Monday, May 7, 2012

JOBS/Secular Decline Labor Participation Rate/ EARNINGS: SU, MWA, GABC/Sold 30 PEP at $66.58/Bought 1 Quicksilver Resources 9.125% Senior Bond Maturing 2019 at 97-ROTH IRA/

The Labor Department reported last Friday that the U.S. economy added 115,000 jobs in April, significantly below the consensus expectation of a 160,000-163,000 increase. This number is subject to revision. Private companies added 130,000 while governments shed 15,000 jobs.

The job gains for March and April were revised higher. The gain for February was revised to 259,000 from 240000, while March was revised to 154,000 from 120,000. Employment Situation Summary

The U-6 number was unchanged from March at 14.5%. Table A-15. Alternative measures of labor underutilization

The unemployment rate fell to 8.1% from 8.2%, but 350,000 people dropped out of the labor force. The participation rate fell to 63.6%, down from 64.2% a year ago, as more Americans become discouraged and drop out of the labor force.  The 63.6% participation rate is the lowest since December 1981.

The labor participation rate appears to be in a long term decline, indicating a structural problem in U.S. job creation:

This is what the labor participation chart looks like from 1948 to date:

Bureau of Labor Statistics Data 

While there appeared to be a leveling off between 2004-2008 before the onset of the Great Recession, that may have been a temporary phenomenon caused by job creation connected with temporary factors, including the housing bubble and the parabolic rise in household and government debt creating demand for products and services. What Will Produce Growth after the Age of Leverage? (September 2009 Post). Those jobs would soon be lost in 2008-2009 and will be slow to return.

Anyone who asks whether a junk rated bond is safe needs to immediately cease and desist managing their own money. Is this Bond Safe? The mere asking of that question indicates a lack of the most basic information about bond investing. My Junk Bond Basket Ladder Strategy is easily my riskiest strategy. After suffering a number of defaults, my best case scenario will be to break-even on the bonds, while collecting interest payments at close to a 8% spread over a BBB rated corporate bonds with a similar maturity schedule.

If anyone asks LB whether a junk bond is safe, it will send the Nerd Machine into apoplexy.

1. SUNCOR (SU)(own): Suncor Energy reported earnings of 93 cents per share for the first quarter, eight cents better than the consensus estimate. Downstream activities contributed 30 Canadian cents to those results. Production for the first quarter averaged 562,300 barrels of oil equivalent per day, down from 601,300 in the year ago quarter. The decline in production was due to the divestiture of non-core assets and the suspension of activities in Syria due to political unrest and sanctions against that country.

Cash flow from operations was $2.426  billion or $1.55 cents per share for the first quarter.

Oil sands production contributed an average of 305,700 barrels of oil equivalent per day.  Annual 2012 production from oil sands is estimated at 325,000 to 355,000 barrels of oil equivalent per day.

This report is discussed in an article published at Reuters.

Suncor also increased its quarterly dividend to 13 Canadian cents from 11 cents. 

Morningstar has a five star rating on SU with a consider to buy target at $34.30 or less.

Suncor Energy declined $1.25 last Friday to close at $30.35. Crude oil fell almost 4% last Friday.

2. German American Bancorp (own 50 shares: Regional Bank Basket Strategy): German American Bancorp reported net income of $5.6 million, or 44 cents per share, for the 2012 first quarter, up from 37 cents per share in the 2011 first quarter. The estimate was for 40 cents.

The Board also declared the regular quarterly dividend of 14 cents per share. 

As of 3/31/12, the net interest margin was 3.88% (up from 3.76% as of 12/31/11); the efficiency ratio was 57.79%; NPLs stood at 1.49% of total loans (down from 1.63% as of 12/31/11 and 1.73% as of 3/31/11); and the return on average assets was 1.19% for the quarter. 

I did not see the capital ratios spelled out in the GABC press release. Several of the smaller banks do not estimate those ratios until the SEC Form 10-Q is filed shortly after the earnings announcement. 

GABC did recently filed its 2011 Annual Report with the SEC. As of 12/31/11, the coverage ratio was 83.83%, page 35. The capital ratios at that time were in excess of the minimum required to be considered well-capitalized:  
GABC Capital Ratios as of 12/31/2011

German American Bancorp declined 44 cents last Friday to close at $18.77.

