Why a Bailout in Cyprus May Mean Lower Mortgage Rates in Rochester

At first glance it seems an unlikely connection. The island of Cyprus, whose economy is just a tiny sliver of the Eurozone, would seem to have little impact on our local economy. But as so often happens, a small domino falling somewhere in the global economy can have an impact far from where it fell.

On Saturday, Eurozone bureaucrats in Brussels – let’s call them Eurocrats – enacted a $13 billion bailout of Cypriot banks.   Cyprus is a small country, total population just over a million; more people live in Dallas. And the Cypriot economy is small – smaller than that of Shreveport, Louisiana. But as part of the Eurozone, Cyprus uses the Euro as its currency.  The damaged banking system, with billions in defaulted loans to Greek companies, was on the brink of collapse. Hence the Eurocrats decreed a bailout to save Cypriot banks.

Still with me? Stop yawning, I’ll make it quick. This Euro-bailout differs from past bailouts in that bank depositors are getting a haircut –  10% on deposits over $130,000 and 6.75% on more modest deposits. Another word for haircut is confiscation. Cypriots with $5,000 in a savings account will wake up with $4,662. Ouch. This new get-tough Euro-bail policy has bank depositors running for the exits. Previous bailouts have left savers untouched. (Makes me think some of those folks would have been better off owning stock in Exxon, but I digress.)

My point: scared European investors will bolster the US dollar and the US economy. If you don’t want the risk of seeing your checking account confiscated, what are you going to do – invest in Chinese Renminbi? Urugayan Pesos? Fact is, scared money flows to one place: the US. More money flowing into our financial markets means higher bond prices and lower interest rates. If you thought 3% mortgage rates were the bottom, think again.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

NYSE Fail

After the September 11^th attacks in 2001, US financial markets were closed for a week.  Such a closure was unprecedented, as markets operate on the premise that investors must always be able to transact – the core principle of any marketplace.  The implied liquidity that investors get from open markets is what makes it possible for investors to consider investing in the first place.  No one would buy a stock or bond without a reasonable expectation that they could get their money when they want it, at market price.

Once the markets reopened on September 18^th, the New York Stock Exchange and NASDAQ got together to design system redundancies that would prevent another shutdown due to an attack, natural disaster, or other problem with operating at the corner of Wall & Broad. The premise was that whatever might happen to a physical location, US financial markets would be able to keep operating. When I get exercised about this topic, sometimes I get a puzzled response from people.  I suppose if you think that the financial markets are merely the Las Vegas of capitalism, or that markets are for hedge fund titans to battle one another, that’s a reasonable reaction.  But consider this: in the last two days, while the markets were closed, we received numerous requests from our clients to raise cash for one purpose or another – to pay the next tuition bill, a downpayment on a new home, replacing the family car, and so on.  We get requests like this every day, routine requests that we routinely fulfill. With markets closed, some requests had to wait for today’s reopening.  Fortunately, that wasn’t a problem for any clients.  Why not just keep lots of cash on hand, in, say, a savings account? In many cases clients seek to actually earn a return on their money, and with most savings accounts paying a tiny fraction-of-a-percent interest, that’s a guaranteed loss once you adjust for inflation.

My point is just this: the Giants of Finance run the exchanges.  Those same Giants sunk billions into redundancy plans and backup systems, systems that all investors help pay for. Yet when the Giants couldn’t get to Lower Manhattan, they pulled the plug on everything? Why bother planning at all?

This is another example of the big Wall Street banks and investment houses’ indifference to average American investors.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

The Crash That Was

Over the better part of 30 years I have seen plenty of ups and downs in the financial markets, but nothing compares to the bedlam – the pure panic – that gripped Wall Street and much of the rest of America twenty five years ago today.  It was October 19, 1987, and when the New York Stock Exchange opened that morning, we were off to a weak start that got weaker all day, as investors saw stocks slump 508 points, a 23% drop.  Wags immediately started calling it Black Monday.  To this day we have never seen a bigger one-day decline, and I am hopeful not to have that record broken.

