1. Alcoa (owned): Aluminum prices rose about 17% during the second quarter to $1630 a ton, but that is down substantially from over 3 thousand a ton last summer. After the bell yesterday, Alcoa reported its third quarterly loss in a row, with a loss of 26 cents a share excluding restructuring costs form continuing operations with 4.2 billion in revenues. The analyst expectation was for a loss of 38 cents a share on revenues of 3.93 billion.
Yesterday afternoon the newswires were using different figures for the analysts' consensus revenue forecast, with MarketWatch using a much higher number (4.3 billion) than the 3.93 billion found at Yahoo Finance.
Anyone nibbling on Alcoa shares now has to expect losses. This is a 2010-2012 story. My last purchase was at 5 and change. I intend to hold.
The President of Alcoa, who was with Obama in Russia, told reporters that he saw signs of a recovery or of a bottoming out in some of Alcoa's markets.
2. Bought 50 JBK in Roth: JBK was a synthetic floater containing a junior bond from Goldman Sachs, maturing in 2034, as its underlying bond. The float was created by a swap contract with Lehman Brothers, which has bankrupted. Although I have not seen an SEC filing containing a notice of the swap termination, it is reasonable to believe that it is no longer in place. Whenever a swap agreement is terminated for whatever reason, the holder of the TC receives the interest rate paid by the underlying security, in this case a junior bond with a 6.345% coupon which is the underlying bond in 9 Trust Certificates. Goldman Sachs 6.345% Junior Debenture Maturing on 2/15/2034
At a $16 cost and a $25 par value, the yield for a 6.345% coupon is 9.914%, which is a higher rate than all of the other fixed coupon Trust Certificates containing this security, GYA, PYC, PYY, PYK, HJJ, HJL, & HJN, at their respective closing prices yesterday.
A reader suggested to me that the swap agreement had been terminated. With the swap agreement, JBK would pay the greater of 3.5% or .75% above 3 month LIBOR. Synthetic Floaters
Since the guarantee is the applicable rate now with the low Libor rates, the applicable rate would be 3.5% with the swap agreement in force, which would make it less desirable than the fixed coupon rate of 6.345%. I currently own two synthetic floaters linked to this junior bond, PYT and GYB, that are more favorable floaters at their respective prices than JBK would be assuming its swap agreement was still in force.
The prospectus does say that a bankruptcy of the Swap Counterparty (i.e. Lehman in this case) will cause the termination of the swap agreement, see page S-30: www.sec.gov
In a few weeks, the interest payment is due. If the penny rate is based on the fixed coupon rate, it will be $.793125. If the penny rate is based on the float created by the swap, which I would seriously doubt, it will be $.4375 or thereabouts.
This is a junior bond which allows GS liberal rights to defer interest payments. The prospectus for the underlying bond that explains those deferral rights can be found at: www.sec.gov
The deferral rights are typical for a Trust Preferred issue. Deferral may happen for up to five years, provided no payment is made to holders of junior securities, which would mean equity preferred and common stock. (see page S-13).
Page S-7 of the prospectus explains what happens when the swap agreement is terminated.
Fitch rates the underlying bond at A-. Fitch Corporate
I am moving my bond allocation (which includes preferred stocks for purposes of the allocation) up to 70% in the retirement accounts.
3. Bought 50 GEP on an Average Up: I raised my average cost some of a GE Capital baby step-up bond (GEP) by buying 50 shares yesterday at $21.75. I explained the terms of this one in my Gateway Post, at # 3, on exchange traded bonds: Exchange Traded Bonds:
This is a link to the prospectus: Pricing Supplement
This is a step-up bond and the interest rate is next scheduled to increase from the current 4.5% to 5.5% on 1/10/2010. When the rate increases next January, the yield at a $21 average cost for all shares would be 6.547%.
Interest is paid quarterly in July, October, January and April.
This is a link to a recent discussion about GE's credit ratings at the thestreet .
While GE Capital has weighted on its parent it did earn 1.12 billion last quarter.
4. Winstream (owned): I noticed that Soleil initiated coverage on Winstream yesterday with a buy rating, noting the high dividend yield of 12% and the free cash flow yield of around 19%. When I made my last purchase, I was concerned about the company cutting its dividend and was relieved somewhat when I calculated the free cash flow amount./Winstream/ Based on earnings the dividend payout exceeds per share earnings.
5. Prospect Capital (owned, currently viewed as a mistake): One of the problems of business development companies like Prospect Capital is a need to constantly issue new stock to finance their activities. Like REITS, a BDC must pay most of its income to shareholders in dividends. This can work out fine, provided the REIT's properties and rents are increasing in value and amounts respectively, or the BDC does not make loans that go sour, which unfortunately has a tendency to happen with increasing frequency during a recession. PSEC just floated yet another common share offering of 5.2 million shares at $9 a share.
It was not that long ago that PSEC closed another stock offering of 7,762,500 shares at $8.25 per share.
When PSEC reported for the quarter ending March 2009, it claimed that the value of its investments equaled $14.19 a share. Assuming that this figure is close to being accurate, PSEC has recently been selling a substantial amount of stock significantly below its net asset value. It is impossible to view that as anything other than a major negative for existing shareholders.
5. 20 Year TIP Auction in July: I looked at the 20 year TIP "real" yield at Bloomberg last night and saw that it was just 2.19%.I am going to wait and buy the 20 TIP at auction until the real yield exceeds 2 1/2%. Instead, I will buy mostly higher yielding floating rate securities with my remaining cash in the Roth and possibly a small position in one fixed rate coupon bond.
6. Head and Shoulders Pattern Formed with Neckline Broken: The Chartists are pointing out that the S & P 500 average formed a head and shoulders pattern, and broke the neckline of that pattern last Tuesday with the close at 881. The target now for the chartists who follow those patterns is around the 822 level. MarketWatch
7. Dividends and Interest (for owned securities):The TC which I own containing the senior Prudential fixed rate coupon bond, JZH, goes ex interest tomorrow. I recently pared my holding of JZH to buy another Prudential senior bond, PFK, which has a shorter maturity (2018) and pays monthly interest at a 2.4% spread over CPI. The TC containing the senior bond bond from Liberty Media (PKK) is ex interest tomorrow for its semi-annual interest payment. OSM, the CPI floater from Sallie Mae, is ex interest for its monthly payment. Several synthetic floaters are ex interest with their monthly interest payments, including the one bought yesterday, GJL, and GJK, tied to a TP issue from J P Morgan maturing in 2014.
DISCLAIMER I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. It is always important to follow the investment process. the investment process NOT A RESEARCH SERVICE These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post. Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it.
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