Monday, November 14, 2011

Romney and Cain/The GOPs Urge to Attack IRAN/Averaged Down by Buying 1 Cenveo 7.875% Senior Subordinated Maturing 12/1/2013 at 81.5/Added 50 of the TC PJA at $24.6/Earnings: Cenveo (CVO), Reddy Ice (FRZ), Travelport, Macy's (M), Wendys (WEN),

The market reacted favorably to news that Italy and Greece had turned over their governments to technocrats. Italy did make some progress in moving legislation forward that would reduce its borrowing needs over time.  Reuters NYT Possibly, both nations will actually carry through on austerity, but for how long?

All of this news about sovereign debt overshadows and detracts investor attention away from the consequences of austerity. With less borrowed money supporting demand, for both individuals and governments, Europe has been moving toward a recession for months now and has probably already slipped into one, at least in the Mediterranean countries.

The audience at a recent republican presidential debate booed the question and questioner who dared to ask Cain about the sexual harassment charges. has an article on the evasion and misdirection of Herman Cain. His new libel lawyer, Lin Wood, tried to downplay his implied threat against any woman making sexual harassment claims against Herman. (see story in Reuters)  The threat of a libel lawsuit will have the desired effect of keeping many accusations in the closet. Those with money and power can threaten to bring litigation against those without money, power and most importantly insurance, and chill the exercise of first amendment rights by merely threatening litigation.  

The latest poll from CBS shows Cain leading the pack for the GOP presidential nomination. CBS News A recent poll conducted by Vanderbilt shows Cain leading the pack in Tennessee. (Q.10B: Cain would also beat Obama in the general election in Tennessee. (Q.38A). It was not surprising to see that 11% of Tennesseans believed the press is the most responsible for the U.S. being on the wrong track. (Q.49) Those individuals are easily manipulated to believe almost anything. By press, the TBs are referring to what is derisively called the "mainstream" media.

In the most recent republican debate, Cain stated that he would reinstate waterboarding as an interrogation technique and would remove civilian oversight of those kind of "enhanced" interrogation techniques. Perry said he would defend the use of waterboarding until he died, which drew sustained applause from the crowd at the last debate.

Waterboarding was used by the Khmer Rouge and by Japan on U.S. prisoners during WWII. Continued use of waterboarding is a popular position to take among most republicans. In the most recent poll, 70% of republicans believe waterboarding is justified (page 5: CBS News polls: 11/11/11 - CBS News) As noted by Senator McCain, the U.S. hanged Japanese for waterboarding American prisoners of war (CBS News), including one of the airmen that participated in the 1942 Doolittle's raid, Chase J. Nielsen, who was captured by the Japanese. Waterboarding

During the last debate, Romney and other republican candidates for President made it clear that they would support military action against Iran to stop that nation from developing nuclear weapons. CBS News USA Today

In the latest CBS poll, referenced above, 59% of republicans believe that removing Saddam Hussein was worth the cost (page 4). And that opinion is held after the loss of well over 100,000 lives (Casualties of the Iraq War - Wikipedia), the maiming for life of countless others, the absence of any weapons of mass destruction or an ongoing nuclear weapon's program (Iraq War), the increased influence of Iran in Iraq due to Saddam's removal, and the expenditure of a trillion dollars of borrowed money which unquestionably damages the long term fiscal health of the country. Support for the Iraq invasion was close to 100% among republicans before the invasion and for a long time thereafter. It has now dwindled to close to 60% after the consequences of this war have become known. (see also:  U.S. Military Presence in Iraq and the GOP (10/26/11 Post); Accurate Information is Not a Side to an Issue/ Lying Works In Politics (12/21/2008 Post); Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent? (12/25/2008 Post);  Conservative: Each to his Own Definition (1/2/2009 Post);  Fail to Remember or Refuse to Learn? (3/16/2009 Post).

The WSJ published a detailed article showing how Mitt Romney changed his views on social issues as he transitioned from the Governor of Massachusetts to a candidate for the GOP presidential nomination. This is one series of facts that have penetrated the usual mental fog surrounding the TBs. He is the candidate for many GOP voters who are not obsessed with those issues. If he wins the nomination, however, I would anticipate that a large number of GOP voters will decline to vote for him on election day, due in part to his flip flops on those social issues and his support for the forerunner of Obamacare when he was Governor of Massachusetts. Many of those voters will be states that are already heavily republican anyway, particularly in the south. It remains to be seen whether he can survive the republican primaries with that baggage in tow.

