Thursday, April 8, 2010

Bought 100 MYP at $10.12/KEY DD/BOUGHT 100 FE AT $39.54 & SOLD 141 POM AT 17.62/Sold 50 of 150 AMAT at 13.54/SOLD 100 YAHOO at 16.84

When I reference in a post a dividend declaration in the WSJ market data center for dividends, that information can only be found for a few hours after a post during the weekdays. This information is updated by the WSJ with new information on a daily basis, either in the late afternoon or early evening of each business day. So a reference to a dividend declaration from last Monday evening can no longer be found by following my link.

I bought another Citigroup Funding principal protected note yesterday, MYP, discussed in Item # 6 below. I had been attempting to buy it every day this week at $10.12. There was a large bid to ask spread and no volume until yesterday, when a seller showed up to fill orders at $10.11 and $10.12. I have used limit orders on all of my purchases of these Citigroup notes. As discussed below, this one has already reverted back to its 3% guarantee due to a maximum violation during the current coupon period, but has not yet paid that 3% which is due to be paid on 5/3. Pricing Supplement

1. DuPont (owned): I noticed yesterday that a wizard analyst at Bank of America Merrill Lynch upgraded DuPont (DD) from underperform to neutral, and raised the price target to $40 per share from $36. MarketWatch This always causes some trepidation and anxiety as a contrary indicator. The RB bought DD shares in March 2009 at $16.68 during its frolic and detour: 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 The stock is now trading at close to $39. Maybe the LB is confused, was it a buy or sell at $16.68?

2. KeyCorp (owned- Regional Bank Stocks strategy-category 1 ): Goldman Sachs raised KEY to buy yesterday, apparently based in part to the repricing this year of 2/3rds of the certificates of deposit issued by KEY. The repricing will lower KEY's financing costs since interest rates are lower now than when the CDs were issued to KEY's customers. The price target was raised to $10 from $7 MarketWatch I have not been renewing my CDs as they come due. Instead, I have been using those funds in a satellite brokerage account to buy stocks with good dividends including several of the regional banks in category 2 of the regional bank strategy, COP and Southern (SO).

3. Roger Lowenstein: The End Of the West West Capitalism on Wall Street?: In this interview at Tech Ticker, author Roger Lowenstein, who just published his book "The End of Wall Street", argues that wild west capitalism has come to an end.

It is hard to see any change yet, certainly not in the levels of compensation: WSJ The Near Depression has already faded into a distant memory for the 30 year old wunderkind, who view themselves as indispensable and deserving of those 10 million dollar bonuses-at a minimum. And, as in the past, anyone who dares to express caution and good judgment, and puts their hand in front of a carnivore (a master of disaster) and a piece of red meat (the bonus), will need to find another job pronto, maybe in need to brush up on their janitorial skills. The financial wizards, whose primary financial talent is the negotiation of their pay packages, will find a way to undermine whatever weak risk controls are placed in their way, as documented yesterday in testimony by Richard Bowen yesterday before the Financial Crisis Inquiry Commission and further documented in these articles in The Reckoning series relating to Merrill Lynch and Citigroup. On Wall Street, Bonuses, Not Profits, Were Real Citigroup Merill Lynch and Stan O'Neal

4. SOLD 100 YAHOO AT 16.83 AND 50 OF THE 150 AMAT AT 13.54 (See Disclaimer): These trades are not hard to understand with LB at the helm of the trading desk. Yahoo was an RB buy at $15.95, which is barely tolerated at best by the LB, and it does not pay a dividend.

Fifty shares of AMAT were sold solely to reduce my cost basis by selling the highest cost shares and keeping the lower cost ones. I use FIFO accounting and the shares sold yesterday were the first ones bought. Those 50 shares were bought at $13 last September and were the highest cost shares in the main taxable account.

I am keeping the 50 shares bought at at 12.48 last January and the 50 shares purchased at $12.28 last month.

This is typical LB trading. A small profit was realized on the 50 shares and the cost basis for the remaining shares was lowered to around $12.54 with the two commissions. Tech stocks are played tightly, mostly small positions and then the objective is frequently bunting for a single. The primary tech position is in INTEL. Intel at 14.46 INTEL at 15.25: INTEL AT 15.87 Added to Intel at 19.08. (plus shares bought with dividends).

5. Bought 100 shares of FE at 39.54 and Sold 141 shares of POM at 17.62 (see Disclaimer): I have not been pleased with a single earnings report from Pepco (POM) since I first bought shares in 2008. I stayed with the company solely due to its dividend. Yesterday, I noticed that all of my shares, including those bought with the dividends, were in profit territory so I sold all of them. Averaged Down on POM at 11.63 LQD AND POM

I substituted for them 100 shares in FirstEnergy (FE), buying those shares yesterday at $39.54. FE is a larger electric utility company owning 8 principal electric utility utility operating subsidiaries and is in the process of attempting to acquire Allegheny Energy (AYE). Reuters AYE's service territory encompasses parts of Pennsylvania, Maryland, Virginia and West Virginia. AYE shareholders would receive .667 shares of FE. Allegheny has about 1.6 million customers. S & P believes that this acquisition will be accretive to earnings in 12 months after its completion, and views the proposed acquisition positively. However, it may take over a year to obtain regulatory approvals, and I would not view such approvals as a sure thing.

