Monday, November 8, 2010

Bought: 200 JPC @ 8.61, 50 FBSS @ 13, 50 PJS @ 24.6/Bought 2 Alon Krotz bonds-Sold 50 ALJ @ 5.96/Sold: 170 CBL @ 18.04, 50 RA @12.24, 203+AMSWA @ 6.32

The Labor Department reported an increase of 151,000 non-farm jobs in October, higher than the consensus estimate of 70,000. The previously released numbers for August and September were revised up by 110,000. Employment Situation Summary Private sector payroll rose by 159,000 in the month. The U-6 number declined slightly from 17.1% in September to 17%. Table A-15. Alternative measures of labor underutilization The average work week increase by .1 hour in October to 34.3 hours. According to Abelson, John Williams at the "Shawdow Government Statistics" claims that the Labor Department created 200,000 phantom jobs with its seasonal adjustment.

The German Finance Minister, Wolfgang Schaeuble, called the U.S. policy clueless, referring to the Fed's recent decision to print more money to buy U.S. government debt. While spot gold initially fell some after the Fed's announcement on Wednesday, the N.Y. close jumped from 1348.8 on Wednesday to 1392.9 on Thursday. The P.M. fix in London on Thursday was at 1381, up from 1345 on 11/03. China claimed the U.S. was manipulating our currency.

LB was reading the Internal Revenue Code earlier this morning for its entertainment, when it received an anonymous phone call. The caller made the allegation that the Headknocker was past his prime, and needed to be retired to the Old Folks Home. The caller recommended that the Stock Stud replace HK as the Head of HQ. LB has an obligation to report what happens at HQ in these minutes of the trading operation, and it goes without saying that LB does not share that caller's sentiments.

LB returned to reading the Code, focusing on Sec. 7702, and a private letter ruling,, regarding the deductibility of caregiver services.

The London PM Fix for Gold last Friday was at $1395.50. THIS WILL CAUSE A REVERSION TO THE 2% GUARANTEE FOR MOL's FIRST ANNUAL PERIOD ENDING IN A FEW DAYS. Bought 200 MOL at 9.95 While it was down to the wire on this one, one day's close over the maximum is sufficient to trigger the reversion. I sold 100 of the 200 MOL on Thursday after recognizing that the reversion looked inevitable based on gold's move on Thursday. Sold 100 MOL @ 10.3 I am keeping the other 100 just to have a different closing date than MTY which has better terms. Bought 100 MTY at 10.49

I also have two Citigroup Funding senior notes whose interest payments are tied to the commodity index, MKN and MKZ. Bought 100 MKN at 9.85 Bought 100 MKZ at 9.91 in the Roth IRA Sold 100 MKZ at 10.49 in IRA 100 MKZ bought at 9.96 in a taxable account I received in April $180 in interest for my 100 shares of MKN based on a 18% rise in the commodity index during its first annual period. I believe that the starting value for the second annual period for MKN is 132.67, and the relevant commodity index closed on Friday at 153.21: This is a 15.48% increase, but the only relevant numbers are the reversion and closing numbers. MKN allows for an increase of up to 33% before triggering the reversion to its 3% guarantee. This would mean that I would not want a single close during the first annual period of more than 176.45 on the commodity index. The closing date for MKN's second annual period is 3/30/2011. I am already satisfied with the 18% received in the first period, and this makes me sanguine about earning more than the 3% guarantee for the remaining periods. Of course, if I earn a good payday in the second annual period, then this security will turn out to be a good investment, provided Citi survives to pay me at maturity in 2014. (see generally, Principal Protected Notes)

The commodity index rose in MKZ's first annual period by less than the 3% guarantee. Item # 4 MKZ Ends Its First Annual Period with A Thud The ending value was 126.58, and I previously calculated the new maximum level at 165.8198, though I would recommend any interested person to check those calculation for themselves. So MKZ illustrates another problem with these notes, in that there may be no gain in the index above the guarantee in addition to a possibility of a reversion due to too much of an increase during the period. While those are negatives, I view them as one reason for having two of these notes tied to the same index, dividing up my investment in at least two parts for each index. One may hit while the other pays the guarantee, just based on their different time periods and terms. MKZ has a 31% limit. Pricing Supplement

The rise in gold and silver price, as well as the Swiss Franc, have had a positive impact on my long term holding in the Permanent Portfolio (PRPFX), a mutual fund. I have never sold a share in this fund and view it as sort of a disaster kind of hedge. Just look at its top 25 holdings: PRPFX - Fund Top 25 holdings I have discussed it periodically in the blog. Comments on Barron's Roundtable (Jan 2009) Given the parabolic rise in gold and silver I do not plan to add to it now. This is a link to the sponsor's web site: The Permanent Portfolio Family of Funds This is a link to the last SEC filed shareholder report. As shown in that report, the gold and silver bullion alone is close to 1.7 billion dollars, REITS at 500 million, natural resource stocks at 557 million and 679 million in Swiss government bonds. The fund then allocates 15.4% to what it calls aggressive growth, which I would call a large cap value strategy. The remainder is in U.S. treasury and corporate bonds. The percentage allocation to asset classes remains fairly static and its portfolio turnover is low. When this fund receives more money, it appears just to add those funds to existing positions while maintaining a constant allocation percentage.

