Thursday, December 31, 2009

Bought 100 MKZ at 9.96/Bought 50 DSPG at 5.62 and 30 BRKS at 8.62 as LTs/Sold 50 GJT-Some Details about Managing My Two IRA Accounts

1. Bought 50 DSP Group (DSPG) at $5.62 Tuesday (Lottery Ticket Category)(See Disclaimer): LB is being given too much work to do by our Great Leader, so some tasks are being postponed such as describing the immaterial purchases being made by the No Wit RB as Lottery Tickets. LOTTERY TICKET PURCHASES: LINKS IN ONE POST Between the Old Geezer and its nit wit ally, Headknocker will soon own 400 securities. How on earth can the LB keep track of these small LT positions, that don't amount to a hill of beans in HK's capital position? LB is going to trim some of these positions next year before it goes bonkers.

DSP Group was found with one of the screens that I use to find LTs which focus frequently on balance sheet cash, prices below 10, and low price to sales and price to book ratios. I will then do a cursory analysis of whether the company looks interesting enough to perform additional research, and I will place those candidates on a small cap or the micro cap monitor list. The micro cap list is defined for this limited purpose as those companies with less than a 250 million market cap, whereas small caps include those between 250 and 1 billion in market capitalization. Most but not all LTs come from one of those two monitor lists.

DSP is a new name for me. After I found it with a screen, I went to YF to start the research process, and the first item looked at was this recommendation by David Peltier, TheStreet TV. He noted that it trades at about 2/3rds of its tangible book value with $4.8 per share in cash. That is what I picked up in my screen.

On DSP's balance sheet, the cash is listed under both current and long term assets:
Current Assets: Cash and Cash Equivalents= 37.976 million
Marketable Securities & Short Term Deposits: 17.308
Long Terms Assets: Long Term Marketable securities and cash deposits: 58.436 million
This brings the cash up to 113.72 million. There are 22.901 "basic" shares outstanding, so that brings the cash to $4.96 per basic share. Peltier uses the diluted shares (23.662 million shares) to arrive at $4.8 per share which is what I would do too.

DSP made money in the 3rd quarter of 2009: Form 10-Q There were a lot of unusual items, positive and negative, in the 29 cent GAAP number. The non-GAAP number for the 3rd quarter was 18 cents. DSP Group, Inc. Reports Third Quarter 2009 Earnings Revenues have suffered a sharp decline from the 2008 numbers, falling to 65.5 million in the 3rd quarter of 2009 compared to 87.4 million in the year ago quarter.

YF lists the price to book at .78 and price to sales at .56. DSPG: Key Statistics for DSP Group, Inc. The forecast for next year is for 36 cents in earnings: DSPG: Analyst Estimates for DSP Group, Inc Three analysts cover DSP with a consensus hold recommendation:

The long term chart is consistent with many LTs: DSP Group, Inc. Share Price Chart | DSPG The price is currently hovering significantly below its range in 1994, which marked the commencement of the price data. In April 2000, during the crazy period, the common traded over $71. By February 2001, it appeared to hit bottom in the low 20s and started to move into a 20 to 30 channel until May 2007, when it broke down again, falling to its current level in the ensuing two or so years.

The reader will notice that nothing has been said about the DSP's business. The focus was on other matters which is the best that I can do given DSP's description of its business:

"DSP Group is a leading global provider of wireless chipset solutions for converged communications at home, delivering system solutions that combine semiconductors and software with reference designs. We provide a broad portfolio of wireless chipsets integrating DECT, Wi-Fi, PSTN and VoIP technologies with state-of-the-art application processors. We also enable converged voice, audio, video and data connectivity across diverse consumer products – from cordless and VoIP phones to home gateways and connected multimedia screens. Our current primary focus is digital cordless telephony with sales of our in-house developed Communications over Internet Protocol (CoIP), Digital Enhanced Cordless Telephony (DECT), and 2.4GHz and 5.8GHz chipsets representing approximately 92% of our total revenues for the first nine months of 2009." Page 20: Form 10-Q

This is a link to the profile description at which even caused my eyes to roll back into my head. The Key Developments page, which is always looked at before buying, shows that DSP estimated its revenue forecast for the 4th quarter at 50 to 56 million below the 59 million forecasted by the analysts.

