Saturday, January 16, 2010

Bought 100 HRPN at 19.32/Intel & JPM/Bought 1 BRK/B at $3244/Bought 50 WSBC at 13.3/Sold 50 of 300 PJS

1. Intel's Capital Spending Plans: Normally, I am not inclined to explain irrational behavior. After what even Alan Abelson would have to regard as a positive earnings report, Intel and the entire semiconductor sector declined last Friday. Some say that it was the typical buy on the rumor and sell on the news. Maybe that is adequate explanation, but I would view it as more a fear that the 4th quarter of 2009 will mark the high water mark in the current cycle, and this does not appear to me to have much, if any, factual basis. I would think that the PC upgrade cycle, particularly among businesses, has yet to kick into gear. The bears have tried to latch onto Intel's 2010 forecast for capital spending. When I first read some comments about that forecast, I thought that Intel must have reduced its estimate to a negative number. Instead, the midpoint of Intel capital spending projection was up 6% from 2009, which was better than the consensus of flat spending MarketWatch I noted in that article from Marketwatch that the Caris analyst, Ben Pang, believed that 2010 will mark the beginning of a multi-year cycle in semiconductor equipment spending. I have read recently similar comments from other analysts. Some of those reports are referenced in some recent posts: Item # 1 /AMAT/ and Item # 4 Sold All of GCI.

I hope that the knuckleheads who sold Intel last Friday continue their mindless selling into next week. I would like to have an opportunity to buy more at below $20. I certainly hope that the ones who were selling because the gross margin hit a record during the fourth quarter are not charging anyone of their financial acumen.

2. Bought 100 HRPN at 19.32 (See Disclaimer): I was unaware of this relatively new senior bond issue from the REIT HRT Properties until Thursday night. I found it doing a check for anything new at the I am already familiar with this REIT, an owner of office buildings, and currently own a few common shares. The quantum site shows that this issue is investment grade, rated BBB by S & P, and I did not attempt to verify that claim. That seems about right to me based on what I know about this REIT.

This is a senior bond, so it will be senior in priority to the 3 publicly traded equity preferred stocks: HRP-PB; HRP-PC; and HRP-PD. And, unlike the cumulative preferred stock the senior bond has a maturity date which is a point in its favor. The bond matures on 11/15/2019. Deferral is not an option with a senior bond which is also a plus compared to the more junior securities. The company would be in default if it failed to pay within 30 days of the due date. Interest is paid quarterly, and the first payment will be on 2/15/2010. The coupon is 7.5% and the par value is $20.

At a total cost of $19.32, the current yield would be 7.76%, and a slightly higher yield to maturity given the small discount to par value. Buying the cumulative preferred stock would fetch about another percent in yield, but I view that as too narrow for the risk involved in owning a REIT preferred stock compared to a senior bond.

This is a link to the prospectus:

I am a firm believer that anyone contemplating the purchase of a bond needs to become familiar with the company by reviewing analyst reports, the balance sheet, types of debt and maturity schedules, and prior earnings history. For the purchase of a senior bond issue from a REIT, two of the more important factors to know is the amount of secured debt, which would be more senior of course, and the total amount of other senior debt issues in parity with the one that you want to buy.

This is a link to the last 10-Q:

The balance sheet shows a lot of senior debt, totaling 2.133 billion and a lesser amount in mortgage debt, 447.693 million. I then note that the carrying value of the real estate after depreciation is 5.315 billion. There is a fair amount of preferred stock outstanding, but I am not concerned about those junior securities. HRPT owns 330 office buildings and 185 industrial and other properties as of 9/30/09. The maturity schedule of the debt is listed at page 29. This shows that only 50 million in unsecured senior notes mature in 2010 and none of the secured senior debt. In 2011, 261.7 million of the secured senior debt matures, and none of the unsecured senior debt. The secured debt covers only 27 properties, so the REIT has a lot of properties that are free of mortgage debt.

I placed the 100 shares in the ROTH IRA, and would contemplate buying another 100 in the taxable account if the price fell another 50 cents. The price did fall some after my purchase on Friday on light volume.

I would really like to see more firms issue senior exchange traded baby bonds with maturities in the 7 to 12 year range. I am more comfortable assuming the interest rate risk for intermediate term bonds that pay me around 8% or more to assume that risk.

One problem with the REIT from a lender's viewpoint is that it must pay out most of its income as common dividends to maintain its tax status.

3. J P Morgan (own bond only): Part of the negativity last Friday was tied to JPM refusing to raise its dividend above the miserly five cents a quarter. This was taken as a sign that credit losses had not yet peaked, and that was reinforced by the credit losses taken by JPM in the 4th quarter. JPM added 1.9 billion to the consumer loan loss reserve. Credit reserves were strengthened to 33 billion or 5.5% of total loans. JPMorgan Chase (JPM) earnings of 74 cents for the quarter handily beat expectations of 61 cents. At the end of the quarter, the tier 1 capital ratio was 11.1% and the tier 1 common ratio was 8.8%. Book value was listed at $39.88.

4. Added 1 Share of BRK/B at $3,244.89 (see Disclaimer): I have a lot of confidence in Uncle Warren and believe the Berkshire shares are undervalued at the current price, so I added 1 more to my stable last Friday. It is of no consequence to me that the baby Berkshire shares will soon split 50 to 1. The shareholders are voting on approving this split next Wednesday.

I suspect that the BRK/B will be substituted in the S & P 500 for Burlington Northern when Berkshire completes that acquisition and splits the baby shares 50 to 1 which should resolve the liquidity concerns that have kept this company out of the S & P 500. Berkshire is the only security where I will take my investment exposure over 10 thousand. This purchase is part of my 2010 Speculative Strategy.

