1. Special Investment Products: I previously mentioned that quantumonline has a list of exchange traded Special Investment Products, which includes all of the Citigroup Funding principal protected notes that I have recently purchased (MOU, MKZ, MKN, MHC). I wanted to note a couple of issues. I am not able to trade any of these issues via TD Ameritrade. Second, the confirmation for MOU bought earlier this week states that the guarantee is 2% even though the prospectus clearly states that the guarantee is 3%. Pricing Supplement
An annual interest payment of $180.06 was deposited into my account today in connection with my 100 shares of MKN. Note ON MKN
2. Sold 50 CVI Energy at $9.29 Yesterday (see Disclaimer): This odd lot order was filled properly through FDLM. This refiner was bought recently at $7.75. I had bought a small number of shares in several refiners and have now sold the positions in all of them. The increase in crude prices will pressure their margins as the crack spread narrows (the difference between the crude price and the price of the distillates). In CVI's place in the 2010 Speculative strategy, I bought 100 of HMA.
3. Bought 100 HMA at $8.82(See Disclaimer): There are several reasons for classifying the purchase of Health Management Associates (HMA) as part of the 2010 Speculative Strategy. The two main reasons are the lack of a dividend, and the amount of long term debt. As of 12/31/2009, the firm had slightly over 3 billion in debt, with 2.492 billion of that coming due in 2014 (see page 65: Form 10-K). I would note that some of that debt coming due in 2014 in the foregoing referenced table is a convertible bond with a 2028 maturity, classified as coming due in 2014, since those noteholders could require a repurchase in 2014. HMA is making some progress in paying that debt down.
HMA owns and leases hospitals, primarily in the southeast, as shown in the list found at page 24 of its 2009 Annual Report. Form 10-K The total number of beds is 8,418, The hospitals are primarily located in small towns. Revenues for 2009 totaled 4.617 billion up from 4.36 billion in 2008. (page 27). GAAP earnings in 2009 fell to 56 cents per share from the 69 cents earning in 2008.
HMA was a good stock to own in its heyday, rising on an adjusted basis from around $1 in 1991 to $23.5 in 1998, and then started to run into some difficult times. Health Management Associates Price Chart | HMA. The worst phase of the decline was a waterfall from around 21 in December 2006 to $1.50 in November 2008. The stock has rallied since then and is now trading back above its 200 day moving average.
So why buy HMA? It is more of a long term macro call. I view hospitals to be the primary beneficiary of the new health insurance legislation.They will have a lot more paying customers and far less bad debt expense, which has been a major problem in the past. This will be an issue that will start to become apparent in the numbers by 2014-2015, assuming the GOP is not successful in repealing this legislation which is one of their primary goals now.
The current consensus estimate is for an E.P.S. of 57 cents this year and 66 cents in 2011.
Price to sales is .48. The forward one year P/E is around 13.3. I am not buying HMA due those numbers, but attempting to look out even further in time.
4. BOUGHT 50 of the TC CPP at $24.2 (see Disclaimer): There was a five cent spread on CPP yesterday when I placed my order. I decided to place an odd lot limit order at the ask price to see what would happen. I clicked the order status page immediately after sending the order, and it had already been filled at $24.2 by Knight Trading.
CPP is a trust certificate containing a trust preferred issue from Countrywide Capital III. The underlying security in that Delaware Trust is a junior bond issue from Countrywide maturing on 6/15/2027. The SEC registration for the TP issue can be found at www.sec.gov Countrywide is now part of Bank of America and I have not been able to detect any difference in the ratings of Countrywide TPs and those originally issued by Bank of America. The following is a link to Fitch's recent upgrade of Bank of America trust preferred obligations to BB from BB- (both junk classification). Free Online Library The trust preferred issues originally issued by BAC, and those issued by firms acquired by BAC including Merrill Lynch, Fleet Capital and Countrywide, are all grouped together. The TP from "Countrywide Capital III" was rated at BB by Fitch, same as the original BAC TP issues.
This is the link to the prospectus for CPP: www.sec.gov Unlike other TP issues, CPP pays interest on a semiannual basis in December and June. This is the link to the last trustee's report on the December distribution: /www.sec.gov CPP provides more of a yield than another Trust Preferred issue from Countrywide, CFCPRA, which matures several years later in 2033: www.sec.gov The QuantumOnline site shows the rating of CFCPRA from Moody's and S & P to be the same as original BAC TPs shown on the same page, with Moody's at Baa3 and S & P at B. The trust certificate CPP, which contains a TP from Countrywide Capital III, has the same rating as the original BAC issues too according to QuantumOnline.com. So if those ratings are up to date, it appears that the rating agencies do not see any difference between a TP issued originally from Countrywide and those originally from BAC.
The yield differential is not insignificant. CPP has a yield of about 8.35% at a total cost of $24.2 whereas CFCPRA has a yield of around 7.8% at a $21.65 price. And both of those yields are higher than original BAC issues with similar maturity dates. So it appears that a discount is applied by the market to CFCPRA compared to an original BAC issue, and then another discount if a Countrywide TP is packaged in a trust certificate. I compared the Countrywide TPs most to BACPRW which is yielding at around 7.5% at a $23.3 price, and it matures in 2031: /www.sec.gov I am performing just current yield calculations, not yield to maturity.
