Wednesday, February 16, 2011

Bought 100 XEG:CA at $21.1 CAD/RB BOUGHT 100 MSFT at 27.08

I received the redemption proceeds for my 100 shares of the  Trust Certificate KVW last Monday. This TC was redeemed by the owner of the call warrant at the $25 par value plus accrued interest. As previously noted, I had acquired those shares at a total cost of $16.16 on 9/30/2008. Besides the profit on the shares, this TC was a good earner, generating a yield of 12.38% at my cost. ITEM # 1  KVW Called by Owner of Call Warrant



I received on Tuesday the redemption proceeds for my remaining shares of PKM held in  a taxable account. I sold 100 of the 150 shares owned after the owner of the call warrant exercised its option. Sold 100 of 150 PKM at 25.93 The remaining 50 shares, which were redeemed on Tuesday, were bought at a total cost of $17.88 on 6/18/2009. PKM Called  Bought 150 TC PKM (June 18, 2009 Post).

The Office of National Statistics in the U.K. reported CPI annual inflation of 4% in January 2011, up from 3.7% in December. National Statistics Online - Inflation The Bank of England kept its interest rate at .5% earlier in the month but some members have started to vote in favor of an interest rate increase.

Inflation in China rose to 4.9% in January.

U.S. import prices are up at a 4.3% rate over the past three months and rose 1.5% in January 2011.   U.S. Import and Export Price Indexes

The N.Y. Fed manufacturing index rose to 15.43 in February, up from 11.92% in January. Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York The prices paid component rose to the highest level in 2 1/2 years.

1. Bought 100 of the S & P/TSX Capped Energy Index Fund (XEG.TO) at $21.1 (CAD) on the Toronto Exchange Last Monday (see Disclaimer):  XEG is an ETF offered by Ishares in Canada that owns Canadian oil and gas companies. This ETF is fairly large with close to 1 billion in assets. The expense ratio is high at .55%. This ETF  has a heavy weighting in the two Canadian companies. Suncor and Cenovus Energy,  mentioned favorably by Charles Maxwell in his recent Barrons interview, as two companies likely to grow production in the years ahead.   Maxwell's thesis is that demand will continue to grow, while production will soon plateau at perhaps 95 million barrels per day (bpd) by "around 2015".  Consequently, given the rising demand outstripping supply, he is predicting that oil will rise to $300 per barrel by 2020. In his opinion only 5% or 6% of the energy companies will be able to grow production during what he calls the plateau period.   

As of 2/11/2011, Suncor had a 18.53% weighting in XEG, with Cenovus Energy at 7.68. Another company with extensive oil sands operations, Canadian Natural Resources, is the second largest holding at 13.84% of assets. 

Suncor recently reported 4th quarter net earnings of 1.353 billion CADs or 87 cents per share. The company produced 325,900 barrrels per day from Oil Sands (excluding Syncrude), up from 278,900 bpd in the 4th quarter of 2009.  In an earlier press release, Suncor announced that it was targeting "oil sands production growth of approximately 10% per year" over the next ten years. December 2010 SEC Filed Press Release 

Cenovus (CVE) discussed its plans to increase oil sands production five fold over the next decade in a recent press release. 

An alternative available on a U.S. exchange, which I have previously purchased, is ENY - Guggenheim Canadian Energy Income ETF (formerly Claymore). See Item # 4  Bought 100 ENY at $17.56 (June 2010).  That fund has 36 holdings and an expense ratio of .65%. Suncor is weighted at 6.56% as of 2/11/2011.

2. Bought 100 MSFT at 27.08 on Monday (see Disclaimer):  I decided to re-purchase a small position in Microsoft after selling my shares  at $28.1, which were bought at  $17.79.  I made the decision late in the trading day on Monday to re-purchase a position,  so possibly the OG was just too fatigued to form a rational thought.

I do believe that Microsoft lost its Mojo many years ago.  And, I have to ask myself why Apple is the innovator on such consumer devices as the IPod, IPhone and the IPad,  and why is Microsoft with all of its resources and talent continually playing catch up on virtually every "cool" new gadget?  Then there is the slowness in responding to Google's inroads.  Then there are legitimate concerns about the future impact of cloud computing.

