Friday, October 8, 2010

Bought: 50 BMLPRL at 18.17, 100 TSCM at 2.86, 50 UBCP @ 8.13/Sold: 300 IMF @ 17.23, 100 JBK at 21.59/AA/MOL & Spot Gold Price

1. Sold 100 of 150 JBK at $21.59 on Wednesday (see disclaimer): I took my long term capital gain in the 100 JBK shares bought at $16.15 in July 2009. This security has had an interesting history that I discuss in more detail in other posts. New Information about JBK more on jbk I still own 50 shares bought in the Roth IRA at 19.63 in late August 2010. Most financial web sites have the yield on this security wrong. At the current price, and based on the trustee's decision to treat Lehman's bankruptcy as a swap termination event, the owners of JBK have been receiving a semi-annual interest payment at the coupon rate of the underlying GS TP since 2/2009. That TP has a 6.345% coupon, which translates into two $.7931 per share/certificate payments annually. This produces a yield of about 7.35% at a total cost of $21.59, not the 14.63% yield shown at Marketwatch. The sites that have the wrong yield information assume incorrectly that the semi-annual payment is made quarterly. JBK was making quarterly payments prior to the Lehman bankruptcy based on the formula contained in the swap agreement, which was the greater of 3.5% or .75% above 3 month LIBOR. While I did well recognizing that JBK had turned into a fixed coupon TC after the swap termination event, and was paying significantly more than the other fixed coupon TCs tied to the same GS TP, this security required a lot of time and analysis for the profit realized in it.

2. RB Buys 100 (TSCM) at $2.86 on Wednesday ( LOTTERY TICKET category)(see disclaimer): LB, always diligent and focused on details, was working on a modification to trading rule 1, 374,492,673.123 (A)(1)(vii) for the Unstable Vix Pattern within the confines of a long term secular bear market in stocks when the Nit WIT RB seized control over the keyboard and attempted to buy 1000 shares of TSCM. As one would expect, LB quickly realized that the RB was up to no good, and managed to delete one of the zeros prior to Lame Brain hitting the buy tab.

Admittedly, and it pains the LB to even say this, the RB did make a successful trade of TSCM, buying 100 at $1.88 in May 2009 and then selling those shares at 3.02 last February.

As far as the LB is concerned, only two positive comments can be made about TSCM. One is that the cash on the balance sheet, as of 6/30/2010, is about equal to the market capitalization of 90.23 million or so at the $2.86 price. The last filed form 10q shows cash and marketable securities at $80,936,805. I did not see any debt. The other is that the price to book is less 1, currently around .89. TSCM Key Statistics Price to sales is around 1.53.

The company did lose 1 cent for the Q/E 6/2010. The stock price is currently supported to some degree by a quarterly dividend that results in close to a 3.5% yield on shares bought at a total cost of $2.86: Inc, TSCM Stock Quote At best this is a low expectation trading buy in the LT category. TSCM may be able to start turning a profit when and if individuals return to the stock market in a big way.

TSCM closed at $2.9 yesterday.

3. MOL (own 200 shares): It looks like MOL, the "principal protected" note issued by Citigroup Funding, guaranteed by Citigroup as provided in the prospectus, will either have a good pay day next month or will suffer a reversion back to the 2% guarantee. This note pays distributions based on the greater of 2% or the percentage increase in gold up to 19%, provided there is no close in the spot gold price above that 19% cap during this securities pertinent annual period. It only takes one close above that cap to trigger a reversion back to the 2% guarantee, as explained in more detail in Bought 200 MOL at 9.95 It will be tight. I bought this security at $9.95 even though I did not like the low 19% maximum level. That is not much leeway before triggering the reversion back to the guarantee. Whatever, I previously calculated the maximum level for gold at $1391.7 during the current annual period. The good news is that the annual period ends on 11/18/2010 and the price of gold has not yet closed above $1391.7. The bad news is that gold is trading near 1350 now, so there is not much room left before it exceeds the maximum level which triggers the reversion. If there was no maximum level violation, and gold closed at $1350 an ounce on 11/18, then this security would pay out $1.55 per share for its first annual distribution. On the other hand, a close above 1391.7 would trigger a payment of only $.2 per share irrespective of the percentage increase in gold. So, you have to be a bit of a gambler to buy a note issued by Citigroup and then add to that the gamble on a maximum level violation.