2. Bought 30 Brooks Automation at $8.62 (BRKS) (Lottery Ticket Category)(See Disclaimer): This is the last of the 5 LTs that HK allowed the RB to select. Brooks is a name that goes way back here at HQ, and RB was going to buy a 50 shares based on its contention that prior trades had netted a profit which it could add to the Nerd's $300 stinking limit rule for Lottery Tickets. HK and OG could not remember anything about the amount of the profit, if any, and asked LB to look it up in prior tax returns. LB refused, saying it was sick and tired of doing the grunt and gofer work in this operation, so RB was limited to a trade under $300. That is just the way it happened here at HQ yesterday. The OG had a temporary moment of memory lucidity and said something like didn't Brooks acquire PRI Automation and maybe HK had owned that one too. No one really knew about the past relating to this security or the prior trades, keeping up with the present is enough of a chore. This LT did not originate from a screen.

Brooks does have a decent balance sheet, even after suffering two very rough years, losing $3.62 in its F/Y ending 9/30/2009 and $3.67 in F/Y 2008: Page 14 e10vk Part of these results are clearly tied to global economic conditions. Brooks also cut its workforce by 40% since the end of its F/Y 2007 and closed redundant facilities. Of the losses in 2008, 197.9 million was an impairment charge taken against goodwill. An additional goodwill charge was taken in F/Y 2009 of 71.8 million. There were also impairment charges to long lived asset including a 35.1 million charge as of 3/09. Charges for restructuring amount to 12.8 million in F/Y 2009. So it is important to realize that the losses are not as bad as they seem at first blush, with a lot of non-cash losses.

Revenues fell of a cliff in F/Y 2009 declining to 218.706 million from 456.222 million in FY 2008. Revenues hit 670.935 million in F/Y 2007 before the recession hit. So the first determination that has to be made, as best as I can, is whether or not the fall off in demand has to do with Brook's products or external events that it has no control over. I believe that it is the later. So, I suspect that an upturn in its business is about to occur.

Brooks had about 88 million in cash as of 9/30/09, and no debt. The current consensus estimate from the analysts is for earnings of 15 cents in F/Y 2010, and then 65 cents in F/Y 2011. I would not pay much attention to those numbers. This is a cyclical company that may earn a lot more or less than those estimates. The revenue forecast is for 402.9 million in F/Y 2010 and 544 million in the next year. BRKS: Analyst Estimates for Brooks Automation, Inc Those estimates show a belief of a substantial increase in the current FY compared to the 218.706 million actual number for the just concluded 2009 FY.

S & P has the stock rated 4 stars and estimates FY 2011 earnings now at 79 cents, and forecast a 97% rise in FY 2010 revenues.

This is a high beta stock at 1.9. Brooks said that it expects to break even in its first quarter of FY 2010. Reuters

Brooks is a major supplier of semiconductor tools (77% of revenues) and factory equipment with a leading market share in many of its product segments. A full description of its business can be reviewed at Reuters.

So why buy this one as a LT? The possibility of positive earnings surprises during the course of 2010 and 2011 seems more likely than currently reflected in the stock price, which is a judgment call. During the last up cycle for the semiconductor industry, Brooks was trading mostly in a channel of between $12 to $18. The stock broke above it 200 day moving average in July and has not come close yet to retesting that line: Brooks Automation, Inc. Share Price Chart | BRKS Although it is not certain yet, the price chart seems to indicate to me that the stock has broken the narrow $4 to $8 channel it was in from 10/08 to 10/09. Also, the movement in the semiconductor stocks in general seem to indicate a market perception of an upturn in the business cycle for this sector. Still I am not confident enough to even buy this position outside of the LT category. So, it is without question a speculation at this point.

3. Bought Another 100 shares of MKZ Yesterday at $9.96 (see Disclaimer): This buy was made in a taxable account, and I do not intend to go beyond 200 shares, which I now currently own. This is a complicated security that I explained adequately in Item # 3 from Wednesday's Post: Bought 100 MKZ at 9.91 in the Roth IRA In effect it is a senior bond issued by Citigroup which matures in 2014 that pays a guaranteed 3% per annum, and possibly more based on the percentage gain of the Dow Jones UBS Commodity Index, up to a maximum of 31%, with a lot of twists and turns. One of the main caveats is that a close for just one day above a 31% increase at anytime during the annual period will cause a reversion to the 3% guarantee, no matter where the index ends up at the annual closing date.

4. Sold 50 GJT at $17.5 Yesterday in the Roth-And More Detail About How I Managing My IRA Accounts (See Disclaimer): Before the market opened yesterday, I had a discussion with a reader, where I mentioned that my retirement accounts were now bond heavy with the accounts now yielding over 10%. It would be higher, I said, except for a few synthetic floaters which had low yields based on their guarantees, but those securities provided these accounts with some inflation protection. I mentioned GJT as one of those floaters, along with several others, including GJN, GJL, GJP, PYT, GYB, OSM, PFK, & GYC. (AEB & METPRA are also floaters with some shares in the retirement accounts with average costs around $5 and $7 respectively for the shares held in the IRA) All of my synthetic floaters are in the retirement accounts. Of those, GJT had one of the worse current yields since it did not have a guarantee. I expect OSM and PFK to move up in yield in the coming months, and the yield at my cost for those securities will look even better. I sold GJR and GJO already because they lacked the guarantee protection which comes in handy now. So when I saw GJT spurt yesterday morning 9.38%, with a ask price at $17.5.