1. Added 50 FBSS at 13.00 on Thursday ( Regional Bank Stocks' basket strategy)(see Disclaimer): I was critical of the decision by the Board at Fauquier Bankshares to slash the quarterly dividend from 20 cents to 12 cents, announced on Tuesday morning, 9/21/2010. Based on the subsequent earnings report for the third quarter, discussed in Item # 4 FBSS, I do not see any justification for that reduction. The share price certainly suffered from this unexplained action, falling from $14.94 on 9/20 to $12.52 by 10/13, a 16.19% decline. FBSS Historical Prices | Fauquier Bankshares This switch my small position of just 50 shares to an unrealized loss. Bought 50 FBSS at 14.08

I elected last Thursday to round my lot to 100 shares by averaging down on this thinly traded small bank, by purchasing an additional 50 shares at $13.00. There are a few reasons for purchasing this stock now, notwithstanding my negative view of the dividend reduction. This small bank appears to be well capitalized and in good shape. With a market cap south of 50 million, it could easily be digested by a larger regional bank interested in expanding into Northern Virginia. As noted in the press release announcing third quarter earnings, the bank has the leading market share in Fauquier county at 34.89%, and has the second leading share in Prince William: Fauquier Bankshares Announces Third Quarter 2010 Earnings And, lastly, even with the substantial dividend cut, the yield at the current rate is around 3.7% at a total cost of $13. Since I did not see a justification for the first cut, I would be shocked if there was another one, unless there was a substantial deterioration in profitability.

This is a link to a recent investor presentation. PDF I thought that the chart at page 14, showing the decline in median sale prices for residential real estate, in Fauquier and Prince William counties was interesting, particularly in light of the relatively low unemployment rates in those two counties and the higher income levels.

The regional bank basket has been more volatile up and down than the S & P 500. Last Friday, my basket rose .71% while the S & P gained .39%.

2. Sold All of AMSWA (203.4156 shares) @ $6.32 and Bought 200 of the CEF JPC @ 8.61 in a satellite account on Thursday (see disclaimer): RB wants to ask a question. Would the readers of this blog, who suffer through the incredibly boring minutes of HQ's trading operation written by LB, prefer to buy JPC at $8.14 or at $8.61? Like all of RB's' quizzes, it is not hard to make an "A+" on that one. The Nerd sold 300 shares of JPC in September at 8.14. While a response is hardly necessary to explain the millions of variables considered by the LB in every trading decision, LB would just note that JPC was sold for a quick profit and it goes without saying that you will never go broke taking a profit. Sold 300 JPC at 8.14 Well, maybe RB said, but you can go broke continually buying back at a higher price than the last sale and then having the securities hit the crapper, as during the Dark Period.

JPC is a closed end fund from Nuveen. JPC - Nuveen Multi-Strategy Income and Growth Fund As of last Wednesday, it was trading at a -10.83 discount to its net asset value based on a closing price that day of $8.56. The current distribution rate of 17 cents per quarter would result in a yield of 7.94% at that closing price, assuming that the dividend remained constant. This fund's target allocation is to invest about 70% in fixed income securities (preferred stock, fixed-and-floating rate debt including high yield and senior loans) and 30% in equity and equity like securities, such as convertible bonds. The fund uses leveraged at about 23% as of 9/30/2010. JPC The fund had 910 holdings as of 8/31 and close to 30% of those holdings were foreign. As to credit quality, 4% was rated AAA; 3.2% AA, 21.5% A; 38.5% BBB, and the remainder at various junk ratings or not rated: JPC

JPC is listed under "preferred stock" funds at the Markets Data Center for CEFs at the The discount as of Thursday's close was at -11.13% with a net asset value of 9.7. So the discount expanded some on the day of my purchase. Friday's closing price was at $8.74 with a NAV at $9.71.

While American Software (AMSWA) has a good dividend, its recent earnings history does not justify its current premium valuation in my opinion. I was hoping for a much larger percentage increase in earnings per share this year. The consensus forecast for the F/Y ending in April 2012 is 34 cents, up from 27 cents in F/Y ending in April 2011, AMSWA Analyst Estimates | American Software, Inc. This gives AMSWA a forward P/E on that fiscal 2012 estimate of 18.8 at a $6.4 price. The trailing P/E is over 28. Bought 50 AMSWA at 6.02-LT Added 50 AMSWA at 5.81 Added 100 AMSWA at 5.5

3. Sold 50 RA @ 12.24 on Thursday (see Disclaimer): LB, firmly in a trading mode, and "thinking small" as always", RB helpfully added, sold the 50 shares of RailAmerica bought in late September at 9.75. LB noted that was a 20% profit or so, and RB replied that now Headknocker can take the entire family to McDonald's for a veritable feast of Happy Meals with the profit realized by the NERD from this trade.