There was no internet, of course, no financial channels on cable, but TV and radio stations broke into regular programming to alert people to the meltdown.  The computer systems that the exchanges used had difficulty handling the volume of transactions, and some major brokerages teetered on the edge of insolvency.  At the office where I worked, most of us stayed until after 9 pm, taking calls from clients.  Then we dragged ourselves – hoarse, tired, and stunned – out to some downtown bar that was not surprisingly filled with colleagues from other firms.  We all hoped our employers would reopen the next morning – it was far from certain that they would.

In the end, some firms were mortally wounded by the crash and had to merge.  Mine, EF Hutton, was one.  But the economy wasn’t tipped into depression as some suggested would happen, and markets gradually recovered.  No crashes, no bear markets, are ever the same as previous ones.  Trying to predict the size and duration of the next one is like generals who always seem to be preparing to fight the last war.  The investors who came out of Black Monday in the best shape were those who selected high quality investments, stayed informed, and held their investments if nothing in their reason for investing had changed.  That has remained a sound basis for investment decisions and will serve well in the next crash – whenever that might be.

GTC

 

 

 

 

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Equality at Eastman Kodak

Yesterday we learned that the bankrupt Eastman Kodak Company has reached agreement with the court-appointed “1114” retiree group (named after a bankruptcy code clause covering retiree benefits) to terminate health care benefits for all retirees effective December 31^st of this year.  No, this wasn’t a shock for anyone, particularly not for retirees who have been expecting to lose some or all of their benefits even before Kodak filed for Chapter 11.  Everyone knows that this sadly mismanaged company can no longer afford to deliver on its promises.  As usual, CEO Perez once again hailed a wonderful management achievement, saying: “With this proposed resolution to our U.S. retiree benefit legacy liabilities, Kodak takes a major step forward toward our successful emergence. (The) agreement is a decisive accomplishment toward one of our fundamental objectives in our restructuring.”  Every time I hear him use the word successful I say “huh?”

Here’s what we know:

Kodak has reached agreement with the 1114 committee (court approved retirees committee, unrelated to EKRA) to terminate retiree non-ERISA benefits at year end. This will include health, dental, life insurance, and survivor benefit (SIB).

The company will pay to the retiree committee:

1. $7.5 million cash
2. $635 million unsecured bankruptcy claim
3. $15 million administrative claim

What’s all that worth?

Depends on what creditors get out of the bankruptcy, but I would not expect them to get more than about 20 cents on the dollar on those claims, in total. That would mean the whole package is worth, in my estimate, about $137 million.  The current health benefits are estimated at a total of $1.2 billion, and cost Kodak $10 million a month.  So $137 million will not go far.

What should retirees expect?

Those over 65 now get Medicare plus an enhancement.  The enhancement will no longer be funded by Kodak.  Those under 65 have the most exposure, particularly if they are no longer working and may have to scramble for healthcare at considerable expense.  Benefits will terminate at year end, but the bulk of the promised payments to the retirement committee consist of bankruptcy claims, which will get paid at the end of bankruptcy, and that won’t come until March of 2013 at the earliest (and probably May or June).  Thus retirees face an almost certain gap in their coverage. There may be some recompense for some or all retirees, but based on the amount the committee can expect to realize vs the current cost of benefits, that recompense will likely not be much.

And about that word, Equality: 

Kodak has thousands of shareholders, creditors, and retirees.  With this news the retirees will get equal treatment with the shareholders and creditors.  The message to all: stand in line and hope for something from the bankruptcy of this once-great company.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Kodak’s Latest Layoffs: One Short

I have attached the text of this morning’s memo to Kodak employees from CEO Antonio Perez.  I’ll point out one thing that the memo says and one thing that it doesn’t.

First, note that at the start of the 6^th paragraph, Mr. Perez mentions that he “will take a direct oversight role” in operating what will likely end up as Kodak’s only meaningful business unit.  Just what the company needs – the Butcher of State Street in an operating role.  Since Perez joined the company in 2005, nearly every metric has been straight down, culminating in the cliff-fall of bankruptcy last January.

Second, with 1,000 more layoffs, Kodak will have eliminated 3,700 jobs this year alone.  Every time another round of mass firings is announced, I keep hoping that CEO Perez will be among the missing.  Alas, not yet.

