Friday, October 23, 2009

Canadian Energy Trusts/ MSFT/WL/Bought 100 DFP at $17.1/Added to CEF JDD at $9.45/Sold LT TRAD and Bought 50 NDAQ at $19.98

1. CANADIAN ENERGY TRUSTS (OWN ERF, PVX & PWE): Yesterday, my holdings in Canadian Energy Trusts received a boost when a Korean firm agreed to acquire Harvest Energy Trust at a premium, causing a 30%+ spike in HTE's share's yesterday. These firms have been struggling over the past year or so due to the fall in natural gas prices and the Canadian government's decision to start taxing them as regular corporations starting in 2011. The ones that I own pay monthly dividends, though the fall in energy prices has forced them to cut their dividends. Enerplus for example was paying around 4.66 Canadian in 2007, and is now on a yearly rate of about 2.16 Canadian. In 2008, Penn West paid about $3.84 Canadian in dividends, and is currently at a run rate of 15 cents per month Canadian or 1.8 CAD annually. Historically, these trusts were able to pay generous dividends since there was no Canadian tax at the corporate level. This would be similar to the way REITs or BDCs are treated now for a U.S. shareholder. When the Canadian government starts taxing earnings at the corporate level, I would anticipate further declines in dividends, though the timing is not certain. I have not bought any of the Canadian energy trusts in 2009, but I did buy 50 shares of an ETF, ENY, which contains them along with other energy companies located in Canada. Bought 50 ETF ENY at $13.6 I sold my 100 shares of Harvest Energy yesterday (see disclaimer).

Some of prior discussions of these trusts from last year include:

For these companies, I rely on reports from Morningstar which does have research reports on PWE, ERF and PVX. Value Line covers only PVX.

2. Bought 100 DFP at $17.1 Yesterday (See Disclaimer) : This is a junior bond issue from Delphi Financial, an insurance company. The purchase yesterday was sort of a rule violation in that the maturity date for this security could be in 2067, about 27 years beyond the limit for bond purchases. And, if Headknocker is alive then no doubt he would be a spry 116 years old, and a much older though perhaps wiser Old Geezer. I think that the record age is 122 held by a French woman. But this rule violation was offset to some degree by the sell of another one, also a rule violation, for a profit.

I could have bought a senior exchange traded bond from Delphi, DFY, for around $23.5 but that would not have satisfied my yield hunger from yesterday. The junior bond is yielding about 2 1/4% month more than the senior bond, and both pay quarterly dividends.

I said the maturity could be in 2067. This is about to become a little complicated. Delphi has to redeem the security on May 15, 2037 but only to the extent it has raised sufficient proceeds from the issuance of "qualifying capital securities" (Page S-2: e424b2) Delphi has to use "commercially reasonable efforts" to raise that replacement capital. So this may not be a rule violation in that the securities may be redeem under this provision in 2037. There is no way now to place odds on that happening.

There is another practical reason for a redemption. DFP is one these fixed to floating rate securities. Delphi pays a fixed coupon of 7.376% until May 15, 2017. At a total cost of $17.1, this results in a yield of about 10.78%. The security then become a floating rate bond, paying interest tied to a 3.19% float over 3 month Libor. So if that becomes too onerous with a very high LIBOR rate, and assuming further Delphi can refinance at a lower rate with a long term fixed rate bond, then those kind of circumstance could conceivably cause it to redeem the security prior to maturity.

Some characteristics of this security are worse than other junior bonds. For example, interest may be deferred up to 10 years rather than the standard 5. It looks to me like the company has to attempt to pay any deferred interest after five years, or after making a single coupon payment, using an Alternative Payment Mechanism. (S-18) Deferred payments do earn interest at the coupon rate. Delphi is paying a common dividend and there is a standard type stopper provision on deferral of payments on this junior bond as long as payments are made on the common stock. (S-19). The alternative payment mechanism is described at page S-20. I would not be concerned about any of this until Delphi eliminates the common dividend.

I did review the Morningstar report on Delphi, and the most recent quarterly report: e10vq A description of the firm's business can be found at page 21. This is a link to its SEC filing of the press release for the 2nd quarter earnings report: exv99w1 Most likely, this security will be traded on a pop. I have been scraping the bottom of the barrel for weeks now. Most of the exchange traded bonds that I would have some interest in buying have risen too far in price and no longer provide the yield cushion that I demand to take on the risk.

