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freeman 09-16-2005 08:51 PM

What is going on here?
For some reason, this story from today's Pittsburgh Post-Gazette set off my internal radar.
What is going on here? Why would the largest investment houses on Wall Street be sinking money into bankrupt airline stocks? I'm getting a fuzzy deja vu flashback to the mysterious trading just before 9/11, with airline stocks being sold short by individuals who appeared to have inside knowledge of the pending attack.
But what are the insiders betting on this time? Do they know that Peak Oil is a scam and they're hoping to make a killing when fuel prices suddenly drop in the future, maybe the near future? Are they anticipating another act of terror or manufactured disaster that will somehow increase the value of airliine stocks? Are railways or other modes of transportation about to be targeted? I put it to you ladies and gentlemen:

Heard on the Street


Heard on the Street: Why were savvy investors in Delta, Northwest?

Friday, September 16, 2005
By Gregory Zuckerman, The Wall Street Journal

Who would be foolish enough to buy up the shares and debt of struggling Delta Air Lines and Northwest Airlines? Some of the smartest investors on Wall Street, that's who.

In recent months, hedge funds including Ziff Brothers Investments LLC and Kingdon Capital Management LLC, as well as money managers like Charles Schwab Corp.'s U.S. Trust Corp., Wellington Management Co. and Deutsche Bank AG all piled into shares of the airlines, according to regulatory filings. And in recent days, a rush of hedge funds bought up Northwest's debt, betting that the airline would avert a bankruptcy filing.

Bad call. Northwest and Delta both made voluntary Chapter 11 filings Wednesday. Delta's shares, which hit $4 in June, Thursday were at 75 cents, up 5.6 percent, in 4 p.m. composite trading on the New York Stock Exchange. Northwest tumbled 53 percent Thursday to 88 cents in 4 p.m. composite trading on the Nasdaq Stock Market, after trading above $6 in June.

New York-based Ziff reported Aug. 10 that it had built a new position of almost 5.3 million Northwest shares, or about 6 percent of the airline's outstanding shares. For its part, Wellington established a new position in Delta during the second quarter of this year, buying up 5.3 million shares, though the Boston-based firm reduced its position in Northwest to 2.4 million shares from about 5.1 million in the first quarter, according to regulatory filings.

Others got out in the nick of time, though not without having losses. On July 28, large hedge fund SAC Capital Advisors LLC said it had added 2.8 million shares to an existing 2.1 million-share position in Northwest, while on July 14 SAC reported that it added 5.8 million shares to a 3.7 million stock position in Delta, according to FactSet Research Systems Inc. People close to the firm say SAC exited these big positions a few weeks ago, selling Northwest stock when it was still around $3 a share, avoiding some of the pain. But SAC still lost money on the trades.

Regulatory filings provide a snapshot of holdings on a certain date, of course, and the investors may have adjusted their positions, or offset them with other trades. Still, all the buying is surprising because it came in the face of persistent worries about the impact on airlines of hefty fuel and labor costs, onerous pension obligations, strained union relations, brutal competition and a history of well-regarded hedge funds getting burned by betting on airlines.

Representatives of Ziff, Kingdon, Deutsche and Wellington declined to comment.

So what were these guys thinking? Some of these investors say they were hopeful that Northwest could forge a closer relationship with it unions, helping to send shares close to $10. Others viewed the investments as inexpensive ways to bet that oil prices would fall. Had jet-fuel prices dropped, instead of soaring after Hurricane Katrina, the airlines would have been much healthier, and the stocks likely would have climbed. Indeed, shares of other airlines, such as AMR Corp. and Continental Airlines rose over the summer as business travel picked up.

The days leading up to Northwest's bankruptcy have seen particularly strong buying of the airline's debt, traders say. One reason they had hope: Northwest never arranged debtor-in-possession financing from creditors, usually a precursor to a bankruptcy filing, suggesting to the investors that the airline wasn't about to file. Northwest has said that it decided against a DIP because it believes it has sufficient cash and most of its assets already are pledged.

Some sophisticated investors are trying to establish large positions to gain a seat at the table when the airlines' fates are negotiated. Still others are hoping that the airlines could end up merging with rivals or think Congress will step in to provide pension relief.

Thursday, trading in the debt was heated, as some traditional money-management firms and mutual funds sold bonds, while some investors covered short positions, or bets against the price of the bonds, by buying back the debt. In recent weeks, others traded "recovery swaps." These new instruments are an obligation to buy the cheapest bond within 30 days of a default, an attractive investment for those convinced that the value of the debt will rise during the bankruptcy process.

