This Week in Bank Failures

High-leverage and high-yield funds may have to change strategy or shut down as a U.S. interest rate increase appears imminent. Third Avenue Focused Credit Fund has suspended redemptions and says it will liquidate. The fund has almost $1 billion in assets, down from $2.75 billion last year. Liquidation of a high-yield bond fund typically takes about a year. A Stone Lion high-yield fund that is half as large also suspended redemptions today. It isn’t immediately clear whether the Stone Lion fund will have to liquidate, but that is a common fate of a fund that cannot meet its cash requirements. The fund represents a third of Stone Lion’s total assets.

Redemptions leading to a loss of solvency is a recurring problem with bond funds, which as a rule keep very little liquidity and can go from normal operations to insolvency in just two or three trading sessions when investor sentiment turns. This is a risk that is not widely recognized because it a risk of bond funds themselves, not of the underlying bonds. Given the risk, conservative individual investors should never invest in bond funds, and as investors decide to get out before it’s too late, more bond fund redemptions and liquidations are almost surely on the way.

U.S. interest rates have not increased in nearly a decade, and there are questions about how well the financial sector is positioned to survive normal interest rates when they return around 2019. Interest rate increases put more pressure on distressed business of all kinds, and lenders will inevitably take losses on some of their loans to marginal businesses.

Firefox Is a Browser Again

Mozilla says it is dropping Firefox OS, its HTML-based mobile phone platform. It’s a surprising retreat from the software-development foundation, which over the past six years or so has put everything it had into the mobile phone project while leaving its popular web browser to try to pick up what new features it could by porting them from the phone project. Firefox OS shipped in its initial version two years ago, and in the process of creating it, with the Firefox web browser largely neglected, Mozilla saw its browser market share fall by more than half. During this period major browser bugs went unaddressed for as many as five versions while important browser features were taken away because it was thought they would make the desktop browser too incompatible with the mobile platform. Mozilla thought it had to take this course because of the enthusiasm of its developers for the mobile phone project.

Perhaps that enthusiasm has waned now that Firefox OS, facing an already crowded market for mobile platforms, has failed to gain any traction in its first two years of release. In any case, the leaders at Mozilla are trying to position the Firefox web browser as their marquee product again. This year saw the Firefox browser ported to the iOS platform, if only for those with the latest iOS version. It shows that Firefox has no intention of disappearing from mobile even if it is no longer trying to own the mobile platform.

The renewed focus on the long-neglected web browser may allow some of its more troubling deficiencies to be corrected. Firefox is still seen as the most standards-compliant browser and it will have a ready audience if it can focus on being secure, user-friendly, and productive again.

Looking back, it is hard to say the Firefox OS project was a mistake even though it ultimately failed. The mobile-first approach at Mozilla helped usher in the current era of mobile-compatible web design, a change that would not have happened so smoothly without Firefox leading the way. It is now not so easy to remember that just a few years ago, few people thought web sites could be mobile-friendly and standards-compatible at the same time. Now that is what everyone expects to see in a web site. That’s a substantial shift in the web, and the world will reap the benefits from it for years to come.

A Gloomy Report from Barnes & Noble

It is hard not to have a gloomy feeling about the large corporate bookstore after seeing the earnings report for the revamped Barnes & Noble for the quarter ending October 31. Shrinking down Barnes & Noble was expensive anyway, with more than $10 million in one-time expenses and surely a similar degree of distraction occurring during the quarter. Now that the restructuring is complete, it reveals a retail giant utterly dependent on the holiday shopping season. The holiday season is split between quarters, with around 15 percent of holiday gift purchases occurring during the quarter. Even with this advantage, excluding special items, the bookseller reported an operating loss of $10 million.

Barnes & Noble has for years reported losses in the spring and summer quarters. Now it seems the fall quarter is unprofitable too. The latest quarterly loss comes after operating losses of $67 million over the two preceding quarters. It may be unrealistic to expect a profit from Barnes & Noble during any of the first ten months of the year, but if it loses $5 million per month in the off-season, it needs an above-average holiday season to make up the losses. Obviously, it isn’t quite a business model if you need above-average results every time. Statistically, a below-average season must come sooner or later.

There are reasons to doubt the current pace of holiday shopping in general. There was a palpable drop-off in Black Friday traffic and other indications of a generally lackluster season in-store. With store closings and a technically obsolete e-book platform, Barnes & Noble can’t match the results of last year’s holiday quarter. It will be doing well if sells enough calendars, board games, and other high-markup items to show an operating income of $50 million for the current quarter and a loss of $20 million for the year. That would leave the bookseller looking for ways to close stores faster and cut costs in other ways. And if the current quarter’s results are below average?

This Week in Bank Failures

New Fed rules prohibit emergency lending like the AIG and Bear Stearns bailouts in 2008. The rules prevent the Fed from making emergency loans to select companies. In a crisis, the Fed can still offer “broad-based” credit to solvent borrowers, but it must charge a penalty rate on such loans. Under these rules, in a repeat of the banking crisis of 2007–2009, most of the same banks would have survived, but with little or no value accruing to the prior stockholders.

Cost-cutting: Morgan Stanley has begun laying off senior managers in its fixed-income business in London. The moves are said to be a prelude to 25 percent staffing cuts in the fixed-income business, most to take place next week. The company has not commented on its plans. Separately, Barclays is said to plan to reduce staffing by 20 percent early next year in its investment banking operations, in addition to cuts already announced.

Target has agreed to pay banks $39 million to cover part of the cost of replacing cards compromised by the retailer’s massive in-store data leak in November and December 2013. At least 40 million cards were compromised in the data leak, so in total, Target has reimbursed card issuers and shoppers less than $5 per card.

The U.S. Export-Import Bank is back in business after a charter renewal was approved as part of a transportation funding bill that passed Congress last Friday. The bank was effectively shut down when Congress voted to let its charter lapse in June.

The NCUA liquidated Greater Abyssinia Federal Credit Union, which had 425 members, mainly members of the Greater Abyssinia Baptist Church in Cleveland, Ohio. The NCUA decided it wouldn’t be able to restore the credit union to financial viability. The credit union had less than a million dollars in assets.

Pin-Drop Week at Retail

Since 2007 I have gotten used to seeing the retail crowds vanish after Black Friday and Cyber Monday, but I never saw a pattern quite like this year. I’m told there were more people shopping in stores on Thanksgiving. The Black Friday traffic I saw was muted, particularly in the afternoon and evening. I did not hear any stories of shopping all night for Black Friday — perhaps that was just a novelty that most people wouldn’t elect to do a second time. On the other hand, I heard of two malls that filled their primary parking on the morning of Black Friday. If Black Friday was slow, the next afternoon was busier than previous years. Then came Sunday, and its retail traffic was slower than an average Sunday. Cyber Monday seemed a little busier in stores than an average Monday.

And then nothing. You could hear a pin drop in stores on Tuesday. After shopping I went to a restaurant at the peak of dinner hour. This was a place that seats 400, but on this occasion they were fortunate to have a family of five in the dining room — otherwise it would have been effectively empty.

Of course, there is a paycheck effect and a fatigue factor that tend to reduce shopping after Cyber Monday. Shoppers who spent their entire paycheck over the extended Thanksgiving weekend might wait for the next paycheck before they go shopping again. Anyone tired out from hours of shopping or traveling might not be ready to shop again until next Sunday. Nevertheless, it seems that Black Friday may be counterproductive from the retail sector’s point of view if there are no shoppers at all the following week. And this year, looking at the sharpest drop-off I’ve ever seen, I can’t help wondering if shoppers got what they wanted a little more quickly this time around.