Why Egypt Should Concern Investors; Three Yield Ideas for the Week

by: Yieldpig
As Americans, most of us watch the news from Egypt and, at least, a little pride swells in us as we watch a huge group of people unite to demonstrate collectively against a long standing, repressive dictatorship. But as investors, are the events truly THAT important? If you’re holding the Egyptian ETF (NYSEARCA:EGPT) or Total (NYSE:TOT) or GDF Suez (GDFZY.PK), yes, you should be concerned. Oil prices are a bit nervous. But the bigger issue is the Suez Canal. Since 1859, the canal has saved time and money for global ocean freight trade. Today, about 10% of all world ocean cargo passes through Suez. 10% doesn’t sound like much. But, any disruption could really screw things up.

Some background on Egypt politically. Since 1952, Egypt has had 4 “presidents”. All four started as career military officers. All four “ascended” to the “presidency” through some form of violent, non-democratic process. And while the Muslim Brotherhood has played an adversarial role in Egyptian politics all along the way, obviously, they haven’t been too successful over the course of almost 60 years. So, basically, dictatorship in Egypt has been the norm since the end of World War Two.

In 1956, Egyptian “president” Gamal Abdel Nasser, who had directed loyal followers to kidnap his predecessor during a power struggle and then mandated a single party system shortly thereafter, nationalized the Suez Canal. A brief war pitting Egypt against an alliance consisting of France, Israel, and Britain ensued. Britain and France wanted the canal back, Israel just wanted the land. Israel was successful although sent back to the post 1948 war lines by the U.N. Britain and France, again, saw more sunsets on their shriveled empires. Again, the Suez Canal was the centerpiece of conflict. During the Six Day War of 1967, Israel’s light speed preemptive strike took their western flank all the way to the canal. In 1973, Egypt used the Suez Canal as the springboard for their initial assault during the Yom Kippur war.

Over the last 30 years or so, most of us probably haven’t thought much about the Suez Canal. I know I haven’t. We should be thinking about it now. Egypt is the largest Arab country in the Middle East that controls a vital trade artery. For all practical purposes, it’s spiraling into, for now, non-violent anarchy. The non-violent part rarely lasts. Saudi oil tankers, which, unfortunately, we need for now, need to pass through the canal. Otherwise, the only western route is around the horn of Africa. Product takes longer to get to market. Supply gets tight. Prices go up. Hello more inflation. Hello stalled recovery.

Military ships need the canal as well. How does the U.S. Mediterranean fleet get to Straits of Hormuz or the Indian Ocean if it’s locked down? Same long route. Around Africa. Think the Iranians are annoying now? Think of how they’ll behave knowing it will take American aircraft carriers two weeks to get there. Not good. Not good at all.

Dictators and totalitarian regimes suck. Unfortunately, the United States has a bad habit of playing ball with them due to some sort of strategic interest whether vital or not. Yes. I wish we didn’t have to do business with those types. And I hope things settle out peacefully and moderately in Egypt. But the way things are in the world today, optimism comes with a side of caution. Be prepared. Things could get weird.

Well…let’s walk like an Egyptian over to this week’s three lil’ piggies!

“Banker Blues…”

Blue River Bancshares (OTCPK:BRBI)
Recent Price: 1.25
P/E: 20.83
Current Yield: 3.2%

The Skinny

Lots and lots of small, blown up banks out there. Some of ‘em are worth picking up. Some aren’t. BRBI may fall in the first group. Founded in 1937 in Shelbyville, Indiana, BRBI provides community banking services through three branches and a loan office in Indiana and a branch across the river in Kentucky. Tiny asset base ($200 million+). Citi (NYSE:C) it ain’t. But the numbers aren’t too bad. The company is earnings positive after a rough six quarters since 2009. Shares trade at barely one times sales and are priced near the bottom of the 52 week range. Nothing fancy. Just a local bank. A local bank that didn’t cut or eliminate the dividend in 2008-2009. But, the community banks that can hang on should do OK. Community banks are just that: community based and going forward, that’s probably a better way to do business.

The Danger
While BRBI’s earnings worm has turned, the picture in the rearview mirror is still fairly ugly. And keep in mind, with a market cap of around $4 million on a good day, that’s a microscopic sized institution. Those are the ones dropping like flies. In fact, FDIC could probably phone those seizures in. Along with the tiny market cap comes the occasional trading volume. If you want shares, always, always use a limit order and be prepared NOT to get filled. Those types of things are very hit and miss. And keep in mind the less than stellar macro environment. Things are better, but they’re not galloping. Gonna take a while.

“High Yield At Blackrock…”

Blackrock High Income shares (NYSE:HIS)
Recent Price: 2.12
Current Yield: 9.84%

The Skinny
CEFs on sale? Our favorite kind! Run by asset management behemoth, Blackrock (NYSE:BLK), HIS’s stated objective is to provide the highest current income attainable. The fund does it by holding over 70% in high yield bonds. The rest is scattered amongst other vehicles that include bank loans, converts and preferreds. Shares trade at a 5% discount to NAV which is just how we like ‘em. Being primarily a high yield fund, you’ll get some exposure and diversification to a fixed income space that still offers some value and is performing decently in a dicey bond market. Last, HIS currently uses 17% leverage which is very little compared to other funds of the same age.

The Danger
The main concern with HIS is credit quality. Over 70% of the portfolio is rated “B” and lower. Definitely not for the timid. Also, HIS shares have underperformed while the broader high yield market has done well since the structural bottom of 2009. High yield can be a money maker. But the space is always more vulnerable during an economic downturn. And even though HIS doesn’t use a lot of leverage, it’s still leveraged.

“Attention…Bargain Shoppers…”

Albertson’s Inc. Senior Debenture 8% due 5/01/31 (cusip# 013104-AL-8)
Recent Price: 83.75
Current Yield: 9.867%

The Skinny
Food prices may be inching higher, but these grocery store bonds are on sale. The Albertson’s (OTC:ABSNU) chain was acquired nearly five years ago by space consolidator Supervalu (NYSE:SVU), so, naturally, these bonds are the acquirer’s responsibility. In addition to Albertson’s, SVU’s portfolio includes some well known regional names such as Jewel-Osco and Cub Foods. The retail grocery space is a tough, tough business. The margins are razor thin. But, with a complex of more than 2,500 stores, SVU has been around since 1870 and has paid out dividends for over 60 years. So, not a bad little company, there. Just looking at the bond stand aone: it trades at a better than 16% discount to par and carries a B2/B rating. Junk, but upper quality junk. And looking at a chart, it appears that the price has bounced nicely off of what seems like a low of around 75.00. While that was 8 points ago, the discount is still pretty good and the bounce can give an investor a bit of confidence.

The Danger
Despite a decent B2/B rating, junk is junk. While offering some decent reward on the upside, high yield ALWAYS holds plenty of risk on the downside as the tradeoff. The 20 year maturity is also a caveat. That’s a long time for any bond these days: junk or investment grade. With rates poised to go higher, longer maturities are almost guaranteed to receive extra abuse. If you know what you’re doing when it comes to trading individual bonds (and believe me it’s hard to do…even for the “pros”), this one falls in this category. If you get 10 points or better and can give it to someone else, that would make sense. And again, it requires a LOT of coordination. We’re not talking about day trading Cisco (NASDAQ:CSCO). Finally, as mentioned in the first paragraph, the grocery business is brutal. WMT is clobbering everyone. Bankruptcies are par for the course in that space with the venerable old A&P being the most recent victim. Be careful.