Wednesday, August 15, 2012

Paul Ryan is a Reactionary (Not a Conservative)-An Advocate of a Gilded Age Political Philosophy/Sears Senior Secured 2018 Note/Earnings: Ally, CBB, SEM

Mr. Oregon Man (OM), one of the daily readers of this blog, likes to ask questions about whether to buy this or that, particularly after the RB has lost some of Heaknocker's money in this or that.

The OG asked Mr. OM last week what he would do with the 30 shares of Terex bought by the RB, just in the interest of quid pro quo so to speak.  Bought TEX at $14.43-LT Category Surely, he doesn't expect us to rely on Mr. Never Sweat the Details to make an informed decision.

Just as a reminder to Mr. OM, the OG may die before Mr. OM responds or may become so afflicted with that Old Man's disease that he will forget how to turn on the computer. Surely, Mr. OM can provide more guidance than the usual means utilized for making LT sell decisions here at HQ, which consists of throwing two wads of paper high in the air, one wad has the word "sell" and the other "hold", with the decision based on which wad falls closest to the OG's bid toe on the left foot.

‎Eurostat's flash estimate second quarter GDP was -.2% for both the Euro Area and the EU27. This would be in comparison to the previous quarter. The decline would be -.4% compared to the same quarter of 2011 for the EU17 and -.2% for the EU27. So, Europe is probably already in another recession.

The Commerce Department reported yesterday that consumer spending rose .8% in July, seasonally adjusted.

Home Depot gave an upbeat evaluation of demand flowing from the housing market in the Earnings Call.

The CEF Gabelli Dividend & Income Trust (own) is ex dividend today for its monthly distribution. I own 230 shares.

Bar Harbor Bankshares (own) is ex dividend today for its quarterly dividend. Earlier this week, Bar Harbor Bankshares completed its acquisition of Borders Trust Company which had three branches in Kennebec and Sagadahoc Counties, Maine.

TICC Capital (own) is selling 2 million shares of stock with an over-allotment option of up to another 300,000 shares. This company is a mortgage REIT. I own just 100 shares in the ROTH IRA.

There must be something that I do not understand about SNMX: 1.87 -0.11 (-5.56%) : Senomyx. The market is assigning a low probability that any of its flavor ingredients will be a commercial success. The company is burning cash but expects to have $40M at year end.  The market cap at yesterday's closing price is about $74.65M. I am about $300 in the hole on this one.

The Masters of Disaster are now cutting their price targets on Groupon shares, as the shares fell over 27% yesterday. GRPN: 5.51 -2.04 (-27.02%)  RB placed the shares on the LT monitor list yesterday for a possible 30 share buy below $5. Lottery Ticket Basket Strategy

Masters of Disaster (MD) are at their best when incinerating other people's money by the truckload. Groupon's IPO price was $20 per share. WSJ POOF, the sound of more investor money going to money heaven. The MDs are really some of the best magicians in the world. Making rabbits disappear out of hat is nothing compared to what they can do. And their legerdemain of moving money from your pocket to their own is breathtaking in both its frequency and audacity.

I took a snapshot of my KO shares as of yesterday's close, which includes the stock split shares:

265.996 KO Shares Average Cost Per Share=$25.41
KO: $39.38 +0.08 (+0.20%)

The selection of Paul Ryan as Romney's V-P will focus attention on the out-of-control budget deficits. Voters are already aware of, and concerned about that problem. While my personal polling is not scientific by any means, I discovered that many acquaintances have never heard of this bright young man and knew nothing about him. The Democrats certainly have an opportunity to influence voter perception of Ryan given this blank slate.

Ryan is intelligent and articulate. I believe that he is sincere in his beliefs unlike Romney who believes in whatever idea helps him win an election, rather it be the GOP nomination for President or the governorship of Massachusetts.  

From an independent's viewpoint, however, he carries a lot of baggage with him.

One or two readers of this blog may characterize what I am about to say as frothing at the mouth partisanship. I do not view it that way since I am simply stating what the GOP intends to do as shown by their recent votes and actions.

Ryan is a follower of Ayn Rand, who has a large and devoted following in the Modern Day GOP, but whose vision for America is not shared by non-partisan voters, many of whom are repulsed by it. Paul Ryan And Ayn Rand

Ryan represents the Ayn Rand wing of the Modern Day GOP, one of the two most dominant forces within the Modern Day GOP. I have a more favorable view of this wing than the other one which I sometimes characterize as the American Talibans and assorted wingnuts (e.g. birthers; guns everywhere including playgrounds, bars and airports, etc).