4. Sold 170 CBL @ 18.04 on Thursday (See Disclaimer): This stock was available for purchase at less than $5 during the Dark Period. I discussed its earnings and my purchase of the stock in the LOTTERY TICKET category. I decided to sell the common shares, Item # 1 CBL , and wait for an opportunity to buy CBLPRC again. REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages Buy CBLPRC near $10 Bought 50 CBLPRC at 21.87 SOLD CBLPRC at 24.25 The shares popped again by 4.86% on Thursday to close at $18.12. It is almost impossible to believe now the prices that sellers were willing to take for CBL as late as April 2009, when $2 ti $3 trades were common: CBL Historical Prices | CBL & Associates Properties

5. Sold 50 ALJ at 5.96 and Bought 2 Senior Bonds Issued by ALON Krotz Springs, INC. at 98.80 with Accrued Interest and Commission on Thursday (see Disclaimer): Before Alon issued earnings after the close on Thursday, which were not viewed favorably, I sold the 50 shares of the common stock, ALJ, at $5.96, having just bought those shares at 5.24. The reasoning was that I did not want anymore exposure to this company after buying 2 $1,000 par value junk bonds issued by one of its subsidiaries.

Krotz Springs is a refinery in Louisiana that Alon acquired from Valero in July 2008 for 333 million in cash plus approximately 141.5 million in working capital, including inventories, as well as earnout payments of 35 million. Maybe Alon would not pay that much now.

In connection with that acquisition, Alon formed a separate subsidiary, Alon Krotz Springs, Inc, ("Krotz"), to own this refinery, originally placed into service in 1980 with a current throughput capacity of 83,100 barrels a day. To finance the acquisition, Krotz issued a senior secured bond with a maturity on 10/14/2014. This is the note that I bought on Thursday in the bond market: e424b3 While I paid near par value for those two bonds, the coupon is somewhat enticing at 13 1/2% but not so enticing that I would risk more than 2 grand given the heightened risk. The notes may be called after 10/15/2012 at the prices specified on page 103 of the prospectus plus accrued interest. Interest is paid semi-annually in October and April.

Alon reported that the Krotz Springs refinery throughput averaged 64,158 bpd a day during the 3rd quarter and its margins was just $1 per barrel compared to $2.45 per barrel for the same period in 2009 due primarily "to higher HLS/LLS crude costs relative to WTI". SEC Filed Press Release In response, the company is "undertaking initiatives with crude suppliers and other third parties to receive crudes such as WTI" (West Texas Intermediate) at Krotz Springs that will enable it "to reduce our crude costs during these price spikes of Louisiana crudes".

The note is secured by the assets of Krotz except as provided in the prospectus (see pages 88 et seq) The summary also states that there is "a first priority lien on our PP&E and a second priority lien on our cash, accounts receivable and inventory (“Working Capital”). Our existing revolving credit facility (the “Revolving Credit Facility”) is secured by a first priority lien on our Working Capital and a second priority lien on our PP&E. If we enter into certain hedging agreements, our obligations in connection therewith may be secured by a lien on our PP&E on a pari passu basis and certain cash collateral on a prior basis." (see page 11).

I did not see a guarantee by the parent. So this senior note does have more security than your standard unsecured senior bond. It would certainly be even better to have a guarantee from Alon USA (ALJ). Without that guarantee, Alon has the option of bankrupting its Krotz subsidiary without recourse to it.

Other information on this bond includes the following:

Current Rating: B2 by Moodys; "B" by S & P
FYI: List of NYSE Traded Bonds can be found at NYSE, New York Stock Exchange > Bonds > NYSE Bonds

6. Added 50 PJS at 24.6 on Thursday (see disclaimer): After looking at all of the cash raised from stock sales, I decided to start adding more TCs with senior bonds to soak up a small portion of that cash. This caused me to go back to the TC PJS, a senior bond originally issued by First American and now an obligation of CoreLogic, as explained in several prior posts. Item # 4 Added: PJS at 24.72 & Item # 3 TC PJS. The underlying bond matures in 2028. The TC has a $25 par value and a 7.55% coupon. Data about the underlying bond can be found at the FINRA site. After selling my entire position in response to a tender at par value, including shares bought during the Dark Period at $7.2, I have decided to come back to this TC as I calibrate my response to the FED's Jihad against savers, now viewed as likely to continue into 2011.

I have not yet finished discussing the numerous trades from last Thursday, and hopefully will include most of them in a discussion in the next post. I am busy on other matters. I simply do not have the time to discuss everything that I am doing now.

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