Saturday, January 9, 2010

Sold 50 of the 150 DFP/ Coca Cola Downgrade/Bought 50 OIIM at 5.12-Lottery Ticket/CVB Financial/Sold 100 of KCC

1. COCA COLA: I mentioned in my first post for the new year that I did not expect much, if any, gain from the consumer staple stocks that I purchased back in March 2009. 2010 Speculative Strategy-Gateway Post I intend to keep what I now own, including the KO shares bought at 38.72 on 3/10/09, for their dividend yields at my cost, and the likely future stream of dividend increases which will increase my yield. I also made the same type of comment about Campbell Soup in an earlier post. Item # 1 Campbell Soup I could say the same about my purchase of Heinz at 31.67. Most of the price appreciation that I can reasonably expect in the near term has already happened, but I like the dividend yield at my cost too much to give it up now, particularly when cash is still trash, the bond alternatives have rallied too much, and Uncle Ben is likely to continue his Jihad against the savers and responsible citizens by keeping interest rates near zero for at least several more months.For How Long Will Cash Be Trash?

On Friday, J P Morgan's analyst, John Faucher, downgraded KO to neutral, though he kept his $62 price target. He apparently believes that there was little room for price appreciation.

I also do not expect much, if any, capital appreciation in my electric utility and bond holdings in 2010, which is why I am venturing more into what I would call intelligent speculation.

2. Sold 50 of the 150 of DFP at $18.9 (see disclaimer): This is another bond with a long maturity. DFP is a Trust Preferred issue connected with Delphi Financial. The shares sold last Friday were part of the 100 shares bought at $17.1 in October 2009. One quarterly interest payment has been made to me for those shares so far. I recently added 50 shares in a retirement account, after noticing an unusually large yield spread between this TP and an exchange traded senior bond from Delphi, DFY, which I then owned in that retirement account. The retirement account is managed with Aggressive Conservatism. I sold the senior bond, and bought the Junior bond to capture more yield, the yield difference then being about 2.5% more for the junior bond than the senior note. Item # 7 Bought 50 DFP & Sold 50 DFY in Roth I would not be adverse in buying the senior bond back in the ROTH provided it fell at least two bucks from current levels.

The reason for the trade was to reduce a tad my long bond exposure, to take a profit, and to wait for a more advantageous opportunity to buy the more senior security.

3. CVB Financial (CVBF) (owned-Regional Bank Strategy: Category 2): There was an interesting and informative story at MarketWatch about this small regional band located in the "Inland Empire" region of California. The bank's headquarters is in Ontario, San Bernardino County. I knew economic conditions were bad in this area, but did not realize how bad until I read this article. It appears that CVB may be the last bank standing in this area. I did not invest much, buying just 50 shares at $7.94. Item # 6 /Bought CVBF/. I have about a 20% unrealized gain in the shares based on Friday's closing price of $9.52: CVBF Stock Quote - CVB Financial Corp Stock Quote CVB has paid back TARP funds.

I may need to be more flexible with my Regional Bank stratagem, allowing for a sell before five years with the proceeds to buy another bank in a different geographic area. I already own a regional bank with California operations in EWBC, whose headquarters is in Pasadena.

4. Bought 50 OIIM at $5.12 (Lottery Ticket Category)(See Disclaimer): This is another small cap tech company, selling at near the value of the cash on its balance sheet. O2Micro (OIIM) develops and markets integrated circuits for power management and security applications, and is basically a fabless semiconductor company. It is a foreign company which files reports with the SEC: Search Results This is the link to its last filed annual report and the description of its business can be found at pages 13-17: Form 20-F It sounds interesting to me, but I am not a technology investor. I am approaching these small companies with an angle that is not based on comprehension of the products.

The cash on the balance sheet as of the last quarterly report was 33.788 million and 86.936 million in short term investments. The firm claims that this 120.7 is unrestricted, and it has no debt. The market cap is about 190 million at the price paid for my shares on Friday.

And, OIIM earned a penny during the last quarter compared to a loss of 34 cents in the year ago quarter. Third quarter revenue (Q/E 9/09) increased 6% sequentially to 36.664 million. The consensus forecast of 4 analysts is for a 25 cent profit in 2010 after suffering a 11 loss in 2009: OIIM: Analyst Estimates for O2Micro International Limited

The company has 849 employees and 538 of those are engineers. It has 13,058 patent claims and 15000 pending.

