Tuesday, January 12, 2010

Bought 100 PBI at 21.9/Sold 50 CVBF at 9.65/ Added to CEF RMT/ AA & ASBC Earnings/GLW Upgrades

1. Associated Bank (own Trust Preferred ABW-PA only): Associated Banc-Corp (ASBC) announced that it had commenced a 400 million dollar common stock offering. I do not own the common shares, and I view these kind of equity raises as a positive for the bank's bond owners. Associated also reported a hefty loss for the 4th quarter based on credit related charges of 405.1 million. ASBC also cut its common dividend from five cents to 1 cent. As an owner of its Trust Preferred, I am concerned about the maintenance of a cash dividend to the common shareholders, not the amount of the dividend. A one cent quarterly dividend provides the owner of ABWPRA the same amount of protection for continued interest payments as a five cent dividend. But, this does not mean that the dividend cut is irrelevant to the TP owner. The dividend cut reflects a deterioration of the bank's financial stability, and that is always a matter of concern to the bond owner. I view the large allowance in the 4th quarter for losses to be in part house cleaning by the new chief Philip Flynn, WSJ. While this bank will require continued close monitoring, I am not inclined now to sell my 150 shares of ABWPRA, nor am I likely to add to the position even on weakness.

2. More Positive Upgrade Action on Corning (GLW) (owned 2010 Speculative Category): Yesterday, Goldman raised GLW to a buy from neutral, and increased the target price to $23 from $18. Deutsche Bank also changed its rating to buy from hold and increased the price target to $23 from $19. A summary of recent analyst comments on Corning can be found in this Seeking Alpha article.

3. Bought 100 Pitney Bowes (PBI) at $21.9 Yesterday (see Disclaimer) (dividend hog category): This buy is strictly a contrarian play. PBI is not getting much love these days. I last discussed it in connection with the short recommendation made by Doug Kass. Item # 3 /Kass: Short PBI? I mentioned then that it did not seem much of a short with a dividend yield of close to 6.5% and selling at just 10 or times the forward earnings estimate. The yield at my cost is close to 6.5%, and the consensus estimate for 2010 is $2.41, up from $2.26 in 2009. PBI: Analyst Estimates for PITNEY BOWES Price to sales is just .81: PBI: Key Statistics for PITNEY BOWES INC PBI's revenues have been declining. The company does look like it has stagnated. Still, it has about 80% share of the postage meter market in the U.S. and 60% internationally. It would not be unreasonable to expect its business to turn up modestly with an improving worldwide economy. I do not have great expectations for this buy. But if PBI maintains its dividend, I will need just a 3.5% or so rise in the share price after brokerage commissions to receive a 10% annualized gain.

Most likely, whenever I receive a gain of 10% to 15%, based on a combination of the dividend and any share appreciation, I would consider selling this one due to my current view that PBI is not growing, which view can change as a result of subsequent events. It is hard to see much downside as long PBI maintains the dividend, at least in the current low interest rate environment.

This is a link to the Reuters profile and to the Key Developments page, Reuters.com, which contains a general summary of PBI's guidance for its fiscal 2010. This guidance can also be reviewed in an 8-K SEC filing: www.sec.gov/

Besides being naturally contrary, what convinced me to take the plunge with a 100 share buy was Cramer's analyst of the dividend's safety in his book "Getting Back to Even". Without going into detail, he views the dividend as safe based on PBI's cash flow, the payout ratio, and its A rated balance sheet. (see analysis starting at p. 96: Google Books)

4. Alcoa Earnings (Owned): AA was apparently proud that it had 761 million of free cash flow (FCF) in the 4th quarter, the first positive FCF since the second quarter of 2008. I had to delve into the body of the report before finding the earnings number before extraordinary items. I was not impressed by the number. Excluding the 28 cents in charges, AA had a non-GAAP E.P.S. number for continuing operations of just 1 cent. The consensus was for six cents a share excluding items. Revenue fell to 5.43 billion, down from the 5.68 billion received in the year ago quarter, but the 4th quarter revenue did increase sequentially by 18%. The revenues did significantly beat the estimate of 4.817 billion. Alcoa's chief sees 10% growth in aluminum usage in 2010. I am not a fan of Alcoa. In fact, I was a first time buyer when it had a meltdown in price last year buying my last shares at $5.6 on 3/12/2009 Buys of DKF, AA and a Lottery Ticket in 50 shares of RF. That purchase was an average down from a 50 share buy at $11.49 in October 2008. Notable News 10 31 2008 So Alcoa is a candidate for disposal at some point.

5. Sold 50 CVB Financial at $9.65 (see Disclaimer): I mentioned in my weekend post that I might sell this one and buy another small regional bank in another geographic area. Item # 3 CVB Financial I manage to sell the 50 CVBF at $9.65 at $7.94 on 12/4/09, but my effort to replace CVB with another bank was not successful yesterday since I was attempting to clip a few cents with a limit order.