I had originally bought the shares in April at $8.3 in a taxable account. BOUGHT VEU AND GJT. I later sold those shares on a pop as I recall, after I decided to transition all synthetic floaters to the retirement accounts. I then bought the shares back on a slide in the Roth at around $10. I then sold 1/2 of those shares in June at $13 Sold GJR, Trimmed GJT & JZH . And I sold the remaining shares at $17.5 yesterday. I made a decision to de-emphasize the synthetic floaters that do have a guarantee, and I no longer own any. I may buy one or more back on a substantial decline in price. The proceeds will be used to buy a higher yielding security, possibly another synthetic with a guarantee.

A number of the synthetics bought in the retirement account were bought at very attractive prices and will be held until I become spooked about the quality of the underlying credit contained in these securities. For example, I bought GYB at around an $11 average cost for 200 shares, and this synthetic is tied to a Goldman Sachs junior bond maturing in 2034. added another 100 gyb in regular ira/ Bought GYB This one has a $25 par value, so I have built into the security a $14 per share in profit assuming GS survives to 2034 to pay me. I will be paid (as long as the swap agreement creating the float stays in effect) the greater of 3.25% or .85% above 3 month Libor, which is a good float. So why is this a keeper as long as I have confidence in GS's surviving?I explained it in my post from April 21st and I will just highlight some of the passages:

"GYB is the best GS synthetic floater in my opinion based on the current pricing as of yesterday's close (I.E. APRIL 21, 2009 WHEN THE POST WAS MADE), and I know of five. The minimum rate is 3.25% and the maximum is 8.25%. The float provision is .85% plus 3 month LIBOR which is also good. Interest is paid quarterly. Since the minimum rate is the applicable rate now, the yield at my $11 cost is 7.38% and that would be the minimum yield for me for the life of this security which is 25 years. The maximum yield based on the float provision would be 18.75% (.0825% x $25 par value=$2.0625 per certificate in interest per year divided by $11 cost=18.75%). The maximum yield to me would be hit when the 3 month LIBOR rate rises to 7.15%. At a 3.5% average 3 month LIBOR rate over the next 25 years, the {current average annual} yield would be 9.88% (.035 3 month Libor + .85%= .0435% x 25 par value= $1.0875 in annual interest divided by $11 cost=9.88%).. . . . This is another link: LIBOR Rates History (Historical)"Bought GYB/DD/Will Hold Synthetic Floaters In Retirement Account / So this one does not have a high yield at the current guaranteed rate of 3.25%, but the 7.38% minimum yield at my cost is good with the float protection. But like some of the other floaters paying the guarantee now, they do lower my overall current yield in the retirement accounts.

Another synthetic linked to the same GS bond is PYT and I started adding that one at $11.2: Bought 50 PYT
This is the link to my post describing how I now analyze the GS floaters: Analysis of Prior Question about Goldman Sach's Floaters

The only other synthetic floater that is questionable long term hold is GJP, primarily due to the price paid reducing my overall long term potential returns. For now, I will keep it because it does have a guarantee and a decent float of 1.15% above the 3 month T Bill, plus it is senior security from Dominion. Bought 100 GJP at $18.97/Bought 100 BCE at $24.75/Bought 50 AHLPRA at $19.75 GJL had a good yield to maturity when I bought 200 shares: Bought Another 100 of GJL/ GYC and GJN were both bought at attractive prices that juices the value of their guarantees and floats.

Most of the yield in the IRA's is now coming from opportunistic investments in preferred stocks, European hybrids (AEH, INZ, AEB & AEF) and Trust Certificates, made during the meltdowns between October 2008 and April 2008. This would include several investment grade bonds yielding over 15% at their purchase price. Those opportunities are long gone. It is hard now to find anything to buy. Therefore, the best course now is to keep the best ones (including the ones with built in inflation protection) for income generation for as long as I do not become spooked about credit issues.

