Tuesday, March 5, 2013

Bought 200 NAUH at $3.76/Eliminated CWH at $24.18/Paired Trade: Bought 100 VGI at $18.97 and Sold 82+ CWH at $22.31-Roth IRA/Sold 50 GOV at $26/Sold 1 HCA 7.69% Senior Bond Maturing in 2025 at 104.18/Sold 50 of 200 MSPRA at $22.04

Big Picture Synopsis:

Stocks:
Stable Vix Pattern
Short Term: Back to Neutral to Slightly Bullish (based on economic data and market shrugging off sequestration)
Intermediate and Long Term: Bullish

Bonds:
Short Term: Neutral to Slightly Bearish
Intermediate Term: Bearish
Long Term: Extremely Bearish

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One of the best catches that I have seen was recently made by an N.C. State outfielder: CNN

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ISM Services:

The February ISM Services Index rose to 56% from 55.2%. The new orders component rose 3.8 points to 58.2%. The employment index was reported at 57.2. The business activity index rose to 56.9% from 56.4. ISM


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JUNK Bonds: Overpriced?

In my opinion, most junk bonds have insufficient yields to compensate for their risk of default. This chart demonstrates graphically the historic anomaly of today's composite junk bond yield:



BofA Merrill Lynch US High Yield Master II Effective Yield - St. Louis Fed

That chart does not provide me with much comfort.

A recent article in Bloomberg titled "Wall Street Junk Kings Selling Debt Poised to Lose Value" summarizes some of the issues.

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Consumer Debt:

I thought this chart was interesting. It shows the total amount of consumer debt which has declined some recently and the components of that debt:



newyorkfed.org.pdf (page 3)

The New York Fed reported that total consumer indebtedness was $11.34 trillion, as of 12/31/12, down from the peak of $12.68 trillion observed during the 2008 4th quarter. Originations of new mortgages rose to $553M, the fifth consecutive quarterly increase.In the 2012 4th quarter, 8.6% of the total debt was "in some stage of delinquency compared with 8.9% the previous quarter".  Federal Reserve Bank of New York


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Natural Gas Super Cycle

A recently published study, summarized in the WSJ, estimates that U.S. shale rock formations will provide relatively moderately priced natural gas through 2040.

The natural gas super cycle is discussed in Item # 4 Bought 50 FCG at $15.84.

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PPN MOU Annual Interest Payment

I did receive $104.83 from the PPN MOU on 3/1/2013:

MOU: Annual Interest Payment on $10 Par Value
The coupon was 10.483% for the recently concluded annual coupon period, calculated in the manner set forth in a prior post: Item # 5 MOU Ends Annual Period with 10.48% Coupon

The current period is the last one before maturity: Prospectus The par value of this senior unsecured note is $10.  Bought 100 MOU at $10.12 In addition to this last payment, MOU paid 27.3% for its coupon period ending in February 2011 and 3.7% last year. (see snapshots at MBC & MOU and MOU)

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Changed Distribution Option on Intel Dividend

Since 9/1/11, I have been taking my dividend in cash. After the recent slide in the stock, I decided to go back to the reinvestment option:


My plan for Intel is set out in a previous post. I previously failed to execute on that plan. Stocks, Bonds & Politics: SPECIAL POST ON LB'S INTEL LECTURE

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Lot's of Room for Corporate Spending Increases

U.S. corporations are sitting on a record amount of low yielding cash, around $1 trillion for the companies in the S & P 500. Kopin Tan noted in Barrons that the average ratio of capital expenditures to corporate profits was 89%, but that ratio has shrunk to 55% now.

Without question in my opinion, corporate chieftains are the ridiculously overpaid compared to their value. I noted in the Berkshire Hathaway Annual Report a thinly veiled criticism by Buffet who noted that he was spending to expand the operating businesses owned by Berkshire. berkshirehathaway.pdf He refers to CEOs who cried "uncertainty when faced with capital allocation decisions, "despite many of their businesses having enjoyed record levels or both earnings and cash". Buffett noted that "we didn't share their fears, instead spending a record $9.8 billion on plant and equipment in 2012". (page 5).