Last week, there was a significant bid on MOL at $10.45. As the gold price inched closer to the maximum level, that bid was withdrawn, and the last trade yesterday was at $10.06.

Spot gold did decline some yesterday falling to $1331 per ounce at the NY close: 24-hour Spot Chart - Gold

4. Bought 50 BMLPRL at 18.17 on Thursday (see Disclaimer): The LB has devised a new strategy for floating rate equity preferred stocks that are obligations of Bank of America. The idea is now to buy several of them and then sell whichever one pops first. BMLPRL is a non-cumulative equity preferred stock, originally issued by Merrill Lynch, that pays the greater of 4% or .5% above the 3 month Libor rate. Term Sheet Due to the Jihad against savers by central bankers around the world, I would anticipate that it will be many months (possibly a year or more) before the 3 month Libor rate will rise above 3.5%, the point where the Libor float + .5% would be greater than the 4% guarantee. A history of the 3 month Libor rate can be found at LIBOR Rates History (Historical). Historically, it would not be unusual for the Libor rate to be higher than 3.5%, but it is now hovering at an abnormally low level of .29%. The daily rate can be found at the under the heading "consumer money rates".

BMLPRL does pay qualified dividends according to Hopefully, Congress will extend that favorable tax treatment which is set to expire at the end of this year, but I would not bank on it. This security is rated as junk.

The dividend for BMLPRL can be eliminated provided BAC first eliminates the common shares dividend, currently at 1 cent per quarter. It would be embarrassing for BAC to eliminate a 1 cent per quarter dividend, and then eliminate the non-cumulative preferred stock dividends. If you had an amount in excess of the FDIC coverage limits at Bank of America, and learned that it eliminated those dividends to preserve capital, what would you do?

The guarantee provided in these securities provides some protection in a low inflation or deflation scenario. At the 4% guarantee, the yield at a total cost of $18.17 is around 5.35%. The Libor float provision in BMLPRL is not a good one, comparatively speaking, but it does provide some inflation protection. At a 6% 3 month LIBOR during the relevant computation period, and the $18.17 total cost, the yield becomes 8.94%. Par value is $25. So if inflation kicks in, causing a rise in short term rates after the central bankers end their Jihad against savers, then the increase in interest rate due to the float provision provides some protection to the value of BMLPRL, possibly even making it more valuable assuming no change in the credit risk. An improvement in BAC's credit risk may also improve its value. Inflation or Deflation: Bond Alternatives/

I have a gateway post that discusses in detail my opinions on the Advantages and Disadvantages of Equity Preferred Floating Rate Securities.

5. Added 50 UBCP at 8.13 on Thursday (Regional Bank Stocks' Basket Strategy) (see Disclaimer): I have little to add to my discussion of this small savings bank made in a post discussing at prior purchase at $8.49. The bank is paying out 14 cents per share in quarterly dividends. At a $8.13 total cost, this translates into a 6.89% yield. I have had recently some banks with high dividends cut them with two discussed in yesterday's post. The bank earned 15 cents in the Q/E 6/2010. The capital ratios are above the well capitalized levels:

Total risk based capital ratio 14.45%
Tier 1 risk based capital ratio 13.51%
Tier 1 capital to average assets 8.75%

10Q at page 29 As of 6/30, the non-accrual loans to total loans ratio was 2.01% and the allowance for loan losses as a percent of nonaccrual loans was 50.54%. That later number is somewhat discomforting. SEC Filed Press Release for Q/E 6 /2010v99

United Bancorp closed yesterday at $8.07.

