Wednesday, September 12, 2012

Bought 70 AWC at $3.44-LT Category/S & P Downgrade Pactiv-Tenneco Packaging Debt/MS, CNO/Sold 1 Telefonica Emisiones 4.94% Senior Bond Maturing 2015 at 102.524

George Soros asserted in an interview that Germany will be in a "depression" within 6 months unless it abandoned its austerity demands for southern European nations. While the austerity measures are pushing Greece and Spain deeper into a depression, Soros is engaging in extreme hyperbole to assert that the same fate awaits Germany. It is possible that Germany will slip into a mild recession later this year or in early 2013, but it is just reckless to use the word "depression" to describe a probable outcome for Germany.

Goldman Sachs reiterated its conviction buy on CNO Financial Group, a Lottery Ticket, and bumped its target price to $11 from $10. Bought 35 CNO at $7.81 (March 2012). CNO: 9.81 +0.14 (+1.45%)

Morgan Stanley announced that it had reached an agreement to buy the remainder of Citigroup's interest in their brokerage joint venture, "Morgan Stanley Smith Barney Holdings". The total value place on this business is $13.5B. The agreement calls for MS to buy Citigroup's 14% stake now and the remaining 35% by 6/1/2015. I view this agreement as a positive for MS. I recently bought 50 shares of MS common and currently own 250 shares of its floating rate equity preferred stock MSPRA. Item # 2 Bought 50 MS at $14.98 (9/5/12 Post)

Yesterday's closing price: MS: 17.25 +0.64 (+3.85%)


Joe Nocera cited some interesting statistics about the Chicago public school system in his NYT column yesterday. About 60% of the Chicago public school students graduate from high school and a paltry 6% graduate from a college before the age of 25. The school system is expected to have a $3 billion shortfall over the next three years. No wonder those teachers do not want their pay tied to performance. The city wanted 40% of a teacher's evaluation to be based on student test scores, up from the current 30%, and the union objects to that increase. Teacher salaries in Chicago have increased at a far greater rate than inflation between 2007-2012.


Kurt Eichenwald  claims in a column in yesterday's NYT that George Bush received several warnings about an Al Qaeda attack in the U.S. before 9/11 and refused to put the security apparatus on high alert.
Almost all of these classified briefings have not been made public, but Eichewald claims to have seen several of this national security daily briefings. The only one made public (8/6/2001) contained the heading "Bin Laden Determined to Strike in U.S."

In a few years, I would hope that most of this historical information can be declassified, possibly with some redactions, and examined by historians. While I have no reason to either accept or reject Eichenwald's conclusion that the Bush administration was negligent in responding to those threats based on his alleged access to those classified documents, I do believe that the evidence is overwhelming already that George Bush was a deeply flawed President whose extraordinary poor judgment on a wide variety of matters will have a substantial negative impact for years.

According to a story in the WSJ, Israel's government is upset with the Obama administration's failure to set a "red line" for Iran which "if crossed, would trigger a U.S. military response". Just what the U.S. needs now, another Middle East war lasting a decade. Romney seems game to do Israel's bidding.


1. S & P Downgrades Pactiv/Tenneco Packaging Debt (own debt: Junk Bond Ladder Strategy): Tenneco Packaging changed its name to Pactiv before Pactiv was acquired by the excessively leveraged private company Reynolds Group. I own four Pactiv senior unsecured bonds: two 2018 Pactiv 6.4% coupon and one each of the 2025 and 2027 bonds originally issued by Tenneco Packaging.

I have not been impressed with a single earnings report issued by the Reynold's Group since I purchased these bonds. I was further dismayed by Reynold's need to expand an over leveraged balance sheet with its debt financed acquisition of another leveraged packaging company known as the Graham Packaging Company. Press Release And, Reynolds is not making progress in paying down its clearly excessive debt levels. Perhaps, the owner of Reynolds, Graeme Hart, likes to live dangerously and to be at the mercy of his lenders when constantly refinancing Reynold's massive debt load. It will not be pretty when interest rates start to rise.

Why care when you have not one but three yachts (no joke), plus a gigantic home in need of an occasional renovation? NZ Herald News$30 Million home improvement  

Last week, S & P cut the senior unsecured ratings of Pactiv debt to CCC+, noting the highly leveraged balance sheet and lack of earnings growth and debt reduction. TEXT-S&P It is noteworthy that S & P has a "6" recovery rating on that debt, which simply means that S & P estimates that there will be a zero to 10% recovery in the event of a default. That estimate would normally be a wake up call for the owner of a business, but I seriously doubt that the owner of Reynolds is listening. 

