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alstry (35.03)

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August 21, 2009 – Comments (27)

From the WSJ:

A number of corporations are quietly buying back bonds on the cheap in the open market as the financial system works its way out of crisis mode.

They are taking advantage of depressed prices to save millions of dollars in interest and debt-repayment costs.

In the recent round of second-quarter financial filings, companies including Beazer Homes USA Inc., Hexion Specialty Chemicals Inc., Harrah's Entertainment Inc. and Tenet Healthcare Corp. disclosed they had bought slugs of their bonds from the market at discounts to the debt's face, or par, value. Until the disclosures, investors were mostly in the dark about the purchases.

http://online.wsj.com/article/SB125080949684547827.html

NOW THE REST OF THE STORY....

Many companies are now borrowing money at higher interest rates from Wall Street to buy back debt at lower interest rates.  Why would anyone do such an idiotic move you ask?

They will tell you because it's a good deal and to restructure their capital base.....but if you are losing money, borrowing more is NEVER a good deal.  The real answer is much easier to understand and far more manipulative.

Simple....it is an easy way to report profits.  When a company buys back its debt below face price, the difference between face and purchase price is reported as profit.  The worse off financially the company, the cheaper its debt, and the more profitable it is to buy it back...especially if you are losing money and maintain a fiduciary obligation to your senior debt holders.

In the second quarter, Beazer spent $58 million buying back $115.5 million in bonds, paying an average of 50 cents for each dollar in debt. The bonds represented 8% of Beazer's debt.

Meanwhile, Hovnanian Enterprises Inc. paid $223 million to buy back $578 million in debt, mostly during February and April.

Why lose money actually building homes when you can make tens of millions or hundreds of millions simply buying back your own distressed debt with even more debt?  How do you think so many companies are beating Wall Street Analyst estimates even though sales are evaporating?

You gotta luv the sheeple.

Welcome to the world of Credit Default Swaps....who needs to make money pruducing products when you can make MUCH MORE buying back your own distressed debt....with even more debt that bankers will gladly line up to give you, at a higher interest rate nonetheless, so they can make even more money selling SWAPs on the new debt..... and maybe taking the other side on the old debt.

Welcome to a form of insider trading that no one sees and leaves very little paper trail since there is no exchange for SWAPS....and it is a much larger market than equities.  The stock market these days is for simply manipulating the minds of the sheeple...the real money is made in SWAPS.

Is this the New American Economy?...the BIGGER the Loser you are.....the more you make on Wall Street....too bad you are putting millions of legitimate businesses out of business and causing millions to lose their jobs and homes....not to mention the tax base of America to evaporate resulting in one of the biggest national security threats in our nation's history.

Who needs to worry about Al Quaida when you have Wall Street and the Fed to destroy America's economy.....and not only that, while its happening many Fools are cheering it on as they watch our country implode and millions of their fellow citizens lose their jobs, homes, and businesses.

9.09  The Mother Of All Ponzis

27 Comments – Post Your Own

#1) On August 21, 2009 at 12:30 AM, alstry (35.03) wrote:

Hovnanian these days are building 817 square foot homes.  817 feet total for a single family home.  Do you know how hard it is to make money selling 817 square foot homes when you have the infastructure costs of a publicly traded company?

Tiny detached homes still have kitchens, bathrooms and mechanicals...the most expensive parts of a home to construct plus a higher land per unit cost....why do you think HOV is still taking one time land writedowns three years into one time writedowns?

And if you know Ara Hovnanian, he doesn't come cheap....he carries on daddy's legacy and has a wonderful private jet and maintains a yacht hanging out with the Monaco crowd.

You think you can cover his income and benefits and beat Wall Street estimates building 817 square foot homes?

There is one thing you can do with 817 square foot homes...sell a few and tell shareholders and analysts you are selling more homes than expected...just don't tell them the homes you are selling are not much bigger than doll houses.

 

The K. Hovnanian-built house in Natomas has a standard-size bedroom and a surprisingly large great room that combines a kitchen and living room. But that's about it for 817 square feet – likely the smallest new house for sale in Sacramento.

http://www.sacbee.com/business/story/2108425.html

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#2) On August 21, 2009 at 2:35 AM, ikkyu2 (99.38) wrote:

Speaks for itself, doesn't it.