An article in the NYT examines Romney's career in"private equity", a misnomer that does not describe the true role these leeches play in American capitalism. There is little in the way of equity invested by these Masters of Disaster when they acquire a company. Instead, the unfortunate target is loaded up with debt, employees are fired by the boatload, and the new owners drain the company of cash. A historical example is discussed in this article, involving Dade International, where Romney fired 1700 workers, loaded the company up with excessive debt that ultimately led to its bankruptcy, and Romney's company drained $100 million from Dade's coffers in fees for their good deeds in helping the company. When an investor starts to invest in junk bonds, that pattern of activity is seen frequently.

1. Added 1 Cenveo 7.875% Senior Subordinated Maturing on 12/1/2013 at 81.5 Last Thursday (CVO)(Junk Bond Ladder Strategy)(see Disclaimer): Cenveo reported third quarter net income of 26 cents per share from continuing operations on a 10% increase in revenues to $550.6 million. (GAAP E.P.S. of 4 cents after restructuring, impairment and integration charges). The consensus estimate was for 12 cents.  Only two analysts contributed to that estimate.  

A few days ago,  Cenveo amended its senior credit facility to allow the company to buy up to $30 million of its bonds. Those bonds have recently been selling at significant discounts which have narrowed some after that announcement. FINRA -2013 Bond;  FINRA -2018 Bond

I decided to average down by buying another 2013 CVO bond. The order was filled at 81.5 last Thursday. This 2013 is a senior subordinated bond, with a 7.875% coupon, maturing on 12/1/2013. FINRA


I have a 5- risk rating on this one: Personal Risk Ratings For Junk Bonds. Given CVO's debt level, which is viewed as high, that rating is probably too optimistic. The debt is discussed in the most recently filed form 10-Q at page 12: cenveo10q

Bought 1 Cenveo 7.875% Senior Sub Bond Maturing 12/1/2013

My confirmation states that the current yield at my cost is 9.568% and the YTM is 18.689%. The confirmation also states that this bond is rated currently at Caa2 by Moody's and CCC+ by S & P.

2. Reddy Ice (FRZ) (own 1 bond: FINRA): Reddy Ice stock plummeted when the company released its earnings report for the third quarter, and deservedly so. FRZ fell 48.36% on the day of the earnings release (11/9/11) to close at 67 cents per share. The total market capitalization of the company at that price is around 15.23 million, while the long term debt is close to $439 million. Of that amount, $300 million is a first lien note with a 11.25% coupon maturing on 3/15/2015. I own the second lien note, issued in the original principal amount of nearly $140 million, and maturing on 10/1/2015.  SEC Form 10 Q at pages 14-17. If Reddy files for bankruptcy, it would be questionable whether a second lien will be worth anything. I made the same point in the post ascribing this buy to the RB: "A legitimate question could be asked whether the second lien note is secured by anything, sort of like a lot of second mortgages on homes throughout America now." Bought 1 Reddy ICE Second Lien Senior Bond at 88.875 I did recently receive the semi-annual interest payment.

This company needs to make a lot of money during the summer to offset losses during the cold weather months. The company reported net income of $4.892 million or 21 cents per share, down from $8.99 million or $.39 cents per share in the 2010 third quarter. SEC Press Release The company claimed that its adjusted EBITDA number for the quarter was $34.5 million. The CEO wanted to focus on the revenue increase when discussing this report. I do not anticipate recovering par value at maturity. My risk rating is 10+, the highest capable of being given. Personal Risk Ratings For Junk Bonds This company needs to cease using its cash to make acquisitions. I have no interest in the common even as a Lottery Ticket. 

3. Macy's (M)(own 1 bond: FINRA): Macy's reported net income of $139 million or 32 cents for its Q/E 10/29/11. This beat estimates by 16 cents. The company also raised its full year E.P.S. forecast to a range between $2.7 to $2.75. Macy's expects same store sales to rise between 4% to 4.5% during the holiday quarter. For the 4th quarter, Macy's estimates in earnings in a range of $1.52 to $1.57, and the consensus estimate was $1.66. SEC Filed Press Release

I have bought and sold a trust certificate containing a May Department store senior bond. May was acquired by Macy's. Trust Certificates: New Gateway Post  I no longer own that TC, DKQ.  

4. Travelport (own 3 bonds): I am way over exposed to Travelport and now view the decision to buy any of its bonds as a mistake.

