Monday, November 21, 2011

Rot in the Financial Services Industry-M F Global Just the Latest Example/Earnings: Sears, Unum/General Maritime Bankruptcy/AMR Bankruptcy?/Super Committee Confirming Political Dysfunction

Based on number of articles published over the weekend, it appears that the Super Committee of politicians will be unlikely to agree on 1.2 trillion dollars in budget cuts over 10 years. WSJ  NYT Washington Post CNBC  Reuters  Of course, $1.2 trillion over ten years is a drop in the bucket given the magnitude of the U.S. fiscal crisis.  One reason for S & P's downgrade of U.S. debt was the political dysfunction in Washington, and this latest episode only confirms once again the inability of the two political parties to govern.

The Conference Board reported last Friday that the index of leading economic indicators rose .9% last month.

The WSJ reported late last week that the financially troubled Eastman Kodak was trying to sell its money losing online photo sharing business.

The WSJ has a good article on how the European Central Bank has become the most powerful institution in Europe. Originally, the sole mission of the ECB was price stability. Its most important role now is buying debt of some EU members in an effort to hold down their borrowing costs and to ultimately save the EU from disintegration.

Morningstar has a price target of zero for AMR stock. (see interview imbedded at MSN Money) Many analysts believe AMR will have to declare bankruptcy. AMR has the highest labor costs in the airline industry as a percentage of sales. The pilots are not helping by refusing to sign a new labor deal that would provide generous compensation to them.\pdf. The pilot's union thought that AA's latest offer was so unsatisfactory that it refused to submit the proposal to a vote. This negotiation has been ongoing for 61 months.

I own 1 AMR senior bond. Most of AMR's debt is secured debt. (see note 5 at page 10:  FORM 10-Q). I can not see how a bankruptcy would help much unless it involved some kind of forbearance by the secured debt owners (e.g., swapping debt for equity) and a new labor deal.

I have several bonds issued by companies that are experiencing what I would characterize as significant financial difficulties (2 Eastman Kodak; 3 Travelport; 1 AMR, 1 AGY, 1 FRZ, and 1 GMR discussed below). GMR is the first one to declare bankruptcy, and I expect a near total loss on that one. The others mentioned above are very dicey.  Of course, all of the bonds in my junk bond ladder strategy are risky, it is only a matter of degree.

As noted in this article at CNBC, financial repression by the central bankers around the world forces the savings class to take riskier bets to produce income. The responsible are being forced to bail out the irresponsible and reckless, and even the criminals. I do not use the phrase "financial repression" to describe the Federal Reserve's monetary policy, even though it is an adequate description. I prefer to say the "Federal Reserve's Jihad Against the Saving Class".  The end result is that responsible Americans have to pay for the many sins of others including the Masters of Disaster who made fortunes incinerating other people's money and who still believe, notwithstanding abundant evidence to the contrary, that they are smart and deserving of the most outrageous compensation packages in the history of civilization.

The Masters of Disaster at MF Global were allegedly using their customers' money to place risky bets on European sovereign debt. Apparently, it is legal for the Masters of Disaster to use customer money provided they put up enough collateral. MF Global, however, kept using their customers money without putting up that collateral according to a report published at the NYT The bankruptcy trustee noted last Friday that the assets available for segregated commodity accounts was "substantially less" than potential customer claims.  Bloomberg  That money may have been incinerated.  CNBC

Anyone with their eyes open can see the pervasive rot in the financial services industry.

1. Sears (SHLD)(own SSRAP; and 1 bond: FINRA): Sears reported another dismal earnings report. For the Q/E 10/29/11, SHLD reported an adjusted loss of $2.57 per share on $9.57 billion in revenues. SEC Filed Press Release  Same store sales declined .8% decline in the U.S. and 7.8% in Canada. The company is continuing to lose market share. The company claimed to have $632 million in cash ($450 million in U.S. and the remainder in Canada).  Credit availability was $1.8 billion.  I do not see anything positive in this report.

Eddie Lambert has been allowing the Sears stores to run down. A consultant was quoted in a WSJ article as saying that the Sears stores were the most rundown in U.S. retailing.

I noted another problem at the Sears store in Cool Springs. Several months ago, I was in that store buying a new garage door opener. Since the clerk needed to fax the order to the installer, I stood around for about fifteen minutes while the clerk went to the store's fax machine. Upon his return, I asked him what took so long and he replied that the fax machine was so old that it took 15 minutes to fax a single page. The clerk also told me that he was not sure whether the page was even sent. Of course, a new fax machine could have been purchased for a few bucks and Sears customers would not have to be inconvenienced waiting for a vintage 1975 machine to fire up. I discussed that episode in a post from January 2010, which is just an indicia of what is wrong with Eddie Lambert. Item # 4 Sears In fact, I may give Lambert a new fax machine for his store near HQ. I also discussed in that earlier post how Sears responded to one of its rebate offers.

2. Unum (UNM)(own senior bond in TC Form): Unum, the largest disability insurance company in the U.S., reported an operating profit, which excludes investment losses, of 74 cents per share. SEC Filed Press Release The company had $15.9 million in losses for the third quarter, compared to a $.9 million in gains from the year ago quarter.

UNM 9/30/2011 - 10-Q

The long term debt is discussed by the company in its 2010 Annual Report, starting at page 152: Form 10-K

I own PJR, a trust certificate that represents an undivided beneficial interest in a Unum senior bond maturing in 2028. Bought 50 PJR at 16.72 July 2009  ADDED TO PJR at 20.7 October 2009 Bought 50 PJR in ROTH IRA at $23.61 May 2010 Bought 50 PJR in ROTH IRA at 24.88 October 2010 Sold 50 PJR at 25.79 May 2011

Trust Certificates: New Gateway Post

PJR closed last Friday at $25.64. I have no interest in PJR at the current price and may pare my position again in that price area.

I still own the 50 shares purchased at $16.72, and those shares are held in a taxable account.

50 PJR Average Total Cost Per Share= $16.88/Annual yield at that cost=10.96%

If I decide to pare the position, I will sell the higher cost shares owned in the ROTH IRA.

3. General Maritime Files For Bankruptcy (own 1 senior bond): GMR filed for bankruptcy last week. Form 10-K I own one senior unsecured bond maturing in 2017. I anticipate a near total loss on that bond as the best case scenario. Possibly, I will receive some common stock in the reorganized company when and if it emerges from bankruptcy. There is a sentence in the form 8-K that the bankruptcy plan filed by the company "does not contemplate a determinable recovery, if any, by holders of the Senior Notes".  I would assume some large holders of that note will try to squeeze something out which would inure to all owners if successful.  Bloomberg

I received the semi-annual interest payment on 11/15, but it was taken back by my broker on 11/18 after the bankruptcy filing. However, the date of the take away was changed on 11/19 as if it had occurred on 11/15.

This is my first default in my Junk Bond Ladder Strategy. I expect more. I will not include the loss in my realized gain and loss post until I can quantify it. I have not been able to sell this bond using Fidelity for months. Realized Gains Junk Bond Ladder Strategy

This bond had my highest risk rating, 10+, from the start.  Personal Risk Ratings For Junk Bonds

FINRA Links to Bonds in Junk Bond Ladder Strategy 

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