Wednesday, October 14, 2009

Intel & JPM Earnings/Sinclair Broadcasting/ More on SCEDN/

1. Exchange Rates and The Value of Dividends Paid by a Foreign Company: Last year, I bought and sold FXC, the ETF for the Canadian Dollar. I have not re-initiated that position due to my larger than normal position in dividend paying Canadian companies. As the value of the Canadian dollar rises against the U.S. dollar, the value of those dividend paid in Canadian currencies rises for a U.S. citizen, as those payments buy more U.S. dollars when converted from the stronger Canadian currency to the weaker dollar. So ownership of dividend paying Canadian companies already exposes me to the potential benefits and detriments of the Canadian currency. I did the following calculation, based on the currency calculator at YF, to illustrate this point. I assumed the investor owns 2000 shares of a Canadian stock that pays 30 Canadian cents per share before the 15% withholding tax. This would yield as of yesterday around $.2895 U.S. for 30 cents Canadian or $579 for those 2000 shares. On March 9th, the Canadian dollar was weaker against the U.S. dollar and that 30 cent Canadian dividend would have bought only $.2315 U.S . The same dividend would have then been worth $463. I will buy foreign dividend stocks in a taxable account due to the foreign tax credit issue.

2. Intel (owned): Intel reported impressive numbers for the third quarter, handily beating the consensus estimates for revenues, earnings and margins. Intel earned 33 cents on 9.4 million in revenues. Gross margin was 57.6%. For the fourth quarter, Intel is currently estimated revenue at 10.1 billion, plus or minus 400 million and a gross margin of 62%. The consensus according to YF before today for the 4th quarter was revenues at 9.51 billion.

While the 3rd quarter beat the consensus forecast of 28 cents in earnings, earnings and revenue did decline from the comparable quarter last year when Intel earned 35 cents on revenues of 10.217 billion.

Recently, I have been listening to a number of analysts who were bearish on Intel, many of whom have appeared on Fast Money When I re-entered my Intel position at $14.46 and $15.25 , Barron's was featuring a money manager who called Intel his favorite short. Dynamic Asset Allocation Trumping Trading Rules Bought 50 PYT/ Eric Savitz on Intel It is far better to make up your own mind. The knuckleheads who find a natural home in the financial industry would have had the individual investor on the sidelines with Intel at $14, when simple common sense would have led most people to understand that $14 or $15 was a good entry point for a long term position or even a shorter term trade spanning a few months. Hopefully, those who witnessed the real financial acumen of the Wall Street "wizards" and Masters of Disaster, financial gurus and money mangers over the past few years would now realize that there is no connection, and never has been, between good judgment, ability, and compensation levels. I have managed my own money for my entire life, and that is not about to change as long as I have a few functioning brain cells.

3. Bernstein on Zions and Huntington Banks: I noted yesterday that Bernstein initiated coverage of Zions with an outperform rating. I was also encouraged after I read a Morgan Stanley report on ZION dated October 2nd, where the analyst called it one of "our highest conviction Overweight-rated stocks" . I do not own any common shares. I do own ZBPRA, ZBPRB and ZBPRC, and I have been contemplating buying a few more shares of the series C preferred stock. I was going to wait until I had a chance to review the 3rd quarter earnings report from Zions. Bernstein also started Huntington Bank as a market perform. I own just 50 shares, recently purchased, in my Lottery Ticket category. Proctor Upgrade/Bought 50 Huntington Bank as Lottery Ticket/Sold 50 ISF at $14.65 and Bought 50 AEF at $16.82/ Pared JZH by Selling 50 at $20.2

4. ING and SCEDN: Response to Reader's Email: I was asked a question by a reader about whether I was considering buying an ING hybrid at the moment, and also asking about the three negative factors that I mentioned in connection with the floating rate, non-cumulative perpetual preferred stock SCEDN. I thought that it would be helpful to copy my email response:

"Given the overall lack of any volume in SCEDN for weeks, today (i.e. yesterday) was a torrid trading day. When I saw the volume this morning, I knew that today may be my only chance to buy it for some time, and it helped that it was trading down about 3 points. The three negatives that I mentioned in my blog are present with virtually all equity preferred stocks. After mentioning those negatives, I discuss some of the factors which softens their pointed edges for SCEDN. One is the possibility of redemption under two scenarios, one involving a prolonged period of high Libor rates and the other being a similar period of much higher long term rates, where Edison has the incentive to refinance. That assumes that the refinance rate would at that point in time be attractive enough to call the security. This makes the perpetual character of the security less of a concern. The fact that Edison is a utility with a long history of paying common share dividends makes the cumulative and non-cumulative issue far less important. I would not pay up for the cumulative feature for this kind of security by more than a 1/4%, and the cumulative preferred issues from Edison are priced to yield as much as a percent more with low fixed coupons. I view that as a significant pricing disparity in favor of SCEDN.

