Tuesday, November 3, 2009

Added to Intel and CEF JQC/ED EMR & CNA Earnings/ ISM and Construction Spending Much Better than Expected

1. ISM Manufacturing Index: This report released yesterday morning was much better than expected, with the October manufacturing PMI rising to 55.7%. ISM The forecast was for 53.3. The new orders component, however, fell from 60.8 to 58.5. Prices increased from 63.5 to 65. The employment component rose to 53.1, the highest reading since April 2006. This report is clearly a positive development.

2. Large U.S. Firms Hoarding Cash: The WSJ reported yesterday that the five hundred largest non-financial firms in the U.S. increased their cash holdings, as a percent of their assets, to the highest level in 40 years during the second quarter. And, based on the firms who have reported their third quarter results so far, that percentage has increased further. An increase in business investment is needed now to help generate growth and businesses are apparently still reluctant to spend. Also, the GDP does not include spending on research and development, an omission scheduled to be corrected by the Bureau of Economic Analysis in 2013, and corporations continue to reduce spending in those important areas so essential to generate future growth. BusinessWeek has reported that the U.S. employment of scientists and engineers has fallen 6.3%.

3. SYSCO (SYY-owned): Sysco was one of the stocks added last March using proceeds from the sell of short term bonds. At my purchase price of $19.46, the current dividend yield is around 5% which is why the stock was purchased then. Buys of CPB LQD SYY XKK/ Sysco is a food distributor and has suffered some due to the recession's impact on its customers. Sysco reported third quarter earnings of 55 cents per share. This was better than the 46 cents earned in last year's quarter but all of the increase was due to two special items totaling nine cents per share (benefits from a 4 cent per share from the change in the value of corporate owned life insurance and 5 cent benefit from a settlement with the IRS). Excluding items, SYY earned 46 cents per share, one cent better than the consensus forecast. Revenues decreased 8.1% from the same period last year. Only about .5% of that revenue decline was from currency fluctuations since Sysco generates the bulk of its revenue in the U.S. so it can not blame adverse currency exchanges for a sales decline. Food deflation during the quarter did adversely impact revenues by 3.4%. SYY continues to be a weak hold, and only a hold due to the dividend yield.

4. Consolidated Edison (owned-core utility holding): Excluding items Consolidated Edison of $1.16 compared to 98 cents in the year ago quarter. GAAP earnings were $1.22 which included a positive six cent net mark-to-market effects of its competitive energy business.

5. Construction Spending: The government reported that construction spending increased .8% in September. www.census.gov/ /release.pdf The forecast was for a negative .2%.

6. Added to Intel and the CEF JQC Yesterday (see Disclaimer): The Intel shares were bought at $19.08, an average up from my prior purchases at $14.65 and $15.25. Intel I thought that I might be able to sell the Microsoft shares if I bought more Intel, but that did not work, at least not yet. Intel is trading below the closing price before its favorable third quarter earnings report and upside guidance for the 4th quarter. INTC: Historical Prices Intel released its third quarter earnings after the close on 10/13: Intel The closing share price before the release was $20.49. Intel was downgraded to hold from buy recently by Roth Capital analyst Arnab Chanda who suspects that some orders could be double or phantom orders. Intel Shortly before that downgrade Intel's CEO told an audience in India that he expected corporate spending on computers to increase significantly in 2010 TheStreet.com The dividend yield at $19 is about 2.9%, and I am reinvesting the dividend to buy additional shares. And, it goes ex dividend tomorrow.

The purchase of additional shares in the CEF JQC was made at $6.97. I am reinvesting the dividends to buy additional shares. The current yield is over 9% at that price and the shares are selling at close to a 18% discount to net asset value as of yesterday's close (-17.91). JQC - Nuveen Multi-Strategy Income and Growth Fund 2 My prior buys discussed in the blog were at $6.31 in July Added 100 JQC and at $4.3 in October 2008 (AEB AND JQC:).

7. CNA Financial (own senior bond in TC JZV only): I successfully traded the TC JZV, which contains a senior bond from CNA Financial several times last year and earlier in 2009, to the point that I was playing with the house's money and owning now the lowest cost shares ever purchased using FIFO accounting. The remaining shares were bought at $9.93 in early March, and I see no reason to part with them. Buy of 50 JZV at 9.93 At that price, my current yield is 18% annually until maturity in 2023 plus another $15 or so per share at maturity assuming CNA pays off the bond. Owning a a bond does require me to monitor the firm for financial viability. CNA Financial reported net operating income of 331 million or $1.11 per share. So, at least for now I am not concerned about being paid interest on the senior bond. JZV has more than doubled since my purchase in March and closed yesterday at $20.9: JZV: Summary for LEHMAN ABS 7.0 CNA-