I found this one in the Quantum table for exchange traded debt securities: Exchange-Traded Debt Securities Table - QuantumOnline.com

3. East West Bancorp (EWBC): This is another one of the bank Lottery Tickets that I have bought and I did not cringe reading its earning release yesterday which caused the stock to shoot up about 20% to around 10 bucks. My purchase was in April at $5.7: Buy of 50 EWBC as Lottery Ticket

4. SOLD Tradestation (TRAD) Lottery Ticket at $8.3 and Bought 50 Nasdaq OMX Group at $19.97 Yesterday (NDAQ) (see Disclaimer): TradeStation reported earnings of 9 cents, down from 20 cents in the year ago quarter, and guided down for the 4th quarter. Reuters I sold my LT bought at $7.26 for a negligible profit. Bought Lottery Ticket in TRAD I bought 50 of Nasdaq OMX, having noticed that NDAQ has not experienced any kind of rally since early March. On March 10, 2009, the stock closed at $22.54. The current price is close to 10 times the earnings forecast of $2.04 for 2010. NDAQ: Analyst Estimates for The NASDAQ OMX Price to book is around .9. Price to sales is 1.07. The five year P.E.G. is expected at .71. All of those kind of statistics can be found in the "Key Statistics" page at YF: NDAQ: Key Statistics for The NASDAQ OMX Group, Inc. I always check this page when doing research. I reviewed several analyst reports prior to making this purchase, and the most recent annual and quarterly reports filed with the SEC: Form 10-Q Form 10-K Morningstar has it rated 4 stars. VL has it rated 3 for timeliness but currently has a forecast of $2.35 for next year. S & P rates it 4 stars with a $25 target. As of its June report on NDAQ, Barclays had it overweight with a $27 target.

5. Added to JDD in Roth at $9.45 (see disclaimer): This was an average up from my purchase of 100 shares at $8.4 in August. Bought 100 JDD in Roth One quarterly dividend has been paid since that purchase. Part of the increase in share price has been due to the narrowing of the discount to Net Asset Value for this closed end fund. The discount was 16.76% when I purchased the first 100 on August 7th, and stood at 11.92% based on data from 10/21. JDD - Nuveen Diversified Dividend and Income Fund I would simply refer to my early post for the description of this CEF. At the current distribution rate, which is subject to change, the yield is around 9.25% at my cost for this latest purchase, and higher for the August purchase at over 10%: See Item # 6 Jobs Report-Better than Expected/Recession Kaput/POM, BAM/Bought 100 JDD in Roth Based on yesterday's closing price of $9.46, the NAV was $10.95 as of 10/22 and the discount to NAV expanded to 13.6%.

6. Pepco (POM)(owned): I noticed that J P Morgan downgraded Pepco to underweight from neutral, based on that analyst's views of continuing problems at Pepco's unregulated subsidiary, Conectiv Energy. That subsidiary has been a major problem for almost a year now. I will stay with my shares, provided Pepco does not reduce the dividend. I will also continue to reinvest the dividend to buy additional shares, which I am doing with Duke and Consolidated Edison, but not with my other utility holding such as Progress Energy and Pinnacle. POM did declare yesterday its regular quarterly dividend of 27 cents per share.

7. Christine Romer Prediction on Unemployment: Romer, chairwoman of the White Counsel of Economic Advisors, expects the unemployment rate to top out at over 10% next year, and to recover slowly, staying at elevated levels throughout 2010. NYT www.whitehouse.gov/ .pdf

8. Wilmington (WL- Owed Lottery Ticket Category): This LT was bought in March at $9.98 as a LT. /BOUGHT 30 WL=Lottery Ticket WL reported a loss of 15 cents caused by losses in the bank's securities portfolio that reduced earnings by 34 cents per share. About 87% of total loans as of 9/30/09 were to clients in Delaware. The loan loss reserve ratio stood at 2.24% at the end of the quarter. Loan losses declined from 54 milion in the 2nd quarter to 38.7 million. On an operating basis, the bank was profitable with operating net income of 17.8 million or 19 cents per share. This beat the consensus forecast of 7 cents. Book value was listed at $14.29. Tier 1 risk based capital ratio was 9.95%. Tangible common equity to assets ratio was 5.6. Due to the $300 limitation on LTs, I was only able to buy 30 shares.

9. Microsoft (owned): The remaining 50 shares of MSFT that I own were bought at $17.79 in January. ADD 50 MSFT/ Microsoft reported before the bell diluted earnings per share of $.40 on 12.92 billion in revenues. The 40 cents figure excludes 12 cents of deferred income representing Windows 7 sales before general availability. While the 40 cent number beat the forecast of 32 cents, it was still less than the 48 cents earned in the same quarter a year ago. Revenues beat the forecast of 12.31 billion.

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