Northwest's most heavily traded bonds, those maturing in 2008, traded at about 24 cents on the dollar Thursday, down from 26 cents late Wednesday and from about 34 cents last week. Though the equity of the airlines likely will be wiped out, there likely is some value to the bonds at these levels, some say, because the bonds will be converted into equity in the airlines when they emerge from Chapter 11.

"I can't guess the value of jet fuel in 18 months when the airlines emerge, but there is some value to the bonds at these levels," said David Feinman, managing director at Havens Advisors LLC, a New York hedge fund. He says he hasn't yet purchased debt of the airlines, though he has wagered against the shares of the carriers. "But you better have a strong stomach and a lot of patience to get involved at this point."

That hedge funds continue to place big bets on airlines is somewhat surprising given the poor track record many of the best in the business have in divining the future of this notoriously challenging business. Legendary investors Michael Steinhardt and Julian Robertson both suffered big losses from stakes in US Airways Group. Warren Buffett made money investing in US Air but not before writing off 75 percent of its value and calling it a "mistake." Carl Icahn had a difficult ride after gaining control of Trans World Airlines in 1986. In all, more than 100 airlines have filed for bankruptcy in the past 25 years.

truebeliever 09-16-2005 09:11 PM

Re: What is going on here?

If it's a mid term investment oppertunity...say 18months to 2 years then i'd say a period of peace and prosperity was on the way.

Just take the chip...and the travel, like life, becomes cheap.

truebeliever 09-17-2005 01:21 AM

Re: What is going on here?
I have consulted my crystal ball.

Through the swirling mist of uncertainty and butterfly wing turbulence...i say the Federal Government is going to nationalise the airlines at a very generous price and run it uniformly as a National Security issue vital for the health and safety of the nations economy.

No doubt Halliburton will be buying up.

Your biometric papers please citizen.

Just some wild speculation.

Shannow 09-17-2005 01:28 AM

Re: What is going on here?
Not a bad concept.

Especially in times of national emergency, when large numbers of people need to be relocated quickly, and as far away as possible.

freeman 09-17-2005 06:07 AM

Re: What is going on here?
Could this nationalization of the airlines be accomodated by another act of terrorism, possibly on a foreign airline flying to the United States? The preprogrammed rationale being that the U. S. must have control of all flights in and out of the country in order to maintain Homeland Security?
And of course a nationalized airline will operate with all of the benefits and profit margins of Haliburton, i. e., government subsidies on everything from oil to airport terminals, big tax breaks, no competitive pricing. And as Shannow says, the implicit benefit of controlling all of the nation's air transportation as the icing on the cake.
Maybe the Bush insiders know this and are already establishing market positions to sell out at a profit, while the rest of the investment world runs scared from the bankruptcy filings...

truebeliever 09-17-2005 09:39 PM

Re: What is going on here?
From what you've posted, there is a scam afoot. Exactly what, is hard to tell.

If the U.S is to be plunged into a total Police State then a Nationalization of the transport system is not out of the question.

Saturnino 09-18-2005 06:35 PM

Re: What is going on here?
CNN said yesterday that 50% of the seats in the air industry in the US are in the hands of Chapter 11 companies (bankrupt). I guess a nice loan from the government would be reason enough for them to help with laws about total control of passengers and an end to privacy.

Minuteman 09-19-2005 05:55 AM

Re: What is going on here?
Me thinks TB is right in this. Just this morning on the local Illuminati channel was a piece about DNA testing. Yes, folks for the small price of 3 to 4 hundred dollars you too can have your own customized diet to loose weigh based on 19 characteristics of your DNA. Way cool huh? A way for them to increase the database and have the victims pay for it too!
Oh a lighter note my daughter bought a horse last week. This event in my life seems to have significant karmic implications in many ways. First off horses are not very common in our suburban setting, space, land, and the wherewithall for my daughter to have a horse would be like me winning the lottery. But guess what?
This horse has pale blue eyes so here we go with the phrase "Behold a pale horse". God, like I need another dam project.

freeman 09-19-2005 07:22 AM

Re: What is going on here?
Well, the Peak Oil scam isn't over yet -- the mere threat of more hurricanes in the Gulf has driven oil prices up again. That horse might be a better investment than you know, Minuteman. I hope you invested in a buggy, too.
This AP article about the non-reaction of Boeing to seeing two of its best customers heading into bankruptcy leads me to believe that something global may be in the works for the airline industry...will America lose yet another major industry to outsourcing?