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Architects Billing Index in Expansion Mode

This index is a leading economic indicator (9 to 12 months) for nonresidential construction activity. The last reading was 54.2, signifying the strongest growth in 5 1/2 years. The American Institute of Architects Above 50 shows an increase in billings. ABI January 2013

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1. Sold 1 HCA 7.69% Senior Bond Maturing in 2025 at 104.18 (Junk Bond Ladder Strategy)(see Disclaimer):




FINRA Information on this HCA 2025 Bond: FINRA

When I bought the bond, Moody's rated it Caa1 and S  & P had a B- rating on it.

According to FINRA, this bond is now rated B3 by Moody's and B- by S & P. 

With HCA, I am mainly concerned about the sheer magnitude of its debt and the willingness to increase that excessive leverage in order to pay common shareholder's special and large dividends. In November 2012, HCA announced a $2.5 per share special dividend to be funded through borrowings under the HCA's senior secured credit facility. HCA Announces Special Dividend of $2.50 per Share and Record and Payment Dates Another special dividend of $2 per share was announced in December 2012 to be funded out of HCA's recent $1B senior 2021 note offering. Press Release, dated December 3, 2012 As of 12/31/12, HCA had $27.495B in long term debt: page 8 2012 4th Quarter Earnings Press Release As a bond owner, it is just not acceptable to me for a heavily leveraged company to borrow this kind of money to pay common shareholders dividends. 

I still own 1 HCA bond:  Item # 3 Bought 1 Senior 7.5% HCA Bond Maturing 12/15/2023 at 96.854FINRA  I am looking for an opportunity to sell that bond.

2. Sold 50 GOV at $26 (see Disclaimer): Government Properties Income Trust (GOV) is a REIT managed externally by REIT Management & Research (RMR), a company controlled Adam and Barry  and Adam Portnoy who are also members of GOV's Board of Trustees. Trustees of the Government Properties Income Trust RMR is also the manager of Commonwealth REIT, Senior Housing Properties, Hospitality Properties Trust and Select Income Trust. I have a negative view of this external management scheme and view any REIT so controlled by RMR to be no more than an occasional trading vehicle based on valuation and income potential.


I realized a short term gain of $231.42 on this position:

2013 Taxable Account 50 GOV +$231.42
Added 50 GOV at $21.22 (June 2012)

The shares closed above my sales price:

Closing Price 2/27/13: GOV: $26.23 +0.98 (+3.88%)

Previous Sale: Item # 4 Bought Back 50 GOV at $21.78 Roth IRA (August 2012)- Sold 50 of 100 GOV at $24.5 (October 2012)

2012 4th Quarter Earnings: Government Properties Income Trust Announces 2012 Fourth Quarter and Year End Results (normalized FFO of $.53 for the quarter)

Supplemental 4th Quarter Information

3. Paired Trade ROTH IRA: Sold 82+ CWH at $22.31 and Bought 100 of the Bond CEF VGI at $18.97 (see Disclaimer)

2013 Pared Trade Roth IRA/Sold CWH and Bought VGI

2013 ROTH IRA Realized Gain 82+ CWH=$244.46

In my last post, I discussed some recent events involving two funds who desire much needed changes at CWH and the existing powers at CWH. Commonwealth REIT

Corvex and Related filed a legal action against CWH and its individual Board members seeking to enjoin the issuance of a highly dilutive stock offering. A copy of the Complaint filed against CWH,  was filed with the SEC: ‎www.sec.gov.

Commonwealth responded to the Complaint by re-affirming its intent on completing the dilutive share offering: ‎www.sec.gov

After the close on 2/27/13, CWH announced that it had sold 30 million shares at $19, with an over allotment option of 4.5M shares, more than the original announcement of 27M. CommonWealth REIT Prices Offering of 30,000,000 Common Shares

CWH's conduct is just an outrage, but nonetheless expected. The Board needs to be fired of course.

Since I believed that the CWH would proceed with this dilutive offering regardless of the negative impact on existing shareholders, I consequently sold my stock position held in my ROTH IRA.

Take the profit and run seemed like the appropriate response in that account.