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#3) On August 21, 2009 at 3:01 AM, JakilaTheHun (99.94) wrote:

But they aren't losing money.  They are making money off of idiots like you.  This is what I have been saying for several months. 

As "sheeple" such as yourself continue to promote absurdist doom-and-gloom scenarios, corporations that are actually aware of their own operations buy back their debt at huge discounts.  The only reason people are willing to sell their corporate notes at such absurd discounts to face value is because they are indoctrinated with doom-and-gloom prophecies of the type that you and Zero Hedge regularly pump out.

So the companies get to wipe out their debt at huge discounts, then restructure their debt at lower interest rates, and report a profit.  There's no downside.  The only people S.O.L. are the idiot bondholders who decided to sell off in the first place. 

You also seem to have no idea how bonds work.  If a bond has a face value of $1000 with an interest rate of 8%; then the face value of the note drops to $500, the implied interest rate is no longer 8%!  It's much higher! Hence, if the implied interest rate jumps to 20% and they refinance at 10%, they are not actually 'refinancing at higher rates.'

This is further proof that you have absolutely no F@#$ING clue what you are talking about.  

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#4) On August 21, 2009 at 3:02 AM, JakilaTheHun (99.94) wrote:

then the face value of the note drops to $500,

That should read, "then the market value of the note drops to $500"

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#5) On August 21, 2009 at 6:59 AM, JerseyShoreGirl (< 20) wrote:

I know this may be somewhat off topic but it does relate in terms of how the media is misleading us and not getting to the bottom of what's going on (on many fronts) but rather twisting the facts .. letting this country slide down further because they aren't being the watchdogs they should be ....

In case any Fools missed this story .... of MSNBC blatantly twisting the facts and fanning the flames of racial tension to make gun-toting protestors look like racists (when the gun-toting protestor was BLACK), here ya go ....

 http://pajamasmedia.com/rogerkimball/2009/08/20/notes-from-the-post-racial-presidency/

Is the media intentionally trying to flare things up?  And if so, who is telling them to do so? 

By the way, I used to be against guns ... but after really understanding the purpose of the 2nd Amendment, I've come to the conclusion that the 2nd Amendment is very necessary to keeping our freedoms and it's the people's only hope in protecting themselves from a rogue govt (wink, wink).  This guy bringing this gun was not stupid or irresponsible ... he was simply sending a message ... "Don't Tread on Me," reminding the ELECTED officials that they work for us.  This healthcare outrage is more about Americans DEFENDING OUR CULTURE and preserving freedoms and choices ... all coming on the heels of $Billions of debt being rammed down our throats.  NO MORE!

I love this country and I want my children's freedoms to be preserved.  I want them to pursue their gifts and be able to keep the fruits of their labor .. I don't want them saddled with debt and being told by the govt what their profession will be, etc.  Our country's at a crossroads and we must wake up the sheeple! 

 

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#6) On August 21, 2009 at 7:58 AM, alstry (35.03) wrote:

Jakila,

Please you Fool.....don't be such a Fool.  The only reason the debt is trading at a discount is becuase the business is losing tons of money and no one thinks they are going to survive under traditional capitalistic rules.

It is why failing businesses in America fail.  If you let cancer grow, pretty soon it will spread throughout the body and shut down every system until the patient dies.

If businesses continue to operate while losing money indefinitely, then they will put everyone of the legitimate competitors out of business who do not have access to infinite money losing capital.  If they continue to over build money losing homes then they will lower the value of all of the homes in the neighborhood destroying the tax base.

The cost to society is incredible with thousands of legitimate homebuilders forced to shut down, over one million construction jobs lost, and home values down over 50% in a number of areas.  And that is just the residential construction business.

Why?  So banks can continue to make what was traditionally bad loans and strip our pensions of assets by selling them SWAPs that banks control whether they pay off or not...regardless of the fundementals of the business.

The joke now is that this has been going on for so long with so many industries that many are so burdened with debt that real business profit is a distant memory.   So much debt has infected our nation that our country is shutting down due to lack of profit and taxes being paid. 

The only people making money in the above environment are the very few controlling the SWAP game and at tremendous cost to society.

