Saturday, October 24, 2009

ADDED TO PJR at $20.70/Continued Weakness in Freight Volumes/SNV-Just Awful/SVB Earnings/GDP Preliminary for the 3rd Quarter

1. Continued Weakness in Railroad Traffic: The problem on Friday with the market was the downbeat numbers from Burlington Northern and Union Pacific. Union Pacific reported a third quarter profit decline of 26% on a 25% decline in revenues. Industrial products freight fell 39%. Automotive freight by 30% and agricultural products by 23%. UNP said that volumes seemed to have stabilized but at "very low levels". Revenues for UNP were 3.47 billion, below the consensus forecast of 3.73 billion. Burlington Northern Santa Fe reported than earnings fell to $1.36, excluding items, from $1.99 a year ago. BNI stated in its press release that it was too early to know whether we "are at the beginning of a sustainable market recovery".

2. Bought 50 of the TC PJR at $20.7 in Regular IRA (see Disclaimer): I have ended up with too much cash earning nothing in the retirement account. I should not say nothing. I did check the money market rate in Barron's this weekend and the seven day yield is .24%. PJR was bought in the taxable account in mid July at a total cost of $16.72. Bought 50 PJR/ Intel PJR is a Trust Certificate. The underlying security is a senior bond from Unum (UNM) with a 6.75% coupon. Unum is a disability insurance company. The TC has a higher coupon at 7.4%, which will generate a yield of close to 9% at my cost. The prior purchase made at a lower cost would generate a 11.06% yield. I also own a junior bond in TC form from a company called Provident, which was acquired by Unum. The junior bonds from UNUM in TC form, KCC, KSA, KRJ (FINRA), continue to have similar yields to PJR which contains a senior bond. Eventually, I will sell the junior bond and keep the senior one. That anomaly of pricing the junior bonds to yield around the same as the senior ones has been ongoing for some time now. Trust Certificates Containing Unum Debt The senior bond also matures about 10 years earlier in 2028. There is another pricing anomaly associated with TCs containing Unum bonds. There is another TC containing the same senior bond as PJR. That security is KVN, and it is being priced to yield as of Friday's at around 7.88% after falling 98 cents on Friday. So PJR has about a 1% yield advantage over KVN, and both have the same underlying bond.

KVN: 424B5

Sure, KVN has a .1% higher coupon but the relevant issue for functionally equivalent securities is the yield at the purchase price.

3. Synovus (SNV-owned Lottery Ticket category): When I bought 50 shares of SNV as an LT, I had nothing positive to say about the management of that bank. I paid $3.73 per share. /Bought 50 LT SNV at $3.73 After reviewing this banks third quarter's earnings report, I realize that my disparaging remarks were far too kind in that earlier post. The performance of this bank is just pathetic and that is being polite. Maybe the Board would want to replace the leadership with someone more competent, like a Chuck Prince. The stock fell over 18% after the release of this latest disaster, closing at $2.92 on Friday. What can you say about a group of highly compensated people who destroy 20 years of value creation in the space of a couple of years. One accomplishment of the current management is that they exceeded the consensus estimate, losing $1.27 per share when the street was looking only for a 67 cent loss, and that is a noteworthy accomplishment if you are short the stock.. Loan loss provisions tripled to almost 497 million,

4. SVB Financial Group (own Trust Preferred Only-SIVBO): SIVB had a more positive report. Earnings for the third quarter were 61 cents per share, up from 24 cents in the second quarter, but down from the 77 cents earned in the third quarter of 2008. SVB stated that it was seeing credit quality improve overall, and signs of relative improvement in the bank's clients. While the common stock fell, I view the report as a good one for the owners of the Trust Preferred issue. I mentioned when I bought the TP that I believed the common stock was too expensive. Bought 50 SIVBO AND DKK

5. GDP Release on Thursday: The preliminary estimate for GDP is scheduled to be released this upcoming Thursday. If this number shows growth, though at an anemic level, then many will start to question the strength of any recovery and stocks may pull back. Much is being said about better than expected earnings numbers. Whirlpool, for example, rose almost 5% on Friday to close at $77.13, up from a March low of around $20, based on its third quarter report. What exactly did it report? WHR had earnings of $1.15 per share down from $2.15 a year ago. And both the economy and new housing construction, an important market for WHR, were already well into a recession in the third quarter of 2008. Another example would be Honeywell, now trading near a 52 week high. HON reported third quarter earnings of 80 cents compared to 97 cents in the year ago quarter. In many cases, these firms are beating low expectations, with the low guidance provided by the companies, and the stocks rally. But, when you look at the revenues, there is a substantial decline from a year ago, and a decline in earnings too. Declines in costs, partly due to layoffs and lower commodity prices for some firms, are driving the better than expected results from many companies. So, all that I am saying is that the GDP needs to start growing at a nice clip or the rally off the March lows is in danger of expiration.

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