5. Bought 50 shares of WSBC at $13.3 (See Disclaimer): This purchase will be classified in Category 2 of the Regional Bank Stocks' stratagem. This small regional bank is headquartered in Wheeling, West Virgina. The bank has approximately 114 branches in West Virginia, Ohio and western Pennsylvania.

The bank has repaid the government its TARP funds and repurchased the government's warrants. WesBanco Repurchases the Warrant Issued Under the U.S. Department of the Treasury's Capital Purchase Program Earnings are estimated at .67 in 2009 and then increasing to 1.10 in 2010. WSBC: Analyst Estimates for WesBanco

WSBC did reduce its quarterly dividend by 50% to 14 cents a quarter in August. At the current distribution rate of 56 cents annually, the yield at a total cost of $13.3 is about 4.2%.

WSBC reported of earnings at 9 cents, down from 43 cents in the year ago quarter. 9300910q.htm Part of the decline was associated with a 2.3 million dollar decline (9 cents per share) connected with the repurchase of the government's preferred stock (see page 19) Another 3 cent charge during that quarter was due to the preferred stock dividend paid to the government in the 3rd quarter. Both of those items are non-recurring since the government has been paid back. There was a 9.7 million dollar increase in the provision for loan losses during the quarter. Allowance for loan losses stood at 1.74% of total loans as of 9/30/09. The allowance for loan losses to total nonperforming loans was .74.

The capital ratios show some deterioration since 12/31/08 but are still satisfactory:

September 30, 2009
December 31, 2008
(unaudited, dollars in thousands)
Value (1)
Capitalized (2)
WesBanco, Inc.
Tier 1 Leverage
$ 407,016
$ 507,075
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
WesBanco Bank, Inc.
Tier 1 Leverage
$ 382,484
$ 456,882
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
(1) Minimum requirements to remain adequately capitalized.
(2) Well capitalized under prompt corrective action regulations.
(3) Minimum requirement is 3% for certain highly-rated bank holding companies.

6. Beware of Prosecutors Who Play to the Mob and Politicians Evolving To Conform to the Beliefs of Their Audience: I thought that Dorothy Rabinowitz made a convincing case that Martha Coakley, the Democrat's candidate for Ted Kennedy's senate seat, played to the mob, or more appropriately liberal P.C., in the infamous Amiraults case in Massachusetts, which shows to me that she disregarded the core responsibilities of her office. And, as the LB just said, the kind of character flaw demonstrated by Ms. Coakley may be some kind of precondition to holding high public office in the U.S. and is certainly a trait shared by members of both Tribes in spades. I would have to vote for the GOP candidate in Massachusetts, who apparently has less obvious character flaws. LB just reminded the Old Geezer that he is a resident of the SUV Capital and has never even been to Massachusetts. While that might not disqualify him from voting, particularly in some noteworthy Democrat controlled towns, it would disqualify the Old Goat from casting a legal vote.

The timing of Obama's new Populist attack on the large financial institutions is connected with this Senate race, indicating that to me at least that it is primarily political. The aim was to arrest the fall in the President's own popularity ratings and to find an issue to turn the tide in Massachusetts. This purpose is established in recent events documented by the

And this brings to mind a fellow from Tennessee, Harold Ford, who may be running for the Democrat Senate seat in New York. Now, the OG admits to voting for Harold when he ran for the Senate here in Tennessee and lost to Bob Corker. Possibly, the OG was offended by the GOP commercial of a scantily clad white woman calling Harold up for a date. Most likely the OG would vote for Corker when he runs again since I am now convinced he is not completely controlled by the American Taliban wing of that Tribe. Whatever, like that former Governor from Massuchusetts, Mitt Romney whose views on such contentious issues as abortion changed (I mean evolved) depending on the office being sought, Harold has apparently had a conversion of sorts himself the other way, after losing the race to Corker in Tennessee, on many of these hot button social issues. Harold E. Ford Jr. NYT As you can probably imagine, certain stances on those social issues are necessary if a candidate wants to win in Tennessee, so it is important to evolve if you are running in N.Y. after losing in Tennessee.

7. What is a Reasonable Expectation for the Rate of Return on Your Investments after Taxes, Fees and Inflation Over the Next 20 Years: I would agree with the thrust of Jason Zweig's article in the WSJ that many investors have unrealistic expectations of what their portfolios will earn after taxes, fees and inflation. This is true even after the shelllacking that most individuals received in the stock portion of their portfolios over the past decade. The annualized real rate of return after taxes and expenses would be significantly negative for most investors over the past decade. I discussed this topic in a recent post explaining why I intended to keep most of the long term bonds bought at favorable prices during the meltdown, as long as I am comfortable about the credit risk. ( Item # 7 Bought 100 PBI at 21.9 ) I am factoring into that assessment a long term inflation rate of about 3%, which is the number used by Zweig in his column, and I already know about the fees. The only fee incurred was a small brokerage commission incurred in the purchases of those securities. Even with a default or two, which has yet to hit me (and no doubt will some day), I am figuring a 7% annualized return after inflation and expenses and before taxes for the bonds referenced in that post as a group based on my purchase cost. That is reason enough to keep them, and to resist the temptation of taking profits now. A number of them are held in the Roth retirement account so that would be 7% after inflation and taxes for those securities. Maybe closer to 5% for those held in a taxable account.

8. Sold 50 of the 300 shares of PJS at $22.83 (See Disclaimer): I wanted to get comfortable with the credit risk on this TC containing a senior bond from First American (FAF), so I pared 50 shares and will keep the other 250. This one has had, to say the least, a huge rally from when I first mentioned it in this blog, a buy at $7.2 on October 10, 2008: Stocks & Politics: Some Nibbles Got Filled: JZE, PJS, INZ and FAX My first post was on 10/4/2008.

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