Ryan's vision, which is not subject to dispute, is that rich people need to be given more tax breaks. Never mind that many of the richest Americans already pay less than 15%, as shown by the recently released IRS data from 2009. Those folks will not be asked to pay more, but less.

Instead of addressing the revenue side of the problem, which the modern day GOP is incapable of doing to any degree, the Ayn Rand GOP will slash spending on programs that benefit both the middle class and the poor while giving tax breaks to the super wealthy.

Oddly, GOP middle class voters do not believe that this true. The largest middle class entitlement programs are Medicare and Social Security. The rich do not need either of those programs.

During their golden years, the middle class would likely perish into bankruptcy without them. Numbers do not lie about this point. The middle class has saved nowhere near what is necessary to retire. The Census Bureau published data recently showing that the median household net worth was $15,000 in 2010 exclusive of the home. Wealth and Asset Ownership - People and Households - U.S. Census Bureau

Under Ryan's first plan for Medicare, approved by the GOP dominated House of Representatives last year with virtually no GOP dissent, those individuals who would become eligible for Medicare in 2022 would be required to buy private insurance partially funded only in part by vouchers from the federal government. The purpose of that plan is to transfer costs from the federal government back to the individual, and thereby save the government a lot of money over time.

What is not generally known among the electorate is that this cost shifting to the individual will bankrupt most of them. Premiums in 2022 would be about twice as much as traditional Medicare, and will go from bad to worse thereafter. GOP's Plan To Bankrupt the Middle Class That vote, more than anything, shows their true colors.

There would be some justice for those middle class voters who were 55 last year and support Ryan's budget plan. I hope none of them ask me to bail them out. And, they will need to be bailed out without question.

Medicare is just one of the budget cuts envisioned by the Ayn Rand devotees. The GOP's Movement Toward An AYN RAND Vision for America

As noted in an earlier post, the GOP voted on a budget plan that would cut taxes for the wealthy, their benefactors, while slashing spending on programs for the poor and middle class. Chairman Ryan Gets Nearly Two-Thirds of His Huge Budget Cuts From Programs for Lower-Income Americans — Center on Budget and Policy PrioritiesThe GOP Budget Plan and The Middle ClassGOP's "Cap Cut and Balance" PlanModern Day GOP: No Longer A Conservative Party.

David Stockman has noted that the Modern Day GOP, as shown in Ryan's budget policies, would try to solve the U.S. budget problems on the backs of the poor. The Bipartisan March to Fiscal Madness in Sunday's NYT There can be no question about that statement from Stockman. And that is fine with the Koch brothers and the hedge fund billionaires who are worried about their carried interest tax loophole.

Stockman, who was Reagan's director of OMB from 1981-85 called Ryan's budget plan a fairy-tale in yesterday's NYT.

Forbes columnist calls Ryan's new Medicare plan, which is nothing more than an outline, a "fantasy" unworthy of adult conversation. (see also: Paul Ryan’s 2011 Medicare Plan: A Primer - ABC News)

Ryan wants to put doctors in jail who perform partial birth abortions. He calls Obamacare's coverage of contraceptives for women to be "an affront to religious liberty". He voted against a bill that would expand hate crime laws to cover offenses based on a victim's sexual orientation. He voted against funding NPR. NYT

Ryan was a sponsor of a bill that would give "personhood" to a fetus from the time of fertilization. Sanctity of Human Life Act (H.R. 212) - That bill provided that a fertilized egg "shall have all of the legal and constitutional attributes and privileges of personhood". This would make some forms of contraception (e.g. hormonal contraception) and in-vitro fertilization a crime.  I understand his opposition to abortions, which is nothing new from GOP politicians, but this reactionary party is now regressing to challenging birth control too. About 60,000 babies are born each year to IVF.

Ryan is also an advocate of privatizing Social Security, so that Americans can have an opportunity to lose a large chunk of their retirement savings during one of the periodic long term secular bear markets. A History Of Paul Ryan's Attempts To Dismantle Social SecurityThe Roller Coaster Ride of the Long Term Secular Bear Market

Ryan is one of the few active politicians who attends the Koch brothers' biannual indoctrination seminars about the myths of climate change and the evils of government.

He is the embodiment of the Koch brothers ideal politician, a pure reactionary firmly embedded in the guiding principals of the Gilded Age and Social Darwinism.

Ryan is a firm believer in the trickle down economic theory, and no amount of credible evidence disproving it will change his mind. His belief in trickle down economics is as immutable as his sincere belief that a fertilized egg is a human being deserving of constitutional protection. As noted by the republican Bruce Bartlett, the evidence is overwhelming that the budget deficits were caused to a great extent by the Bush tax cuts. He noted in yesterday's column that the GOP is now blaming Obama for Bush's fiscal policies. NYT;  Bush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ; and my post titled Bush Tax Cuts and Jobs (which uses Labor Department data to show just how bad job creation was after the Bush tax cuts).

