Friday, May 18, 2012

Causes for Labor Participation Decline/BYD/ Earnings: Cascades, Travelport, CenturyLink/Bought 1 Forest City Enterprises 7.65% Senior Bond Maturing 6/1/2015 at 100/Sold 50 UBCP at $10.05

I have been raising cash, as noted by the preponderance of sell transactions discussed in this blog, and have returned to my most cautious stock buying strategy. That cautious strategy allows for new stock purchases, other than REITs and BDCs, only with cash flow or the proceeds of a stock sell. Cash flow refers to dividend and interest payments received into one of brokerage accounts.

Alexis Tsipras, the head of Greece's "Coalition of the Radical Left", told the WSJ that Greece will repudiate its debts in the event the EU cuts off funding. Tsipras wants Greece to renege on the recently approved austerity agreement that was a condition precedent to receiving more EU funds. So, from his viewpoint, once Greece reneges on austerity, the EU will need to keep the billions flowing into Greece or that country will simply repudiate all of its debt. Tsipras, who is a "former" Communist, is also in favor of nationalizing Greece's banks and scrapping plans to lay off public employees. The public sector in Greece is bloated to the extreme.  

According to a recent poll discussed at Reuters, Greek voters would give the two parties that approved austerity measures enough votes to form a new government.

Barclays upgraded Cisco to buy while maintaining a $21 price target. The report is summarized in the Tech Trader Daily blog at Barron's. I would be a seller at $20.

The Philadelphia Fed released its manufacturing survey which showed contraction. The index for general business activity fell to -5.8 from +8.5 in April. Survey Shows Pace of Growth Fell Back (May 17, 2012) - Philadelphia Fed The expectation was for a slight increase to +9.3. As soon as that number was release yesterday, the market sold off.

Caterpillar noted in a SEC filing yesterday a decrease in sales growth in the Asia/Pacific region during April compared to March. The downtrend in Latin America sales accelerated in April SEC Form 8-K The common shares, CAT, declined 4.42% in trading yesterday to close at $87.8. I have no position.

The Treasury auctioned 10 year TIPs yesterday at a -.391% yield.

The Federal Reserve members disagree about the underlying causes for the decline in the U.S. labor participation rate. FRB: FOMC Minutes, April 24-25, 2012 I noted in a prior post that the participation rate appeared to be in a long term secular decline that would be occurring independent of the recent recession, which just accelerated the decline. Secular Decline Labor Participation Rate

Some research papers estimate that almost 1/2 of the decline can be explained by patterns likely to continue. While those papers discuss some reasons for the decline, which are undoubtedly contributing factors, more problematic explanations may be providing the impetus for the decline.

Those trends include the loss of U.S. jobs as companies move factories overseas in search of cheaper labor or hire cheaper foreign labor to perform jobs formerly held by U.S. citizens. Those job losses originate mostly from corporations who are sitting on record cash piles. Another long term factor is the unwinding of leverage, both at the consumer and government levels, that was a major driving force for aggregate demand during the Age of Leverage. What Will Produce Growth after the Age of Leverage? (September 2009)

When large sums of borrowed money are being spent, there will be more jobs created to serve the demand for products and services created by the surge in leverage. As that process is unwound,  jobs just disappear, causing segments of the workforce to give up, a decision that may be made easier by extending unemployment benefits for unprecedented periods of time.

Neither political party has a plan to address the underlying causes for this secular decline in labor participation rates.

An article published in the WSJ discusses an aggressive and profitable trade made by JPM's London Whale, Bruno Iksil, last year. It is not possible to even argue with a straight face that this kind of trade represents a hedge. It was clearly an aggressive wager aimed solely at generating profits for the bank.

Boyd Gaming is buying Peninsula Gaming for total consideration of $1.45 billion. Part of that amount involves the assumption of Peninsula's debt by Boyd. The seller will throw in a note in the approximate amount of $144 million. The deal will add five casinos, located in the south and midwest, to BYD's operations. BYD anticipates that the deal, expected to close by year end, will immediately add to earnings. WSJ I own the common as a LT and 1 senior bond. Bought 1 Boyd Gaming 9.125% Senior Bond Maturing on 12/1/2018 at 89 (October 2011); FINRA. S & P placed the senior debt under review with negative implications. TEXT-S&P The common shares, BYD, rose 3.72% in trading yesterday to close at $7.24.

1. Cascades (own2017 senior unsecured bondJunk Bond Ladder Strategy): Cascades reported a first quarter profit of 6 million CADs or 6 Canadian cents per share, up from a loss of 8 cents per share in the 2011 first quarter. Revenues rose 15% to C$891 million. 

Bought 1 Cascades 7.75% Senior Bond Maturing on 12/15/2017 at 96.5

The common shares, CAS, trade on the Toronto exchange but three of Cascades' bonds can be bought in the U.S:

2013 Note
2017 Note
2020 Note

All of those bonds are currently rated Ba3 by Moody's and B+ by S & P according to FINRA.

2. Travelport (own 3 bonds: Junk Bond Ladder Strategy): Travelport reported a first quarter loss of 11 million on $550 million in revenues, compared to a 23 million loss on $531 million in sales for the first quarter of 2011. SEC Filed Press Release

The company claims that it is making progress in expanding its Asian operations:

Operating income fell to 66 million for the quarter, down from 79 million in the year ago quarter. Travelport generated $29 million in net cash from continuing operations, a $32 million dollar decrease "due to a $20 million payment under the 2011 employee plan in March 2012 and fluctuations in our collection and payment cycles".

As of 3/31/12, the company had $109 in debt and $3.376 billion in long term debt.

Due to adverse developments since I purchased the bonds, I have raised the risk ratings on Travelport's senior and senior debt to 10- and 10+ respectively. Personal Risk Ratings For Junk Bonds Those events are described in earlier posts: Item # 2 Travelport; Item # 1   Travelport; and Item # 3 Update on Travelport.