Fewer and fewer people can afford to support our nations infastructure.  Our nations business model has been gutted and so has the balance sheets of many of our most important businesses, municipalities, schools, and hospitals. 

Things have deteriorated so far that there is not enough money in the world to revive it.  My guess is you alone can't step up to the plate and make up the difference.

Now here we are, a nation that is infected with tens of trillions of dollars of debt and broke...unless we restructure the debt....there will be no nation.....and you will be standing alone cheering.

Trust me...I get....and soon you are about to get it as well....right up your backside when Obama comes to tell you our nation is broke.....and he needs everything you have to maintain the soverignty of our country.

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#7) On August 21, 2009 at 8:12 AM, alstry (35.03) wrote:

Jalila,

Now that our nation is broke...our governments running trillions in deficits, millions of jobs lost and tens of millions suffering massive wage cuts, millions of families and businesses declaring bankruptcy, foreclosures at record highs and notices of default even higher, commercial real estate practically worthless in many areas......

you remind me of the guy bragging to the fire chief how much money can be made starting a fire and collecting insurance...the only problem now is you have just burned down the entire city and the insurance company is broke.

Now you can't collect and even if you could, there is no place to spend it and no one to spend it with.........

Thanks for making my point why we in America never let people over insure their property....because there would be a pandemic of houses "accidently" burning down while you would be sitting there cheering it on.

We also don't let your neighbors over insure your house either.....can you figure the policy reasons on that one?

So you keep cheering on the burning down of America's economy....pretty soon you will be the only one cheering.  I hope you are good with a gun.....with so many coming after you, you will run out of bullets fast.

Thanks for making my point in more ways than one.

 

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#8) On August 21, 2009 at 8:22 AM, JerseyShoreGirl (< 20) wrote:

For all of you who doubt Alstry, maybe, just maybe he possesses something called Precognition or Exceptional Situational Awareness ... many Top Gun 'Super Pilots' do.  Time will tell. 

http://www.youtube.com/watch?v=H3pNeJKUcR4

 

 

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#9) On August 21, 2009 at 8:40 AM, outoffocus (23.59) wrote:

Not sure why this is supposed to be for CPAs and analysts but I'll chime in anyway.  Buying back distressed debt isn't just good for reporting profits. Because most debt is on the books at face value, when the company buys back the debt for pennies on the dollar,  it improves their balance and reduces their interest expense, even if the money used to buyback the debt is borrowed at a higher rate(if done correctly).  By improving their balance sheet, the company raises its debt rating, which allows them to borrow funds at cheaper rates.  So buying back your own debt for pennies on the dollar is not some big conspiracy, its good money managment. The only real risk is if the company uses funds that are needed for operating the business to buy back the debt, which will ultimately put the company in a worse position.

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#10) On August 21, 2009 at 8:42 AM, alstry (35.03) wrote:

Jersey,

Just a lawyer who practiced in the insurance area.

I have never been very bright so I have to keep things simple.

Who woulda ever thunk that the FED would ever allow anyone to over insure America by MORE THAN 10X the total value of the nation, allow them to burn it down......

AND ALLOW THEM TO COLLECT WHILE GIVING THEM TRILLIONS IN TAXPAYER MONEY(because the money was never there i.e. AIG bailout?) AND BILLIONS IN BONUSES ALONG THE WAY???

We became a nation where the banker became the arsonist, and we gave the banker much more money for being an arsonist versus being a banker.

Now we as a nation are broke and must restructure the debt....or there will be no nation.

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#11) On August 21, 2009 at 8:45 AM, Londamania (60.62) wrote:

The only question we need to ask is - what will Alstry invent to croon on about after Septermber comes and goes with no noticeable event occuring?

1.  Some new state that has financial problems and needs to act in order to avoid a big near term problem (like CA did)
2.  Something to do with perceived false-hoods with emerging markets.
3.  Yet a new wave of mortgage or consumer credit crisis events that will destabilize the whole financial system (by my count the next one will be round three of this)
4.  Some new misinterpretation or clearly one sided view of the old standby Unemployment.