On Monday, Corvex and Related lost their motions for a temporary restraining order to stop the consummation of the share transaction that were filed in two separate courts. CommonWealth REIT Announces That Motions for Temporary Restraining Orders to Block Equity Offering Closing Have Been Denied; Bloomberg The share sale was consequently completed today.

CWH recently slashed its dividend by 50% to $.25 cents per share. At $22.31, the yield at that dividend rate is around 4.48%

VGI

I substituted for those 82+ CWH shares 100 shares of the leveraged bond CEF Virtus Global Multi-Sector Income Fund (VGI), which pays monthly dividends.

I increased my yield with this switch.

At a total cost of $18.97 per share and the current monthly dividend rate of $.117 per share, the yield is about 7.4%.

Virtus Global Multi-Sector Income Fund declared three months of monthly dividends at $.117 per share in a 3/1/13 press release.

This brings me up to 250 VGI shares, with 150 of those shares owned in the ROTH IRA.

Since I have discussed this CEF recently, I would simply refer to those posts for a more detailed discussion: Item # 2 Bought 100 VGI at $18.46 (snapshot); Item # 4 Bought 50 of the Bond CEF VGI at $18.52-Roth IRA (11/29/12 Post).

I may sell the 100 VGI shares bought at $18.46 in a taxable account, preferably at over $19.25 per share. I routinely transition bond CEF positions from a taxable to an IRA account in this manner. I am in no hurry to sell those 100 shares given the 7.6% dividend yield at a total cost of $18.46.

Generally, I would like to receive a 10% annualized return on bond CEF positions before liquidation, but am content to sell at any profit after harvesting several dividends. I do not have to realized much on the shares to reach that goal when I start out with 7.6% from the dividend alone.

Money doubles in about 7.27 years at 10%: Estimate Compound Interest

VGI Data on Date Before Purchase (2/26/13)
Closing Net Asset Value Per Share: $20.26
Closing Market Price: $18.95
Discount to Net Asset Value: -6.47%

VGI Data on Date of Purchase (2/27/13)
Closing Net Asset Value Per Share= $20.28
Closing Market Price= $19.06
Discount to Net Asset Value= -6.02%
Discount at $18.97 Price= -6.46%

VGI Page at the CEFA

VGI Page at Morningstar: VGI

Sponsor's webpage: Virtus

Last Filed SEC Form N-Q: Virtus Global Multi-Sector Income Fund (holdings as of 9/30/12)

Closing Prices 2/27/2013:
VGI: $19.06 +0.11 (+0.58%)
CWH: $22.51 -1.89 (-7.75%)

VGI closed yesterday at $19.06. Net asset value per share was reported at $20.31, creating a discount to net asset value of -6.35 at that time.


4. Bought 200 National American University (NAUH) at $3.76  (The $500 to $1,000 Flyers Basket Strategy) (see Disclaimer): In this strategy, my risk assessment dictates the amount of money that I am willing to invest. Other examples of purchases under this basket strategy include the following: Bought 50 Vale at $15.9/Bought 50 FVL at $12.95Bought 50 GLW at $11.98/Bought 50 MS at $14.98ADDED 70 AEG at $5.28; and Added 60 XRX at $7.1 (both AEG and XRX promoted from LT strategy).




Company Description: National American University Holdings (NAUH) is a post-secondary education company offering courses online and at 37 physical locations in the midwest (four more pending approval).

This company was discussed in this recent Seeking Alpha article. I was unaware of the company before reading this article which only came to my attention since the author discussed Washington Banking (WBCO), one of my stocks in the Regional Bank Basket Strategy. I left a comment discussing WBCO in more depth for anyone interested.

Another recent Seeking Alpha discussed NAUH along with other for-profit schools.

The current consensus E.P.S. estimates are for $.29 in the F/Y ending in May 2013 and $.39 in the 2014 F/Y. NAUH Analyst Estimates At a $3.8 price per share, the forward P/E based on the 2014 F/Y estimate would be 9.74.

The stock did crater from a high of $10.25 in July 2011 to $3.58 in May 2012. The stock hit $12 in 2010. NAUH Interactive Chart A smashing of the stock price before purchase is one of the essential requirements for both Lottery Tickets and the Flyers Strategy. Both strategies will use a deep contrarian approach, sometimes called by skeptics as attempting to catch a falling knife.

