Into Bad Banks

Pension plan adminsitrators have plenty to worry about between sub-par returns, unfunded payout liabilities, and illiquid assets stuck in their portfolios.  Now they're being urged to compund past mistakes with even more stupidity:

U.S. regulators are encouraging public pension funds that control more than $2 trillion to inject capital directly into the banking system by buying failed lenders, said people briefed on the matter.

This IMHO is a poor plan to "get back to even," something many financial commentators are urging retail investors to do.  Getting back to even for most investors who've lost money since the market peak of 2007 really means increasing one's risk appetite.  That is probably unwise given the bubble-like rise in equities since March 2009.  The FDIC, apparently running out of options after asking banks to prepay three years' worth of insurance fees, has hit on this plan as a way of forestalling the pending collpase of troubled regional banks without resorting to another TARP. 

Pension plan administrators may not be the sharpest tacks in the drawer.  Many of them followed the Yale model over a cliff; after all, the smartest guys in the Ive League were doing it and no one wanted to miss out on a hot hand.  They will continue in this tradition if they follow the FDIC's urging to put their capital into banks sitting on CRE debt waiting to blow up.  The last paragraph of the article cited mentions that distressed bank investors often end up on the hook for writedowns of bad loans.  I have no idea how pension plans will explain that to their retirees.  That's why I'm not buying stock in any shaky banks. 

Sunday, March 07, 2010

The Haiku of Finance for 03/07/10

Popping bubble loans
Deflate the desire to lend
Guarantee no more

Popping Chinese Bubble Wrap

When you were a kid, did you ever enjoy popping the bubble wrap that came with whatever new household appliances your parents bought?  I sure thought it was a hoot to make all those popping noises and irritate my family members.  It's even more fun when you grow up and get to pop a whole bunch of bubbles in localized loan portfolios:

China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases.

China's national leadership is taking a bold step that America's leadership is unwilling to take.  Our state governments are very dependent on federal matching funds to fill gaping holes in their budgets (see my last post on California's budget woes).  China's recognition that it has pumped too much stimulus juice into its economy will be painful to experience firsthand, but afterwards their economy should be cured of any hunger for more unproductive lending.  Wringing bad debt out of an economy is a healthy step.  China will emerge from this recession stronger than the U.S. because of this action.

Our own leaders won't pop their bubble wrap, but they certainly act like children.

Saturday, March 06, 2010

LTL Trucking Running On Flats

The trucking industry's Achilles heel is the cost of fuel.  Check out how the high cost of gasoline, plus the recession's effect on freight delivieries, is delivering a crushing blow to trucking revenues:

The less-than-truckload industry shrank 24.4 percent in 2009, as total U.S. LTL revenue plunged from $33.3 billion to $25.2 billion, according to an industry study.

The recession triggered by the 2008 global financial crisis spurred the worst decline in freight revenue in several years, the study by SJ Consulting Group revealed.

Long-haul truckers that have trouble consolidating deliveries will continue to struggle.  One trucking firm I like to follow, Landstar System (LSTR), was not immune from this revenue plunge.  LSTR's revenue plunged 24% in 2009, in line with the industry total mentioned in the article.  The good news is that LSTR's retained earnings continued to grow in 2009.  I like that.  I'll have to take a closer look at LSTR next week.

Nota bene:  Anthony J. Alfidi has no position in LSTR at the time this post was published.

Friday, March 05, 2010

U.S. Headed In Greece's Direction

Greeks have lately taken to the streets to protest austerity measures that are absolutely necessary if their country's government is to avoid insolvency.  The U.S. is now beginning to experience the same phenomenon:

Anger over increasing tuition and school budget cuts boiled over as students across the country staged rowdy demonstrations that led to clashes with police and the rush-hour shutdown of a major freeway in California.

I had the misfortune to be on a Muni train in San Francisco with some protesters yesterday afternoon.  They were all college kids headed to the Civic Center to voice their displeasure with state budget cuts.  Generation Z has been told that they deserve to have everything handed to them, and now they're up in arms that "entitlements" like four years of susbsidized drinking are about to be ripped from their hands.  I felt sorry for them as I watched them flood out of the train.  None of them have a clue about the budget train wreck awaiting California.  None of them have any alternative ideas for keeping state colleges funded.  None of them will likely be able to make full use of their degrees in sociology, psychology, political science, media studies, gender studies, ethnic studies, nonsense studies, useless studies, and crapology in the years of underemployment awaiting them after graduation. 

I'd suggest that these kids digest James Altuscher's recent article on how a college education has become a poor investment.  He's absolutely correct.  Hey, Gen Z:  Quit wasting time protesting and go learn a skilled trade making something useful.  It will pay off for you much more than your bachelor's degree ever will.

The Haiku of Finance for 03/05/10

Jobless report out
More permanent jobs go temp
Still tough to find work

Unemployment Posts Positive Surprise

My headline may be a bit disingenuous.  The financial blogosphere was expecting this week's unemployment report to be a massive disappointment to the downside.  The fact that the numbers were little changed is an encouraging sign:

Nonfarm payroll employment was little changed (-36,000) in February, and the unemployment rate held at 9.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction and information, while temporary help services added jobs. Severe winter weather in parts of the country may have affected payroll employment and hours; however, it is not possible to quantify precisely the net impact of the winter storms on these measures. For more information on the effects of the severe weather on employment estimates, see the box note at the end of the release.

