Friday, January 30, 2009

More On Gannett & P & G/Hertz and Leveraged Buyouts/GOLD

Well, January was a bummer. My first thought about a 2009 investment strategy, and probably the first substantive thought on the subject for the new year, was to sell everything after the first few days of January and just leave on a trip around the world, returning in the fall. Buy of PGN/Was there really a Black Swan Event?/ Alcoa Sometimes the first thought that creeps into my brain is the best one that I am likely to have.  I do take some comfort in owning more bonds than I have every owned in my life.  In fact, I think that I have had more bonds in my portfolio for the last two years than I have had for my first four decades as an investor even after combining all of them and multiplying the sum by two. 

Goldman added Caterpillar to its conviction sell list.   Caterpillar is one of the many industrial stocks that I will consider adding under one of two circumstances.  I will need to see either a significant fall in the share price or a ray of sunshine providing firm evidence to me of an economic recovery in progress.   Neither of those events has yet to happen.

Proctor & Gamble did have a sour note about the next quarter, its fiscal third quarter. PG predicted earnings between 78 to 86 cents versus the consensus estimate of 85 cents, with revenues falling 2 to 7%. Yahoo! Finance
This kind of company is only recession resistant.  P & G  is not immune to a downturn.   I do not view it as a refuge in a downturn.  The stock will fall and nothing that goes down is a refuge.  P & G will simply not fall as much as cyclical companies.   I view it and other consumer stables, including Pepsico,  to be the last major positions to jettison.  My last sale of PEP was in an IRA on 9/9/08 at over 70.8.  I am not under any illusion that the consumer staple stocks will hold their value during a recession, let alone a deep one.  PEP has declined almost 30% since September.   

At some point, when investors realize P & G will suffer some declines, and this realization is just starting to sink in, an opportunity will come again to buy this quality company for the long term at a lower price.  The entry price for me is yet to be determined but I am inclined to wait and see whether it can hold above 50.  I am confident that I will end up owning P & G and Pepsico before this crash is over.  Maybe this is just a slower motion crash than the one starting in 1929. 

Gannett did say that the Board would consider reducing or eliminating the dividend at the next meeting.  Based on the recent price action of the stock, I would have to conclude that the market believes the dividend will be eliminated or substantially reduced. Yahoo! FinanceMarketWatch
At the current rate the dividend costs 365 million annually. 

It is difficult to read the chart at Marketwatch that contains all of the Gannett data.  It appears to me that you would have to go back to 1978 to 1980 to find a 5 and change price.  Eliminating the dividend will just make it worse, not better, as every dividend oriented fund must then dump the shares and others will just throw in the towel as most investors no doubt have already done. Many will view the money saved by eliminating the dividend as likely to fall down some rat hole, or likely to be used to help fund another failed acquisition.   

Gannett also announced that it could take an impairment charge of up to 5.2 billion.  MarketWatch
This is a non-cash charge. The pension plan is underfunded due to the market crash by about 575 to 595 million which deficit can be made up over the next 7 years according to GCI.   No funding is required this year.

Gannett may recover some when the economy picks up, but their management and Board appear to be operating in a clueless manner and without any vigorous pursuit of alternatives.   I had a low target for my shares, say 15 bucks, and was hoping for a decent return with the dividend. If the dividend is eliminated, then I would view the situation as close to hopeless and my investment to be a mistake.  On the other hand, if the Board continues the dividend during this downturn and the company could fund it with cash flow, then it may turn out in a couple of years to be okay.  

The rental car industry is lobbying Congress for access to TARP to assist them in financing new vehicle purchases.  I do not own common stock in Hertz and I recently sold 1/2 of my position in its senior bond contained in the TC DKR when it popped to over 14.75. SOLD 1/2 POSITION DKR/GE FUNK/ I DO NOT OWN ANY BANK TRUST PREFERRED issues/CURRENCY INTEREST RATE DIFFERENTIALS/FOREST CITY
I would just add this caveat to the request made by Hertz to Congress.  This company is just loaded with debt.  Hertz was taken private a few years back by a private equity firm.  I believe that a lot of debt was added to Hertz to finance this acquisition and more was added to pay the private firms special dividends before the company went public again.    This is summarized in pages 4 to 6 of this filed annual report of Hertz:
These kind of transactions severely weakened Hertz's ability to withstand an economic downturn in order to enrich a few people.  The only effective way to stop that kind of transaction would be for all investors to simply boycott the exit strategy and thus refuse to buy a single share when the private firms seek to sell shares back to the public.  Just make them eat their own cooking.  But, this will never happen because as W.C. Fields once said, never give a sucker an even break and the suckers were the ones that bought shares in the IPO.

Ishares has also recently introduced some international government bond funds similar to BWZ and BWX.
The expense ratios for those funds are .35%. 

It appears to me that gold is almost taking on the form of an alternate reserve currency.GLD: Summary for SPDR GOLD SHARES - Yahoo! Finance  Sure, the dollar is gaining value against most foreign currencies other than the YEN, but gold is also rising.  Normally, I would expect gold to fall when the dollar is rallying like it did today.   This suggests that the rise in the dollar has more to do with all currencies major currencies other than the YEN simply being viewed as bad, with the dollar being lumped into the bad category but simply perceived to be better than the other bad alternatives.  In that scenario, gold would be an alternate reserve currency to the dollar, or at least perceived as such by many as holding its value in a period of heightened uncertainty.  I do maintain a sizable and constant allocation to gold.  

The Chicago purchasing manager's index fell to its lowest reading in 26 years.   MarketWatch

One of the few actions taken by me today was to change the distribution option for most of my closed end funds from reinvestment into additional shares to payment in cash.  I decided that I would prefer to have the cash now, and I have just grown weary of reinvesting dividends at ever lower prices.  This will significantly add to my cash flow on a monthly basis and I will then decide how to re-allocate those additional funds into other securities.  


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