Both Morningstar and S & P rate FE at 4 stars.

The current dividend payout is 55 cents per quarter with the next ex date on 5/5: FirstEnergy Corp, FE Stock Quote Citigroup downgraded FE to neutral a few days ago: MarketWatch

The five year chart shows a steady climb from around $42 in April 2005 to a top over $83 in July 2008, followed by a waterfall down to around 35.8 in March 2009. FirstEnergy Price Chart | FE Since then the price has been mostly meandering in a channel between $39 and $47. I did see in Reuters key developments some modest lowering of guidance in August 2008. Earnings per share did fall from $4.41 in 2008 to $3.31 in 2009 (annual report at page 47: form10k.htm). Revenues in 2009 were close to 13 billion dollars. The current consensus estimate is for an E.P.S. of $3.6 in 2010 and increasing to $4.02 in 2011. FE: Analyst Estimates for FirstEnergy Corporation A lot depends on the economic recovery in FE's service territory in Ohio, Pennsylvania and New Jersey covering about 36,100 square miles and 4.5 million customers. I would not view the $83 price in 2008 to be justified, then almost 19 times earnings which I would view as too high. The current price is less than 10 times estimated 2011 earnings, which may prove to be conservative with a stronger than expected recovery in the U.S.

6. Bought 100 MYP at 10.12 (See Disclaimer): This is another Citigroup Funding principal protected note, with a $10 par value and a maturity date on 5/12/2014. Like MOU, it has already had a reversion during the first year and will pay only the guarantee of 3%. Unlike MOU, however, the first payment has not yet been made. The first closing date is April 26, 2010. This note will pay the greater of 3% or up to a 32% increase in the S & P 500 during the relevant coupon period, but the percentage increase is paid only if there is no closing during a coupon period of more than 32% above the starting value. So, since the maximum permissible level has already been exceeded, a buyer now of MYP will receive just $30 for each 100 shares on the first coupon payment date which will be 5/3/2010. Pricing Supplement

Since the first coupon period has not yet ended, I do not know yet the starting value for the second year. The first annual period ends on April 26, 2010. The starting value for the first coupon period was 866.23 as of 4/29/2009. This would place the maximum level at 1143.4236. The S & P 500 has breached that level repeatedly and closed yesterday at 1182.44. ^GSPC: Historical Prices for S&P 500 INDEX So the buyers of the note at its IPO will not receive any of the benefit of the S & P's rise during the first coupon period since the average rose too much. And, this is the trade off for the principal protection and the 3% guarantee. If the S & P 500 had never exceeded 1182.44 during this first coupon period, and closed up 30% from its starting value of 866.23, the owners could have received $300 in annual interest for every 100 shares held. Instead, they will receive $30, as will I, on 5/3/2010.

The benefit to this note is that I have downside protection and a decent upside potential. The main risk, which is currently viewed as remote, is an implosion of Citigroup before the maturity date. If Citigroup survives until it pays off this note, then I will receive $10 per share for the 100 shares purchased, and my downside is about a $20 loss on the shares assuming they are held to maturity. The worse case scenario on the interest payment is a 3% annual payment in May of 2011, 2012, 2013 and 2014. The more realistic case would be one or more payments over 10% based on the rise of the S & P during the relevant coupon year with no days closing over the maximum level. I view the best case to be two of those four payments over 20%, and one between 10%--20%. I would view MYP to be a successful investment with one payment over 20% and another one between 10%-20%, plus payment of par value in 2014.

Logically, I would break down the scenarios for MYP as follows:

1. a rise in the S & P 500 of less than 3% on the closing date from the starting value=3%

2. one day where the S & P 500 closes at more than a 32% increase from the starting value during the coupon period=3% (doesn't matter what happens then!)

3. an increase of more than 3%, with no days above 32% during the coupon period: then the % gain in the S & P 500 from the starting value to the closing date of the coupon period (e.g. 20% gain with no maximum level violation=20% payment on the $10 par value)

So, as long as Citigroup survives, the annual interest payment will be either 3% or some percentage between 3% and 32% based on the percentage gain in the S & P 500.

The reason for buying this one now is that the percentage increase is much better on MYP than the other one which I recently purchased, MHC, which has not had a maximum violation-yet. At some point, I may sell the MHC, which has a 21% maximum, and keep the MYP with the 32% maximum. This just gives me a better shot of avoiding a maximum violation in subsequent years.

This purchase will be the last one of a Citigroup Funding senior note, at least until I sell another one. I have now reached my maximum exposure to this firm, with 200 MKZ, 100 MYP, 100 MKN, 100 MOU & 100 MHC.

If I start to become uncomfortable with Citigroup's credit risk, I will need to sell all of these notes.

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