Saturday, October 10, 2009

Bought 50 shares of ABAT at $4.12-Speculative Lottery Ticket/CEF Buy-Write Funds/Risks of Bond Funds

1. Bought 50 share of Advanced Battery Technologies (ABAT) at $4.12-Speculative Lottery Ticket (see Disclaimer) ABAT is a manufacturer of rechargeable Polymer Lithium-Ion batteries for electric automobiles, motorcycles, mine-use lamps, notebook computers, and other electronic devices. Its manufacturing facilities are located in China.

Advanced Battery recently raised 18.05 million after placement agent fees by selling stock and warrants to institutional investors. abat424b520091002.htm The warrants have an initial exercise price of $4.7. The stock and warrants were issued as one unit, at a $4.1375 price, with each unit consisting of one common share and one warrant to purchase .3 shares of ABAT's common stock.

That issue caused a stock drop. ABAT had cash and cash equivalents of 45 million and no long term debt as of 6/30/09. Short term loans were listed at 7.325 million (see page 2: abat10q20090630.htm) Total plant and equipment was listed 44.1 million after depreciation. ABAT has a net loss carry forward as of the Q/E 6/09 of slightly over 2 million which can be used to offset future U.S. tax liabilities. The firm is incorporated in the U.S. The recent stock and warrant issuance probably has something to do with the September announcement of a pending acquisition of another battery maker: Advanced Battery

ABAT has outstanding convertible preferred stock that can be converted into 4,388,522 shares of its common (see page 23). Additional stock warrants are outstanding and are described at pages 24 -25.

Four customers accounted for 41.1 of revenue with one customer at 21.2%.

I see why the company needed to make equity placements late last year. Its battery production capacity was 45 million dollars per year. It needed capital to expand its production facilities which it completed with two new production lines in July 2009 (see page: 32).

In April 2009, the company acquired Wuxi Angell Autocycle. To finance growth of that companies' products, ABAT did another equity placement in June 2009.

While the company reported a profit last quarter, it was mostly due to a 9.9 million gain recorded from buying Wuxi for 1/2 of the value of Wuxi's assets. This is a link to the press release for that quarter earnings report: Second Quarter 2009 Financial Results Backlog was at 53 million on 8/03/09. This is a link to the firm's web site: Advanced Battery Technologies, Inc. This is how the firm describes its products: Battery This is a link to its product lists: Advanced

This one does not fit the usual criteria for a Lottery Ticket. It is selling within 20% or so of its 52 week high, and has already recovered from a slide to $1.17 last November and to $1.69 in March 2009: ABAT: Historical Prices Price to sales is over 5 whereas most LTs have a P/S ratio of less than 1, with many substantially below 1. What interests me is the burgeoning market, primarily in emerging markets, for the battery powered vehicles.

2. Retail Investors and Bond Mutual Funds: I read a report that individuals continue to pour capital into bond funds. Flows into the high grade funds hit 15.8 billion in the week ending October 7th, the highest amount since 1992. For June, July, & August long term bond funds saw an inflow of 29.6 billion. Short and intermediate bond funds had a 73.7 billion dollar inflow. For 2009 to September, taxable bond funds saw a total inflow of over 200 billion. I am going to make a prediction. Like all predictions about the future, I am simply expressing an opinion. There obviously can be no statement of fact about the future course of events. I believe that these individuals pouring money into bond funds now will regret their decision. To me, it would not be that much different from loading up on stocks in 1999. This is not to say that there are no individual selections worthy of buying, but the pickings are mighty slim now. And, to emphasize a point made many times, a bond mutual fund does not have a maturity date, and does not promise to pay your original investment back to you. For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal Possible In that post I discussed why I sold BND. When we look back to today in five years, do you really think that a purchase of a 10 year bond with a 3.2% yield will be viewed as a good investment?

The abnormally low short term rates are forcing other rates down to abnormally low rates, due to investor demand as distinguished from intrinsic worth. That demand for any yield better than near zero, which is what short term money is yielding now, is viewed as desirable. So, money is flowing out of money market funds to bond funds, with what I suspect is little or no regard for the risk of the bond funds at current yield levels. I checked this morning the SEC yields of some low cost bond ETFs from Vanguard. BSV, the short bond ETF, has a yield at Friday's closing price of 1.72%. Vanguard - Exchange-traded funds by name - Prices and performance The Total Bond market ETF, BND, had an SEC yield of 3.56%. The average maturity of the bonds in BND is currently listed as 6.8 years. Vanguard - Fund Holdings While it is up to each individual investor to decide whether a security is worth the risk, and I can only speak for myself, I personally would want far more yield to compensate me for the risks of owning bonds. For BND, while there is some credit risks that result from owning even a large sampling of bonds, the main risk is interest rate risk. It would not take much of a rise in interest rates, and concomitant fall in the NAV of these bond funds, to wipe out the value of their annual interest payments at the current low levels.

3. Buy-Write Closed End Stock Funds: I noted in a post from yesterday an article in the WSJ where the author suggested buying stock funds that use a buy-write strategy as an alternative to bond funds. Item # 6: U.S. DOLLAR/PARED JZH AT $21.5/Sold 100 RJZ at $9/Cramer on Hertz

I mentioned that I already owned several closed end funds that follow this strategy. While I have not conducted a study of how well those funds held up during the bear market, I was disappointed with their results. I still own them, with the exception of IRR, where I sold out of my position recently in several stages. I would not buy any of them at current prices because several of them are selling either too close to their net asset values or even above net asset value. When I buy a CEF, I want to improve my chances of success by buying at a large discount to NAV.

Some of the fund families keep changing the links to their web pages. If you try a link in an old post, and receive a message "page not found", that is the problem, but you can then navigate to the fund's CEF section to find what you are looking for.

I am keeping the other buy-write funds for their income generation, though I have ceased reinvesting the dividends. I certainly do not want to buy additional shares with dividends at the current prices. I believe my current positions in these type of funds include the following:

Blackrock, ING and Eaton Vance have several funds that employ this strategy.

I probably left some out because it is too early in the morning to search for this stuff. I own over 30 CEFs. My largest positions are in ETW and BCF. I did recently add to BCF but would not do so at the current discount to NAV. Sold Remaining shares in the TC PIS/Added to BCF and BUY 50 BDNPRC at $9.25/Buy 50 BCF at $6.6/Home Sales/Kudlow's Creation of His Own Reality/LQD & Correction in Bond Prices/ The same is true for IAE:

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