Bought 50 GABC at 17.05 (May 2011)

3. Mueller Water (own 2017 senior sub bond: Junk Bond Ladder Strategy)Mueller Water Products (MWA) reported a loss from continuing operations of 6 cents per share on revenues of $215.5 million. During the Q/E 3/31/12, the company agreed to sell its U.S. Pipe operation for $89.8 million in cash, subject to working capital and other adjustments and reimbursement of certain liabilities up to $10.2 million. The company announced the completion of that transaction on 4/2/12.  SEC Filed Press Release

The adjusted net loss for the quarter was 1 cent per share. Adjusted EBITDA was reported at $26.7 million for the quarter. The consensus E.P.S. estimate was for a 4 cent per share loss.  If that number is based on the adjustments proposed by MWA, then the company beat by 3 cents.

Subsequent to 3/31/12, the company repaid $48 million that was outstanding on asset based lending agreement and redeemed $22.5 million in principal amount of its 8.75% senior unsecured notes. The 8.75% senior note was issued in an original amount of $225 million and matures in 2020. The 2017 subordinated senior note was issued in the original principal amount of $425 million. {The debt amounts shown in the last filed 10-Q for the Q/E 12/31/11 was $221.8 million for the 2020 senior note;  $420 for the 2017 subordinated note; and $34 million for the asset based lending agreement (page 7)}

Prior to the recent debt extinguishment, the company had $692.5 million in outstanding debt, of which $.7 was classified as current debt.  

I own just one senior subordinated note. Bought Back 1 Mueller Water 7.375% Senior Subordinated Bond Maturing on 6/1/2017 at 94.5 June 2011 If I could sell that one bond at par value or higher, which would be difficult, I would likely do so.

I had previously bought and sold this bond before buying it back. Bought 1 Mueller Water Bond at 94.5 December 2010 Sold 1 Mueller Water Sen Sub Bond at 100.625 May 2011

Corporate Website: Mueller Water Products - Home

4. Bought 1 Quicksilver Resources 9.125% Senior Bond Maturing 8/15/19 at 97-ROTH IRA Last Tuesday-ROTH IRA (Junk Bond Ladder Basket Strategy)(see Disclaimer): This bond was previously bought in a taxable account. Bought 1 Quicksilver Resources 9.125% Senior Bond Maturing 8/15/2019 at 99 (January 2012 Post)

The bond details are provided in this snapshot taken just before I placed the order. Since I am a Voyager customer at Vanguard, my commission for this purchase was $2.  My current yield will be close to 9.4%. 

Prospectus: Prospectus
FINRA Information: FINRA

This bond is currently rated at B2 by Moody's and B by S & P. 

As previously discussed, KWK is a highly leveraged production company whose production is unfortunately weighted in natural gas. 

I have not yet assigned a risk rating for this bond. Personal Risk Ratings For Junk Bonds I am leaning toward giving it a 6. I want to see how much progress KWK makes this year with its emerging oil plays, and whether it is successful in monetizing some of its natural gas assets in a limited partnership IPO. 

I did review the S & P bond report available at Fidelity. The Moody's report is available at Charles Schwab. I will generally print these reports and examine them during the evening. 

I also own the common shares as a Lottery Ticket: Bought 50 KWK at $5.3-LT Category As previously noted, anyone buying the common will need a lot of patience and a long term perspective. KWK

5. Sold 30 PEP at $66.58 Last Thursday (see Disclaimer): For the reasons given in when I sold 50 shares of PEP in the ROTH IRA Sold 50 PEP at $66.48-ROTH IRA), I decided to completely liquidate my position by disposing of the 30 shares held in a taxable account.

2012 Pepsico 30 Shares +$182.9
Bought 30 PEP at $59.95 (October 2011 Post)

I am sticking with my 132+ shares of KO.

PepsiCo Board announced a 4% dividend increase. The new quarterly rate will be $.5375 per share. The new annual rate will be $2.15 up from $2.06 per share. The author of this article at Investopedia argues that PepsiCo looks like a better investment than KO based on growth prospects after such an anemic 2012 year.

Morgan Stanley upgrade PEP shares to overweight this morning.

PepsiCo shares lost $1.01 last Friday to close at $65.9.

I am not likely to buy back shares north of $60.  During the Near Depression period, I was able to buy PEP shares for as low as $49.6 (May 2009). 

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