While all of those concerns are legitimate, and many of those issues call into question the basic competency of MSFT's management without question, Microsoft is still a money machine, selling at close to 10 times projected forward earnings.  Net income for the Q/E 12/31 was 6.634 billion dollars and over 12 billion for the last six months in 2010.  Cash and short term investments stood at 41.252 billion dollars or about $4.76 per share. MSFT Key Statistics  MSFT has 9.671 in low cost, long term debt on its balance sheet as of 12/31/2010: Form 10-Q  That debt is described in more detail in note 10 at page 20.

MSFT is  paying at dividend, currently at a quarterly rate of 16 cents per share, which is sufficient to provide some support to the downside. That quarterly rate represented a 23% increase from the 2009 rate   The quarterly dividend rate was 13 cents in 2009.  The yield at a total cost of $27.08 is around 2.36%. More importantly, it is clear to me that MSFT has embarked on a multi-year policy of raising the dividend every year, and that will eventually have some impact on investor decisions to hold the stock and to buy more, and for new investors to initiate positions.  The annual dividend rate has been raised since 2003, when a regular dividend was initiated, and has risen from 34 cents in 2006 to the current annualized rate of 64 cents.  I will call that a double in 6 years. The dividend payout ratio is hovering around 25% recently, so there is room for MSFT to improve the payout.

While investors are justly critical of MSFT's failure to keep up in the fast growing consumer markets outside of its traditional Bailiwicks (Windows and Office),  the current depressed share price is a function of placing too much emphasis on MSFT's many failures, while failing to give the company its due for its achievements. It also suggests to me that the youngsters who dominate money management lack perspective, and frequently define long term in much shorter units of time than the Old Geezers who have seen many trends come and go. While I should not even hazard a prediction, I suspect that MSFT will have a 25% to 35% market share in handheld computing devices within five years, with Google and Apple controlling most of the remainder.

I also do not have a negative view of MSFT's recent link up with Nokia. I can understand why the market has pounded NOK shares over the past few days, but I do not see the logic in selling MSFT on that news.  While it does highlight MSFT's perpetual problems, it does provide the potential for MSFT to capture a large market share for smart phone operating systems. It would certainly be fair to ask why a relatively new company like Google has captured the leading market share for smart phones with its Android operating system. Android Smartphones

MSFT has a long term chart that is typical of many large cap companies over the past decade or so.  The following chart includes the period from 2/1998 to 2/2011:


This would certainly be discouraging for an investor who bought the stock in early 1998 and still owned the shares. And, anyone looking at this kind of chart, without knowing the name of the company, would likely take a pass and understandably so. I would first ask, though, whether the stock market was in a long term secular bull or bear cycle during the period shown by the chart, which may explain a lot.

A lot of this sideways pattern is due to multiple compression that occurs for most large companies  over the course of a long term secular bear market, when the market averages go up and down and end up going nowhere for about 15 years or so. To be sure, many of the large cap companies that are in this pattern have some issues.  According to Value Line's data, Microsoft earned 45 cents per share in 1998 and had an average annual P/E of 42.8.  By 2000, the annual average P/E hit 53.1.

At the start of the going sideways pattern period, the stock is selling at a high multiple reflecting the irrational enthusiasm prevailing in the dying stages of a long term bull market.  Large companies, who might be lucky to grow earnings at 10% a year are valued at over 30 or even 40 times future earnings.  The end of the long term secular bull market will cause those multiples to contract, even though the company continues to grow  earnings, to strengthen its balance sheet, and to expand its business and/or products. At the tail end of the long term bear cycle, generally around 15 years or so, investors will look at these companies and give them up for dead at 10 times earnings or even less. That is no more rational than valuing them at 40 times earnings near the end of the bull cycle.  {See Item #  3. Multiple Compression for Many Large Cap Stocks/Long Term-Large Cap Valuation Strategy at  Large Cap Valuation Strategy-A New Long Term Strategy and at Item # 1 Large Cap Valuations}.  There is an article published today in Seeking Alpha that discusses the relative "cheapness" of mega-cap stocks.


The problem is investor perception more than anything now, and that negative perception will be fueled by many young analysts who will not see any catalysts for the large cap company to break out of that long term, narrow trading range.  The catalysts will ultimately be the valuation, a change in perception about the firm's long term prospects, and the overall strength of its balance sheet and financial position. The problem is trying to predict a transition point in a going nowhere cycle which has been ongoing since 1998. That is one reason why I have traded Microsoft shares and have not been a long term investor over the past decade or so.


I do not have a target price for the shares, except I believe that $33 to $35 is doable within two years. A $6 gain on the shares would equate to a 22% return on the shares plus the dividends.    


MSFT was ex dividend on Tuesday.

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