Links to More Information:

Company Website: National American University | Online College Classes & Degrees

November 2012 SEC Filed Investor Presentation: SEC

NAUH Key Statistics page at Yahoo Finance

National American University Holdings, Inc. Declares Third Quarter 2013 Dividend of $0.04 Per Share

National American University Holdings Profile Page at Reuters

National American University Holdings Key Developments Page at Reuters

Form 10-Q

Form 10-K (lists degrees offered at page 12; location of leased educational sites at pp. 15-16)

NAUH Enrollment Information

NAUH Enrollment Information

Recent Earnings: For the three months ending 11/30/12, NAUH reported net income of $2.862M or 11 cents per share, up from $.07 in the year ago period, on revenues of $31.518 (up from $28.603)

As of 10/30/12, the company had 28.223M in cash, cash equivalents and available for sale securities. There is no long term debt but there are lease obligations (see page 28).

Form 10-Q

Rationale: (1)  See Some Value with Appreciation Potential at the $3.76 Price: My initial upside target is $5 within 12 to 18 months. If NAUH can hit a $.39 E.P.S. for its F/Y ending May 2014, the target price is at least rationale from my perspective. The trailing P/E would then be 12.8 at a $5 price. Assuming the company earns $.29 in its current fiscal year, a rise to $.39 would represent a growth rate of 34+%. If there was a raise in the dividend, then that would likely improve my odds of hitting that initial target price.

(2) Dividend: The current quarterly dividend rate is $.04 per share.  SEC Filed Press Release At a total cost of $3.76, the yield would be about 4.26%.

The dividend was increased from $.3 to $.0325 per share in January 2012 and then to 4 cents per share in October 2012, page 13, Form 10-Q

(3) An Alternative to High Cost College Education: As a general observation, college education is becoming really expensive. When I started in 1969, the tuition for a private university was around $2,200 for a year. College costs have increased since that time at a rate greater than CPI, rendering any degree after high school out of reach for a lot of folks. A specialized technical degree would probably increase a persons chances of actually securing a job compared to a B.A. from a state school.  Some of the degrees offered by this school include nursing, electronic health records specialist, business degrees with varying focuses (logistics, supply chain management, hospitality management, etc), criminal justice and computer security, page 10 Form 10-K

Risks: (1) There are a hosts of risks associated with for profit colleges including changes in government regulations, competition from other schools, and federal funding for student loans. I juxtapose those risks with the potential benefits and achieved what I would call a balance for me with a 200 share purchase.

Future Buys/Sells: I am not likely to buy more shares unless I first profitably trade what I own and even then I would wait for a pullback to near or below the $3.76 entry price.

5. Sold 50 of 200 MSPRA at $22.04 (see Disclaimer): MSPRA is a floating rate equity preferred stock that pays qualified, non-cumulative dividends at the greater of 4% or .7% over the 3 month LIBOR rate on a $25 par value. Every word in that description is important. ProspectusStocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

I have bought and sold this security many times. I have now liquidated my higher cost shares profitably.  I reduced my average cost per share in my main taxable account to $16.76:

Snapshot 3/3/13 MSPRA 50 Shares Avg. Cost Per Share=$16.76
I realized a small gain on the 50 shares sold while lowering the average cost per share and after collecting several dividends on those shares, a typical trading pattern in this type of security:


2013 MSPRA 50 Shares +$109.08
This sale brings my gains on this security to $147.66 this year. The prior 2013 transaction is discussed in the 1/22/13 Post: Item # 3  Pared 50 of 250 MSPRA at $20.8

The largest prior gain occurred in 2010 when I realized a total profit of $962..87: Bought 100 MSPRA at 12.88 in May 2009-SOLD 100 MSPRA at 21.43Bought 50 MSPRA at 15.7-Sold MSPRA at 18.50


I flipped a position in the IRA: Bought 50 MSPRA @ 19.57 in IRA-Sold 50 MSPRA at 21.03 in Roth IRA

I still own 100 shares in a satellite taxable account (see snapshot in ITEM # 3 Pared 50 of 250 MSPRA at $20.8;  Added 100 MSPRA at $18.9)

The fifty shares sold at $22.04 were bough at $19.54 in January 2011. Using FIRO accounting, the remaining 50 shares in that account were bought at $16.6 in September 2011.