6. Alcoa (owned): I last bought AA shares at $5.6 in March 2009. Frequently, I hear pundits advise selling AA after its recent run, using some short term criteria to assess the relative worth of this company. If I had listened to the Fast Money crowd on CNBC, I would no longer own my shares. I am not taking a short term view on this stock, however. At some point, there will be a robust economic recovery and Alcoa will be in its sweet spot again. Maybe that recovery is starting now or possibly it will not kick into gear until 2011 or 2013. It is only necessary to have faith that there will be a synchronized worldwide boom within the next few years to buy Alcoa. The issue is not whether a run from $10 to $12 is sufficient to take a profit, but instead whether the stock can return to a more normalized range at over $30 within the next five years.

I made the following comment in a post from April after J P Morgan downgraded AA based on the typical tunnel vision that infects most investors:

" The last purchase of Alcoa was at $5.6 in March 2009.You do not have to be a financial wizard to make money in stocks. It helps just to have some common sense. When Alcoa hit $5.6 in March 2009, the collective judgment of the rational man, so treasured by practitioners of the dismal science, had to be that aluminum demand would not return for at least five years, possibly for as long as a decade. The $5.6 price for Alcoa was prevalent in 1987. Alcoa Inc. Common Stock Share Price Chart | AA Was the market pricing Alcoa efficiently at the time? The market was dominated by irrational pricing behavior that failed to take into account the massive efforts undertaken by governments and central banks around the world to stabilize the financial system. It was evident by March 2009 that those efforts would succeed. The here and now crowd were pricing stocks then, as if nothing would improve for years to come and consequently it was appropriate to value companies as if the recessionary earnings were the new normal. Sort of like the entire world channeling the spirit of Alan Abelson.

I still own my Alcoa shares and have no intention of parting with them. My shares were bought between $5.6 and around $11. .. . The (J P Morgan) analyst cut the 2011 earnings forecast to 48 cents based on an aluminum price forecast in 2011 of 92 cents per pound or $2027 per tonne. This is what I call short term thinking. The analyst apparently acknowledges that Alcoa has used the Near Depression period to take significant costs out of its operation. This appears to be the case. And, wouldn't this be good long term for the business? And how does one, by the way, come up with a 2011 forecast for aluminum prices?. . .

But, in the last analyst, it does not matter whether the J P Morgan's pessimistic forecast for aluminum prices proves to be prescient, though I would question the wisdom of that forecast. What matters is whether the current price is a good entry point for someone willing to hold for five years, giving time for the demand cycle to return, as opposed to focusing one's attention on the hear and now and trying to predict what will happen just in the next year. A rise in price to $20 from $14.4 at any point within five years would give the investor a 38.8% return before taking into account any dividend payments. Yet a $20 price would have been the time to buy, not sell, Alcoa in 1999 and 2002 based on subsequent price movements to the low 40s: Alcoa Inc. Common Stock Share Price Chart | AA"

Item # 2 Alcoa (April 2010)

After the close yesterday, Alcoa reported better than expected earnings and increased its forecast for aluminum demand from 12 to 13%. The company earned 9 cents per share on an adjusted basis on a 15% increase in revenue.

7. SOLD 300 IMF at 17.27 on Thursday (see Disclaimer): IMF is a closed end fund that invests in inflation protected bonds. Legg Mason - IMF - Western Asset Inflation Management Fund Inc.The OG was taking his afternoon siesta, with LB temporarily in charge of the trading desk, when this order was entered, to the great consternation of Headknocker who castigated the LB for taking yet another short term gain, in its typical myopic Nerd think. LB then launched into a thirty minute discussion, replete with charts and numbers coming out the wazoo, putting the entire staff asleep, until the Nerd said "in conclusion, it is clear that inflation protected treasuries are overpriced". Whereupon the RB replied, "is that why the Nerd sold the TIP ETF at $104.68 that closed yesterday at $110.81."

I bought 300 of the CEF IMF at 16.51 in May and collected a few monthly dividends before selling all of my shares yesterday.

IMF closed yesterday at $17.27, which represented a -7.99% discount to its net asset value. WSJ

No comments:

Post a Comment