If Ryan and the GOP are able to implement their vision for America, the middle class will find out soon enough whether they are the intended beneficiaries of this vision. Polls show that most of them do not have much of a clue as to how they benefit from federal programs now. Klein column at  Bloomberg That will change when and if the GOP gains enough power to implement Ryan's vision. If the voters want to go down this path, then so be it.

While I will not hazard a guess on the eventual outcome, I do believe that the worst possible long term outcome for Republicans would be to actually implement Ryan's vision.

In about a 10-15 years thereafter, the GOP would have difficulty holding onto Wyoming and Idaho. And even a billion of the Koch brothers' money poured into false and misleading campaign advertisements would not likely sway those who have awakened and finally seen the light.

I understand why the GOP feels a need to help the Koch brothers become richer given the hundreds of millions that are being spent by them this year. Fifty or hundred billion dollars is after all better than say 30 or 40 billion. But ultimately, even some of the GOP's middle class voters will start to wonder whose interest is really being promoted by that party.

There are sensible and fair long term solutions to the fiscal train wreck that lies in the not too distant future. Generally speaking, the solution involves about one-third revenue increases, which the GOP opposes, and two-thirds spending cuts.

Politicians need to do a better job explaining the situation to voters. For example, I have found that most people are unaware of how much the federal government subsidizes Medicare. Those people believe their premium payments actually cover the cost!

For Medicare, one baby step would be to increase gradually the eligibility age.

On the cost side, it is important to crack down on medicare fraud which could easily be costing $50-$70 billion a year. The Obama administration is in my opinion doing a better job in this area than prior administrations who were mostly talk with little action. HHS, Department of Justice highlight Obama administration efforts, Health Reform tools to combat Medicare fraudObama officials tout record ‘takedown’ by Medicare fraud force - The Hill's Healthwatch;;

1. Sears Senior Secured (own 2Junk Bond Ladder Strategy): As previously discussed, the security for the 2018 Sears note consists primarily of domestic inventory and credit card receivables. The 2018 secured note is discussed by Sears at page 8 of Form 10-Q. The 2018 senior secured note has in effect a second lien interest in that collateral, while borrowings under Sear's credit facility have a first lien priority. 

Collateral for and Priority of 2018 Secured Note

The 2018 secured note is discussed by Sears at page 8 of Form 10-Q. As of 4/28/12, the company had borrowings of $1.486 billion under its bank credit facility. Of that amount, $694M was in letters of credit, the majority of which are used to provide collateral for Sears domestic insurance program (page 7).   The amount borrowed under the bank credit facility would be secured by a first lien.  To the extent of Sears borrowings under that facility, the 2018 secured note is a second lien, which would indicate to me that it attaches as practical matter only to the collateral value in excess of those first lien borrowings. 

I am bringing this bond up again since there is a good article about Sears in this week's Barrons, written by Michael Santoli. Anyone that owns this bond, or is considering purchasing it, will want to read it. 

Santoli focuses on a the "hidden value" in Sears shares that could result in a $100 share price based on a sum of its parts.  I would not call those assets as hidden since they are in plain view.

One asset is Land's End, a catalogue retailer, which is up for sale, and may fetch between $1.5 to $2B.

Sears plan to spin off the 1000 small format HomeTown stores through a $400 rights offering. A subsequent article in the WSJ stated that Sears intended to proceed with this offering and expected to raised $400 to $500 for Sears Holdings with it.

About 1/2 of Sears Canada is scheduled to be spun-off later this year. It can also raise cash by selling stores or long term leases.

Eleven properties were sold recently to General Growth Properties for $270 million. Santoli also points out that Sears has slashed inventory by $800M.

I took a snapshot of the owned and leased properties as of January 2012, taken from the Annual Report:

Form 10-K at page 13

The foregoing is not the reason for bringing up the article. In the 2018 note prospectus, several of Sears subsidiaries guarantee the debt. Given the second lien status of the note, those guarantors could become important. I took a couple of snapshots of language relating to the identity of those guarantors:

Guarantors Page 6

Subsidiary Guarantors p. 22
The guarantors would include those subsidiaries who are also borrowers under the secured credit facility. Some subsidiaries are expressly excluded from the guaranty including Sears Canada and Orchard Supply which was spun off in January 2012. Sears Holdings Corporation Completes Spin-Off of Its Interest in Orchard Supply Hardware Stores Corporation - Dec 31, 2011

Santoli names two subsidiaries that are walled off from the guarantees. One is known a KCD which owns the "intellectual property" associated with the Kenmore, Craftsman and DieHard brands. That partnership licenses the use of the trade names to Sears. That entity was formed in 2007. Seeking Alpha KCD securitized the license fees by selling bonds to a Sears insurance subsidiary called Sears Re. This entity would not be able to sell those bonds if its assets had been subject to a secured lien. So, based on what I know, I do not see anything nefarious in this transaction which is at least suggested in the Santoli article.

