Thursday, August 19, 2010

Sold 50 PNW at $40.2/Bought 100 DEW at 38.82/Bought 50 of the TC PJS at 24.84/Bought 30 PCBK at 8.9/Dangers & Benefits of Leveraged Bond CEFs/LTD

1. Limited Brands (own TC PZB only): Limited Brands reported an adjusted E.P.S. number for its second fiscal quarter of 36 cents, beating the consensus estimate by 2 cents. The adjusted number excludes some extraordinary gains from the sell of stock. LTD sold its remaining interest in the Limited Stores for a pre-tax gain of 19.7 million and a related net tax benefit of 22.4 million. The company also realized a pre-tax gain of 52.3 million or 10 cents per share in selling a portion of its shares in Express (EXPR). There was a pre-tax loss of 25.2 million associated with the early retirement of LTD's 2012 and 2014 bonds. All of the foregoing is viewed as a positive for an owner of a LTD senior bond. The firm's major operating companies are Victoria Secret and Bath & Body Works.

I own the TC PZB, which contains a senior Limited bond, buying the position at $16.05 and at 19.85. It goes ex interest for its semi-annual payment on 8/27.

2. Bought 30 PCBK at $8.9 on Tuesday (LOTTERY TICKET Category & Category 1 of Regional Bank Stocks Basket Strategy)(see Disclaimer): This small bank is headquartered in Eugene, Oregon, and has 14 branches in Oregon and Washington. The branches are in Seattle, Portland and Eugene. Locations :: Pacific Continental Bank The main reason for nibbling at the shares was geographic diversification.

The bank did not participate in TARP. (see page 39: 2008 Annual Report form 10k 123108)

In the last quarter, the bank did report a profit of 9 cents per share compared to a 63 cent loss in the year earlier quarter. 10-q The capital ratios do exceed the well capitalized levels under the FDIC guidelines. (see page 22). The interest margin was good at 4.74% at the end of the 2010 second quarter. NPAs to total to total assets was 4.16% (pcbkpressrelease) which is one reason for the small purchase. Tangible book value was listed at $8.05. Another issue is that the allowance for loan losses as a percentage of NPLs was 45.46%. That low number is a matter of concern. Another concern is the persistent weakness in the stock price since hitting a five year high at around $18.9 early in 2007: Pacific Continental Chart | PCBK

There are five analysts following this small bank. The consensus estimate is for 37 cents in 2010 and 54 cents in 2011. PCBK: Analyst Estimates for Pacific Continental Corporation I could not justify the purchase of more that 30 shares based on the current forward P/E ratio coupled with the lack of a meaningful dividend. PCBK is only paying 1 cent per quarter after being cut several times. The annual rate was 35 cents in 2007.

PCBK did a public offering of stock in October 2009, selling 5.52 million shares of stock at $8.75 and raising 45.7 million dollars in net proceeds. Prospectus Supplement No. 9

Looking back though some of SEC Form 8-K releases, there was apparently a negative earnings pre-announcement on 6/30/09 that caused a decline from $12.86 on 6/29/09 to a low of $9.4 on 7/7/2009. PCBK: Historical Prices

3. Bought 50 shares of the Trust Certificate PJS at 24.84 on Tuesday (see Disclaimer): I am playing with the house's money on this TC. My best buy was at $ 7.20 during the Near Depression period. I recently traded 50 shares for a small profit. Sold PJS at 25.45 With the purchase on Tuesday, I only own 50 shares, and I have no desire to purchase more. I did own 250 shares earlier in the year, but sold all of those shares primarily in response to a tender made by the issuer. {See item # 6 Sold 50 COP at 56.63; Sold ALL PJS at 24.75 & 24.65; /Bought 50 PJS at 17.95 August 2009; Bought 50 PJS at $17.8 in Roth} I am now in a trading mode for this TC, buying 50 shares only, and then trading the shares for small profits and hopefully a few interest payments here and there. When I bought back on Tuesday the 50 shares recently sold, the bid was $24.68 and the ask was $24.84, and I placed a limit order to buy 50 shares at the ask price. These trades of PJS are now primarily done for the entertainment of the LB.

This security goes ex interest for its semi-annual interest payment in late September. Originally, the underlying security in PJS was a senior bond issued by First American. Recently this corporation split into two parts. The title insurance company is traded under the name and symbol of the old First American (FAF), but this company is not the firm that will be paying the interest on the bond. Instead, I believe that the underlying bond contained in the TC PJS is now an obligation of the other part of the old First American, a company that is now called CoreLogic and traded under the symbol CLGX. This is a link to the firms web site, CoreLogic , and to its first quarterly earnings report filed with the SEC. The underlying senior bond in PJS is discussed at one of CLGX's obligations at pages 13 to 15, form10q.

I explained how CLGX ended up with the underlying bond in PJS in this email to a reader who inquired about it:

"I read this document filed with the SEC that says the CoreLogic is the surviving company to the old First American:

On May 18, 2010, the shareholders of FAC approved a separate transaction pursuant to which FAC changed its place of incorporation from California to Delaware (the “Reincorporation”). The Reincorporation became effective June 1, 2010. To effect the Reincorporation, FAC and CoreLogic, Inc., (“CoreLogic”) which was a wholly-owned subsidiary of FAC incorporated in Delaware, entered into an agreement and plan of merger (the “Merger Agreement”). Pursuant to the Merger Agreement, FAC merged with and into CoreLogic with CoreLogic continuing as the surviving corporation. As used herein, the term the “Company,” refers to FAC at all times prior to the Reincorporation and refers to CoreLogic, Inc., as successor to The First American Corporation, at all times subsequent to the Reincorporation.Unaudited Pro Forma Condensed Consolidated Financial Statements

In the above quote FAC refers to the old parent, First American, the original issuer of the bond in PJS. "

Prior to the break up of the old First American, the bond had an investment grade rating, but now it is rated junk. FINRA Moody's rates the bond at B1 and Fitch has it at BB+. I would regard it as higher quality junk. I would be less sanguine about it with a double dip recession. The underlying bond is not actively traded, and there are a few recent small transactions in the 93-95 price range. The underlying bond and the TC both have the same coupon of 7.55%.