I would add this caveat about any large bank's TPs. If they need to be bailed out again, I would expect a deferral at a minimum of a junior bond's interest payments.
A more likely scenario would just be a forced liquidation of the financial institution and a virtual destruction of a junior bond's value. The American taxpayer is just not going to stomach another deal to help the Masters of Disaster resume making their millions as quickly as possible.
It is this forward looking forecast that will tend to cause me to tread lightly in bank TPs. The masters of disaster will find a way to blow up their firms again while pursuing their personal greed agendas. LB is not bitter, just making an observation of fact based on decades of careful observation of the Masters of Disaster. The WSH reported earlier this week that 38 financial firms paid out a record 140 billion in compensation and benefits last year to the wizards and 30 year old wunderkind. I know that everyone feels an inner glow inside, all choked up, for making so many sacrifices to help those wizards get back on their feet so quickly and earning their billions once again. ( CBS News ran a story last night about Cassano, who claims to be just another victim of the Near Depression, not one of its many chief architects. The CBS story noted that the hapless and clueless Feds were unlikely to file criminal charges against Cassano, see also Michael Lewis' article in Vanity Fair)
5. Fed Minutes: The Fed released its minutes of the March meeting yesterday: www.federalreserve.gov/monetarypolicy .pdf The Fed still expects inflationary pressures to be subdued for some time:
"housing starts had remained flat at a depressed level, investment in nonresidential structures was still declining, and state and local government expenditures were being depressed by lower revenues. Moreover, consumer sentiment continued to be damped by very weak labor market conditions, and firms remained reluctant to add to payrolls or to commit to new capital projects. Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected. In light of stable longer-term inflation expectations and the likely continuation of substantial resource slack, they generally anticipated that inflation would be subdued for some time."
So, don't expect a let up in the Fed's Jihad against savers and other responsible Americans anytime soon. The Fed is saying that the Jihad will continue longer than investors currently believe if their outlook worsens or inflation falls. The period will be measured in terms of the data rather than the time.
Some other downbeat assessments made in the minutes include the following statements:
" participants were concerned about the scarcity of job openings, the elevated level of unemployment, and the extent of longer-term unemployment, which was seen as potentially leading to the loss of worker skills. Moreover, the downward trend in initial unemployment insurance claims appeared to have leveled off in recent weeks, while hiring remained at historically low rates. Information from business contacts and evidence from regional surveys generally underscored the degree to which firms’ reluctance to add to payrolls or start large capital projects reflected their concerns about the economic outlook and uncertainty regarding future government policies. A number of participants pointed out that the economic recovery could not be sustained over time without a substantial pickup in job creation, which they still anticipated but had not yet become evident in the data. . . . Participants were also concerned that activity in the housing sector appeared to be leveling off in most regions despite various forms of government support, and they noted that commercial and industrial real estate markets continued to weaken. Indeed, housing sales and starts had flattened out at depressed levels, suggesting that previous improvements in those indicators may have largely reflected transitory effects from the first-time homebuyer tax credit rather than a fundamental strengthening of housing activity. Participants indicated that the pace of foreclosures was likely to remain quite high; indeed, recent data on the incidence of seriously delinquent mortgages pointed to the possibility that the foreclosure rate could move higher over coming quarters. Moreover, the prospect of further additions to the already very large inventory of vacant homes posed downside risks to home prices. . . . Nearly all members judged that it was appropriate to reiterate the expectation that economic conditions— including low levels of resource utilization, subdued inflation trends, and stable inflation expectations—were likely to warrant exceptionally low levels of the federal funds rate for an extended period, but one member believed that communicating such an expectation would create conditions that could lead to financial imbalances."
I will refer back to these minutes in about a year to assess the Fed's crystal ball. I think that they are being too pessismistic and are not properly assessing the long term repercussions of their zero rate interest policy.
6. Added 50 Shares of KO at $54.26 (dividend growth strategy)(See Disclaimer): The LB is known for being a cautious, conservative sort, slightly paranoid that the denizens of Wall Street and their minions are out to get him. LB does not like stocks that jump around a lot, and is the primary proponent among staff here at HQ, joined at times by the Old Geezer, of the dividend growth strategy. The RB has difficulty spitting the word dividend out, sort of chokes on the "d" before making that upchuck sound. Yesterday, noting that most consumer staple stocks were correcting more than the market, LB averaged up on KO, the last shares being bought at 38.72 in March 2009. Buy of KO at 38.72 KO has been on a historical path to double its dividends every 7 years. { Item # 1 Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009; see also Item # 2 KO & recent article in Barrons). The current forecast is for an E.P.S. of $3.73 in 2011, or a forward P/E on that estimate of 14.55 which is historically low for KO. The shares fell 57 cents yesterday to close at $54.29.
Since LB is now in charge of the trading desk, Yahoo stock may be on the chopping block today if it starts to trade over $17.
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