I have also emphasized CEFs that pay high dividends as an alternative to mutual funds. An example would be the buy of 100 JDD in April: Bought 100 JDD in Roth And I have limited myself only to a few individual stocks with high dividends bought during meltdowns such as the DD purchase in March at $16.68, which I will keep as long as the dividend is not cut, since my yield is currently close to 10% at my cost The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology I also bought AT & T at around $23 and hold it both the retirement and taxable accounts.

So all of this explains what I am doing in the retirement accounts and why I jettisoned a low yielding security with some inflation protection due to its lack of a guarantee on a pop in price. And why I intend to keep others, until some external event shakes me out of them. The income generation will allow me to add more income generating securities, possibly on a monthly basis going forward, so there is a compounding effect to this method of managing the IRAs.

Wednesday, December 30, 2009


I had some interest in the unusual security that I bought, MKZ, described in this post from earlier today: Bought 100 MKZ at 9.91 in the Roth IRA I added another 100 today in a taxable account (see disclaimer) and will discuss all of my purchases today in tomorrow's post.

I would add that the other security MKN is very similar except it has a 33% maximum, and matures a few months earlier in 2014 compared to MKZ. And there is another important distinction for the RBs out there. MKN has a starting value for the first interest period of 112.43. Okay, that could be good or bad depending on what happens in the next 3 months or so. What is 133% of 112.43? That number is 149.53. The index closed today at 139.47: MDC - Java Chart - One day over the maximum during the relevant annual period will cause a reversion back to 3%. The index is now up about 24% as of today's close from MKN's starting value of 112.43. So it could be a tight squeeze, down to the wire so to speak. MKZ has more room to run before hitting its maximum described in the earlier post from today.

I got the starting values from quantumonline.

The futures contract on the index only gives you the market's best guess of what the index value may be. The only relevant question is what it turns out to actually be.

Bought 100 MCQPF at $5.84/Case Shiller Oct/Bought 100 OPXT at 1.89/Bought 100 MKZ at 9.91 in the Roth IRA/Bought Canadian $/Roger Gibson's Book

1. Case Shiller Index (.standard): The Case Shiller index of home prices in 20 metropolitan areas was unchanged in October compared to September. The consensus estimate was for a .2% increase. The September number, however, was revised up to a .4% gain from the previously released .03%.

The 20 city index is down 32.6% between its peak in the second quarter of 2006 to the current reading in October 2009. Only 7 of the 20 cities showed rising prices in October compared to September 2009. Los Vegas continues its dismal performance, with 38 months of decline with a -55.4% peak -to-trough. Vegas prices are around where there were in January 2000, after gaining 135% from January 2000 to their peak in August 2006. San Francisco had the largest percentage gain in October 2009 at 1.2%. San Diego gained .4%. Los Angeles improved by .3%. Just based on the readings in this index, the large California metropolitan areas are showing the most consistent upward movement in prices after reaching their trough levels earlier in the year.

Karl Case, the co-developer of this index, expressed some cautionary words in a story in today's NYT.

2. Bought 100 Macquarie Power & Infrastructure Income Fund (MCQPF) at $5.84 Yesterday (RB's Combo Lottery Ticket) & Bought $3,100 Canadian Dollars with U.S. Dollars (see Disclaimer)

This is a Canadian company that trades in Toronto under the symbol MPT-UN.TO and on the pink sheet exchange in the U.S. I am running out of Canadian dollars and the price was close to equivalent on the pink sheet exchange, where my brokerage commission is about 1/2 has much. I did receive a bad price for a market order, filled at about three cents above the highest ask price according to the quotes at the pink sheet exchange. This one is being classified as a Lottery Ticket under the special dispensation granted by the Great Leader to RB yesterday, allowing for the combination of 2 LT maximum limits of $300 into one purchase. RB now has 1 LT left to purchase before Thursday, having bought 4 yesterday.

HK did buy another 3,100 or so Canadian dollars yesterday to help the RB on its quest to buy Canada, all of it, though HK suspects that the Canadians are not worried-not yet at least. HK reminded the RB of the importance to set realistic goals, so possibly the RB might consider dropping its quest to acquire both Canada and Switzerland, at least at the same time. The Old Geezer, having returned from the Old Folks home claiming to be rehabilitated and ready to assume his role as the Head Trader, opined that this desire to acquire cold places with snow sends shivers down his spine. After all, the OG views a snow storm as anything over a 1/4" and firmly believes that a new ice age must have started whenever temperatures stay below freezing for two consecutive days.

