Steve's Value Picks

Fed Treasury Sale

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The failure of yesterday's Federal Funds Auction is an event that many may miss the significance of. The Fed in it's rush to lower interest rates to bail out our failing financial system, has put itself between a rock and a hard place. They face the challenge of financing our enormous public debt at interest rates that are no longer high enough to attract investors.
I believe their hands are tied when it comes to future reductions in interest rate. In fact the rate is going to have to come up.

In my opinion, due to the collapse of our finanicial system funding methods, money is going to become extremely scarce. Liquidity is drying up and companies are going to have a hard time finding money to fund their daily operations. Some fortunate companies have their money supply already locked in, but those who don't are going to be scrambling for survival. It is not just the mortgage loan and construction industries that will suffer, but all kinds of industries are going to be hit by the ripple effect.

I would avoid investing in companies with high debt (as I always do). Some industries are heavy in debt by the nature of their business (eg. auto manufacturers and airlines). If the financial connundrum is not solved, we could finally see some decent interest rates being paid on cash. It might even become sensible to save again in this country. No fixed income retiree should be forced to settle for a 4% return on their savings so we can bail out the reckless when true inflation is probably at least double that (check the current price on a dozen eggs compared to a year ago). I wouldn't be surprised to see 8% rates being paid on CDs by the end of the year.

Hey we have dug ourselves a hole and as the first law of holes says, "if you find yourself in a hole, stop digging!" In our case we need to stop spending and learn to save again.

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IPSU has become too risky for me

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I have entered orders to sell my positions in Imperial Sugar (IPSU) due to the recent explosion at their plant in Atlanta, Georgia. This was my favorite stock as outlined in my previous blog. I read an article which indicated that Imperial obtained this plant in 1997 when they acquired another company (I believe it was named Dixie Sugar). The article said that acquiring this company enabled Imperial Sugar to almost double their revenue. I was not sure how many sugar plants that Imperial operated but apparently the number is few.

I know that Imperial will no doubt recieve insurance payments to cover their losses from the explosion. I assume that there will be lawsuits against the company as a result of the 12 employee deaths and the employee injuries. I also believe that they will be able to make up some of the production shortfall by increasing production in existing facilities. They will save on labor costs from this plant no longer operating. It opens up options for them regarding whether and where to rebuild. My fear is that increasing production at other facilities will not be able to make up the production shortfalls as a result of the loss of this plant. I believe that they will take a large hit on revenues, and lose market share as a result of not being able to deliver the necessary product to meet their committments. These are my fears.

In my mind there are now too many variables operating and the stock has become too risky for my tastes. In the long run, I have confidence that Imperial will continue to generate solid income as they have in the past, but I am expecting a shortterm downside hit after their next earnings statements are released.

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