Equity preferred stocks issued by highly leveraged financial institutions are highly volatile. As the market has become more comfortable with the credit risk, the prices have been trending higher in recent months. During the financial crisis, they could have been bought at greater than 50% discounts to their par value. With the market becomes volatile and nervous, they can experience sharp downdrafts as noted in a August 2011 post.  Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities (8/9/11 post). In that particular downdraft, I was able to buy SANPRB at $13 and USBPRH  at $18.12.  While these securities have a small place in my asset allocation, due to combining some inflation and deflation protection in the same security, their many disadvantages causes me to keep my overall allocation small and to trade them.

Snapshots of my trades can be found at the end of my Gateway Post on this topic:

Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Total Realized Gain for Securities in this Category 2009 to 3/1/13= $10,209.8 excluding dividends

6. Sold 170 CWH at $24.18 on Monday (see Disclaimer): I discussed the recent events relating to the Commonwealth REIT in my last post. Commonwealth REIT I included a snapshot in that post showing my last purchase at $18.55. I mentioned above previously selling the 82+ shares in the Roth IRA.

I am just become too disgusted with the managers and Board of this REIT and have only contempt for them. 

I did cast my votes already for the upcoming CWH annual meeting. Of course, CWH has staggered terms for the Board members, and only one was up for election this year, an alleged independent trustee. CWH does not allow its shareholders to vote against a Board member. My only alternative was to vote for him or to "abstain". I abstained but found that choice annoying. 

In the most recent conference call, management refused to take any questions from analysts. Earnings Call Transcript - Seeking Alpha


I have no idea what will happen in the ongoing fight between several of CWH's shareholders, including Corvex and The Related Companies, but a buyout at a higher price is too uncertain when the potential downside would be below $16, the price hit just a few days ago after CWH announced a large dilutive stock offering (2/25/13 price: CWH Historical Prices)



I have a cost basis issue on 25 of the 170 shares which I have managed to resolve.

This post is already long enough. I will discuss one more trade made prior to publication in next week's post. 

2 comments:

Scott said...

Any thoughts on the BoA fixed/floating preferred series L? I think you've traded before. It's been taking a beating lately. I find it tough to put of a value on these securities that primarily benefit from tail scenarios.

TENNINDEPENDENT said...

Scott: Other than SCEDN which may be called since it is floating at a spread to the 30 year treasury, all of the equity preferred floaters have been taking a beating this year and the downturn has accelerated over the past few days. Some of the recent decline may be due to tax loss selling. These securities and my bond CEFs have been a drag this year.

For BAC securities, I currently own 50 shares of BMLPRJ at the moment which is a floating rate equity preferred stock originally issued by Merrill Lynch.

http://tennesseeindependent.blogspot.com/2013/10/steve-king-bought-back-vwitx-at.html

I discussed in September some of the problems with these securities now when buying 50 share lots of SANPRB and HBAPRF:

http://tennesseeindependent.blogspot.com/2013/09/bought-50-hbaprf-at-1853-roth-ira.html

I have not owned a BAC fixed to floating rate security. Do you mean BCXQL? That one pays a 5.2% fixed coupon until 6/1/2023 when it starts to float at a 3.125% spread to the 3 month Libor.

I have not given that one any thought. I did recently evaluate the fixed to floating rate bond RZA:

Most of the discussion is in the first post:

http://tennesseeindependent.blogspot.com/2013/09/bought-300-of-artis-reit-at-c1436bought.html

http://tennesseeindependent.blogspot.com/2013/10/bought-200-pdt-at-1173-200-fax-at-608.html

I would consider what you are giving up now and for how long compared to the potential likelihood of a redemption on or after 6/1/23 which is very hard to estimate with any certainty. Generally, I am more comfortable with a higher libor float and a discount to par value. The RZA is a bond with a 4.37% spread to Libor in 2022. The BCXQL pays non-cumulative dividends which could legally be eliminated once BAC eliminates its current 1 cent per share quarterly common dividend.