Here’s the text:

September 10, 2012

 

Dear Colleagues,

 

We recently shared with you the strategic next steps we are taking toward emergence from Chapter 11 based on a three-business structure:

Kodak will emerge as a company focused on commercial, packaging, and functional printing solutions and enterprise services.  This business builds on our legacy as a worldwide innovator in digital imaging and materials science technologies to offer differentiated products and services for growing markets; and our Document Imaging and Personalized Imaging businesses, both well-established businesses that are now in the process of being sold.

Our immediate task now is to make the organizational changes that reflect this three-business structure and to ensure they are appropriately scaled with a lean management structure.

As we prepare to separate the Personalized Imaging and Document Imaging businesses from the company, we know that our current cost structure is not appropriately sized for the business that remains, as it was designed for a larger, more diversified set of businesses.  Therefore, we need to make the adjustments now to ensure that our corporate structure is appropriately consolidated and scaled to enable Kodak to emerge as a competitive and profitable company.

As one of the first steps in the process of creating a sustainable cost structure for the emerging Kodak, while operating our business for the benefit of our customers and positioning our Personalized Imaging and Document Imaging businesses for successful sales, we are reorganizing our senior management team.  Under the new management structure:

I will take a direct oversight role for the Commercial, Packaging & Functional Printing Solutions and Enterprise Services business, which primarily has two component parts:  Digital Printing & Enterprise, led by Doug Edwards, and Graphics, Entertainment and Commercial Films, led by Brad Kruchten.  Doug and Brad are both proven and talented executives – with the skill required to tightly manage our key business lines and the vision required to build their future.

As a result of our efforts to ensure that this business has a leaner structure, we have determined that Phil Faraci will leave the company.  I have discussed with you previously Phil’s critical role in contributing to the transformation of our company during his tenure as Chief Operating Officer.  Phil was invaluable in helping to lead the commercial team in the weeks following our Chapter 11 filing by successfully reassuring key customers and suppliers of our continued commitment to our relationship.  He has personally been a good friend and colleague.  I brought Phil to Kodak in 2004 and have valued his support and commitment ever since.  He is an original thinker and passionate and hard-working manager. However, Phil and I believe that management alignment with our new structure must prevail.

Ann McCorvey has decided to leave the company.  Replacing Ann as CFO on an interim basis will be Becky Roof.  A managing director of AlixPartners, Becky has served in similar capacities for other companies that have successfully emerged from Chapter 11 restructurings, and she has deep experience in scaling overhead costs, implementing cost reduction programs, managing liquidity and raising capital, and executing asset sales – all critical areas on which Kodak must focus as we conclude our restructuring.

I thank Ann for her leadership of the Finance organization and the critical financial advice she has provided to me and to our Board of Directors.  Her counsel and financial management skills have benefitted the entire Kodak organization, and she has played an important role in putting us firmly on the path to successful emergence.

We are also putting in place the leadership necessary to execute effective and successful sales of both the Document Imaging and Personalized Imaging businesses.  These are complex businesses that require specific skills in terms of engaging with potential buyers while at the same time ensuring that current operations continue without disruption and customers continue to receive the superior service and products they expect from us.

Laura Quatela will assume the additional role of President, Personalized Imaging, and lead that business through its sale.  As Laura focuses her energies on Personalized Imaging, I am confident that she will bring to bear in this role the same sound instincts, analytical skill, and deep engagement with and respect for our employees that she demonstrated across Kodak as Chief Operating Officer.

Dolores Kruchten, President, Document Imaging, will oversee the business that she has successfully led for many years and guide the sales process for the company.

In addition to Becky Roof, our other function heads are Patrick Sheller, General Counsel, Secretary & Chief Administrative Officer; Terry Taber, Chief Technology Officer; and Chris Payne, who will lead Corporate Strategy.

The regional structure is largely unchanged, with the leaders of our worldwide operations continuing to report to me.

We announced in a press release today our headcount reductions for the year.  We are continuing to analyze resource requirements of each business, with an understanding that further reductions will be needed.  Decisions about employee assignments will be based on that work.  For many employees, this process will not take long – several weeks at most; for others, we may not be able to make decisions until 2013.  I want all employees to know, however, that I understand you want information as quickly as possible, and providing it to you is a top priority for the business leaders and the HR team… and for me.

