Bought: 1 Travelport Senior Bond Maturing in 2016, 50 STDPRB @ 17.96, 50 HBAPRG at 23.31/

The NY Fed manufacturing survey showed improvement in January, as the indicator for general business conditions rose 2 points to 11.9. Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York  New orders increased 10 points to 12.9.  For these regional FED surveys, any number over zero indicates expansion.

The  NYT had an interesting article about a border collie in yesterday's paper whose vocabulary includes 1022 nouns.  I recall reading the story about another border collie, RICO, in National Geographic Magazine, who was able to associate a large number of objects with words.  LB wondered whether those learning techniques for border collies could be applied to the Old Geezer.


1. Comments on the First Installment of the Barron's Roundtable:  I thought there were several interesting factoids in the  Barron's Roundtable, Part I.   I thought that I would summarize some of the bullet points:

A. Since 1999, the value of the stock market is down 80% measured in the price of gold.

B. In the 1970s, the U.S had 20 million manufacturing jobs out of a population of 220 million. Now, the U.S. has over 320 million people and only 12 million manufacturing jobs.

C.  The U.S. had a 1.4 trillion dollar deficit last year (F/Y ends in Sept) and created only 500,000 net new jobs.

D.  The top 20% of the U.S. population own 93% of the financial assets.  Everyone else is living paycheck to paycheck or worse.

E.  Zulauf maintains that it will take sometime before people realize that the Fed's monetary policy is "highly inflationary".

F.  Gross argues that the Fed's monetary policy, which engineers negative real interest rates, is "in effect" a "default" by the U.S., in that it "robs" creditors and investors of their money.

G.  Roughly 40% of the profits for the S & P 500 come from foreign markets.

H.  Black maintains that REITs are "way overpriced" as investors chase yield.

I.   Cohen believes that the best performing asset classes in 2011 will be stocks followed by commodities with cash and fixed income at the bottom.   Of the stocks recommended so far, I own only GE, which was among the large cap picks made by Cohen.

J.    Initially, in the early stages of a stock market rebound, small caps will outperform large caps, due in part to a "reversion to risk" and small caps will generally decline more than large companies during a stock bear market.  As the recovery ages, large caps will start to outperform.  

According to data at the  WSJ, the forward P/E on the Russell 2000 is 27.25, while the forward P/E on the DJIA companies is just 12.75 and 13.51 on the S & P 500.  Even the Nasdaq composite index has a significantly lower forward P/E multiple than the Russell 2000.

2. Bought 1 Travelport Senior Bond Maturing in 2016 at 94.5 on Friday (95.3 with concession)(see Disclaimer):  I view this purchase from last Friday to be questionable. This senior note has a 9% coupon and matures on 3/1/2016.  (prospectus: SEC Filing) Travelport is a privately owned company that files reports with the SEC.  This is a description of its business taken from its last filed Form 10-Q:

"Travelport Limited (the “Company” or “Travelport”) is a broad-based business services company and a leading provider of critical transaction processing solutions to companies operating in the global travel industry. Travelport is comprised of the global distribution system (“GDS”) business that includes the Worldspan and Galileo brands and its Airline IT Solutions business, which hosts mission critical applications and provides business and data analysis solutions for major airlines, and Gullivers Travel Associates (“GTA”), a leading global, multi-channel provider of hotel and ground services. The Company also owns approximately 48% of Orbitz Worldwide, Inc., a leading global online travel company. The Company has approximately 5,400 employees and operates in 160 countries. Travelport is a closely held company owned by affiliates of The Blackstone Group (“Blackstone”), Technology Crossover Ventures (“TCV”), One Equity Partners (“OEP”) and Travelport management."

Orbitz Worldwide currently has a market cap of around 560 million at a $5.5 price.  

This is a link to the firm's web site which contains descriptions of its businesses:  Travelport.com 

The long term debt is described at pages 13-14 of that 10-Q.  There is a substantial secured credit facility totaling 2.172 billion dollars as of 9/30/2010.  The 2016 senior note would be subordinated to that secured credit facility.   I would view this bond as the most risky junk bond bought to date.  

A recent  Form 8 K highlights another risk, the loss of a large customer.

This is a link to the  on this bond. FINRA 

This bond is rated B3 by Moody's and CCC+ by S & P.  I would be inclined to go with the S & P rating on this one, and then add a negative credit watch.

My confirmation states that the current yield is 9.443% and the YTM is 10.196%. 

3.  Bought 50 HBAPRG at 23.31 on Friday (See Disclaimer):  HBAPRG was another marginal buy.  It is an equity preferred stock, issued by HSBC USA, that pays qualified dividends.  The coupon is the greater of 4% or .75% above the 3 month LIBOR rate.  Prospectus   The dividends are non-cumulative and there is no maturity date.   I discuss this type of security in more detail at Advantages and Disadvantages of Equity Preferred Floating Rate Securities.   

Given the current low short term rates, the applicable coupon is the guarantee of 4%.  I suspect that the guarantee will be the applicable rate for the remainder of 2011.  At the guarantee, the yield is about 4.29% at a $23.31 total cost.  

