Wednesday, December 9, 2009

Added 50 HBAPRD/Sold 50 CEW/Kroger Disappoints/Sysco Upgrade

The RB claimed yesterday in a plea to the Headknocker for justice, titled "Set the RB Free", that there was some kind of conspiracy to kill it with boredom hatched by the Old Geezer and the Old Geezer in training, the infamous LB. It was that plea that caused the change yesterday in the profile picture by the Acting Head Trader, LB. The RB wants everyone to know that it no longer trembles in stark terror when viewing that picture from 1961 of the LB after it ate that baseball. Besides, after seeing that look 24/7 for about fifty years, you know, the don't mess with me stare with those steely blue eyes, the RB can only say, bring it on LB, not really, just kidding LB, you know how the RB runs at the mouth.

The trades that are being made now at HQ are Exhibit 1 in the RB's proof of this dastardly plot. Can there be any doubt? What on earth is a first mortgage bond, a synthetic floater or an equity preferred stock howled the RB, barely able to conceal its disdain. Just buy more Yahoo, even though the RB is naturally suspicious of anyone who likes the color purple, it whined in disbelief. RB added that all of the Head Traders, other than the Great RB of course, have turned into a bunch of babies and girlie men as Arnold would say, scared sissy wimps with the backbone of jello. The Headknocker would soon see that he will never own Canada with these scaredy-cats at the helm of the once proud Trading Desk manned by a real man, i.e., the Great RB as the Head Stock Jock Extraordinaire, the one who saved the day in early March with its Coup d'Etat as those girly men were hiding under the covers crying for their mamas.

1. Kroger (KR) (not owned): I have bought and sold Kroger twice this year, and no longer own it. Yesterday, I saw that KR stock was being hit hard, down almost 13% in early trading to below $20, which is a price point that I will consider buying KR back. I then read the earnings report and was surprised about its ugliness. Kroger reported a net loss of 874.9 million based on an impairment charge related to its prior acquisition of Ralph's. Even without that impairment charged, Kroger would have earned just 27 cents in the quarter compared to 36 cents in the year ago quarter. That 27 cents was way below the 37 cents consensus estimate. And, Kroger lowered its forecast for the full year to $1.6 to $1.7 from its earlier guidance of $1.9 to $2. When faced with that kind of deterioration, I will change my assessment of a potential re-entry point and wait at least a few weeks before even considering a buy. I am not going to buy Kroger again in the $19 to $20 range which I would normally consider doing. Instead, I want to see a price below $18 before considering an add. The links to the prior transactions this year for Krogers can be found in these earlier posts: BOUGHT 100 PG AT $52.85/SOLD 100 KROGER AT $21.9 Bought 100 Kroger Sold Kroger/ Bought 100 PHO at $13.6 Bought KR

2. Sold 50 CEW at 22.13 (see Disclaimer): Anyone making a prediction about currency movements is playing hunches, making guesses, and relying on instincts. That is exactly what I am doing when playing with currencies. I suspect that the fall in the dollar is about over, at least temporarily, and the greenback may start to stage a recovery. Some arguments in favor of this hunch are discussed in a WSJ article this morning. This has led me to buy a double short for gold (GLL) to hedge my gold bullion position ( Added to Gold Hedge GLL at 8.48) and to initiate a double short on the Euro (EUO) as a hedge against what I hope to be the future purchases of stocks on the European exchange after a prolonged rally in the dollar against the Euro. Bought 50 EUO at $17.17 as a Hedge

I bought CEW, an ETF containing a basket of emerging market currencies at $20.25: bought 50 currency etf for emerging markets-cew I also sold a few weeks earlier my position in Brazilian Real. I intend to buy back my position in Australian dollars, recently sold , and to gradually build up a position in that currency to use to buy stocks on the Australian exchange to further diversify HK's already ridiculously diversified holdings. My prior position in Australian dollars was in the currency ETF, FXA, which I sold in late October: /Sold FXA I can not use those Aussie dollars as a medium of exchange to buy stocks in Australia. So, when I start to add them back, hopefully at a much better exchange rate than now, I will be buying the Aussie dollar directly.

LB is the Chief Director of Diversification, and no one else at HQ understands what it is doing anyhow.

3. Skepticism About the Labor Department's Numbers: As you would expect, the perma bears have been attacking the reliability of the BLS unemployment data released last week, which showed only 11,000 job losses for November. For the perma bears, the only reliable number is one that supports their point of view. Some of the skepticism about the BLS numbers is summarized in Randall Forsyth's column in I would be skeptical about all government data, after all, this is a very large country and it is difficult for anyone to keep track of everything that is really happening in every nook and cranny. Still, it is clear to me that the jobs picture is improving significantly, and job growth is likely to return by early 2010. My question and concern is not about the current data, which I view positively considering the depths of the problems caused by the Masters of Disaster and their comrades and fellow travelers in irresponsible greed. Instead, as I have said, the problem is what happens when the stimulus wears off late next near.