The fall in construction employment is not surprising.  Big drops in existing home sales this year translate into even lower demand for new homes from homebuilders.  The increase in temp employment, as the press release notes father down, reflects cutbacks in hours worked by employees who previously worked full time.  That means consumer demnd will continue to be slack for some time until prospects for permanent employment improve.  This is not good for the prospects of long-term recovery.

Mr. Market is happy that this news is not as bad as expected.  Getting a bull market restarted will take reports that are a lot better than this one. 

Thursday, March 04, 2010

Merck KGaA Makes Merger Maneuver With Millipore

Merck KGaA (that's the original German Merck, not to be confused with the U.S.-based Merck trading as MRK) has offered $107 cash per share for Millipore (MIL) to beef up its life sciences product line.  MIL currently trades at a P/E over 33, which looks expensive until you compare it to the average P/E of 37 for the entire medical instruments and supplies industry.  MIL's results also look better than average:  its ROE of 12.73% beats the industry's 9.8%, and its net profit margin of 10.31% surpasses the industry's 8.4%. 

However, MIL trades far in excess of P/Es of direct competitors like Alcon (ACL) at 24, Baxter International (BAX) at 16, or Covidian (COV) at 27.  Merck is paying this premium to earnings presumably because MIL's product line fits its own strategy well.  Would other acquisition targets be superior fits for Merck KGaA?  The firms named above have far larger market caps, so Merck KGaA is playing within its league by acquiring MIL. 

Nota bene:  Anthony J. Alfidi has no position in MIL, MRK, Merck KGaA, or any other company mentioned at the time this post was published. 

Coca-Cola Plans Sweet Combination With CCE

Coca-Cola (KO) and its largest bottler, Coca-Cola Enterprises (CCE), are planning a complicated merger.  CCE's current shareholders will receive a $10 cash payment per share in exchange for new shares in the part of CCE that will retain control of its European bottling operations.  If CCE's price remains near $25, as it has in recent days, the $10 payment will result in an ex-dividend adjusted share price around $15 for the "new" CCE after the transaction closes.  Shareholders should find this acceptable provided CCE can successfully institute its planned $1B share repurchase and proposed $0.50 annual dividend (an increase from the current $0.36 dividend).  Note that the transaction's announcement qualifies this plan by making it subject to funding from continuing operations. 

Furthermore, KO's assumption of $8.9B worth of CCE debt and $0.6B in unfunded pension obligations relieves CCE of a significant financial burden.  Subtracting this consideration from CCE's enterprise value of $20.68B leaves the new CCE (before new debt issuance) with a notional enterprise value of $11.18B, a discount to its present market cap of over $12B.  KO probably believes structuring the transaction this way is a bargain compared to an outright takeover of CCE followed by a separate sale of its European business units.  This looks like a very smart, efficient deal for both KO and CCE shareholders.

Nota bene:  Anthony J. Alfidi has no position in KO or CCE at the time this post was published.

Wednesday, March 03, 2010

Germany Holds Fast to Denials of Greek Aid

Rarely do we get to watch the death of multinational regimes in real time.  The last artificial empire to fall was the Soviet Union.  Now we get to watch the European Union come apart:

Greece’s pledge to ramp up planned budget-deficit cuts by half failed to yield commitments of financial assistance from Germany, Europe’s biggest economy, to help solve its financial crisis.

Given what looks to be a likely Greek default on its bonds, followed by departure from the EU, followed by similar dramas in Spain and elesewhere, a relevant question would be . . . why not short the euro?  I'm not sure that's a viable investment strategy simply because the largest European economies may choose to remain in Euroland to keep the currency viable. 

Tuesday, March 02, 2010

The Haiku of Finance for 03/02/10

Another report
Finds nothing at all has changed
Nobody listened

Nothing Has Changed, Economically Speaking

I've been syaing lately that the U.S. economy is not out of its crisis.  If you won't believe me, maybe you'll believe a bunch of supposed notables and geniuses:

Even as many Americans are still struggling to recover from the country's worst economic downturn since the Great Depression, another crisis – one that will be even worse than the current one – is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.

Note the language used in the report warning of a "calamitous global collapse."  Go back and search my posts tagged with the keywords "economic annihilation" and you'll realize that Establishment analysts are catching on to what the blogosphere has been chirping about for some time.  The intrepid bloggers in my link list and beyond are vindicated.  At a minimum, the report's finding that bank balance sheets are lies should give investors pause when considering bank stocks as investments. 

Monday, March 01, 2010

AIG Takes First Step Out of Hole

AIG, that massive money pit that all American taxpayers have tried to make whole on behalf of Goldman Sachs, has begun to pay back what it owes us:

American International Group Inc. is selling a cornerstone of its business, Asia-based life insurer AIA Group, in a government-approved $35.5 billion deal. The sale to British insurer Prudential PLC could reduce by nearly one-fifth the amount of federal bailout money still invested in struggling AIG.

But officials and analysts say it's not clear whether taxpayers will eventually recoup all the money AIG drew from a $182.5 billion rescue package the government committed to at the height of the 2008 credit crisis. In return for that package, the government got a nearly 80 percent stake in the insurer.

Read the last paragraph again if you're one of those folks who bought AIG stock in the pennies thinking it was a sure thing. Profit margins and operating margins continue to be negative. The company continues to lose money, so any future asset sales are a race against wasting assets. The longer it takes to sell off the next chunk, the less the whole firm will be worth. The firm is worth about $52B once liabilities are netted out, so even if the firm's remaining assets are sold at a premium the taxpayer will still lose about $130B from the rescue package.

Nota bene; Anthony J. Alfidi has no position in AIG at this time, thankfully.