Wednesday, November 12, 2008

EARNINGS: BBY, M, ING AND AEG/ Treasury Yields

The present is not a good time to own a retailer, and I do not own any of them.  My sole involvement is 100 shares of a TC containing a Macy's senior bond which I recently purchased at more than a 50% discount to par value. TRUST CERTIFICATE MACY'S BOND DKQ  Consumers are definitely spooked and are cutting back on discretionary purchases.  In a post from 11/10, I mentioned that Best Buy would be hurt also by consumers who are no longer able to use their homes as ATMs.  EMERSON/ GS/ AIG/ SUNRISE SENIOR LIVING  BBY is on my monitor list which simply means that I will read any significant news story about it and will scan its earnings reports and transcripts of any earnings call.  One reason is that I will eventually make a decision to buy the stock  and the other is to get a feel for consumer behavior which along with other information will impact my decisions in other sectors.

BEST BUY slashed its earnings forecast, saying that this was the worst retailing environment it has ever seen. Yahoo! Finance
Same store sales fell almost 8% in October.  BBY now expects earnings to be $2.3 to $2.9 down from its prior forecast of $3.25 to $3.4. BBY called the change in consumer buying behavior "seismic".   At a minimum, I suspect a buy of BBY would have to be postponed until the second quarter of 2009, although this is just an estimate now and is subject to change based on subsequent events as well as considerations based on price.   If someone offered me shares today at 5, I would buy but I am not a buyer now in the 15 to 20 range which is where the stock is probably heading.

Another retailer, Macy's (M), reported  a loss today for its 3rd quarter of $.08, excluding a $.02 charge, in line with expectations. MarketWatch My sole interest in this company at the moment is my senior bond position.   Same store sales declined 6% in the quarter compared to last year.  Macy's said it was cutting its 2009 capital budget by 45%.  None of this rings an alarm bell for me as a senior debt holder-yet.  The cut in capital spending is a net positive since it conserves cash which can be used to pay existing debt holders. 

My interest in ING and Aegon is due solely to holding their preferred stocks-INZ, IND AEB . Some Nibbles Got Filled: JZE, PJS, INZ and FAX   AEB AND JQCBoth companies had previously warned about losses due to write-downs in investmentsYahoo! Finance Reuters  I am still comfortable holding the preferred issues but these companies will have to be closely monitored.   I did notice that INZ fell in early trading by a buck but it is still up about 100% above my purchase cost for the shares which I still hold.

Treasury yields have fallen to a five year low with the 2 year note hitting 1.2%MarketWatch  The 3 month bill is yielding around .2%,  a negative real rate of return even before taxes.  I view these low rates to be due more to demand resulting from a flight to safety than a substantial change in inflation expectations.  I can only marvel at others having such confidence in U.S. debt as we generate a one trillion dollar budget deficit for fiscal 2009  There can be no serious disagreement that the U.S. is the cause of the current worldwide recession and near depression.  My inclination is to believe that sometime within the next few years there will be a major re-evaluation by foreign holders of U.S. debt which will result in a change in beliefs about the wisdom of parking so much money with a debt laden country unless rates rise substantially, as in a ten year bond rising from less than 4% now to 10% or more.   

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