I am in a hole on the 2014 and 2016 senior bonds (1 each) and in a really deep hole on the one 2016 senior subordinated bond. The bond prices have improved over the past few weeks, narrowing my losses some.

3. CenturyLink (own bonds originally issued by Qwest): CTL reported adjusted diluted E.P.S. o f68 cents per share on revenues of $4.61 billion. Excluding special items, the company generated free cash flow of $1.04 billion.  SEC Filed Press Release

Discussion of Earnings Report at

As of 3/31/12, CTL reported having $1.53 billion in cash and cash equivalents and long term debt of $20.667 billion. Current maturities of long term debt totaled $2.2 billion.

Last March CTL sold $1.4 billion in 5.8% senior notes maturing in 2022 and $650 million of senior notes maturing in 2042. Prospectus

CenturyLink Profile Page at Reuters
CenturyLink Key Developments Page at Reuters

Fitch affirmed the debt ratings in April: TEXT-Fitch The senior unsecured debt is hovering above junk at the investment grade rating of BBB-.

The current consensus estimate is for an E.P.S. of $2.38 in 2012 and $2.35 in 2013.  CTL Analyst Estimates I do not own the common.

My largest position consists of 150 shares of the Trust Certificate PJA (Prospectus):

Trust Certificates: New Gateway PostBought 50 PJA at 19.45 December 2009Bought 50 PJA at 24.65 December 2010Bought 50 of the TC PJA at 25.06 April 2011Sold 50 PJA at $25.4-ROTH IRA

PJA contains a senior Qwest Capital bond maturing in 2031 so there is a lot of interest rate risk. The TC has a 8% coupon on a $25 par value. The next ex interest date for the semi-annual payment is 6/12/12. TCs trade flat. Merrill Lynch Depositor Inc. PreferredPLUS Cl A 8% TRUCs QWS-2 for Qwest Capital Funding Inc. (PJA) rose 18 cents yesterday to close at $25.55.

I also own 2 U.S. West Communications bonds. FINRA InformationBought 1 U.S. West Communications 7.5% Senior Bond Maturing 6/15/2023 at 100Bought 1 U S West Communications 7.5% Senior 2023 Bond @100.13 -ROTH IRA

I have also traded another TC which contains a senior Embarq bond, another company acquired by CTL. That TC, FJA, has a 7.1% coupon on a $25 maturity, with a maturity in 2036. BOUGHT 100 of the TC FJA at $15.35 May 2009Bought another 50 FJA at $14.2 May 2009Sold 50 of 100 FJA at 24.75 December 2010Sold 50 of the TC FJA at $24.84 June 2011 I have no interest in that long term bond anywhere near its par value.

4. Sold 50 UBCP at $10.05 Last Thursday (Regional Bank Basket Strategy)(see Disclaimer): I sold my highest cost shares bought at $8.49 (May 2010). When I discussed this bank's earnings report for the 2012 first quarter, I mentioned then that I might pare the position at a price greater than $9.75. Item # 4 UBCP FCBC XRX (April 2012). While this small Ohio based bank pays a good dividend, the payout ratio is near 100% and net income grew only 3.1% last quarter compared to the 2011 first quarter.

I still own 111+ shares. I am reinvesting the dividend. Bought 50 UBCP @ 8.13 Bought 50 UBCP at 7.99 The shares went ex dividend on May 17th. United Bancorp, Inc. Declares a Regular Cash Dividend Payment of $0.14

United Bancorp closed at $9.42 yesterday.

5. Bought 1 Forest City Enterprises 7.625% Senior Bond Maturing 6/1/2015 at 100 Last Thursday-ROTH IRA (Junk Bond Ladder Strategy)(see Disclaimer): By buying this junk rated bond in the ROTH IRA, I in effect turn it into a tax free bond. One reason for buying this bond is its maturity in slightly more than 3 years. Given the likely continuation of the FED's Jihad against the Saving Class into 2014, a 7.625% tax free yield has some appeal. It is probably a too risky security, however, for the ROTH IRA, which is one reason for limiting my exposure to just one bond.

This bond is currently rated B3 by Moody's and B- by S & P.

This is a snapshot of the bond information taken shortly before I entered the purchase order:

As a Vanguard Voyager customer, my commission was just $2.

FINRA Information on this Bond.

Bond Prospectus:

2011 Annual Report: FORM 10-K

Profile page at Reuters

I have done well investing in the Forest City common as LT purchases. BOUGHT 50 SHARES OF FCEA AT 6.3-FOREST CITY COMMON (May 2009); Sold FCE at $13.23 (September 2009).

2009 FCE/A 50 Shares +$327.48
I recently bought 30 shares as a LT and still own them. Bought 30 FCE/A at 11.58 (January 2012)

I have also realized profits in its senior exchange traded senior bond maturing in 2034. Forest City Enterprises Inc. 7.375% Sr. Notes 2034  (FCY) When I bought the 2015 bond, FCY was trading at $24.87. Par value for that security is $25. Given its interest rate risk directly linked to its much longer maturity, and its lower current yield than the 2015 bond, I preferred buying the 2015 bond.

During the Near Depression, I bought FCY for less than $10 and sold those shares at $14.6.  SOLD FCY (May 2009). FCY closed at $24.46 yesterday. I made one other round trip in the ROTH IRA in 2010.

2009 FCY 50 Shares +$213.98
2010 FCY 50 Shares ROTH IRA +$71.48
Needless to say, I would have been better off keeping all of those shares. If I had, I would sell them now since the OG is concerned about interest rate risk associated with long term bonds and the credit risk just aggravates those concerns.

Exchange Traded Bonds

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