My major concern about Forest City, a large non-REIT real estate company, was simply whether or not it would survive this recession. This company committed what I would characterize as a cardinal sin of real estate entrepreneurs, entering a recession with a ton of debt and apparently no plan to shore up financing. The company is still in negotiation to extend a 750 million dollar credit agreement expiring in March 2010. Whenever you see a credit crunch coming, and the current one was obvious by the time of the Freddie and Fannie seizure, it was time for any heavily indebted company to kick into high gear, taking any and all corrective measures before the alternatives became merely choosing the less undesirable ones. I mentioned in a prior post that my VIX Asset Allocation model sounded an Alert in February 2007. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern, and that Alert was clearly tied to the improvident expansion an extension of credit in the U.S. First Alert in VIX Model in 2007: Clearly Tied to Mortgage Problem I suggested that this was the time for all companies impacted by a credit cycle to assess with an open mind the potential ramifications. Trigger Event : Cleanse Your Mind of Preconceptions, Dig Down Deep & Think Outside the Box Multiple Confirmations of VIX Model-Canary in a Coal MineI am not aware of any that changed course then. So, I would be very critical of the management of Forest City for allowing the company to reach their current predicament.
The Vix signals in 2007 were more than trigger events for those of us who are stock investors. They were trigger events for businesses, particularly financial institutions and others directly exposed and impacted by the events causing the Alerts and Triggers in the Vix Asset Allocation Model. You have to remember, these events were directly tied to the improvident expansion of credit in the U.S., not to some problem in Thailand. The only logical conclusion to draw from the warnings in 2007 was a high probability of a recession and a credit contraction.
Having said all of that, I noticed that my small position in FCY was going up today, and the common was being hit. So, I read the news stories about FCEA issuing stock at $6.6. That is bad for existing shareholders since that price was around where it traded in 1996. Wow! But, for a new shareholder, it does help to alleviate the concern about a bankruptcy caused by debt maturing in 2009 or early 2010, and buys Forest City some time. Morningstar has a good report on this company which is worth a read if you subscribe to their service. Value Line has a very low opinion, with a 5 timeliness rating and a 4 for safety. I am inclined to agree with that assessment, so I classified my purchase of 50 shares today at $6.3 to be a lottery ticket. Duality of Long Term Risks/Stocks Under $5: Per Se Lottery Tickets/ VL HAD AN EXTREMELY NEGATIVE ASSESSMENT OF FCEA. So, the risk in this one is very high, but maybe it has been alleviated some with this stock sale.
Forest City has been discussed in several posts including the following:
I discussed Karen Finerman and her short position in Forest City in this blog:
I may sell soon the senior bond and go with the small stock position. But the senior bond looks better than the stock even after its rise in trading today. So, I may wait on that transaction.
ADDED 12:27: I just sold my 50 shares of the senior bond that I bought for less than $10, with a couple of interest payments received, at a limit price of $14.6, the market just blew through it. Although I did not classify the senior bond as a lottery ticket when I bought it, my discussion of it clearly indicated that it was in the same class. I decided to take my profit on the bond to cover my gamble on the common. The last trade before this post for FCY was $14.98 up 22.79%, those kind of spikes are just hard to ignore for any speculative position, and I view any security in this company to be on the speculative side of ledger, though the senior bond is of course senior in priority to the junior debt and the common stock.
DISCLAIMER
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments NOT A RESEARCH SERVICE/Add of PWE Last Week These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. Anyone interested in a topic may want to review all discussions contained in the blog about it by using a relevant search term in the box at the top. Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.
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