4. ETFs and ETNs for the Do-It Yourself Small Investor: This article Investopedia contains an introductory type discussion of how individual investors can attempt to mimic the carry trade with ETFs. In several posts over the past week or so, I have discussed how the carry trade was influencing the pricing of risk assets, from stocks to commodities like gold. Gold Prices & Quantitative Easing ; Item # 3 U.S. Dollar and the Carry Trade/Gold & Inflation; Gold (GLD) and Dangerous Parabolas and Item # 4: /End of the Carry Trade-Not Likely/Sysco/Euro vs. U.S. Dollar

5. Moody's Downgrades Greece's Sovereign Debt and Comments on U.S.: I am reasonably confident that the debt of the U.S. will be downgraded from its AAA status during my lifetime, and could easily be BBB by the time OG hopefully enters those pearly gates. I noted a story yesterday that Moody's downgraded the debt of Greece to BBB+ from A-, and then commented that the U.S. and the U.K. may test the boundaries of their AAA ratings. MarketWatch Well, that is sort of obvious. I was listening to the Beanpole's speech yesterday at the Brookings Institution, talking a good game about fiscal responsibility by spending another 150 billion of borrowed money. So, as the LB understands it, fiscal responsibility is achieved apparently by spending more money in an effort to save money or something like that. NYT We try to be fair to politicians from both Tribes here at HQ, but sometimes their speeches fly way over LB's ability to comprehend. Maybe the LB needs to ask the RB to explain how spending more money that we don't have saves money. Since both parties are viewed as fiscally irresponsible along with a large percentage of the population who apparently support more spending too, at least on programs they favor, lower taxes or better yet no taxes, and a balanced budget, all wrapped up in a nice package delivered by Santa or the Easter Bunny. It must be nice being a True Believer, and to be free from responsibility or at least the consequences of irresponsibility, or anything remotely resembling cogent, accurate or sensible thinking. Freedom From Responsibility & item # 7 Freedom & Responsibility For this nation to survive and prosper in the generations to come, responsibility must go with freedom which is clearly not the case now.

6. Added 50 HBAPRD at $20.85 (see Disclaimer): This was a marginal and immaterial buy, and I am just looking for income alternatives for my tax free money market fund cash earning nil, actually .01% but forgive me for being inaccurate when I say nil. I really do not expect much price appreciation with HBAPRD, which is a floating rate equity preferred issue from HSBC USA, a wholly owned subsidiary of the giant HSBC Holdings PLC, ADS (HBC). This equity preferred is unique among U.S. issues in that it pays cumulative dividends.

It also has a generous guarantee at 4.5%. Par value is $25. Dividend payments are made quarterly. The float is unusual, and I do not view it favorably. The rate is the greater of 4 1/2% or .81% of the highest of the 3 month T Bill rate, the ten year constant maturity treasury or the 30 year constant maturity treasury. If I could use another figure other than a mere .81%, I would like the float. SCEDN is somewhat similar and pays 1.45% over the highest of those rates except it substitutes 3 month Libor for the 3 month T bill which is even better.SCEDN Search Results - {SCEDN was bought at $84 in October (BOUGHT 50 SCEDN AT $84), and I would not buy it at its current price of around $100} So, if HBAPRD paid 1% or a little more over the highest of those three rates, I would be more inclined to buy more than I currently own.

How high would the highest of those rates have to be before the sum provides more than the 4.5% guarantee. The answer is a tad over 5.5%. Based on history of these rates, this will happen but not anytime soon. To obtain a historical perspective of what has been the constant 30 year treasury rate, the Federal Reserve provides the data since 1977: www.federalreserve. I would expect the 30 year to be highest of those 3 rates most of the time. The ten year treasury data can be found at this link and that data goes back to 1962:

The guarantee will provide a cushion in very low interest rate environments which is one of the benefits of this type of security. At a total cost of $20.85, the 4.5% guarantee translates into a 5.395% yield (.045% x. $25 par value=$1.125 divided by $20.85=5.395%. It is hard to get even the Old Geezer excited about that yield, but we have to adjust our wants and desires to the reality of the situation that we are all in now. The problem with this security is that will not increase much even if the highest rate in the float was 7%, much higher than now. Then my yield at a $20.85 cost would rise to just 6.79%. So the .81% of the highest of the three rates means a slow upside when rates start to advance.

HBAPRD, like other equity preferred issues, has no maturity date. I view this as a major negative. It simply means that, unlike a bond, there is no promise to ever pay par value. It is legally possible that this security would still be outstanding 100 years from now.

Another issue, which I have discussed with a few readers, is that HSBC USA is a subsidiary of another company. This makes this equity preferred unique when you start to think about the stopper. If HSBC USA was a publicly traded company, and not owned by one company, and assuming it had a history of paying commons stock dividends to those shareholders, it would be under pressure to reinstate that dividend in the event it had to eliminate it due to financial problems, once it started to recover. That is relevant under the stopper provision. At that point, if the dividends on the preferred stock had been eliminated or deferred as the case may be, the firm would have to pay them. I am just making a fine point here. It may never happen. But what if HSBC USA deferred paying the cumulative dividend, when could it be compelled to stop, and the answer is never, unless it paid a dividend on a junior security to its parent. In that type of situation there would be no independent shareholder base lobbying for a common share dividend payment.