To all the Bulls out there - Alstry is very very valuable to you and you should put up with the endless doom posts.  Their are two reasons for this:
1.   Always have a back plan.  It's not all based on nonsense just mostly gross misinterpretations of it.  Keep a close eye on the headwinds and get nervous if we see greater than a 20% correction from current levels.
2.  When you sense that his posts are decreasing, or god forbid he starts to post anything along the lines of "I was wrong and I am getting long" than it is time to get ready to sell, because when the last Bear comes over the market is going to tank for a nasty drop. :)  Alstry is our own pet canary!

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#12) On August 21, 2009 at 8:46 AM, rd80 (98.66) wrote:

Alstry,

They can simply mark the debt to market and report the profit without ever actually buying the bonds.  BAC and C both did that on their first quarter earnings reports.

There is no need to actually buy the bonds to report a profit.  They simply use strict mark-to-market  accounting on the liability side of the ledger. 

If they're actually buying their own bonds, there must be some benefit beyond booking a 'profit' on the lower debt value since they can book the profit without buying the bonds.

Russ

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#13) On August 21, 2009 at 8:48 AM, alstry (35.03) wrote:

out,

 ask yourself why the debt is distessed.....do you think citizens can buy back their debt from the creditors at a discount without going bankrupt and getting kicked out of their homes?

Instead of bailing out the banks, wouldn't it have been a lot easier to simply give the citizens $10 trillion dollars and pay off all of the debt?

It would have saved BOTH the citizens and the banks....and the economy.

Think about that for a second as you soon learn where this is all going when tens of millions are about to get fired because debt can't be paid back.

When you subsidize one to kill a million....you chances of success are one in a million....not very good odds for this poker player......especially for one who likes his country and the millions who are part of it.

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#14) On August 21, 2009 at 8:51 AM, alstry (35.03) wrote:

rd,

They are buying back the bonds to report the profit...it is a big reason why the stock market is staying so high and analysts are not telling you this...because they work for the same banks making money off of it......you think there might be a conflict of interest.

This nonsense can't go on much longer....too many are feeling the pain as our nation is about to collapse economically.

It is nothing more than a Ponzi scheme and America is the patsy.

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#15) On August 21, 2009 at 8:55 AM, alstry (35.03) wrote:

rd,

sorry stupid response...

They are buying back the debt to contract the swap spreads on the old debt.

If you sell the swap at a high premium and the spreads contract, you can buy back the swaps at a much lower price and pocket the difference.

This is not much different than insider trading...because under normal conditions, NO SANE LENDER would have ever extended additional funds to a money losing business....and the banks are cherry picking how swap spreads expand and contract.

In effect, we are financially rewarding bankers for destroying our economy and permitting them to profit in the process.

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#16) On August 21, 2009 at 9:14 AM, alstry (35.03) wrote:

Little kids should never play with matches...9.09 is just a matter of time

USD Falls To Fresh 2009 Low Under CHF 1.0563 - EBS

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#17) On August 21, 2009 at 9:27 AM, outoffocus (23.59) wrote:

Alstry, 

ask yourself why the debt is distessed.....do you think citizens can buy back their debt from the creditors at a discount without going bankrupt and getting kicked out of their homes?

Of course I wish I could buy back my debt at pennies on the dollar, but thats what happens in a capitalistic society.  It encourages entreprenuership. The practice of buying back your own bonds at pennies on the dollar has been going on for decades.  The risk lies with the bondholder, who can refuse to sell the bonds back to the company.

And yes I know why the debt is distressed.  Often its a self-perpetuating process in which the losses cause higher interest rates, which leads to higher losses.  Thats why buying back debt is sometimes the best and only option for some companies. Its also why I qualified my statement with "if done correctly".

Instead of bailing out the banks, wouldn't it have been a lot easier to simply give the citizens $10 trillion dollars and pay off all of the debt?

It would have saved BOTH the citizens and the banks....and the economy.

You are comparing apples to oranges.  Government bailouts and bond buybacks are too different things.  One is controlled by the government, the other controlled by the private sector. In some ways the government bailouts stifled bond buybacks because the bailouts did not allow the bonds to sell for their true fair market value making the bonds appear more expensive then they should be (hence contributing to the freezing of the credit markets) .

