Thursday, September 3, 2009

Bought Exar at $7.15-Lottery Ticket/More on Zion's Debt and My Limited Exposure to Junk Rated Issues//ISM Service Index/UTIW

1. Bought 40 shares of EXAR at $7.15-LOTTERY TICKET (see disclaimer): I could only buy 40 shares since $300 is my limit on Lottery Tickets. I placed a market order near the close yesterday.

Exar has about $5.08 per share in cash and $4.73 per share in cash after subtracting long term debt, which is a 15.217 million dollar long term lease financing obligation. The long term lease obligation is discussed in note 15 at page 22. Form 10-Q At the end of the lease term in 2011 for the firm's Hillview facility, the lease obligation would be 12.2 million which EXAR says it will settle by returning the property to the lessor. So, I would view the $5.08 per share in cash as the more appropriate number. As of the last quarterly report, the firm reported 41.915 million in cash and cash equivalents and 179.553 million in available for sale securities consisting of U.S. government and agency securities, corporate bonds and commercial paper, asset backed securities and mortgage backed securities. (See page 14: ). The asset backed securities consist "primarily" of "premium tranches or auto loans and credit card receivables while our mortgage backed securities are primarily from federal agencies".

Soros Fund Management filed a 13G in July showing the acquisition of 2,465,754 shares of EXAR. //www.sec.gov


A detailed description of Exar's business can be found at Reuters.

The company recently acquired Hifn for 56.8 million in cash and some shares.


So that completes my discussion about the business. I understood the amount of cash on its balance sheet, the absence of debt (other than that lease), the price to book at close to 1, total assets (after subtracting debt and goodwill) divided by market capitalization of less than 1, and the fact that Soros has an interest in it. The rest is gibberish to me which is acceptable only for a Lottery Ticket. One of these ratios just mentioned is something I have not previously discussed. Take all of the assets listed on the balance sheet excluding goodwill, subtract debt and then divide by market capitalization. As of 6/28/09, Exar lists 316.13 million in assets less goodwill and long term debt (more if you do not include the Hillview facility as part of debt) compared to a market capitalization of 311.8 million according to YF at a $7.16 price.

The 2 analysts that make estimates do not have the company achieving a profit in its fiscal year ending March 2010, though a consensus estimate of a 12 cent per share is forecasted for the 2011 fiscal year. I do not have access to any analyst reports on the company.

The long term chart at YF goes back to 1990 and shows three stock splits and a parabolic up move in 1999-2000 culminating in a spike to $60.5 in September 2000. Fortunately, I was not aware of the company until a couple of weeks ago. The price seemed to hit a bottom around 20 for a year between 2001 to 2002, before falling again into a $10 to $20 channel starting in May 2002. And that channel was broken to the downside after the start of the Great Recession, with the stock mostly moving in a narrow channel between $6 to $8 since October 2007. Exar Corporation Share Price Chart

I am just trying to stay out of trouble now with a few Lottery Ticket purchases that do not amount to a hill of beans.

2. More on Zion's Debt/And I Take Only Small Risks with Junk Rated Securities: I did check the ratings of Zion's debt before purchasing the junior bond yesterday. Zions has a junior debt security with a maturity in 2015 and a 6% coupon (Final Prospectus Supplement) rated JUNK by Moody's at B3 and by S & P at BB+. FINRA - Investor Information - Market Data - Bonds - Bond Detail Zion's has a low cost senior floating rate note maturing in December 2009 with a 295 million par value, which it will need to refinance. And several other issues mature in 2010 and 2011. Search Results Zion's did recently complete a 250 million capital raise by selling common stock starting in the second quarter of 2009 at an average cost of $14.85. I will go easy on the junk credits, but I no longer see interesting yields in investment grade bonds with one or two exceptions. My largest junk bond position is Goodyear Tire. I own 550 shares of XKK, an 8% coupon TC with a $10 par value which contains a senior Goodyear bond maturing in 2028 with a 7% coupon. FINRA - Investor Information - Market Data - Bonds - Bond Detail That position is currently valued at around $4,500 at yesterday's close of $8.25, and 5 grand is my limit on junk rated bonds from a single issuer. That position has more than doubled in value since I discussed it in March, when I bought 100 shares at $3.8: Buys of CPB LQD SYY XKK/Regressive Taxation-Cap & Trade/ This bond is rated B2 by Moody's, BB- by S & P and B by Fitch. I was thinking of trimming it a bit before the end of this year. The semi-annual ex interest date on the TC is on 9/10: XKK Stock Quote - Corporate Backed Tr Ctfs NT GT8%

The Bank of America Trust Preferred issue that I sold yesterday is rated BB- by Fitch, B by S & P and Baa3 by Moody's as of 8/17/09: http://phx.corporate-ir.net BAC's equity preferred stock is rated B by Fitch and S & P. Currently, I am down to just 50 shares of a BAC TP, MJH, bought during a meltdown when it was yielding almost 25% per annum and at a 70% discount to its par value in 2026, as my sole BAC debt holding. Buy of 50 MJH at $7.51/ I also sold all of my equity preferred shares soon after BAC's conversion offer. I may at some point go back into one of BAC' floating rate equity preferred stocks: Advantages and Disadvantages of Equity Preferred Floating Rate Securities There are five to choose from when I include the ones from Merrill Lynch, now owned by BAC.