I have been transitioning to floating rate securities with guarantees as one way to manage interest rate risk.  As interest rates start to rise again, and that will happen, the floating rate will eventually become the applicable rate and will increase the coupon payable as the 3 month LIBOR rate increases over time. 

At a 6% 3 month LIBOR rate during the relevant computation period,  the coupon on this floater will rise to 6.75% which translates into a 7.24% yield at a $23.31 total cost.  That is not terribly appealing since we are a long way from a 6% 3 month LIBOR rate.   The main problem with HBAPRG is its current price, rather than its terms.  I added it primarily to achieve some diversity, along with a tad more income.

I view these floaters to be a hedge against unexpected inflation.  If the LIBOR rate increased to say 10%, vintage fixed coupon bonds would be smashed, but I would expect the floaters to hold their values assuming no adverse development impacting the issuer's credit risk.    A 10.75% coupon rate for HBAPRG would translate into a 11.53% yield at the $23.31 total cost.   Needless to say a 4.5% fixed coupon,  thirty year treasury bond would be suffering in that kind of rate environment.

HBAPRG closed at $23.3 in trading yesterday. 

I added to STDPRB, another equity preferred floater, on Tuesday as discussed below.  I am not going to be buying much more, however, given what I view as their current unattractive prices.  

Among floaters with guarantees that pay qualified dividends,  I own two stocks, METPRA and AEB, that were bought at exceptionally favorable prices.  And, I have harvested gains in both of those securities, now playing with the house's money given those gains and the dividends compared to the low cost of my remaining holdings.    I have sold out of ZBPRA with a good total return.  While I have made realized one gain from the Santander floater, STBPRB, the remaining position of 150 shares is slightly in the red.  I have also reinitiated positions in the Merrill Lynch, Suntrust, and Goldman Sachs floaters after realizing several trading gains over the past year of so.  I have maintained a constant 50 share position in SCEDN after buying those shares at $84.    Links to posts discussing most of those trades can be found at Floaters: Links in One Post.

More information about these floating rate equity preferred stocks can be found at QuantumOnline.com, grouped with the other preferred stocks that pay qualified dividends.  QuantumOnline is a free site, registration required.

Daily quotes for the 3 month LIBOR rate can be found at the WSJ.com under "consumer money rates".  Currently, the 3 month LIBOR is at .3%, which highlights the importance of the guarantee. Historical Libor rates since 1989 can be found at LIBOR.  A chart of the 3 month LIBOR rate for up to the past five years is available at Bloomberg.

4. Added 50 STDPRB at $17.96 on Tuesday (see Disclaimer):   Due to concerns about Spain's sovereign debt,  Banco Santander common stock has been volatile and has failed to participate in the financial stock rally.    I own just 100 shares of the common, and that small position is in the red.  I am close to break-even on Santander's preferred "B" series stock and slightly ahead considering the profit made on selling 100 shares and the dividends.   Bought 100 STDPRB at $15.3  Sold 100 STDPRB at 18.11 Added to STDPRB at 18.6 Added 50 STDPRD at $18.54  This last purchase brings me up to 200 shares.

Santander would have to eliminate its common stock dividend before it could eliminate the non-cumulative dividend on STDPRB.

STDPRB is what I call an equity preferred floating rate stock with a guarantee.  Par value of this security is $25.  Qualified dividends are paid at the greater of 4% or .52% above the 3 month LIBOR rate: www.sec.gov  The current coupon is of course the guarantee.  At a total cost of $17.96, the yield at the guarantee is around 5.57%.  That would be the lowest rate payable by this security at that constant cost number.  Theoretically, there is no upside limit on the coupon.  If the 3 month LIBOR rate rose at some point in the future to say 10%, then the coupon would become 10.52% during that future computation period.  Since the coupon is applied to the $25 par value, the yield at the $17.96 total cost in this hypothetical would be about 14.64%. One of the benefits of this type of security is that it provides a measure of deflation protection in the 4% guarantee and some inflation protection in the LIBOR float provision.

I will trade this security, to book profits and to lower my average cost for the shares held using FIFO accounting.  Most likely, a price over $20 would trigger a sale of my higher cost 50 shares.

STDPRB closed at $18.26 in yesterday's trading, up 39 cents.

5.  Citizens & Northern (CZNC) (own Regional Bank Stocks' basket strategy):  CZNC reported net income for the 4th quarter of $4,884,000 or 40 cents per share.  Earnings were reduced by 5 cents due to an accounting charge related to the repayment of TARP. As of 12/31/2010, the tangible book value per share was $10.42; the tangible common equity to tangible asset ratio was 9.71%; the total risk based capital ratio was 17.08%; the NPAs to total asset ratio was at .92%; and the allowance for NPLs to total loans was at a comfortable 1.25%.    www.sec.gov

The one analyst providing an estimate predicted earnings of 38 cents on 14.26 million in revenues.

CZNC closed at $16.47 yesterday, up 15 cents.

Bought 50 CZNC at 11.77 Added 50 CZNC at 10.46

I did add one new regional bank to my basket on Tuesday, which I will discuss in the next post.