Why airline bankruptcies mean little to Boeing


SEATTLE - In most industries, news that two of your customers are seeking bankruptcy protection would be chilling, if not downright jarring.

But when you’re aerospace giant Boeing Co., and the customers are stalwart U.S. airlines, a week like the last one, while not exactly something to shrug off, is also far from a reason to panic.

Delta Air Lines Inc. and Northwest Airlines Corp. are the latest major U.S. airlines to head to bankruptcy court, hampered by high labor and fuel costs that make it tough to compete with more nimble discount carriers.

Both airlines are Boeing customers: Delta has 55 airplanes on order, and Northwest is set to be the first U.S. carrier to put the company’s new 787 airplane into service. But analysts say neither airline is key to Boeing’s most important growth plans, which center on winning customers in growth markets such as India, China and other countries that are fast developing a flying middle class.

“In the past, it would’ve been much more important, but as the roster of customers becomes more and more international, what happens here becomes comparatively less important,” said analyst J.B. Groh with D.A. Davidson.

Of course it’s never good news when a customer heads to bankruptcy court. But analyst Howard Rubel with Jefferies & Co. said another reason Boeing isn’t terribly affected is because worldwide demand for airplanes is continuing to improve.

“The ultimate customer is the flying public, and as long as you have more demand for seats than you do supply of seats, then the production of jetliners is going to go up,” Rubel said.

Delta Air Lines has not placed a Boeing order since 2000; the planes that are still to be delivered are left over from orders placed five years ago or more. Northwest had not ordered a Boeing plane in nearly four years before agreeing to buy 18 of the new 787s in May.

Other U.S. carriers that were once Boeing’s most prized customers also have fallen from prominence in recent years. United Airlines, whose parent UAL Corp. has been operating in bankruptcy since 2002, hasn’t placed a new order since 1999.

In their place are promising overseas carriers and U.S. discounters. Southwest Airlines, one of the few U.S. carriers to weather the aftermath of the 9/11 attacks, economic downturn and high fuel costs without major problems, remains a reliable customer for 737s, the only airplane the carrier flies. And when Boeing launched its new 787, it was with an initial order from Japan’s All Nippon Airways.

Boeing said it expects no immediate economic impact from the two bankruptcies. Spokesman Nicolaas Groeneveld-Meijer said the company has not heard from either airline that they plan to cancel any orders.

That’s partly because there’s no immediate time crunch. Northwest isn’t expected to get its first 787s until 2008, he said, and the airline and Boeing discussed the possibility of bankruptcy when they made the deal.

The jet maker also has already been working with Delta to reschedule orders in the face of that airline’s financial hardships, Groeneveld-Meijer said. Its airplanes are currently scheduled to be delivered through 2010.

But even if either airline does cancel orders, Groeneveld-Meijer said Boeing can easily fill any open slots with another customer who is farther down on the waiting list, and eager to get planes into service more quickly.

“Boeing is having a very good year regardless of that,” he said, adding: “It obviously would be extremely helpful if the U.S. carriers were in better health.”

Of course, Boeing isn’t delivering any airplanes right now — the Chicago company’s Seattle-based commercial jet plants are shuttered because its Machinists are on strike over issues including pension increases and health care costs.

Boeing spokesman Charles Bickers said the bankruptcies serve as a reminder that the company must keep labor and other costs down in order to provide a good deal for increasingly tight-fisted airlines, and beat competitors such as Airbus SAS.

“It clearly underlines how important it is for us to provide airplanes that deliver exceptional value,” he said.

Connie Kelliher, spokeswoman for Machinists District Lodge 751 responded by noting Boeing’s 2004 earnings.

“They are competitive; $1.87 billion after-tax profits is pretty competitive,” she said.

Saturnino 09-19-2005 08:13 AM

Re: What is going on here?
Since I have some few shares of Embraer stock, I can't say I am sad that Boeing is getting screwed. Much less if I think about their involvement in the arms industry.
Embraer will be launching new jets for 100 passengers, very nice ones. All the regional carriers (Continental Express, etc.) in the US fly them. They will probably be successful because of their size...there is more capacity with the big Boeings than is needed now.

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