Monday, December 19, 2011

Bought 100 WIN at 11.31/Bought 2 Exide 8.625% Senior Secured Bonds Maturing 2/1/2018 at 81.375 /Sold 1 United Rentals 2020 Subordinated Bond at 101.125

Randall Forsyth summarizes the opinions of Louise Yamada and Richard Russell in his Barrons column. Both Yamada and Russell are decidedly negative about the stock market's prospects. I am inclined to agree with Russell that the rally off the March 2009 lows was a bear market rally, rather than the start of a new long term secular bull market. I have repeatedly made that point.

Russell believes that the appropriate analogy is to the bear market rally of 1929-1930, which occurred after the October 1929 crash, that was followed by the bear reasserting itself on steroids, punishing severely anyone who bought into the bear market rally and failed to exit their positions in time. Russell believes that the bear will take over when the DJIA falls below 10,000 and surprise everyone with its downside vigor. This is a possible scenario.

Based on what I know now, a more likely scenario would be comparable to what happened after the bear market rally, starting in October 1974 and lasting into 1976.  The decline after that rally was not as severe, but the market was unable to resume any lasting up move until August 1982. 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? More on 1982 or 1974 Continued Discussion on 1982 or 1974 The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets The Roller Coaster Ride of the Long Term Secular Bear Market

Forsyth titles his column "survive the bear to invest another day".  If the Russell scenario happens, the only way to survive is to preserve capital in order to buy at lower prices.

A similar dire scenario was proffered by Felix Zulauf and discussed by me in an earlier post. Zulauf/Faber and Financial Armageddon Redux/Debt Burden of the American Household (June 2011 Post). As I mentioned in that post, the opinions of Zulauf, Russell and many others, relating to future events, are frequently stated with certainty, even though no one can have any degree of certainty about the future.

I prefer to create a frame of reference that includes several possible scenarios and then assign them various decrees of likelihood. Each scenario might have a particular investment strategy attached to it. If I believed now, for example, that the market rally since March 2009 was the start of a long term secular bull market in stocks, I would substantially increase my stock allocation. If I was certain about the Russell scenario, I would own almost no stocks. I do not have that kind of certainty. I view both of them as possible, even though completely at odds with one another, and have accordingly kept a significant stock allocation (the bull case) after making a substantial reduction (the mega bear case).

Whatever scenario comes to fruition, I do believe that the downside risk is more dominant now than the upside. That opinion requires a tilt toward preservation of capital. Part of that tilt is manifested by a high allocation to cash.

At the moment, it appears to me the market is forecasting a very mild and short term downturn in Europe,  a successful resolution of the European sovereign debt and banking problems, and 2 to 3% U.S. GDP growth in 2012. Those are the forecasts baked into the market's current level. A less optimistic scenario is the more likely one, which is why the downside risk is more pronounced in my opinion.

Adjusted for inflation, the S & P 500 has returned to 1996 levels. MarketWatch (see GS chart at page 2 Scribd)  This number was mentioned in this video interview with a Morgan Stanley analyst.

1. Bought 100 WIN at $11.31 Last Thursday (see Disclaimer): I recently exited my common stock position in Windstream.  Sold 300 WIN at 12.31  (August 30, 2011 Post) I sold those common shares to buy 3 Windstream senior bonds. I thereafter sold all of those bonds. Sold All Windstream Bonds: Two 2019s at 101 and One 2020 at 103.5 I then had no position in Windstream securities until I bought back 100 shares of the 300 common shares last Thursday.

Windstream is currently paying a 25 cent per share quarterly dividend. While it is debatable how long this will continue, the dividend is covered by the firm's free cash flow. The yield at a total cost of $11.31 is around 8.84%.  WIN Stock Quote

There are a couple of reasons to tread lightly with this company. It has a lot of debt and most of its revenue originates from a declining land line phone business.  As of 9/30/11, the long term debt totaled $7.297 billion and is summarized at pages 12-15 of the last filed SEC Form 10-Q.

This security was purchased with mid-December cash flow.

2. Sold 1 United Rentals  Subordinated Bond at 101.125 Last Thursday (Junk Bond Ladder Strategy) (see Disclaimer):  I bought this bond a few months ago at 91.5. Bought 1 United Rentals 8.37% Senior Subordinated Bond Maturing 9/15/2020 at 91.5 I have elected for now to take profits on some bonds bought at below par value when their prices pop over par.  And, I am then reinvesting the proceeds in bonds selling at greater discounts to par. It remains to be seen whether this aspect of the junk bond strategy will work.

I sold this bond last Thursday. On Friday, United Rentals announced that it was going to acquire a competitor, RSC Holdings, in a $4.2 billion deal. CNBC Joint Press Release This caused the 2020 senior subordinated bond to fall over 5% in price. I am not likely to buy this bond back, unless there is a substantial decline in its price. As of 9/30/11, RSC Holdings had $2.257 billion in long term debt, see page 3 Form 10-Q.

I am sitting on a fair amount of unrealized losses in this strategy, including large percentage losses from my 1 General Maritime and 1 AMR bonds, both in bankruptcy. That is just a hazard with this extremely high risk strategy. Realized Gains Junk Bond Ladder Strategy

I would have sold one or both of my Vulcan Materials bonds, but no bids have yet to materialize in small 1 bond lots. I have in effect exchanged this 1 United Rentals bond, and hopefully 1 Vulcan bond, for the bond described below.