This is a link to the PJS prospectus: The bond matures on 4/1/2028.

The consensus EPS estimate is $1 for 2010 and $1.24 in 2011. CLGX: Analyst Estimates for CoreLogic

While the company had 395.174 million in cash as of 6/30/2010, it has a lot of long term debt for a company its size. The current portion of the long term debt was 32.762 million, and the long term debt (net of current) stood at 584.628 million, both as of the Q/E 6/2010. In addition the company has agreed to acquire Experian's interest in First American Real Estate Solutions for 314 million which Core Logic is required to pay on 12/31/2010 (see page 40: form10q). Another 72 million is owed for the remainder of First American CoreLogic Holdings Inc, payable in February 2011.

The company also recently announced its intent to sell its employer, investigative and litigation consulting business that had 66.1 million in revenues in the last quarter. Press Release Until I see a price tag for that business, I am not able to assess how it will impact the firm's creditworthiness, which is my only interest in discussing any of these facts. I do not own the common.

4. Sold 50 PNW at $40.2 on Tuesday (See Disclaimer): Pinnacle West was a non-core electric utility holding. I recently pared my position by selling shares before the recent ex dividend date. Pared PNW at 39.25 An earlier purchase was made at $31.9. The stock just went ex dividend. I do not expect much profit in the shares of the non-core electric utility holdings, and will harvest this kind of gain in them after receiving several dividend payments which was the case for PNW.

5. The Possible Triple Whammy of Leverage Bond CEFs: For now, many of the leveraged bond CEFs have been enjoying a positive Triple Whammy. The stampede into bond funds has narrowed the discount to net asset value (NAV) for some funds, while others have expanded to, or increased their premium to their NAV. One way for an investor to receive a benefit by investing in bond CEFs is based solely on the relative movement of the market price to NAV. As an example, if you buy a CEF selling at a 10% discount, and the market price moves to a premium to NAV of 5%, then I would have made money on the investment with the NAV just remaining stable. That is one whammy. The second whammy is that both the dividend yield and the NAV can be juiced by borrowing money at very low rates and investing those funds in higher yielding securities, with the impact magnified by the third whammy which is a rise in the value of the bonds owned by the CEF.

To illustrate how this can all work together, I would reference the leveraged bond fund FAX, which invests primarily in Australian government and corporate bonds, that I bought in October 2008 at $3.38, Some Nibbles Got Filled: JZE, PJS, INZ and FAX. At that time FAX was selling at close to a 40% discount to its NAV based on the calculations that I made at the time. It was just one of those days during the Dark Period. FAX had closed the day before at a 29% discount and had fallen a lot on the day of my purchase which I estimated would add another 12% or so to the discount. The monthly distribution at my cost then was around 12%. The discount to NAV has now almost vanished at FAX's current price of $6.71: Daily Prices & NAV - US Closed-End Fund Investor Center - Aberdeen Asset Management

Now, the triple whammy can be negative too. When the worm turns against bonds, which will happen, and investors start a stampede in the other direction, I would expect the discount to widen. So, by way of example, a fund bought at a 5% discount to NAV may decline to a 10% discount. The stampede in the other direction is caused by a rise in interest rates and a fall in bond prices. This causes the value of the bonds owned by the CEF to decline in value. That loss is magnified by owing more bonds due to the leverage, as leverage does work both ways. The loss is compounded by the increase in the interest paid to borrow funds to buy assets declining in value.

6. Bought 100 of the Stock ETF DEW at $38.82 on Wednesday (see disclaimer): Everyone needs to draw their own conclusions now about the relative value and safety of bonds compared to high yielding blue chip stocks. On Wednesday, I sold or pared positions in 3 bonds to buy 100 of this ETF. I realized a small profit on the bonds, plus some interest. I am comfortable buying stocks and started to buy when I was 16. It is just my personal opinion that the kind of stocks contained in DEW present me with a better capital appreciation potential over the intermediate and long term compared to the bonds which were sold, two of which were trading at well above their par value. And, I have that better profit potential without suffering a material diminution in current income. I will discuss the bond trades in the next post.

DEW is the symbol for the WisdomTree Global Equity Income Fund. As the name suggests, the fund has a worldwide focus on stocks that pay dividends. The fund page states that the current distribution yield is 6.54%. The expense ratio is .58%. Dividends are paid quarterly. This ETF had 463 securities in it as of 8/17/2010, and I copied for the blog the top 21:

So far in 2010, I have booked long term capital gains of $2,392 in the stock ETFs VEU, VV and VTI. Sold 100 of the ETF VEU at 38.6 Sold 101 VTI at 55.21 Sold 102 VV at 49.43 I have established several new stock ETF positions over the past several weeks that focus on large, dividend paying companies. In many cases, the dividends paid by these companies at their current prices exceed the yields on their short and intermediate term bonds. Those new positions include the following:

I will try to hold those new positions for at least a year and then decide what, if anything, needs to be sold.

I am now running a day behind so the remaining trades on Wednesday will be discussed in Friday's post.

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