Wednesday, April 14, 2010

PJS Tender by First American/Bought 100 SDA/AA INTEL COP/Downgrade of Regional Banks by UBS/Real Estate Wizards at Morgan Stanley

LB heard that rumor again about Headknocker (HK) being a candidate for early admission to the Old Folks home. LB would never say such a thing, which goes without saying. This kind of rumor is understandable when HK starts saying the Head Traders here at HQ need to buy when a stock ceases going down and to sell when it quits going up, as if the HTs were omniscient. But, our Great Leader sometimes has a Zeus complex, a seldom mentioned affliction in the psychological journals. It is often found in the Masters of Disaster too. Still while some say the LB has no feelings, which may not be off the mark, still the LB is sensitive about criticisms of its analytical abilities and is still smarting from the HK giving that no wit, lame brain RB the award for BEST HEAD TRADER FOR 2009. If it had not been for LB, the glue that keeps things on an even smooth path here, there would have been no capital left to invest in March 2009. Isn't that obvious? But, LB can get no respect no matter how many times it saves the day, bringing order out of the chaos. And even with the Stable VIX Pattern, the OLD GOAT will need some chill pills to handle the stress of being HT.

1. Alcoa (owned): I would characterize Alcoa earnings report for the 1st quarter as neither disappointing nor inspiring, more like a blah. If one is inclined to exclude special charges, the company reported non-GAAP earnings of 10 cents per share. The revenue number of 4.9 billion missed the expectation of 5.24 billion. A summary of some brokerage reports released after this earnings report can be found at

2. ConoccoPhillips (owned): Fadel Gheit, an analyst with Oppenheimer, raised COP to outperform yesterday, noting the price for Syncrude was about twice what the market expected from the sale of COP's interest. The price target assigned by Gheit was $70. MarketWatch

3. UBS Downgrade of Regional Banks: UBS downgraded Regions Financial (RF), Huntington Bancshares, and KeyCorp to sell from neutral yesterday. UBS Warns The analyst apparently believes that the recovery of the regional banks will be a slow one. (see also discussion in Cramer said yesterday that HBAN was still a buying opportunity:

I have low opinions of all of those banks even though I own a small number of shares in each of them as part of my Category 1 in the Regional Bank Stocks' strategy. These banks have a lot of problems, many of which were self-inflicted, and decent earnings reports are still a hoped for event at some point in the future. All of them have enjoyed large percentage rises in their respective share prices. Prior to this downgrade yesterday, HBAN was up about 65% so far this year. If I was not taking a long term view in this strategy, I would have already sold RF, HBAN, and KEY.

4. Historical Chart Information on the Spread Between Treasury and Investment Grade Corporate Bonds: This document from Claymore has a chart that graphically shows the buying opportunity in late 2008 in investment grade corporate bonds: PDF The average spread is 1.21% but it almost reached 6% in late 2008. As of 12/31/2009, the spread had fallen to 1.57%. In retrospect, the trade would have been to buy investment grade corporate bonds in the Fall of 2008, which I did, and to sell U.S. treasuries which would soon hit a fifty year low in yield for the long bond.

5. Fidelity Capital Markets: This document discusses how Fidelity strives to achieve the best execution at the best available price: .pdf

6. First American Senior Bond (PJS): This TC just went ex interest a few days ago and rose over 6% in trading yesterday to within 50 cents of its par value. I own 250 shares, with some of that position bought at $7.2 during the Near Depression period. Some Nibbles Got Filled: JZE, PJS, INZ and FAX I attempted to find out whether the rise was due to a news event. I found a press release saying First American was preparing a tender offer for all of its 350 million in debt. This will include PJS at its par value of $25. The tender expires May 7th.

This is the relevant language as it pertains to PJS:

"First American also announced that it has commenced a cash tender offer to purchase the certificates. The company is offering to purchase the certificates because they represent undivided beneficial interests in the$45 million in principal amount of First American's 7.55 percent senior debentures due 2028 held by PREFERRED PLUS Trust Series Far-1. First American is offering to purchase the certificates for their stated amount of $25 per certificate. The company is not soliciting consents from holders of the certificates. Because PREFERRED PLUS Trust Series Far-1 is a holder of the 7.55 percent senior debentures due 2028, it is eligible to participate in the consent solicitation with respect to such notes."

This will result in a good gain on my shares plus the interest payments which were very high based on my cost.

I am starting to think that most of the bonds bought in the Fall of 2008 and winter of 2008-2009 will be called by their issuers. Their starting to be called with regularity now.

