Friday, October 2, 2009

Jobs Report-Worse Than Expected/ CIT Exchange Offer/Buy of 1 10 YR TIP at Next Week's Auction

1. Jobs Report: This is just awful. Economists were expecting job losses of 180,000. The Labor Department reported this morning a loss of 263,000 and a rise in the unemployment rate to 9.8% from 9.7%. Employment Situation Summary That is the highest unemployment rate since 1983. Total hours worked fell from 33.1 in August to 33 in September. Generally, I would expect this low number to move up before employers start to hire again. The first step, indicating an economic recovery is in progress, would be to increase the work hours of your existing employees. This first step has yet to be made. The alternative gauge of unemployment which includes those workers who have become discouraged or who have been forced to work part time, rose to 17%, seasonally adjusted. Table A-12. Alternative measures of labor underutilization I do think that this job's report is a powerful argument against politicians designing a stimulus program, the 787 billion (Congress Approves $787 Billion Stimulus Plan) spending bill being just another exhibit in a case for political malpractice.

2. Interview with Bob Rodriguez in Kiplinger's: I received my Kiplinger's magazine yesterday, with a smiling Uncle Warren on the cover, and found the interview with Bob Rodriguez the only subject of interest to me. For some reason, Rodriguez is a well known money manager who has run FPA Capital mutual fund for almost a quarter of a century. Kiplinger's notes that this fund lost 35% last year notwithstanding that as much as 45% of the fund was invested in cash. FPA Capital is currently rated 3 stars and has a five year annualized load adjusted return of 2.62% and a 10 year at 8.18%. FPPTX - Fund returns - MSN Money Many apparently have a favorable view of that kind of performance which explains why Rodriguez has been vaulted to an exalted status among money managers. The fund carries a load of 5.25%. I have never bought this fund, and I do not intend to start. I am interested in his opinion however. I would agree with most of his comments on page 39 that U.S. treasuries are in a bubble phase. He sees inflation being subdued for one to two years, whereas I would give it another year. After that subdued period expires, he expects the U.S. to pay for our out of control spending and irresponsibility with inflation reaching about 5%, possibly more if the U.S. finances become even more out of balance. I would agree with him that both political parties are fiscally irresponsible, and that it is insane to be adding a new and expensive program at a time when the federal government has yet to come to grips with the unfunded existing entitlement programs.

After the jobs report this morning I noted the 10 year treasury trading up in price to yield 3.15% and the 30 year was yielding 3.94%. Government Bonds By 9 o'clock, those gains evaporated and the T bonds were trading down in price.

I did place an order to buy just 1 10 year treasury inflation protected bond at the auction next week. While I will not buy a 10 year non-inflation protected security, I will buy the 10 year TIP in small amounts in a retirement account.

3. Senator Ensign: Viewed as beacon for the Christian "conservatives", who had to lean on mommy and daddy to make a 96 thousand dollar "gift" to his paramour's family, not hush money at all, Senator Ensign appears to have had some ethics issues according to a NYT story other than his failure to keep the oath of the Promise Keepers. NYT At least Johnny looked Presidential, and that is important, isn't it?

4. Discovery of Ardi Fossils: Well, the world is upside down now for sure. Scientists are claiming now that we did not descend from chimps, but that chimps descended from something more human like. Video - 'Ardi' I feel better already. Then, that warm glow was replaced with more negative vibes after reading this story about how the S & P needs a 39% spurt this quarter to break even for the decade: MSN Money Whatever, I know that I have beat the averages handily over the past decade, partly-maybe mostly-due to not losing that much in the two prior cyclical bear markets in 2001-2002 and 10/07/09 to 3/2009. The story can be found in the current issue of Science magazine. Ardipithecus ramidus Ardi ABC News

5. Kroger (not owned): I have bought and sold Kroger twice already this year. I have been contemplating buying it back, but I want a price below $20 after the last earnings report. Forbes has a favorable article on KR dated 10/1.

6. CIT: CIT's Board of Directors approved a plan where it will seek approval of bondholders for both a debt exchange and then a pre-packaged bankruptcy provided its goal for the debt exchange is not met. The offer is contingent on a sufficient number of bonds being tendered to reduce the face amount of CIT's debt by 5.7 billion, and to reach unsecured debt maturities (excluding foreign vendor facilities) that will not exceed "$500 million in 2009, $2.5 billion during the period from 2009 to 2010, $4.5 billion during the period from 2009 to 2011 and $6.0 billion during the period from 2009 to 2012, in each case on a cumulative basis (the “Liquidity and Leverage Condition”)." The plan makes more sense to me than the descriptions made by the press prior to today. Bonds with earlier maturities would receive more new debt whereas the longer dated maturities will receive proportionally more "preferred shares". The bondholders who tender their bonds pursuant to the offer would receive $ 700 to $900 of new debt plus anywhere from .41 to 3.26 shares of preferred stock for every $1,000 in principal amount bond. The liquidation preference of the new preferred shares will be $1300. This is a link to the SEC filing summarizing this offer exv99wt3ew1

I noted on page 6 of the offer that nothing is being offered to existing preferred shareholders or to the common share owners. Anyone holding junior debt can only exchange that debt for the new preferred shares.

For the senior bonds maturing in 2009, the exchange calls for $900 in the new bond plus .40749 shares in the new preferred stock per $1,000 in principal amount. The ones maturing in 2010 would get $850 and 1.22248 preferred shares. I only briefly looked at this complex document since my interest is not significant in CIT bonds. It appears that the new bonds will have a longer maturity than the ones that I currently own, apparently a pro rata portion of new notes maturing in the 2013 to 2017 range, which makes it way too complicated for me and my two measly bonds.

Note: CIT later amended this offer on 10/26 after this post was written: Reuters

7. Manufacturing Orders: New orders for manufacturing goods in August declined .8% and shipments fell .3%.

Due to the jobs report, I will dial back risk some later this morning by selling one of the economically sensitive stocks bought by the RB during March.

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