JZV is a Trust Certificate indicating a beneficial ownership in the underlying security held by the trust, which is the CNA Financial senior bond maturing in 2023. The Grantor Trust was originally formed by an agreement between Lehman ABS, now bankrupt, and the U.S. Bank Trust as trustee for the trust. The trust is administered by an independent trustee, the U.S. Bank Trust, who collects the interest payments made by CNA and then distributes them to the owners of JZV. The trustee has continued to do pay the owners of JZV after the Lehman bankruptcy filing: www.sec.gov/ www.sec.gov Those last two linked documents are the trustee's distribution reports for the last two semi-annual periods to the owners of JZV. The underlying securities are placed into the trust and Lehman ABS assigned ownership of these bonds to the Trustee for the benefit of the Trust Certificate owners. (see pages 39-40: http://www.sec.gov). This is some of the relevant language from the prospectus indicating the transfer of ownership to the trustee:


" In addition, Lehman ABS will, with respect to each Deposited Asset, deliver or cause to be delivered to the trustee (or to the custodian hereinafter referred to) all documents necessary to transfer ownership of such Deposited Asset to the trustee. The trustee (or such custodian) will review the documents within such period as is permitted in the prospectus supplement, and the trustee (or such custodian) will hold the documents in trust for the benefit of the certificate holders (Sections 2.01 and 2.02)."

I have not seen those documents transferring title to the underlying securities held by the Trust,  but I have no reason to doubt their existence and validity. I own a fair number of these Lehman ABS originations since they became subject to extraordinary discounts after the Lehman bankruptcy, as many individuals must have been under the impression that  these securities were Lehman obligations or Lehman securities and consequently sold them out of panic.   

I can only say that I was discussing these securities in this blog at the same time that I was buying them.  So I did what I could to inform other individuals including the ones who were selling these securities to me at ludicrous prices.


There is nothing in my  background that gives me any insight into grantor trusts or these prospectuses.  I can read these prospectuses like anyone else and form a judgment based what I understand to be relatively clear English sentences, at least for sentences written by a lawyer.   Every investment that I make has risks attached to it.  I am just saying that I am sufficiently comfortable in owning the Trust Certificates issued by Grantor trusts originally formed by Lehman ABS and the U.S. Bank Trust.  Others may want to avoid them altogether.   I am not interested in buying JZV at its current price, nor I am willing to give up the 18% interest at my cost by selling the security for a profit.  

8. Emerson (owned):  In another stark contrast with General Electric (owned), Emerson just raised its dividend by 1.5% to 33.5 cents per share.  Granted, this is not much of an increase but it is an increase and not a 70% decrease.  Emerson  reported earning for its fiscal 4th quarter, ending 9/30/09, at 67 cents on a 21% decline in revenues compared to the year ago quarter.   This was seven cents better than the consensus estimate of 60 cents.  EMR expects sales to be down 5 to 7% in fiscal 2010.  The 4th quarter sales improved sequentially 4.6% from the 3rd quarter.  Operating free cash flow for FY 2009 was about equal to FY 2008 at 2.6 billion even with a substantial fall in revenue.  EMR is a long term hold for me. 

9. St. Joe (owned):  I have lost about 6 dollars per share of my unrealized profit in JOE shares but I am going to keep them and may buy more at some point.   The shares were bought during the dark days at $15.69. /Nibbled at ST JOE    Forbes Article on Land Rich Companies:FCE/A JOE and TRC      JOE   JOE is not an earnings story but an asset play.  The St. Joe Company  reported a 3rd quarter loss of 16 cents per share which included after tax charges of 8 cents per share.   

10. Acquisitions:  I would view the acquisitions announced late yesterday and early this morning to be positive. Berkshire announced that it was acquiring Burlington Northern for $100 per share in cash or stock at the election of BNI shareholders.   Berkshire Hathaway  Interestingly, Berkshire announced a 50 for 1 split of its B shares.   In another acquisition, Stanley Works is acquiring Black and Decker The Stanley Works and Black & Decker to Combine  Winstream (owned) agreed to acquire NuVox, a private local exchange carrier based in South Carolina, for 643 million which includes the assumption of approximately 180 million in net debt.    Windstream WIN expects the acquisition to be accretive to free cash flow and to result in 30 million in savings.  

11. Tidbits: I sold my Berkshire baby shares a few weeks ago and may buy them back. There were some large beats by some S & P 500 companies who released earnings reports this morning. 

Mastercard beat the forecast by  54 cents. 

Archer Daniels beat by 20 cents. Walgreens reported that same store sales increased 4.9%.  

DuPont (owned) expects 20% compounded earnings growth from 2009 through 2012. DuPont     

On the more gloomy side, JNJ announced that it was shedding 6 to 7% of its workforce.  I would also view as a negative  the earnings report this morning from Expeditors International: Expeditors Reports 

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