I may sell the 100 shares of PJS in the ROTH rather than tendering it, just to be in a position to reinvest the proceeds in the event an opportunity arises over the next four weeks. The two fifty share lots bought in the in the Roth have a cost basis with commissions of $9.41 from November 2008 and $17.96 from August 2009.

7. Bought 100 SDA in the Roth at $9.8 (see Disclaimer): The RB said that it was not surprised that this security was the first one bought by the Old Goat as he starts his tenure as the Head Trader of the once great trading operation here at HQ. Someone among the staff at HQ said something about the OG having the same level of risk tolerance as a 90 year old Grandma still living the privations of the Great Depression.

SDA, a recently issued security, is a senior unsecured note from Bank of America that matures on 3/27/ 2015 at a guaranteed value of $10. The main risk for me is the credit risk of Bank of America for five years. No payments will be made prior to maturity. This is another security like PGEB that has to be bought in a retirement account for a U.S. taxpayer unless you want to pay taxes on income that is not received.

This one is actually easy to understand. The redemption value is linked to the DJIA's increase, if any, from its starting value on 3/24/2010 of 10,836.15 to the evaluation dates which will occur over a five day period in March 2015. If held until that time, I will receive $10 plus a supplemental amount representing 100% of the increase from the starting value. If that increase is 50%, for example, I will receive on 3/27/2015 $15 per share. If the DJIA falls to 9000 by then, I will receive the guarantee of $10. This is a link to the prospectus: Final Term Sheet No. 286 Of course, this assumes that Bank of America is still solvent on the maturity date and has not been seized by the FDIC.

At some point, I would expect this one to rise in value provided the DJIA continues its upward and onward path, but I would not anticipate that it will rise as much as the percentage gain. This is not like buying the ETF DIA: Summary for SPDR Dow Jones Industrial Average. For SDA, the only DJIA values that ultimately matter are the ones for a few days in March 2015. As the maturity date becomes closer, possibly within a year, I would anticipate a closer tracking of the DJIA gains than I would anticipate now or even in 2011 or 2012. Still, I would not expect SRA to continue trading at below its par value of $10 when and if the DJIA hits 12000, irrespective of the time frame in which that milestone is hit. So, this one requires patience and a forward looking gaze. The key for the OG is that he can not lose anything at maturity, provided BAC survives, and can nonetheless participate with the DJIA percentage increase over the starting value. The RB just said that it is embarrassed and wants all readers to know that it had nothing whatsoever to do with this buy.

The bid was 9.72 and the ask was 9.8 at the time of my purchase. I entered a limit order to buy at the ask price.

8. Intel (owned): Intel had a blowout earnings report for its 1st quarter. E.P.S. beat the consensus estimate of 38 cents by five cents. Revenues were 10.3 billion, well above the consensus estimate 0f 9.84 billion. Gross margin was a better than expected 63%, and Intel raised its guidance for gross margin in the second quarter. For the current quarter, Intel expects revenue to be between 9.8 and 10.6 billion, above the current consensus before the report of 9.7 billion.

I am not going to sell my Intel shares based on any pop in price but I may cease reinvesting my dividends to buy additional shares. INTEL AT 15.87 INTEL at 15.25: Intel at 14.46 Added to Intel at 19.08.

Linear Technology (LLTC) also had a good earnings report. Adjusted earnings were 52 cents, better than the 39 cent consensus estimate, with a 55% increase in revenues. Inventories remain lean in the distribution channel.

9. Morgan Stanley (no positions): On the bright side, the story in the WSJ about the financial acumen at Morgan Stanley does show that investment banks know how to rake in the fees. Yes, of course, the real estate fund that is the subject of that story may lose two-thirds of its original 8.8 billion value, but the firm did receive " $104 million in acquisition fees, $22 million in fund-management fees, $13 million in financing fees, $36 million in real-estate-management fees, and $21 million in financial-advisory fees" just in 2007 for its expertise in the real estate business, according to the WSJ. I wonder if there is a fee for losing 5 billion dollars too. Some of the investments that are likely to be written down in their entirety just defy rational explanation. An example would be the purchase for 1 billion dollars of an office building in South Korea, where the wizards at MS sunk 350 million of their investors capital in hopes for that elusive 22.1% annual average return once projected by the firm. But at least the wizards did not mistake Pyongyang for Seoul.

10. Singapore (own ETF EWS): Singapore raised its forecast for 2010 GDP from 6.5% to as high as 9%, and Singapore's government expects inflation to rise faster than previously expected.

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