As always, thank you for your continued hard work and commitment.

Antonio

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Get Rich Quick? Good Luck With That.

In June of last year the full-page color ads in the Democrat & Chronicle started appearing.  “GET MOTIVATED” screamed the headline, and the ads went on to list top-shelf speakers like Rudolph Giuliani, Colin Powell, Terry Bradshaw, Erin Brockovich, and Bill Cosby.  The full-day motivational session, packed with headline speakers, was advertised with an advance ticket price of $1.95 – less than it would cost attendees to park.

The whole thing sounded to many people like it was too good to be true, and it was.  At the time, Rachel Barnhart did a story (featuring our own Marge Geyer!) where we talked about precisely that aspect.  Now, it seems, the Get Motivated train has gone the way of all such scams – off the rails.

This is just another in the many scams that I have seem come and go over the years, reinforcing my conviction that if  you want to grow your net worth, there is no substitute for hard work, thrift, and careful investing.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Sinking Under the Weight of Copper

My assistant, Marge Geyer, and I have been on the phone the last few days trying to arrange phone service for an elderly client who has entered an adult care facility.  She’s nearly 100 years old, and for the last 60+ years has lived in the same home and had the same phone number.  With today’s hotly competitive phone market, it seemed like it shouldn’t take much for my client’s phone number to move right along with her.

Wrong.

Multiple phone calls to her incumbent carrier, Frontier Communications, were met with patient explanations of the impossibility of keeping that same phone number. You see, Penfield (where my client lived) and Fairport (where she has moved) have “different central offices” according to the folks at Frontier.  I suppose that has to do with the legacy of the copper wires that still connect many homes (mine included) to wireline phone carriers like Frontier.  And I understand that the average centenarian may not want to adapt to an iPhone or droid, preferring to keep that large plastic phone on their desk or nightstand. But my client also prefers to keep her phone number, in case a friend should call.  What to do?

A call to Verizon provided one option: stop by any retail location and they could provide my client with phone service and allow her to keep her long-time phone number.  But Marge and I are busy enough without running down to Verizon for a visit.  Next call was to AT&T. No problem, the agent said. They would ship a device into which my client may plug her 30-year-old phone and begin making calls immediately, all while retaining her original phone number.  Mission accomplished.

A quick glance at the share prices of each company ten years ago vs. today:

AT&T             2002: $24        2012: $36

Verizon          2002: $28        2012: $42

Frontier          2002: $8          2012: $4

Go figure.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

An Objective Measure on Kodak

A week ago today we were expecting to hear the results of the court-ordered sale of Eastman Kodak’s 1,100 digital imaging patents. On Monday August 13^th, the winning bids were to have been announced.  Over the preceding weekend the Wall Street Journal had reported a disappointing bidding process that had produced far less than the expected $2+ billion.  As 5 pm came and went it became obvious that we wouldn’t be hearing anything that day. Observers began to assess what had happened and might happen next.

First thought: good news! After all, auctions can stay alive when bidders, goaded by the auctioneer, raise their bids and battle for success. Perhaps the bidders, primarily consortiums run by Google on one side and by Apple and Microsoft on the other, were finally stepping up to offer big bucks. But as the week wore on with no word, it seemed less likely that a bidding war was at the heart of the delay. Word from Kodak was that the company “had not reached a determination or agreement to sell the digital imaging patent portfolio” and that they might “instead retain all or parts of it.”  For the last year, Kodak has been talking about selling these patents, and using the projected $2 billion (“more,” went some whispers) to pay its creditors and emerge from bankruptcy. Now their plan is to retain them? Sure, who needs cash? We’ll just keep these patents.  But Kodak needs to pay its creditors in cash, not intellectual property. Without the financial muscle to commercialize the patents themselves, and with a declining revenue stream from patent licensing, the question for Kodak is: what now?