I raised my risk ratings on Pactiv debt back in June 2011: Item # 1 Tenneco Packaging and Pactiv Bond-Increasing Personal Risk Ratings I have now a 8+ rating on the bonds maturing in 2025 and 2027 and a 7 on the 2018 bond. 

After reviewing the last earnings report, I noted that the risk ratings would need to be raised again if I did not see significant improvements in the next earnings report. Item # 4 Reynolds Group I doubt that I will see any improvement on earnings or debt reduction. I mentioned in that post that I would likely sell one of the two longer dated bonds as a risk mitigation measure within the next year. 

2. Sold 1 Telefonica Emisiones 4.949% Senior Bond Maturing 2015 at 102.524 Last Monday (see Disclaimer): When I sold a 2019 Telefonica Emisiones bonds, I mentioned that I would probably sell this one and keep the 2016 maturity. Item # 4  Sold 1 Telefonica Emisiones 5.877% Senior Note Maturing in 2019 at 97.13

I bought the 2015 bond about two months ago: Bought 1 Telefonica Emisiones 4.949% Senior Bond Maturing on 1/15/2015 at 96.075

 Bought 1 Telefonica Emisiones 6.421% Senior Bond Maturing in 2016 at 95.178

3. Bought 70 Alumina ADRs at $3.44 Last Monday (Lottery Ticket Basket Strategy)(see Disclaimer): I mentioned this company when discussing a recent Alcoa purchase. ADDED 50 Alcoa at $8.51 I noted in that post that S & P had downgraded Alumina's senior unsecured debt rating to BBB-. TEXT-S&P

Alumina is an Australian company that owns a 40% interest in Alcoa World Alumina and Chemicals (AWAC). Alumina's cash flow depends almost exclusively on dividends paid to it by AWAC.

Alumina Ltd (AWC) Profile Page at Reuters

Company Website: Alumina Limited

2011 Annual Report: Alumina Limited

Each AWC ADR is equal to four ordinary shares. This is a link to the ordinary share price shortly after I completed my purchase: AWC.AX: 0.84 +0.0550 (+7.01%) The value of the ADR will be dependent in part on the exchange rate between the AUD/USD. AUDUSD=X: 1.0360 -0.0025 (-0.24%) I did a quick conversion and calculated the value of the AWC ADR share at $3.48 based on the ordinary share price of AUD $.84 (multiplied by 4) and the exchange rate.

AWAC is the largest producer of Alumina with roughly a 25% world market share. AWAC also mines bauxite, the raw material that is refined into Alumina which is then used in smelters to produce aluminum. Alumina is a more scarce product than aluminum and its price may become unhinged from the aluminum price which has been declining. It is my understanding that aluminum is more of a commodity product than Alumina. Five of the eight AWAC refineries in Australia are in the lowest quarter in cost worldwide.

As noted in the Morningstar report on AWC, the alumina price has traditionally been about 15% of the aluminum price which is not fundamentally justified. This has caused alumina producers to sell their product more at spot prices and to move away from that linked price to aluminum. AWC recently stated that about 40% of AWAC's production will be sold at spot prices by the end of 2012, up from 1/3rd during the 2012 first half. (page 25 Alumina 2012 First Half Highlights) The spot price would still be influenced by the price of aluminum but at a greater percentage than 15%.

Morningstar has a five star rating on AWC with a consider to buy price at $6 or lower.

This is a typical Lottery Ticket selection. The price has been smashed for example. In 2007-2008, the stock was selling for over $20 per share: AWC Interactive Chart Price to book is .76. The stock is depressed due to what may be temporary factors. And, the price does not reflect potential upside factors such as the decoupling of alumina and aluminum prices, let alone a possible cyclical upswing in aluminum pricing.

AWC reported a first half loss of USD$14.6M compared to a profit of $67.7M in the 2011 first half. The dividend paid to AWC by AWAC fell to $70.4M from $170M. As a result AWC will not pay an interim common share dividend. The dividend history on the ordinary shares can be found at Alumina Limited.

The downside is that AWC is basically hostage to AA's majority interest in AWAC and AA has an interest in keeping the price of alumina lower since AA is involved in the final stage of production unlike AWC. The strength of the Australian dollar has been a negative: (see page 7 Alumina First Half Highlights) While the AUD rise may hurt earnings, it would be a tailwind for the ADR price.

Yesterday's closing price: AWC: 3.56 +0.16 (+4.71%)

The AUD gain in value yesterday (9/11/12) against the USD, rising from about 1.034 to 1.044: AUD/USD Currency Conversion Chart (5 day chart).

A rise in the AUD also had a positive impact yesterday on the recently purchased AUNZ: 22.84 +0.25 (+1.11%) : WisdomTree Australia & New Zealand Debt ETF

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