Wednesday, June 1, 2011

Earnings: Momentive Specialty Chemicals, Solo Cup, Cenveo Appleton Papers/Bought 100 of the ETF REM at 15.3/SSRAP/Case Shiller Index Confirming Double Dip in Housing Prices

A good article that highlights the many failures of Cisco's management can be found at the Motley Fool.  While focusing on low margin consumer devices, Cisco has allowed smaller competitors to gain advantages in emerging networking opportunities including load balancing, WAN optimization, and network security.  The many failures of Cisco's management, in spite of substantial cash resources, may be due to its absurd committee structure.   Crazy

Gretchen Morgenson highlights a recent study which makes optimistic and pessimistic forecasts concerning government debt worldwide.  NYT The emerging economies are in far better shape than the U.S., Japan and Europe, with their government debt forecasted to be at just 59% of GDP by 2035, using the authors' worse case scenario. In contrast, the best case scenario for the U.S. would be net federal debt rising to 155% of GDP by 2035. The worst case scenario would be U.S. government debt at 302% of GDP.  The authors point out that 200% is an extreme amount likely to cause destabilization in the economy.  The study is available for purchase at the Peter G. Peterson Institute for International Economics. I would mention that Rogoff and Reinhardt found that a country's growth started to be impacted negatively when the government debt exceeded 90% of GDP.

Egan-Jones has a "D" rating on Greece's debt and states there is a 100% probability of a default within two to 18 months.

The Case Shiller continues to confirm a double dip in housing prices. The national home price index fell 4.2% in the first quarter of 2011, after declining 3.6% in the 4th quarter of 2010.  The 20 metropolitan area composite fell below its earlier April 2009 low of 139.26. Minneapolis posted a 10% annual decline in home prices.   Eighteen of the twenty metropolitan areas posted declines in prices from February to March. Washington, D.C. showed a 1.1% gain and Seattle inched into positive territory at .1%. The leading decliners included Charlotte at -2.4; Chicago at -2.4; Detroit at -2%; and Minneapolis at -3.7%. Several metropolitan areas reported annual declines in housing prices of greater than 5%, led by Minneapolis at -10%. Others showing yearly declines of over 5% include:  Atlanta at -5.2%; Tampa at -6.9%; Seattle at -7.5%, Chicago at -7.6%, Phoenix at -8.45%; Portland at -7.6%; and Miami at -6.1%. It would be reasonable to expect that some of those metropolitan areas to exceed 10% annual declines in the months ahead.

LB remarked near the end of trading yesterday that bond and stock investors have lost their marbles, and need to be put in a straight jacket for their own protection.  After noticing a 4% decline in a double short stock ETF near the close, LB bought another hedge, and continued to increase HK's cash allocation into the six figures.   HK was not pleased that even more of his capital was currently earning nothing and was thinking of appointing the RB as Head Trader.

Once I own a bond, I will at least briefly review an earnings report to make a judgment about the firm's credit worthiness and the likelihood of my loan being paid back in full. 

1. Momentive Specialty Chemicals (formerly Borden Chemicals-own bond only)(Junk Bond Ladder Strategy):  Momentive, a private company, reported first quarter net income from continuing operations of 58 million dollars on revenues of $1.359 billion. SEC Filed Press Release The company also filed a  Form 10-Q for the Q/E 3/2011.  As of 3/31/2011, long term debt was high at $3.464 billion, down slightly from $3.488 billion as of 12/31/2010.  Net long term debt stood at $3.428 billion as of 12/31/2009.  2009 Annual Report Net sales did increase 24% in the 2011 first quarter compared to the first quarter of 2010. 

FINRA Information: FINRA

2. Solo Cup (own-Junk Bond Ladder Strategy): I would be more comfortable with my one Solo Cup "Senior Subordinated" bond (referred to here at HQ as a Junior Bond) when and if the company is able to report a profit.   For the first quarter of 2011, Solo Cup reported a net loss of $25.3 on net sales of $371.1 million.  The sales did increase from $344.9 in the first quarter of 2010.  EBITDA, a Non-GAAP measure, was reported at $18.3 million.   EBITDA excludes $17.3 million in interest expenses, $16.7 million in depreciation and amortization and $9.5 million in accelerated depreciation. The net loss of $25.3 million included some extraordinary items: $2.6 million for plant closures and severance costs and $3 million for "plant inefficiencies". Form 10-Q As noted at page 5, more charges for plant closures are expected throughout 2011. The long term debt is shown at page 6. 

FINRA Information:  FINRA

3. Bought 100 of the ETF iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM) in the Roth IRA at  $15.3 on Tuesday (see Disclaimer): This ETF owns mostly mortgage REITs and banks in the savings and loan industry.  The expense ratio is .48%. The fund currently owns 52 stocks, with the highest concentration in Annaly Capital at 21.61% of net assets as of 5/30/2011. Some of the savings and loans owned by the fund include the following: PBCT, FNFG, HCBK, FNF, DCOM, TRST, and FFIC. Three other mortgage REITs, AGNC,  CIM, and MFA, make up 8.36%, 8.32%, and 5.21% of net assets.