When you subsidize one to kill a million....you chances of success are one in a million....not very good odds for this poker player......especially for one who likes his country and the millions who are part of it.

If the government had not interfered in the markets in the first place, the bond buybacks would have gone on anyway, at a fevered pace, because all the toxic assets would have fallen to their true fair market values and companies would have been able to improve their balance sheets by buying their bonds at pennies on the dollar.  The companies that were not financially able to do so would have either gone bankrupt, restructured, or bought out by companies with much better balance sheets.  Thats the nature of the free market.

IThe credit default swap situation is a completely separate subject that, if dealt with correctly from the beginning, could have eliminated the need for government bailouts. I can understand the outrage with CDS, but bond buybacks alone are not fraudulent or evil.

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#18) On August 21, 2009 at 9:37 AM, alstry (35.03) wrote:

Out,

In the real world...it is not permisslbe to over insure homes...every property and casualty policy has an "other insurance" clause limiting liability to the value of the property.

By allowing banks to collect outsized premiums, we created an environment where the banks were subsidized and financially rewarded to loan money to money losing businesses that should have never been giving loans in the first place.  By doing so, it put the nation into a debt burden that mathematically can't be paid back and millions of legitimate businesses out of business.

THE ONLY REASON THE LOANS WERE MADE TO THE MONEY LOSING BUSINESSES WAS BECAUSE OF THE CREDIT DEFAULT SWAPS.

If you don't understand this concept, which the bankers intentionally conceal from you, you simply don't understand what is destroying our economy.

You think Warren Buffett called them FINANCIAL WEAPONS OF MASS DESTRUCTION LIGHTLY?

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#19) On August 21, 2009 at 10:56 AM, jddubya (61.66) wrote:


#8) On August 07, 2009 at 2:05 PM, alstry (99.37) wrote:

prose,

We have not hit 9.09.

I have pretty much said my peace.

We have about 50 days left.

Going forward I will substantially reduce my blogging as this post pretty much sums things up.

If by the end of September, MOAP never matierializes, Alstry will dematerialize into cyber ether.

This is from this blog

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=240107&t=01002130057764754273

Obviously you've never been one to keep your word

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#20) On August 21, 2009 at 12:01 PM, aqua2 (< 20) wrote:

Not relevant to this post but relevant to Alstry's blogs in general.  Just one more government entity out of control and out of touch.  This will really piss of any vets out there, a fine example of a government without a conscience. 

http://news.yahoo.com/s/ap/20090821/ap_on_go_ca_st_pe/us_veterans_bonuses 

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#21) On August 21, 2009 at 4:44 PM, skeptic86 (95.52) wrote:

alstry,

correct me if im wrong. this is what i think you are trying say. a company issuses bonds, for simplicity sake lets say $100 worth. banks start selling CDS on these bonds and the bonds go out into the open market. the company sucks and is destroying capital, so the bonds start loosing value in the open market. all the while the bank is still earning money on CDS's. the bond is now trading for $75 in the open market. the company borrows $100 from the bank, buys the bonds for $75, then pays itself the $100 the bond was originally worth. the company reports this as profit, which makes them look like they didnt destroy as much capital. the bank's cds contracts are void bc the bond was paid in full. now the bank packages this loan it gave to the company to buy back their bonds into a CDO, sells it, and starts selling more CDS's on the cdo's.

so, just looking at the company, this is good bc it makes the company look like they didnt destroy as much capital as they did.

for the bank its amazing bc they've been selling CDS's the whole time.

but for everyone else it sucks, bc some poor soul bought that bond for $100 and sold it for $75. And someone else bought some cds's but the bonds never actually defaulted.

and this all works out as long as the banks had cheap credit to loan to the company to buy back thier bonds. when the banks didnt have money to loan to the company, the company would continue destroying capital until they default on the bond. then the banks would have to pay out the cds's. then the whole system falls apart.

is that whats going on? am i missing anything here?

   

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#22) On August 21, 2009 at 5:08 PM, wolfhounds (28.89) wrote:

I am a CPA and an avid reader of quarterly transcripts. Instead of getting your information from newspapers and CNBC you Fools would do well to do likewise.

Buybacks of corporate debt is reported in 10-k's as a below the line item, therefore, any profit from discount to par is not operating income. 