BMLPRG 3% or .75% over 3 month LIBOR
BMLPRJ 4% or .75% over 3 month LIBOR
BMLPRH 3% or .65% over 3 month LIBOR
BMLPRL 4% or .50% over 3 month LIBOR
BACPRE 4% or .35% over 3 month LIBOR

The first four are from Merrill Lynch. I was fortunate to buy BMLPRG at $8.8 (/Bought BMLprg at $8.8) shortly before the conversion offer was made, so I have some profit built into it after selling it. It requires a few moments of analysis to determine which one to buy at any given point in time ( Item # 2: Nerd Talk by LB this Morning 5/20/09) The difference in price per share may not justify the small difference in the Libor spread or even a much larger difference in the guarantees. A 1/10th of a per cent difference in LIBOR, assuming the guarantee is not the applicable rate, is worth just $2.50 on a 100 shares per year. A 1% difference in the guarantee is worth just $25 per year on a 100 shares. If there was a $1 price difference in share price between a 3% and a 4% guarantee, it would take 4 years (8 years for a $2 difference) to recoup that difference in price with the dividend before tax. BAC is still paying a 1 cent per share common dividend, and it would look bad to eliminate that insignificant dividend for its common shareholders.

In retrospect, it would have been better to just hold those BMLPRG shares bought at $8.8. Still, with low guarantees and an anemic LIBOR rate likely to persist for months, these securities are uninteresting to me at their current prices, and their non-cumulative nature heightens their risk profile.

3. UTi Worldwide (UTIW-owned): A 50 share position was recently initiated in this freight forwarder. UTi Worldwide reported its 2nd quarter fiscal 2010 results this morning at $.12 per share which included 2 cents of severance costs. Cash flow from operations increased by 44%, while net revenues declined 18% from a year ago (net revenues= gross revenues minus purchased transportation costs). The earnings were below the consensus estimate of 17 cents. Reuters This is a play on the hoped for improving global economy, and this past quarter is not the issue. The issues are whether the world is coming out of a global recession now, and the pace of that recovery. The OECD 's chief economist said yesterday that recovery is starting, the worst is over, and the recovery may be marginally stronger than the OECD predicted 3 months ago.http://www.oecd.org/data .pdf http://www.oecd.org/data.pdf

4. Minutes from August Federal Reserve Meeting: It looks to me like the Federal Reserve is calling an end to the Great Recession in the U.S.:

In their discussion of the economic situation and outlook,

meeting participants agreed that the incoming

data and anecdotal evidence had strengthened their

confidence that the downturn in economic activity was

ending and that growth was likely to resume in the

second half of the year.


Manufacturing firms appeared to have benefitted recently

from an earlier- and stronger-than-expected

pickup in foreign economic activity, especially in Asia,

and the resulting increase in demand for U.S. exports.

Several participants noted that improving growth

abroad would likely contribute to greater growth in

U.S. exports going forward.


Consumer spending remained weak, but participants

saw evidence that it was stabilizing, even before the

boost to auto purchases provided by the cash-forclunkers

program.


http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20090812.pdf

The Fed, however, is not expecting a robust recovery and the economy is still vulnerable to adverse shocks.

5. TIBITS: I noted from the WSJ dividend page that the ETF TIP went ex dividend yesterday with a $.9204 per share dividend. I am reinvesting the dividend to buy additional shares. The Blackrock Real Asset (BCF), a CEF, declared its quarterly dividend of $.2718. Closed End Funds: Energy and Natural Resources Funds Although I have never owned shares in equity preferred securities issued by the Royal Bank of Scotland, I also noted that RBS declared dividends on 5 of those issues. The yields are shown as anywhere from 14.5% to 16.5%. Those securities were included in Fitch's recent downgrades of European hybrids, with the rating for the RBS preferred stocks reduced to B: Reuters I have not looked into the RBS situation, though I did check the quantum site this morning and noted that these securities were not cumulative: Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.com I have not had any interest in RBS since it overpaid for ABN Amro. The ISM Service index is lagging behind the ISM manufacturing survey, with a rise to 48.4 in August, still below the 50 demarcation line: ISM This was the best level since the Lehman failure in September 2008. The price component jumped to 63.1 from 41.3.

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