Macquarie Power & Infrastruture (MPT) has investments primarily in power generation facilities, including wind, gas, hydro (water) and biomas, representing approximately 350 MW (megawatts) of installed capacity. The location of these facilities are shown on this map: Macquarie Power & Infrastructure Income Fund - MPT's Portolio MPT owns four hydroelectric plants with a combined size of just 36 MW, and two of the 4 are just 3 MW each. Generally, I would say 1 MW could provide power to anywhere from 500 to 1,000 homes. So, those are small units hydro units, but at least it is clean energy. The largest unit is a gas fired plant with a 156 MW. The wind farm appears to be large for these kind of operations at 99 MW. The biomass plant is small at 28 MW. MPT has an investment in another plant rated at 31 MW. With a recent convertible offering, MPT has no refinancing needs for 2010: macquarie.comDecember2009.pdf The power generated by those facilities is sold under long term power contracts. Those agreements have a weighted average remaining term of about 10 years: Page 2 /factsheet.pdf More about MPT can be gleamed by reading the 2008 annual report: 2008.pdf

MPT recently announced its intent to convert into a dividend paying Canadian corporation prior to 1/1/2011. The fund announced also a reduced monthly dividend of .055 or .66 annually. That new and lowered rate will still generate a 10%+ yield. The new payout is estimated to cover about 70 to 75% of the distributable cash: macquarie attachments Revenue for the third quarter rose slightly to 32.7 million from 32.4 million in the year ago quarter, and distributable cash was .166 per unit.

MPT shares also trade on the Pink Sheet exchange in the U.S.: Macquarie Power & Infrastructure Income Fund - MCQPF The yield shown on that page will be lower starting next year due to the recent distribution cut. MPT was ex dividend for its monthly distribution yesterday.

There are also a few other small Canadian companies that have similar operations to MPT. One is Boralex Power Income Fund, (BPT-UN.TO). A larger Canadian firm in the independent power sector is Atlantic Power (ATP.TO) (pink sheets: ATLIF). Atlantic was discussed in this recent article from Seeking Alpha. Atlantic trades on the Grey Market in the U.S. where there is negligible transparency. I will sometimes enter limit orders in that market, but I am always uncomfortable doing it. No bid or ask prices are shown and only the last trade is given on a delayed basis.

3. Viterra (owned): The CEO of this Canadian company reaffirmed that its newly acquired Australian operations will show better earnings in 2010 due to the larger than average crop:Viterra - Investors - Newsroom Reuters

4. Bought 100 OPNEXT (OPXT) at $1.89 Yesterday- Speculative Lottery Ticket (see disclaimer): This is the 3rd out of five LT purchases granted to the RB as its reward for being successful with the vision thing in 2009. LB just said that even a Lame Brain can be right just like that broken clock giving the correct time twice a day. A LT is by definition a speculation, and a speculative LT is speculation on top of a speculation. LB does not know exactly the meaning of a speculative speculation, but the phrase does generally describe the essence of RB's approach to investing, with possibly one more "speculative" added, as in RB prefers speculative, speculative speculations, which is just incomprehensible to the LB's way of thinking and it just wants the minutes of HQ's trading operation to reflect that Opnext was the No Wit's pick.

It is difficult to say anything positive by Opnext. One positive is that HK realized a nice percentage gain earlier in the year when the OG guided by the RB bought 50 shares at $1.91 in July and sold those shares for $3.1 in September: Sold LT Opnex RB was so impressed by that move, it doubled down and bought a 100 shares at $1.89, just wild and crazy is the only way to describe it. This company was discussed in July by the LB: Bought 50 OPXT as Lottery Ticket, and I do not want to repeat any of that discussion. Needless to say, LB relunctantly researched it, against its will and under protest. RB has never researched anything ever before making a decision. Don't sweat the details is its motto and it is just embarrassing beyond words to the LB that both the Old Geezer and its Lame Brain ally RB call Opnext's products thingamajigs.

But LB has to be responsible, no matter how much of HK's capital is thrown at these LTs. This is how LB described its burden in that last post when the RB bought this disaster: "The RB wants to have some fun, rational is not exactly an appropriate description for it, and LB feels a need to spend some time researching these lottery ticket finds of RB before allowing the use of immaterial amounts of Headknockers cash which is treated by LB as a scarce resource, no matter the amount available to invest at any given point in time."

Why use the term disaster to describe Opnext? Well look at the long term chart that starts in February 2007 at close to a $18 price: Opnext, Inc. Share Price Chart | OPXT Fortunately, we missed the first $16 of OPXT's move.