The long term chart reveals a double top type formation at close to $25 in 1/2002 and again in late 2003: Price Chart

Price to book is 1.04 and price to sales at 1.61 currently: OIIM: Key Statistics for O2Micro International The price is currently hovering near its all time low as a public company.

5. Dividends and Interest/Rationale for Keeping DKQ: The TC DKQ went ex interest last Friday, but the notice of the interest payment just appeared this weekend in the WSJ market data page for dividends. The underlying bond in DKQ is from May Department stores, now part of Macy's: Bought 50 of the TC DKQ at $15.95 Even though this is a long bond, maturing in 2032, I will most likely keep it based on three primary considerations: (1) the current yield at my cost is 9.8% per year for the next 22 years; (2) the yield to maturity at my cost is around 11.6%; and (3) Macy's is still an investment grade credit with the underlying bond in this TC currently rated BBB- by Fitch and S & P ( FINRA) and the fundamentals of its business appear to be improving. It is important to me to lock in a 10% year in and year out income paying security over a long period of time. During the upcoming 22 years, I recognize that there will be periods when the interest rate risk will cause the value of this long bond to fall, possibly to a price below my purchase cost. If that happens, and I am comfortable with the credit risk, I might use that opportunity to buy more. I am willing to assume the interest rate risk of this long bond now only because of the 10% yield at my cost and my current comfort with the credit risk. This is just an example of the process being used now to make decisions on my long term bonds.

Several synthetic floaters that pay the greater of a guarantee or a spread above 3 month LIBOR pay monthly dividends. Of those, GJL (Daimler) & GJP (Dominion Resources) go ex interest next Tuesday. All of these floaters are paying the guaranteed rate due to the low Libor rates now. OSM, the CPI floater from Sallie Mae, also goes ex interest then with its monthly interest payment.

A CEF that I own, GDV, goes ex with its monthly dividend. Gabelli Dividend (GDV) is a broad based stock CEF, which falls under the category "general equity" CEF funds at the WSJ closed end fund page: Closed-End Funds It closed Friday at a 15.63% discount to NAV. I am not reinvesting the dividends on this one. More information about the Gabelli closed end funds can be assessed at the sponsor's web site: GAMCO - Closed-End Funds This is a link to its last quarterly report: gabelli.com/Gab_pdf/ I have not been impressed with this fund's performance, its expense ratio is on the high side, and the dividend was cut last year from 11 cents per quarter to the current 6 cents. I own just 100 shares.

6. Sold 100 of the TC KCC at $24.6 (see Disclaimer): This sell marked a successful transition of a TC containing a junior Unum bond maturing in 2038 (KCC) and into a senior Unum bond (PJR) maturing in 2028. PJR. The TC with the senior bond was first bought at $16.72, when I noticed that it was yielding more than the Trust Certificates containing Unum junior bonds maturing 10 years later. While this significant dysfunction in price is not a reason to buy one or the other, it is clear that the TC with the senior Unum bond was clearly superior to the ones with junior bonds, maturing later and with a then lower current yield. Item # 1 Bought 50 PJR/ Intel At my cost then, the current yield for the senior bond was over 11% per year for the 18 or so years for an investment grade credit. I later added to PJR by buying shares in a retirement account. The intent was to wait for an opportunity to sell KCC at a favorable price, and thus complete the transition to the more senior security. I am now in a position to assume interest rate risk with the long senior bond and will have to monitor the credit risk continuously. The PJR position will be held for as long as I am comfortable with the credit risk, or until I believe a period of hyper inflation, similar or worse to the late 1970s and early 1980s, is likely.

If the Lord would let me know about the inflation rates in the U.S. for the next thirty years, it would be easier to manage these long bond positions. They do have certain advantages. As long as Unum remains out of bankruptcy, I have locked in a good yield on its senior debt, year in and year out for the next 18 years, plus a built in profit on the security at maturity. And I do not have to be concerned with the liberal deferral rights a borrower has in virtually all junior bonds.

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