ING's stock price is near the point where Merrill Lynch said it would make sense to float a stock sale to pay off the Dutch government. And it has been making some progress in selling assets that I have noted in the blog. The hybrids tend to rally on days when an asset sale is announced, so other investors may be more comfortable buying one of ING's hybrids as it makes more progress in raising funds to pay the Dutch state back. Personally, I would accept 1 to 1 1/2% less and go with a fixed rate coupon Aegon hybrid over ING. ING has more issues than Aegon with the EC, including the investigation on its sweetheart deal where the Dutch state guaranteed 30 or so billion of Alt-A mortgage trash from the U.S. and the 10 billion Euros in state aid. Aegon does not have that guarantee issue, and AEG is further along in paying the aid back and it has less to pay back. Unlike ING, it can pay back 1 billion Euros this year without incurring a penalty. ING's deal requires it to pay 150% of face value. So when the yields were still about the same, I sold ISF and bought an Aegon hybrid AEF: Proctor Upgrade/Bought 50 Huntington Bank as Lottery Ticket/Sold 50 ISF at $14.65 and Bought 50 AEF at $16.82/ Pared JZH by Selling 50 at $20.2

So, I am staying away from the ING hybrids until I have more clarity about what will happen with the EC and the deferral issue. There is no right or wrong answer for this kind of problem, just an analysis that leads me to one conclusion over another."

I would add that the European hybrids were viewed negatively by me before the EC announced its "burden sharing policy". They combined some of the undesirable characteristics of both an equity security and a junior debt issue. The EC burden sharing policy just added another important negative factor to consider. Common Sense View of European Hybrids Burden Sharing: Idiotic, Counter-Productive and Potentially Harmful to Member States More on EC Burden Sharing Policy: The Crafting of A Dangerous Political Policy as A Condition to the Payment of Bond Interest This is not to say that I will never buy one, but I need a nice cushion to compensate me for what I view as the additional risks.

I read last night that ING just called for repayment 800 million of subordinated notes, so called Tier 2 bond notes, due in 2014. This provoked yet another EC review of ING's use of state aid.

I do not follow Dexia, but I did note yesterday that Fitch downgraded two Dexia hybrids to CCC. PRESS RELEASE: Fitch Downgrades Two Dexia Hybrid Instruments to 'CCC'; Maintains RWN

I would want more than a 1/4% in additional yield for a bank non-cumulative preferred compared to one of its cumulative Trust Preferred (junior bond). A rule of thumb is at least an additional 3/4% for a bank fixed coupon non-cumulative equity preferred, and over 1% when I am uncomfortable, though still willing to invest. An example of wanting at least an additional 1% in yield for the non-cumulative preferred would be Zions ZBPRC, compared to the 10% at my cost when I purchased the cumulative junior bond: /Bought 50 ZBPRB in Roth at $19.9

For the differences in the priority of equity preferred and junior bonds in the event of bankruptcy, I do not believe it would make any difference for a bank, both pieces of paper would become worthless in the event the FDIC seized a bank. But recent events do highlight the importance of cumulative versus non-cumulative for bank securities.

5. Sinclair Broadcasting (SBGI)(owned): I sold my 100 shares of SBGI bought at $1 on a pop to $2 in a retirement account, but I still have kept 100 shares purchased in a taxable account.(item # 3: Sold ESD and Bought 50 PYT in Roth/SBGI Sold SBGI in IRA/ The shares rose over 13% yesterday to $4.23 after Sinclair raised its net broadcast revenues for the third quarter to 136 million and said it expected favorable trends in ad spending to continue in the 4th quarter.

6. J PMorgan Chase (own junior bond in TC form only-GJN, BUY 50 GJN/ ): The report from JPM this morning is probably more important than the one from Intel last night for the market to maintain its upward momentum. JPM beat the forecast of $.52 by earning 3.6 billion or $.82. Tier 1 capital increased to 101 billion. The Tier 1 common ratio stood at 9.2% and the Tier 1 capital ratio at 10.2% as of 9/30. Return on equity was listed at 23%. JPM added 2 billion to consumer credit reserves, bringing the firm wide total to 31.5 billion.

Early in the morning, as optimism of about the recovery gained momentum, the dollar continued to slide against major currencies, hitting a 14 month low earlier this morning DXY It started to turn up some a few minutes ago at around 7 A.M. E.S.T. : U.S $ INDEX (NYBOT:DX)

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