At least Opnext still has cash on the balance sheet, ending the last quarter with 155 million in cash with no long term debt. There is a 18.424 million long term capital lease obligation: Form 10-Q The market cap of the company is currently around 168 million at the $1.89 price, based on 88.789 million shares outstanding as of 9/30/09. So, that is sort of positive in that the company is selling at a price close to its cash. But, that is before one considers that Opnext is losing money. OPXT suffered a 17.913 million loss during the 3rd quarter of 2009 on revenues of 80.975 million. This is a link to the conference call for that quarter: Seeking Alpha

Another positive is the low price to sales at .53 and price to book at .58 according to YF: OPXT: Key Statistics for Opnext One of the few firms with a positive rating on Opnext, Jeffries, downgraded it from buy to neutral after the disappointing 3rd quarter report and a lower guidance for the 4th quarter. So, the RB, being the RB, likes all of the negativity and low expectations, sometimes that can be fertile ground for a pop if the firm has some positive news, which would be earnings of 1 cent for this company. The current estimates forecast losses in FY 2011: OPXT: Analyst Estimates for Opnext But, as the RB says there is always hope. Seeking Alpha

Opnext completed the acquisition of StrataLight on January 9, 2009, for 30 million in cash and 26.545 million shares of Opnext stock. exv99w1 Opnext closed on 1/9/2009 at $2.35: OPXT: Historical Prices for Opnext This acquisition added 40 Gbps subsystems: Opnext: OTS 4000

But LB does not want to sound overly negative. The product line appears to be interesting. For example, OPXT makes optical modules and components that transmit and receive data transmissions via light.

S & P still has it rated 3 stars, with a current target price of $2.5. The S & P 500 sees demand stabilizing but expects deployment of the 40G to lag any telecom spending rebound. Morningstar has it rated 3 stars also, but is overall more pessimistic, tagging $1.5 as fair value.

5. Bought 100 MKZ at $9.91 in the Roth IRA Yesterday (see Disclaimer): A reader brought this one to my attention shortly before the close. It is a senior note from Citigroup, which of course causes some trepidation. It matures on 7/11/2014 at $10. So, I do not expect a gain on the shares if held to maturity. There is a guarantee of 3% interest. There could be more depending on the amount of increase in the Dow Jones -AIG Commodity Index (This index was later rebranded, a name change, to the Dow Jones-UBS Commodity Index.)

A general summary of the terms of this security can be found at the quantum site, just enter the ticker symbol. I would hope that all investors avoid crutches, such as only reading that summary, and at least review the prospectus before even considering a purchase. The coupon is payable annually with the first one due on 6/30/2010. The interest payable for that first year period will be based on the percentage increase in that commodity index on the annual closing date, with the starting value for that first period being 123.338. There is a maximum interest payment per annual period of 31% of the $10 par value. For index data, I would go to the WSJ Market Data center for commodities, and here is a link to the current price information on this index: MDC - Java Chart - It closed yesterday at 139.64. The 42 week high is 141.19.

Now, that sounds good until I considered a couple of potential downsides, other the the name of the notes issuer, after reading the prospectus:Pricing Supplement The percentage up to 31% is paid provided "the closing value of the underlying index on every index business day during the coupon period is less than or equal to 131% of the closing value of the underlying index on the first index business day of the coupon period (which we refer to as the starting value)" Okay, that would be a bummer to have one day about the maximum level since the interest payment would then revert to the guarantee. The starting value for the next annual period is the closing value on the previous period. So even if you had say a 30% increase in the first year in the index, with no days over the maximum, you would be starting the next year with a high number which would lessen the odds of a repeat performance. The worse case scenario on this particular issue is one day over that 31% and a high percentage close, say 30% over the starting value. You would get 3%, reverting back to the guarantee, and you would be starting the next period with a high number.

I did a quick calculation of 131% of the initial period's starting value of 123.338 and came up with 161.56. So the index is up from the starting value with yesterday's close at 139.64 but it is not yet so close to 161.56 as to cause me to be concerned about a closing day over 161.56 before 6/23/2010 (the closing date) (payment date is 6/30/2010). But you never know, and it would be a bummer to have one. I calculated the percentage increase as of yesterday's close from the starting value as 13.22% so far.

There is a futures contract traded for this index. The March 2010 contract closed at 140.1: Dow Jones-UBS Commodity Index

There are a large number of these types of securities, grouped together at the quantum site under "Special Investment Products" You have to remember what you are buying, and I am sure that the investors who did not do their homework may have had a rude awakening when Lehman went bankrupt. Another product that is in fact a senior notes is the ETN, and I own a few of those cognizant of the risks.

I do not trade much in the special investment products area for a couple of reasons. Generally, there is low trading volume and large bid/ask spreads. Yesterday, there was some shares available to purchase with a relatively narrow spread. I doubt that I would buy one of these products at a premium to par value. Another issue is that I believe many of them are either mispriced to the upside or priced at a level where I am unwilling to take the risk.