Travelport reported a loss of $26 million on revenues of $509 million for the 2011 third quarter, compared to net income of $25 million for the 2010 third quarter on $488 million. The company claimed to have $118 million in adjusted EBITDA, down from $135 million in the year ago quarter "primarily due to the re-introduction of the management incentive plan in 2011". The press release release references Travelport's bailout of its parent, controlled by "private equity", by issuing a new second term lien loan that would be senior in priority to the unsecured bonds. The use of Travelport's assets did allow its parent to restructure a PIK note about to become due.  Travelport Update on Secured Credit Facility; Item # 3 Update on Travelport. This is a highly undesirable development which occurred after I purchased the bonds.

The bonds sank in response to this report. I expect to take a loss on my 3 Travelport bonds, the only questions being how much and when.  I have no desire to average down. 

5. Wendys (WEN)(own 1 bond: FINRA):  The company reported income from continuing operations of $2.5 million on a 1.8% increase in revenues to $611.4 million, compared to a $.8 million loss in the 2010 third quarter. TWC_WR 10Q Q3 2011 Operating margin increased to 5.3% from 3.4%. Same store sales in North America rose .8% and 1.8% for company owned stores. 

As of 10/2/2011, the company had $488.817 million in cash and $1.348707 billion in debt. 

6. Added 50 PJA at $24.6 Last Wednesday (see Disclaimer): This brings me up to 200 shares of this TC with a 8% coupon on a $25 par value. My initial purchase was at $19.45 December 2009. I subsequently added to that position in two fifty share lots: Bought 50 PJA at 24.65 December 2010 Bought 50 of the TC PJA at 25.06 April 2011

I discuss trust certificates in this Gateway Post: Stocks, Bonds & Politics: Trust Certificates: New Gateway Post

The underlying security in PJA is a Qwest Capital senior bond maturing on 2/15/2031. The coupon on that bond is lower at 7.75%: FINRA As shown on that page, this bond is rated Baa3 by Moody's, BB by S & P and BBB- by Fitch. I am more inclined to go with the S & P rating on this one. These phone companies are losing a lot of landline customers, have large capital expenditure and pay too much to the common shareholders in dividends. The dividend yield on CTL's common shares is close to 7.9% at a $36.75 price. CenturyLink

TC Prospectus:

Qwest was acquired by CenturyLink (CTL) on 4/1/11. SEC Form 8k 

For the third quarter of 2011, CTL reported net income of $140 million on $4.596 billion in revenues. Depreciation and amortization expense during the quarter was $1.225 billion. Interest expense was $324 million. CTL's consolidated long term debt was $21.142 billion as of 9/30/11. (see page 16: The Qwest debt, which is included in that total, stood at  $11.598 billion on the acquisition date. 

I have sold my entire position in FJA, which has an Embarq bond as its underlying security. Embarq was later acquired by CTL also (see snapshots in TC Gateway Post referenced above)

I bought this last 50 shares when the market was melting down last Wednesday. I was able to put in a limit order at the ask price. By Friday, the security had recovered to close at $25.22. Merrill Lynch Depositor Inc. Preferred PLUS Cl A 8% TRUCs QWS-2 for Qwest Capital Funding Inc., PJA This security went ex interest for its semi-annual distribution on August 11, 2011. TCs of course trade flat, so the buyer does not have to pay accrued interest to the seller. Whoever owns the security on the ex interest date will receive the entire interest payment and the stock price is adjusted on the ex date to account for the amount of such payment. 


  1. I have been reading your blog since the fall of 08. I am also a direct descendant of a signer of the declaration of independence. I currently live in the same house my great grand father lived in. This weekend while cleaning above the garage to make a new office I came upon all the old Dairy records. One item was the cost of my first house that I inherited. It was 1125 sq feet and built in 1938. Materials $207.16. Original building permit for to include labor was $600.00. House sold in 2000 for $99000. Current value $135,000. I thought you might find this interesting.

  2. All of the homes owned by my mother and father were built by my dad. The first one, completed shortly after he returned from WWII, was built in the Sylvan Park area of Nashville, near Vanderbilt University, for around $3000 including the lot. Over the next decade, he built three more homes in that area for slightly more money, increasing the size each time, and all of those homes could easily be rented now for $2000 a month. Each had to be sold at the time to pay for the next one.

    My family traces its roots back to a young man who came to Virginia from Bristol England in 1634. By the time of the Civil War, his direct lineal descendants fighting for the Confederates was well over 100 persons. While he died owning several thousand acres south of Washington, D.C., his descendants lost it gambling and drinking which set off a western movement for cheap land that ultimately landed my great--great-great grandfather in middle Tennessee in the 1820s where he was able to buy a lot of farm land for $200. His grandfather was a Captain in the revolutionary army and received a land grant.