The net asset value has been hurt some in recent weeks by share declines in several of the fund's bank holdings, most notably Hudson City (HCBK), along with several other banks which have shown difficulty rising in price or holding price gains like  People's United Financial (PBCT).

Generally, mortgage REITs will borrow money short term and invest in highly yielding mortgages, paying out 90+ of their net income in dividends.  The current environment of abnormally low rates has contributed to nice spreads between the interest earned on the mortgages and the interest cost paid for borrowed funds.  I would not expect for them to perform well when short rates are increasing and the value of their owned securities purchased with borrowed funds are declining in value. Of all of the mortgage REITs, I currently have a very small position in American Capital Agency, whose current dividend, subject to change, is close to 19% at my cost. Bought AGNC at 29.29  So far, I have received 1 quarterly dividend of $1.4 per share on those shares.

The ETF REM pays quarterly dividends, and the current yield is around 9%. iShares FTSE NAREIT Mortgage Plus Capped Index Fund, REM Fund Quote  The historical distributions have been erratic however: iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM): Distributions

I view this holding to be a temporary position and will hopefully be able to sell it for a profit after collecting one or more dividends. Also, by buying these shares, I will not likely buy more of another mortgage REIT, a class of securities that I do not like.  This fund has been underperforming its benchmark index.

iShares FTSE NAREIT Mortgage Plus Capped Index Fund closed at $15.36 in trading yesterday.

4. Appleton Papers (own-Junk Bond Ladder Strategy):For the Q/E 4/3/2011, Appleton, a private company, reported a loss from continuing operations of $5.197 million on net sales of $210 million. One positive comment that I can make is that the revenues did increase, and the loss decreased, from the year ago quarter.  Form10-Q. The long term debt is discussed starting at page 19.

I own just 1 Second Lien Appleton Papers bond and will not buy another: Item # 1 Bought 1 Appleton Papers 11.25% 2nd Lien Bond at 95.75 Maturing 12/15/2015

FINRA Information

5. Cenveo (own Junk Bond Ladder Strategy): Cenveo, a publicly traded company (CVO), is showing some improvement.  The company reported 1st quarter net sales of $503.1 million; first quarter operating income of $22.2 million and adjusted EBITDA of $51.1 million, up 12% from 2010.  SEC Filed Press Release The increase in revenues was driven largely by acquisition of MeadWestvaco's envelope product group, however. The company reported GAAP net income of 2.8 million or 4 cents per share, up form a loss of $11.1 million or 19 cents for the first quarter of 2010. The company has also filed a  Form 10-Q for the 2011 first quarter. The purchase of MWV's envelope product group is discussed at page 6 of the 10-Q.  The discussion of the long term debt starts at page 10.  I own the 7 7/8% 2013 senior subordinated note. Bought 1 Cenveo 7.875% Senior Sub Bond at 97.5 Maturing 12/1/2013 It matures on 12/1/2013 and is now trading near or over its par value.

 FINRA Information on the 2013 Bond: FINRA

6. SSRAP (OWN):  SSRAP is a trust certificate containing a Sears Roebuck Acceptance bond.  The TC has a 7.25% coupon on a $25 par value.  I mentioned in my post discussing the purchase of this security that interest payments are made semi-annually on 6/1 and 12/1. Bought 100 SSRAP at $17.25 (TC-Underlying Bond from Sears Acceptance) I did in fact receive payment this morning on my 100 shares:

Fidelity calls this a dividend but it is an interest payment on a bond.

This security trades on the "Grey Market" after being delisted for the reasons explained in my earlier post.  A better description for that market would be the "Dark Market". Bid and ask prices are not displayed for the security.  SSRAP  Volume is usually light or non-existent. There are no market makers and no transparency. Limit order have to be used. There is no information on when the security goes ex interest. I can only give you the payment dates.  Prior to receiving an execution on my order, I noticed several occasions where a seller had a fill at a price below my limit.  So why bother with the TC, just buy the bond if the investor wants a Sears Roebuck Acceptance bond?

In my opinion, based on looking at the yields of SSRAP compared to its underlying security, the Dark Market causes pricing inefficiencies and just keeps many potential buyers away. The result is that the TC has a better current yield and yield to maturity than the underlying bond which has a lower coupon than the TC.  The bond has a 7% coupon. FINRA At the closing price from yesterday, 5/31/2011, the underlying bond has a current yield of 8.32%.  The TC SSRAP closed at $19, trading in a range of $18.2 to $19.  At a total cost of $19, the current yield is 9.54%.  That discrepancy has been much larger at times. The YTM would be even more in favor of the TC SSRAP given its larger discount to par value.

Based on my constant cost number, my current yield is close to 10.5%.

Both the TC and the underlying bond mature on 6/1/2032 and are rated junk.  FINRA shows the current rating by Moody's at Ba3 and B+ by S & P.

This is a link to the prospectus for the underlying bond:

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