For the other non-guarantor subsidiary mentioned by Santoli, Sear contributed 125 stores to it and then that entity sold mortgages on the property to the wholly owned insurance subsidiary.

These transaction are explained in more detail in Sear's last annual report as follows:

As I understand it, these transactions lowers insurance cost.  

Together, those two subsidiaries generate $600 million in free cash flow per year according to Santoli.  

Those entities could be sold to raise cash, but there value would have to reflect their own debt, 

While I would prefer to have a second lien on the assets owned by the non-guarantor subsidiaries, the lack of a guarantee is not that much of a concern. The lack of a lien and guarantee would be important to the unsecured senior note owners for the simple reason that those subsidiaries are not providing collateral for the secured notes and bank facility. Once the collateral for the first and second lien notes are sold and applied to the debt, then all of the senior debt owners, secured and unsecured, would be in the same position, as between themselves, as to those non-guarantor assets, at least to the extent of Sear's ownership interest in those subsidiaries. 

The problem for the senior secured owners is that they have a no greater claim to those assets than the unsecured senior bond owners. And, to the extent those subsidiaries had their own debt (e.g. liens on the property), then those Sears Holding debt owners would have less to claim for that reason.  

I left two comment to this effect at Barrons. My comments are unlike the others and will never be similar to what is normal for a message board at YF.

Sears is scheduled to report earnings this Thursday. A sneak peek of what analysts expect can be found at the Wallstcheatsheet website. It will not be pretty.

2. Select Medical (one 1 senior subordinated 2015 bond: Junk Bond Ladder Strategy): SEM reported second quarter net income of $43.2 million or 31 cents per share, up from $11.7M in the year ago quarter which included a $19.3 charge, or 12 cents per share, related to debt extinguishment. SEC Filed Press Release Net operating revenue increased by 7.4% to $750.2M. The company increased earnings guidance for 2012 to $1.01 to $1.06 per share. 

As of 6/30/12, the company had $21.52M in cash and long term debt of $1.342+ billion.

As of 6/30/12, the company had net borrowings of $843.2 million under its secured credit facility. 10-Q at page 50 

FINRA shows the outstanding amount of the subordinated note at $345M. 

I have sold my LT position in SEM: $10.32 0.00 (0.00%)

3. Ally Financial (own 2 senior GMAC bonds: Junk Bond Ladder Strategy): Excluding losses related to ResCap, which is now in bankruptcy, Ally earned $553 million in the quarter. SEC Filed Press Release North American auto finance posted $631 in pre-tax income for the quarter, up 13% year-over-year. Ally Bank grew deposits to $30.4 billion, up 24% from the 2011 second quarter. Cash and cash equivalents stood at $16.1B. Needless to say, long term debt is staggering at $91+ billion. GJM 2012.06.30 10Q

Both of my GMAC bonds pay monthly interest:

4. Cincinnati  Bell (own 1 senior 2018 subordinated in IRA: Junk Bond Ladder Strategy): CBB reported net income of $5 or 1 cent per share after a $13M non-cash impairment charge on $368M in revenues.  Earnings Release Q2 2012 Adjusted EBITDA was $140M, up from $137M in the 2011 second quarter.

The more important news is that CBB has filed for an IPO of its CyrusOne data center business.     Reuters;  Form S-11

I have sold 2 CBB 2018 subordinated senior bonds and 1 CBB 2020 senior bond. The 2018 senior sub bond is now trading near its par value. FINRA

I currently own just 1 CBB 2018 senior subordinated bond. This type of bond will have a lower priority than unsecured senior bonds.  

I apparently have not discussed this purchase. It was made in May 2011. I am at break-even on the bond:
2018 CBB Bought at Total Cost of  98.25


  1. OM (?) appreciates the gentle nagging, two things to clarify though. a) yours is one of the tags in the window my browser opens up automatically when it start it every morning. IOW you see me, but I may not necessarily, as I may not actually go to it. But almost daily reader I am, consider yourself honored. b) profound apologies for not following up on your requests to reply. Other things Continu to interrupt.

  2. Are you an Oregon Lady? My apologies if I mistook the gender.

  3. Sorry no, and sorry for the typos above, not very good typing on my iPad.