3. Bought 2 Exide Technologies 8.625% Senior Secured Bonds Maturing 2/1/2018 at 81.375 Last Thursday (Junk Bond Ladder Strategy)(See Disclaimer): The issuer of this note is Exide Technologies, a battery manufacturer. I discussed this company in a recent post: Item # 1  Bought 70 XIDE as LT at $2.75 I mentioned then that I might buy the secured note. I would have preferred to buy just 1 bond, but two was the minimum order.

Finra Information: FINRA According to FINRA, this bond is rated B2 by Moody's and B by S & P. Both ratings were issued in January 2011 when this bond was sold in a private placement. Subsequently, the bonds sold in the private placement were exchanged for bonds with the same material terms that had been registered with the SEC, a common sequence of events. Prospectus  Interest is payable semi-annually in February and August.

This is a secured note. The security is described in the prospectus starting at page 33.

I am assigning a 7- risk rating to this bond. Personal Risk Ratings For Junk Bonds

My confirmation states that the current yield at my cost is 10.542% and the yield to maturity is 13.035%.

The SEC filings for Exide can be found at EDGAR.

Added 1/6/2013: I had a more detailed discussion of this bond in a 12/15/12 comment to this SeekingAlpha article authored by an expert on batteries:  Seeking Alpha

I took a snapshot and had to go small to capture it in one shot:

Perhaps the most detailed discussion in a subsequent post can be in Item # 1 Stocks, Bonds & Politics:  Exide

ADDED 4/4/13: There was a large drop in this bond's price today due to two news events.

The Los Angeles Times that several members of the  L.A. City Council were irate about alleged arsenic emissions from the Exide battery recycling plant in Vernon, CA. At a minimum, this kind of news story will bring the class action lawyers out in droves.

Bloomberg reported late today, based on a story in Debtwire, that Exide had hired Lazard and the Akin, Grump law firm for "restructuring purposes". That phrase will generally would include consideration of the bankruptcy option. I have mentioned previously that Exide has a busted convertible maturing on 9/18/13 ($60M principal amount according to FINRA), which plunged in price on 4/4/13 based on the last trade. FINRA (closing at 64 and trading as high as 95 during the day)

After the close on 4/4/13, Exide announced that it had hired Lazard "to advise the company on financing alternatives to maximize the value of the company for all stakeholders", which would include the common shareholders. Exide Technologies Retains Financial Advisor In that press release, the company announced that its free cash flow for the fiscal 4th quarter would be "approximately $50 million, exceeding prior guidance of $30 million, with total liquidity (cash and availability under credit lines) at March 31, 2013 of greater than $230 million."

Moody's lowered its rating on the 2018 bond to B3 from B2 in March. Moody's

Added 4/9/13: I also discussed Exide in a post published on 4/9/13: Exide/MKN/Sold 100 DRE at 17.24-Roth IRA/Bought 100 GDO at $19.8/Initiated Position in VHCOX/Bought 50 of the Bond CEF GHY at $18.77-Roth IRA/Sold 200 STL at $11.39/MSFT/Jobs/

Added 4/26/13: The most recent piece of bad news was an order from the California Department of Toxic Substances to suspend operations at the Vernon recycling plant which supplied a significant portion of Exide's domestic lead requirements. Exide Receives Order From California Department of Toxic Substances Control Regarding Its Vernon, CA Facility; In response to this latest adverse development, the stock plummeted to below $1 per share. Wedbush downgraded Exide to neutral from outperform and Maxim downgraded to hold.

The 2018 bond is trading now near 65, and has traded down to near 63 intra-day, which suggests to me that institutional investors are attempting now to price this bond's value in a bankruptcy reorganization. Yesterday, the online bids for the 2018 bond disappeared.

Added 5/24/13: Today the 2013 busted convertible closed at 16.25, a price consistent only with a highly probable bankruptcy filing before that bond's maturity date. FINRA - Investor Information on Exide's 2013 Senior Unsecured Subordinated Bond This bond matures on 9/19/2013

The 2018 senior secured bond declined from the lows 70s to close at 66 near what it bottomed after the CDTS shutdown the Vernon plant. FINRA

Apparently, Debtwire published a story during the day that Exide was in talks for debtor-in-possession financing for a Chapter 11 BK financing according to StreetInsider.

I found a link to the Debtwire story after the market closed on 5/24:

The common stock took another tumble today: XIDE: 0.4498 -0.3335 (-42.58%)

Added 6/6/13: A story in today's WSJ noted that Exide was preparing for a "potential bankruptcy protection filing by this summer" which would is not "expected" to include the firm's European subsidiaries.  Exide Technologies Prepares for Bankruptcy Filing -

Added 6/10/13: As expected, Exide filed for BK this morning. According to the WSJ, Exide has secured a $500M DIP loan from JPM. Exide blamed several recent events for its BK filing including the forced shutdown of its Vernon plant that purportedly wiped out $24M in earnings before interest, taxes, depreciation and amortization and the loss of sales to WMT in 2010. See also, BloombergReutersExide Technologies Files Voluntary Chapter 11 Petition to Restructure U.S. Operations The European operations are not included in the BK.

I sold my 2 bonds at near break-even with the interest payments within a few months after the BK filing:

2013 Sold 2 Exide Bonds -$203.5


  1. Good charts from zerohedge on historical credit creation and market/GDP return, maybe you saw this.

  2. The velocity of M2 is frequently positively correlated with the movement of stocks, though there was a negative correlation in the 1980s.

    The velocity of money has been moving down consistently in recent months. This article is helpful for overlaying the S & P 500 with the velocity chart, which anyone can find at the St.Louis Fed:

    I will reproduce that M2 velocity chart in a post later this week.