This is a link to the prospectus:

The stopper provision for the preferred shares is buried in the general part of the prospectus at p.32:
"Except as set forth in the preceding sentence, unless full dividends on the outstanding Cumulative Preferred Stock of any series have been declared and paid or set apart for payment for all past dividend periods and full dividends for the then current dividend period on the outstanding Noncumulative Preferred Stock of any series have been declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment, no dividends (other than in Common Stock of the Corporation or other shares of the Corporation ranking junior to such Preferred Stock as to dividends and upon liquidation) shall be declared or paid or set aside for payment, nor shall any other distribution be made, on the Common Stock of the Corporation or on any other shares of the Corporation ranking junior to or on a parity with such Preferred Stock as to dividends or upon liquidation."
So, if a wholly own subsidiary defers its preferred dividend , you can not count on the common shareholder to lobby for a common share dividend to activate this stopper.  If it can happen it may happen.  But, it would be bad for HSBC USA to do that if it wanted to raise capital again in the U.S. too.   So there is that practical restraint even the legal one is really not present.  
To summarize, the main reasons for the small purchase of HBAPRD is  (1) the relatively low yield based on the guaranteed rate at the current price; (2) the lack of much upside potential on the share price with a purchase at $20.85; (3) the float provision of .81%; (4) the lack of real legal restraint on a deferral under the current circumstances ; and (5) the perpetual character of the security and its low priority.   Those are some good reasons.   The major benefit is that 5.4% looks a lot better than zero now, plus the dividend is qualified and cumulative. 
Case closed said the RB, nothing more needs to be added,  HK has to see that this buy of HBAPRD by the LB, influenced by the Old Geezer no doubt, is conclusive proof of the conspiracy against the RB.  
 7. Upgrade of Sysco (owned) to Buy by Citigroup :   Previously I have discussed my current belief that we are still in a long term secular bear market which started in 1997, and the current rally reminds me more of the push off the 1973-1974 cyclical bear lows rather than the start of a new long term bull market.   But this belief only dictates my current trading strategy.  Even with this belief, I am mindful of using plunges in the market to establish long term positions in dividend paying companies that are more or less reliable.  GE is no longer reliable nor are most banks.  The utility companies that I own, with the exception of GXP, did not cut their dividends and most continued to increase them.  So, I have added shares to those positions during weakness.  Another area where I bought, and plan to hold, are several purchases of consumer stable stocks in March and early April, which included Coca Cola at 38.72 , Sysco at 19.46, Heinz at 31.67, Campbell Soup  at 25.35,  and Unilever at  at 18. (all done by the RB who hastened to add that those buys were made after its coup)  I do not regret buying and selling PG, Kraft and Kroger, all bought and sold twice so far in 2009, but I do regret now selling Nestle:  / SOLD NESTLE & BOUGHT BRKB  Nestle had been bought at the very good prices of $31.28 and $33.88  BOUGHT Kraft & NESTLE/ Bought Lottery Ticket in CBG at 2.39     Bought Nestle Late Today/  Nestle trades on the pink sheets in the U.S. and closed at $47.5 yesterday:   Nestle S.A. - NSRGY  I discussed some of these buys in the following post, and how I would attempt to calculate an exit point:  Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009  I did not follow my own advice very well on Nestle.  The OG had to be in control of the trading desk that day.
This brings me to SYSCO.  The fall in consumer staple stocks in early March was so steep that even a conservative investor had to conquer their fear and make a plunge.  Many of these companies had not only refrained from cutting their dividend, but had kept raising it.  And, it was common to find yields of over 5% on these stocks with long history of annual raises in the dividend.  Sysco is one such company with a long histories of increasing their dividend. See Item # 4    /Sysco  Barron's had a favorable article on SYY recently: Sysco  Barrons  While I do not plan to add more shares at the current level, I did note that SYY rose 32 cents yesterday in a down market.  And it is always important to have securities going up when most everything else is going down, particularly when that security pays a good dividend, or interest like the bonds that I bought over the past 18 months. Sysco was upgraded yesterday by Citigroup based on its channel checks indicating improvement, and Citi raised its price target to $34 from $28.  If this stock reached $34, I will have to make a decision on whether to give up my dividend yield for the share profit. One important consideration in that mental calculation is the likelihood the dividend will continue to grow in the years to come, while my cost remains fixed.  So unlike a fixed coupon bond, my yield will increase every year the dividend is raised.  My yield was originally about 5% based on my cost, and that was before SYY raised it a few weeks ago.    I am going into this again in detail to show how I calculate the advantages and disadvantages of these purchases, what will cause me to keep them longer than I would other securities, and what will influence my decision on whether or not to sell them.  The dividend yield, and growth of the dividend, are two critical factors.

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