6. Added To CEF RMT at $7.64 (see Disclaimer): This CEF, Royce Micro Cap Trust, was adequately discussed when I made my last add at 6.73 back in August. Item # 2 Bought RJA and RMT I am still trying to digg myself out of a hole on this one, and it would have been better to buy more at 6.73 to say the least: C'est la vie. This CEF is currently selling at over a 16% discount to its net asset value. I suspect that one reason that the discount to NAV has expanded over the past year or so, and has stayed high even during the market rally, is that Royce ended the managed distribution policy for RMT back in March of last year. And, I do not believe that there has been a dividend paid since that time. This is a link to the fund sponsor's web page: Royce Micro-Cap Trust (RMT) It would be fair to say that this CEF had a tough 2007 and 2008, but it is way ahead of its benchmark (the Russell 2000) since its inception in 1993 looking at the chart at the above linked site.

This is the link to the semi-annual report for all 3 Royce CEFs, and I also own RVT. www.roycefunds.com/pdf/semiannual

The NAV for this CEF can be found at the CEF page at the WSJ: Closed-End Funds by Category - Markets Data Center - WSJ.com As of 1/8/09, which is the data that I had when placing my order on Monday, the NAV was shown as 9.19, the price per share was 7.66 and the discount was - 16.65%.

7. What to Do with Trust Certificates, TPs and Mini Bonds that Have Gone Up Substantially in Price: This is a problem that rears its head frequently now, particularly on days when many of the TCs enjoy big percentage gains on top of the large unrealized gains already priced into those securities. The Old Geezer is most perplexed and torn about what to do with some of the Trust Certificates that are rallying strongly now. On the one hand, they will provide good income based on my cost for many years to come. On the other hand, their prices have increased dramatically with many of them making pushes toward par value after having been bought at large discounts to par, and gains have been known to disappear over night.

One of the best rallies among the TC holdings yesterday was in PJS, up 8.43% to $21.99, with some shares bought at $7.2 in October 2008, with a current yield on those shares of over 26% per year until 2028: some nibbles got filled: jze, pjs, inz and fax The most recent fills for PJS were at $17.8 and $17.95 in August of last year: /bought 50 pjs bought 50 pjs at $17.8 in roth Another good rally yesterday took PKM up over $24 with a $25 par. My shares in PKM were bought in June of last year: Bought 150 TC PKM While this may end up being a mistake, I have decided to keep the fixed coupon TCs (or TPs & mini bonds) bought at significant discounts to par value that will provide me with 10%+ stream of income for twenty or more years in most cases, even though many of them have gone up substantially in value. This would include PKM, PKK, PJS, JZE, JZJ, XFL, JZH, JZV, FJA, JBK, KRH, XKK, KTN, KVW, KTV, JWF, MJH, PJR, PZB, PJA, PMK, IPB, DKR, DFP, SIVBO, DKF and DKQ. The only caveat is that I have to be comfortable with the credit risk, plus no immediate worries about the advent of hyper inflation which will just kill any long bond. I use different criteria in deciding whether to sell or to hold the floaters, much of those will be kept now.

Another consideration supporting my decision to keep those securities, and to forego taking good percentage gains, is the lack of alternatives for income generation now. Generating cash flow is important in how I manage my portfolio over time, since those funds are used solely to buy more securities. And, who is to say that I will be able to take the proceeds from selling one of those securities listed above and do better than the income generation thrown off by any of them. Lastly, I am not heavy on any particular position. This is an entirely different decision making process than I would use on whether or not to keep Alcoa or Gannett common shares that have experienced a large percentage gain over the past few weeks.

This leaves the other category, TCs and TPs, selling at or over par value, yielding 8% or less at my cost, and spurting up in value now. Those kind of positions may be sold whenever the spirit moves me. This would include, by way of example, the recently added positions in JBI, MJV, AMPPRA, GJX, PLP, DKK, EMO and FPCPRA, with positions like EHL and PJL remaining on the borderline. The fixed coupon Aegon and ING hybrids that I own (INZ, IND, IGK, AEF, AEH) are currently classified as long term holds, due to their yields at my cost, but tightly monitored for credit risk.

GJX & PKK are ex interest today for their respective 6 month interest payments. I own 200 PKK and 100 GJX.

8. Ten Year TIP Auction: The treasury announced the results of its 10 year TIP auction on Monday. The coupon (real rate) was 1 3/8%, and 1.43% with the original issue discount. www.treasurydirect.gov pdf The O.I.D. is the difference between the par value and the purchase price. In this case, the par value is $100 and the note sold for 99.489212. The St. Louis Fed President reiterated his opinion that rates may stay low for an extended period of time: “Policy rates are near zero in the U.S. and the rest of the G-7 countries, something not seen in postwar economic history,” Bullard said. “Interest rates may remain low for quite some time.” St. Louis Fed | Newsroom

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