The patent sale misfire seems to be yet another bad call by CEO Antonio Perez, who has been with Kodak since being named company President in 2003.  We’re not privy to what’s happening on the top floors of 343 State Street.  But there is an objective measure of how Kodak’s CEO has performed since assuming the top job there 7 years ago. The value of a company’s common stock and the amount of cash dividends paid to shareholders are the report cards of the CEO.  With Kodak’s stock now changing hands at less than 20 cents/share and no cash dividends in the last 4 years, this CEO’s grade is F. Kodak still has business generating billions in sales. Maybe what they need is a leader who can run those businesses.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

A Difference of Opinion

There is no more common thing in any market: for every share of stock, for every bond, every option, for everything that someone sells, someone else buys.  It is the ultimate difference of opinion: one person wants something enough to buy it while another thinks they’re better off without that same thing. Experienced market participants take this in stride. After all, we know that when we buy or sell, we could be the one on the wrong side of the transaction.  In an industry where opinions differ to the point of a buy or a sell, I understand that somewhere close to half of the universe of investment professionals disagrees with me at any moment.  My colleagues and competitors know this too – it comes with the territory.

Yesterday, business editor Steve Sink of the Democrat & Chronicle published an article about the Eastman Kodak bankruptcy that mentions two scenarios for Kodak stockholders: a bonanza or a bust. In an illustration of the yawning chasm that sometimes separates opinions in the financial world, a California-based analyst claims that Kodak shareholders could see $10/share if the patent auction is successful. On the other side is my prediction that common shareholder will be wiped out in the bankruptcy.

Then I received this:

Not content with lecturing me via e-mail, Mr. Luskin also left voicemails for me and for my assistant in which he not-so-patiently explains that he knows “the facts” and will share them with me if I call. He also mentions that he “do(es) this for a living” by which I suppose he means investment analysis and not making crank calls on Sunday mornings.  I agree with Mr. Luskin that facts are important, so let’s take a look at a recent fact. Last week Kodak proposed paying its senior management bonuses if the company emerges from bankruptcy and pays off creditors.  Writing for USA Today, Rochester-based reporter Matt Daneman notes that CEO Antonio Perez gets a $2 million bonus if creditors get back 30 cents on the dollar.  It’s a fact that a 30% recovery for creditors leaves little room for shareholders to get anything.  Other important facts are that Kodak owes far more than it can pay for pension obligations, among other debts.  If the patent sale goes well, Kodak’s position would improve. But today’s news casts the sale in a difficult light.

Regardless of my opinion or anyone else’s, Kodak’s bankruptcy will be done in less than 12 months.  We’ll know then how everything turns out, and whether shareholders walk away with wealth or lament their losses. Stay tuned.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Return on Investment, or Paying to Hide Out?

I heard an interesting story on NPR the other day, about investors who are so frightened of financial markets that they are willing to pay – and get no return – just to keep their money safe. Even with rates so low on US Treasury bonds (about 1.5% for 10 years!) investors from around the world continue to buy.  At first it seems puzzling, and here’s why: it’s anybody’s guess what inflation will be over the next ten years, but if you expect inflation to average 1.5%, then the inflation adjusted return for those US Treasury bonds would be exactly zero. It’s not a stretch to imagine inflation of 1.8%, meaning investors in the 10-year treasury would lose an average of .3% to inflation every year.

So: why? That one-word question can be answered with one word: fear. Fear of Europe, fear of banks, fear of corporate malfeasance.  Some investors seem afraid of nearly everything; the equivalent of a monster in the financial closet. I’ll admit, it can seem scary out there. Greece is on the brink, Spain seems close behind, China’s economy is slowing. Here at home you still have big banks doing stupid things. So what’s an investor to do? For many, the answer is to hide in US Treasury bonds, despite what seems like a near-certain inflation adjusted loss.

But think: as I’ve said before and will say again, you seldom make money following the herd.  Even if the herd is crowding into Treasuries.  What can you do? How about this: do you think that Procter & Gamble is on its way out of business any time soon? How about Exxon? Hershey?  I think those companies will be around for quite a while, and the shares of each one pay a cash dividend greater than the 10-year US Treasury.  Does that mean you ought to go out and buy their stock? No. But it means you should think about where the opportunities are for real safety – the safety that comes from confidence in your investments. For me, confidence doesn’t come in the form of government insurance or following the herd. Confidence comes in sound management and solid business. Opportunities exist.  Look for them, or ask your financial advisor what opportunities are right for you.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).