I would add that I would view MKZ as a barely successful investment with just one payday of over 20%, even with four paydays of just 3%, provided of course Citigroup pays off the note in 2014. The note matures in a tad over 4 1/2 years, and 32% in interest payments over that period would be worth almost 7% annualized. Now, if I had one year at 30%, one at 15%, and three at 3%, the yield would increase to around 12% annualized.


6. Roger Gibson's Book: While at the Old Folks home, OG has been making progress on its reading assignments. Admittedly, the OG is a little slow. But, we are pleased to report that OG has now read the first 11 pages of Roger Gibson's book "Asset Allocation: Balancing Financial Risk". OG would note first that it is apparent that Gibson is a believer in the efficient market thesis, viewed as hokum and snake oil here at HQ. Sure, the market is efficient over a long period of time, eventually the S & P 500 or the Wilshire 5000 will more or less reflect the earnings, growth and success of American companies. Most of the time the market is patently and obviously inefficient for particular securities and sectors, pricing them as either too high or too low based on the irrational actions of humans as a collective including the so called professionals hired by mutual funds to manage money.

OG, being a part time philosopher and theologian, was more interested in this quote from the Talmud that Gibson provided at page 1, before the OG started to get weary from all of that reading: "Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve" Gibson then interprets that ancient advice on asset allocation as calling for 1/3 in common stock ("in business"), 1/3 in bonds ("in reserve"), and 1/3 in REITs ("in land"). Okay, maybe he is a little liberal with the interpretation of "in reserve". I would agree with this author that reserves mean safe cash: The Talmud Asset Allocation Model Portfolio, and I would add the equity in one's home to the land part. Overall I would not quibble too much with Gibson's 21st Century application of the asset allocation advice given by that unknown author many centuries ago. Gibson then points out that this type of allocation would have resulted in a 5% gain during the bear market between 3/24/2000 to 10/9/2002 with further refinement by him. In doing that calculation, Gibson narrowed the stock allocation to large U.S. companies, which lost 47% during that period and HIGH QUALITY, INTERMEDIATE TERM U.S. bonds which gained 34%. REITS gained 34%. Asset allocation worked during that bear market, but this static approached would not have faired so well in the 10/2007 to March 2009 period, when both REITS and stocks were crushed.

RB bought his fourth LT near the close of trading yesterday, which will be discussed in Thursday's post. I am running behind in discussing what I am doing. OG is studying today some quotes from the Talmud, thinking that there may be something more to learn about asset allocation from those ancient texts: The Talmud quotes

Tuesday, December 29, 2009

Bought 50 PLP at $20.4-Sold 50 STLPRA at $9.4/ ABAT/

1. Advanced Battery Technologies (owned Lottery Ticket Category): ABAT has not done much since I bought 50 shares of this Chinese company as a LT in October. Bought 50 shares of ABAT at $4.12-Speculative Lottery Ticket This company is discussed briefly in a TheStreet TV interview with Bryan Ashenberg (Breakout Stocks Portfolio Manager) as an interesting speculative play. It trades at 8 times 2010 estimated earnings, and has exposure to the electric vehicle market that he likes.

2. SOLD 1/2 of STLPRA $9.4 & Bought 50 PLP at $20.4-both transactions in the Roth IRA Yesterday (see Disclaimer): HK was advised by the LB on this transaction, and LB refers to this kind of exchange as bunting for a single. RB calls it "thinking small". RB just said that it would characterize these transactions as "thinking microscopically" and the phrase thinking small does not do it justice.

A reader asked me about the exchange traded senior bond (PLP) from Protective Life (PL) a few days ago. I replied that I had placed an order to buy 100 PLP at around $19.7, and it had not been filled. The price then jumped a bit so I let it go. I went ahead and bought 50 at $20.4 in the Roth and may buy the other 50 after the ex interest date, which is today, when and if it falls back to $19.7. Par value is $20 on this bond, the coupon is 8%, and the maturity is in 2024. Interest is paid quarterly.

This is a link to the prospectus: Quantum has the security rated as investment grade, and I did not attempt to verify that assertion.

I sold 1/2 of the trust preferred from Sterling Bank at $9.4 yesterday, which seemed like a high price to me for what amounts to a junior bond with a $10 par value and a maturity date in 2032. Those shares were just bought in early December at $8.68, shortly before the quarterly ex interest date: Item # 2 Added 50 STLPRA at 8.69 The other 50 shares which I am keeping are in the regular IRA.

