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Day of reckoning nears for Lisle-based Navistar

Navistar's new Midwest Parts distributicenter during an opening ceremony Joliet IL Monday June 11 2012.    | Matt

Navistar's new Midwest Parts distribution center during an opening ceremony in Joliet, IL on Monday June 11, 2012. | Matt Marton~Sun-Times Media

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roeder report

David Roeder reports on real estate at 6:22 PM. Every Thursday on News- radio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday

Updated: August 27, 2012 3:09PM

Lisle-based Navistar International (NAV) is in awful straits, mostly of its own making. This month, it was in the unenviable position of having a federal court invalidate its business strategy.

That can’t be good for its stock price, or even for the engine and truck manufacturer’s long-term ability to stand on its own.

Buckled by losses, the company has been willing to pay Environmental Protection Agency fines to keep manufacturing engines that don’t meet emission standards. Competitors charged the EPA policy of letting the company off with fines and the purchase of emission credits amounted to forgiveness for breaking rules that the others accept. An appellate court agreed, and Judge Janice Brown in her ruling fairly stated Navistar’s situation, saying “Navistar’s day of reckoning is fast approaching: Its supply of credits is dwindling and its engines remain noncompliant.”

A forced exit from the business could cost billions of dollars in revenue and thousands of jobs, many of them local. An analyst from Gimme Credit, Vicki Bryan, even dropped the “b” word, “bankruptcy,” in a report speculating on Navistar’s future. She said Navistar doesn’t have the cash or borrowing capacity to sustain the blow.

But others are betting on better outcomes, such as restructuring or a buyout. Activist investor Carl Icahn and a protégé, Mark Rachesky, have separately gained a 26 percent stake in the company, leading the Navistar board to adopt a “poison pill” takeover defense and prompting the thought that the company’s own engine strategy has been a “poison pill” of another kind.

Talk circulates about a purchase by the likes of Volkswagen, Fiat, or, closer to home, Oshkosh (OSK). Robert W. Baird analyst David Leiker discounts that possibility because of Navistar’s high pension debt and operational trouble. He has a neutral rating and a $30 price target on the stock, which closed Friday at $27.02, down 2.2 percent.

A year ago, the stock traded higher than $50. A company that dates from Cyrus McCormick’s newfangled reaper of the 1830s finds itself caught between agitated shareholders and a board that appears intent on standing pat. Investors can pick a side, but only with money they can afford to lose.

DISCOUNTED GROCERIES: Times are getting tougher at the local Jewel, and at other food stores owned by Supervalu (SVU). The company has been running at losses for its last two fiscal years as discounters such as Wal-Mart Stores (WMT) and Target (TGT0 have siphoned sales.

Some investors are betting that private-equity buyers will make a run at Supervalu. The shares are trading near a 30-year low and the debt load is heavy, but the cash flow is thought to be secure. A report by Barclays said Supervalu is the best candidate for a takeover among the three large supermarket chains that are publicly traded, the others being Kroger (KR) and Dominick’s owner Safeway (SWY). It’s also the smallest.

HIGH FREQUENCY HEADACHE: The preponderance of high-frequency trading is skewing market prices and adding to the risk of another “flash crash,” or a system collapse, Joseph Saluzzi, co-author of the book Broken Markets, said in an interview with Yahoo Finance.

High-frequency trading measures executions in the milliseconds and are based on systems that compute any indicator a programmer can feed into it. The systems then authorize trades based on anticipated market changes. When you think about it, it’s a legalized form of the old-fashioned floor trading sin of “front running,” or getting in front of other people’s orders. And it’s institutionalized; Chicago exchange owner CME Group (CME) sells access to server space at its Aurora data hub so firms can executive trades a little faster than the next guy.

Saluzzi told the web site high-frequency trading can’t be wished away, so it should be regulated. One idea: Mandate a minimum “spread,” the difference between bid and ask prices. Spreads have disappeared in today’s market, allowing high-frequency traders to scalp pennies on every deal.

ENERGY JOLT: Goldman Sachs Group (GS) has advised clients it expects a 29 percent return in commodities for the next 12 months, as represented by the Standard & Poor’s GSCI Enhanced Commodity Index. The forecast carries optimism about the economy here and about how Europe will deal with its contagion.

Jeffrey Currie, head of commodities research at Goldman, said the big gains will come in energy, an estimated 41 percent, and in base and precious metals. But his report predicted a 14 percent decline for the agricultural sector, suggesting that Midwestern farmers may want to lock in prices now.

CLOSING QUOTE: “I already sold it, I took my hit, my thesis was wrong. I thought we would get a quick bounce just about the excitement about the stock. I was wrong, and when you are wrong you don’t wait, you just get out. So I took a beating and left.” — Mark Cuban, telling CNBC about his fling with Facebook (FB)

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