I would like any writer here who claims that banks are lending money to buy back debt to companies whose existing debt is selling at sunstantial discount to prove it with any SEC filing or quarterly transcript. I would think that any analyst who can read such a transaction would have some serious questions for the bank involved. Companies with highly discounted debt, may I point out, have junk credit ratings.

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#23) On August 21, 2009 at 6:16 PM, huddaman (97.35) wrote:

alstry, by explaining through the analogy of a over insured house, you clearly explained what the problem is with CDSs.

 

Can you also reply to Jakila's question or doubt about how buying back debt at 50c to a dollar then reissuing at 10% is not smart strategy if the implied yield to maturity had risen to 20%?

 

If I really understand this correctly, they are probably raising new money at even higher rates then implied YTM. So, if their coupon was 8% and they bought back their debt yielding 12%, they actually probably paid 13 or 14% to raise the money to pay off their old debt selling at discount. I don't think Jakila knew this. I can tell he is probably not a CPA or has no idea how company's financial statements actually work. His high CAPS score is probably due to some other skills, but they sure ain't accounting skills..lol

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#24) On August 21, 2009 at 6:59 PM, gldnlvr64 (< 20) wrote:

No more BLOGS from our fearless leader today ? Alstry ?

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#25) On August 22, 2009 at 5:06 AM, JakilaTheHun (99.94) wrote:

Huddaman,

I am an Accountant and an Analyst.  I will be a CPA very soon hopefully.

If a company is buying back bonds at half their face value, the implied interest rate on those bonds would have skyrocketed and it's extremely unlikely they would refinance ABOVE those interest rates, which could be upwards of 20%.

In fact, if you use the "Bond Yield to Maturity Calculator" (http://www.quantwolf.com/calculators/bondyieldcalc.html), you will find that a bond selling at half its face value with an 8% coupon rate, with payments semi-annually over the next 5 years, would have a YTM of 26.68%!!!  It's very unlikely that a company would refinance their debt at that high of a rate.  

Alstry is being extremely dishonest here, as well, as a lot of the companies embarking on this strategy aren't actually *borrowing* money to do it.  Lexington Realty Trust (LXP) and DineEquity (DIN) are two companies that have been buying back their own debt at huge discounts from their sizable and steady supply of cash flows.  

Time to stop drinking the Alstry Kool-Aid.  Anyone who has followed his advice through this crisis has lost some mucho dollars. 

In actuality, the fact that companies are easily buying back their own debt at massive discounts is testament to how out-of-whack the markets have been and how extremely unpriced stocks and bonds were several months ago.  If you had been reading my stuff rather than Alstry's garbage, maybe you could've taken advantage, champ.  

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#26) On August 22, 2009 at 5:19 AM, JakilaTheHun (99.94) wrote:

But hey ... like I said ... keep promoting doom-and-gloom.  It helps drive down the prices for me.  I'm bearish on the US economy long-term, as well, but I'm smart enough to see value. 

I'm also not convinced that Alstry's garbage is any more than an act.  His selections here on CAPS are not in line with the extremity of his predictions.  He mostly red thumbs the absolute worst-of-the-worst and most overvalued stocks; rather than engaging in general market shorts.  In fact, I see no evidence via CAPS that he is bearish on half the stuff he claims to be ultrabearish on.

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#27) On August 22, 2009 at 9:07 AM, alstry (35.03) wrote:

kids,

Bond players and analysts are generally a far more sophisticated crowd than the equity analysts.

When bonds are trading for 50 cents on the dollar, not only is the company sucking wind on the cash flow side, the analysts have determined if the company liquidates, not only is the equity worthless, but the residual value of the company is not enough to pay off the debt.

Remember, management has a fiduciary duty to debt holders as well as equity holders.  If you were a stock holder and management repurchased your shares quietly just before a block buster announcement, you would be screaming and pouting fairness.  My guess is about 50 lawsuits would be filed the next morning.

If the actual business performance was as your represent, then the bonds wouldn't be trading at such a steep discount.  If management was lying or concealing material facts to support your contention, they would go to jail.

Just a guess, but it is very likely you guys don't know the difference between capitalizing interest and expensing it?

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