So, when thinking small, (RB asked are nano particles small?) this is a laundry list of considerations: (1) a profit was realized along with one dividend on the 50 STLPRA; (2) PLP is an investment grade senior bond compared to STLPRA being a junior bond; (3) PLP matures about 8 years sooner than STLPRA; and (4) I do not give up much yield by the switch. The yield on PLP at a total cost of $20.4 is about 7.84%, while STLPRA would yield about 8.9% to an investor buying at a total cost of $9.4. That one percent differential is too little given PLP's status as a senior bond from an investment grade issuer with a shorter maturity. One main difference between junior and senior bonds is the deferral rights an issuer has for the junior security. I may have not made this exchange in a taxable account. In the Roth, tax issues involving gains are not relevant, nor am I concerned about buying a dividend or an interest payment since I am not taxed on those distributions in the retirement accounts.

HK acknowledged that the RB has de minimis input into management of the retirement accounts. But LB has somehow stumbled into a significant gain in these accounts since 11/1/2007 adjusted for the two subsequent 6 thousand contributions, as of today.

3. Pervasive Software (owned-Lottery Ticket): I went to the magicformula web site last night (free with registration) and ran a typical screen looking for lottery tickets. I generally will do that about twice a month. The screens are based on the formula designed by Joel Greenblatt and described in his book "The Little Book That Beats the Market", which I have read. The Little Book That Beats The Market When searching for potential LT purchases, I will run a screen of 50 stocks with a minimum market cap of 50 million. I ran that screen last night and Pervasive Software was one of the 50 names. I recently added that name as an LT coming to it with a different screen. Bought 50 PVSW at 4.72-Lottery Ticket

4. Professor Siegel Responds to Jason Zweig : The Professor is just one of those people who will never adjust his thinking. In an article posted yesterday at Yahoo!, the Professor responds to the criticism leveled at his research by Jason Zweig in a WSJ article written last July, which I discussed in an earlier post. WSJ Exposes Jeremy Siegel Siegel is not, however, addressing the basic and fundamental problems in his own thesis: To Professor Siegel: Time for a Re-Think Stocks have unquestionably failed as an asset class for extended periods of time, with two major secular bear markets just in my lifetime. For individuals with a limited time on this earth, and frequently facing a myriad of situational risks, those long periods where stocks fail can be critical to the individual investor.

So Zweig and Siegel are arguing back and forth about the reliability of data before 1871. I would question whether any data before 1920 is even relevant or material to support Siegel's thesis, even if he did not manipulate the data. The data prior to 1871 is probably not reliable as Zweig claims even if it was relevant and material information.

Over my lifetime, starting on 1/1/1951 to 12/31/2008, there have been two long term secular bear markets. Over that period of time, the inflation adjusted annualized return of the S & P 500 with dividends was 6.49%, which I would view as a good long term inflation adjusted return. CAGR of the Stock Market: Annualized Returns of the S&P 500

But, I want to roughly break out two long term secular bull markets as I define it:

1/1/1949 to 12/31/1965: 14.4% annualized after inflation

1/1/1982 to 12/31/1997 (part of those years I would not include): 14% annualized after inflation

Now let's look at some of the bear data, and these are significant durations in an individual's life:

1/1/1966 to 12/31/1981= -1.04% annualized

1/1/1998 to 12/31/2008: -1.44% annualized

So, while it is difficult without question to identify whether the stock market is in a long term bull or bear pattern, and then to adjust your asset allocation accordingly, the significance of making a correct assessment can not be questioned by Siegel or anyone else without sounding ridiculous.

5. RB Requests an Exemption to LB's Trading Rules for Lottery Tickets: RB is thankful for the opportunity to pick five new Lottery Tickets. It is generally known to readers of this blog that RB is on a mission to acquire Canada, all of it, its good to have goals, and wonders whether HK would grant a limited exemption to the Nerd's Rulebook for Lottery Tickets. RB would like to buy 100 shares in a Canadian company for less $600 and have it count for 2 of the 5 Lottery Tickets that it has been allowed to purchase. LB said that the NO WIT was just trying to swallow the rules governing LT purchases with exemptions and exceptions. The exemption requested by the RB is fundamentally inconsistent with the entire strategy of LTs, LB noted. HK said that LB was right about the fundamentals, but RB has played a critical role in 2009. HK will grant it a one time exemption so it can combine the maximum limits of 2 LTs into 1 purchase, and have it count as 2 of its 5 LT purchases granted to RB by the ever generous HK as a reward for the RB's vision thing actually working in 2009.
Today's picture is of the oldest living member of her clan, my mother, and the newest, a baby girl who is the granddaughter of Sam, who is pictured as a toddler being held by my grandmother in the picture shown in this post: Left Brain & Right Brain Decision Making