Thursday, December 9, 2010

Bought 1 Cincinnati Bell Senior Bond Maturing in 2020 at 96.8/Added 50 DKF in Roth at 25.63/Bought 50 ORIT @ 11.58/Bought 100 of ETO at 20.14

Last night, I was watching Cramer for the first time this month.  He was recommending that individuals sell their bond funds if they would need the money within the next few years. In Dividends We Trust? - He says that bonds are a "miserable terrible bet with a bad risk reward".   In short, he believes the coming bond apocalypse is upon us, ready to deliver pain and suffering to all who have found comfort in them during these difficult times.   I do not disagree that a long term bond secular bear market is coming.  I simply lack his certainty as to the timing.  It is certainly possible that the recent weakness in bonds may be a buying opportunity, for our economic future may not be as rosy as the stock bulls believe.  A possible scenario, possibly not the likely one, is a continuation of a very long cycle of high unemployment, anemic growth in developed economies, and low inflation interrupted by a periods of mild deflation.  So, as the OG is fond of saying, certainty is for fools.  While I agree that the most likely scenario is the one advanced by Cramer,  I will not invest as if I knew that the future will unfold as he and I believe.

Vanguard has issued a caution to bond investors:    Vanguard's investment chief cautions bond investors  

One way for me to mitigate the interest rate risk inherent in bond funds is to buy mostly individual bonds, and then use the cash flow from those investments to buy higher yielding stocks.   My current allocation is tilted toward stocks, but most of my stocks are good income generators too.  Income generation and the reinvestment of that income to purchase additional income generating securities is the hallmark of my investment strategy.   

Bond and Bond Funds (SIFMA SITE)

Jon Stewart makes fun of Uncle Ben in a recent segment, showing a previous interview on 60 minutes where Bernanke had asserted that the FED  was printing money.      The Daily Show with Jon Stewart - 12/07/10 - Video Clip NPR   zero hedge

1. BOUGHT 1 Cincinnati Bell Senior Bond at 96.8 Maturing in 2020-Tuesday (see Disclaimer):   The common stock symbol for Cincinnati Bell Inc is CBB (formerly known as Broadwing).  This senior bond matures on 10/15/2020 and has a 8.375% coupon.  It is rated as junk, with Moody's currently at B2 and S & P at B+.  This is a link to the FINRA information on this bond. (Symbol CBB.GT/CUSIP: 171871AN6). Interest is payable semi-annually in April and October. This is a link to the prospectus:  Final Prospectus Supplement The original offering was for 500 million, completed in early October 2010,  The firm later added an additional 250 million. Press Release dated November 8, 2010

My confirmation states that the yield to maturity is 8.865% and the bond is subject to a make whole provision.   

The company describes this bond at page 10 of its last filed Quarterly Report.

Cincinnati Bell offers wireline and wireless telecommunication  services in Cincinnati, Ohio and surrounding communities.  Wireline services account for about 55% of revenues in 2009, with about 686,900 access lines (down 6.9% year over year) and 251,300 internet customers as of 9/30/2010.  The firm is expanding its fiber-to-the -home  CBB also has about 510,000 wireless customers.

 The firm bought a data center operator for 525 million in cash in 2010, which increased CBB's debt level, but added to CBB's growing technology solutions business that accounted for 26% of revenue in the first nine months of 2010.  CBB reported a disappointing 3rd quarter E.P.S. of 6 cents, down from 12 cents a year ago.  Quarterly Report Revenues were in line with consensus estimates however, up 4% year over year to 352 million. The current consensus estimate is for

CBB recently sold 275 million of 8.375% senior notes due 2020 and plans to use the proceeds to repay the outstanding indebtedness under its secured loan facility.

2. Added 50 shares of the TC DKF in the Roth IRA at $25.63 on Tuesday (see Disclaimer):  This TC contains a senior Goodrich  (GR) bond as its underlying security.  This purchase was an average up from the prior purchase in this account at  $20 in March 2009.  I currently own 100 shares in both a taxable account and in the Roth IRA. 

This is a link to the prospectus,, and to the  FINRA information on the underlying Goodrich bond which is trading at above its par value.  Trading in the underlying bond, however, is sporadic and generally light.  Possibly, the light trading (i.e. demand) of this bond has kept the owner of the call warrant from exercising it. 

The TC DKF has a 8% coupon.  The underlying bond has a 7% coupon.  It is usual for a TC to have either a lower or higher coupon than the underlying bond, though a few have the same coupon.  If the bonds are purchased at a discount to their par value when the trust is first created, then the TC would have a higher coupon than the underlying bond.  Another example is the TC XKK(owned), which contains a Goodyear Tire bond with a 7% coupon, but the TC has a 8% coupon.  All of the Goldman Sachs' TCs which contain the 2033 senior bond, on the other hand, have a lower coupon than the underlying bond. 

Clearly, the TC DKF represents a better value than the underlying bond.  It has a 1% higher coupon and is selling at a less of a premium to its par value.  The problem is the existence of the call warrant, which will place a lid on DKF's price appreciation.   So, at the current price, DKF may appreciate a few cents as it comes closer to its ex interest date, but a rational price would never be above its par value plus accrued interest due to the presence of the call warrant attached to it.   But, there is always downside to a long bond due to a rise in interest rates.  While the Goodrich bond has credit risk, I am not currently concerned about it.  GR is expected to earn $4.39 per share in 2010 and $5.24 in 2011. 

According to FINRA, this GR bond is rated BBB+  by S & P and Fitch, and Baa2 by Moody's. All of those ratings are investment grade. 

At a total cost of $25.63, the yield is around 7.8%.  The bond and the TC mature in 2038.  The melded yield of the 100 shares held in the ROTH is around 8.76%, so I am content with that in the ROTH as long as I am comfortable about the credit risk.  I view a taxable bond in the ROTH IRA to be equivalent to a tax free bond in the taxable account, and it is of course impossible to find an investment grade tax free bond yielding 8.76%. 

3. Bought 50 of  Oritani Financial Corp (ORIT) at $11.58 (Regional Bank Stocks' basket strategy)(See Disclaimer): I asked one of my readers, who calculates Texas Ratios (TR), what the TR was for ORIT, the lower the TR the better.  He calculated ORIT's TR at 3.9% as of 9/30/2010.  This savings bank refused to participate in TARP, which is viewed as a positive.    Since there is no government preferred stock providing equity support, the capital ratio for ORIT is "pure", in the way that I look at it.   Of all of the banks in my regional bank basket, this one has the best capital ratios as of 9/30/2010. For ORIT, the total capital to risk weighted assets was at 38.7% (8% well capitalized) and the tier 1 capital to risk weighted assets was at 37.5% (4% well capitalized).   The numbers for the operating bank are less than the holding company but still at a strong 24.6% for total capital and 23.4% for tier 1 capital to risk weighted assets.  Page 31: Form 10-Q

Oritani completed a conversion to a stock company earlier in the year.  As part of that process, it sold over 41,363,214  shares at $10 per share. Form 10-Q at page 22;  Press Release 

As of 9/30, the net interest margin was okay at 3.25%. The net charge-offs to average loans outstanding was .06%.  The last filed Form 10-K shows NPLs at 2.48% to total loans  as of 6/30/2010 (p.10).  

This is a link to a map of ORIT's branches, most of them are in Bergen County in NJ:   Oritani Bank : Locations

The main knock on the stock, not the bank, is that the P/E based on the estimate for F/Y 2012 of 58 cents is very high at close to 20 based on the $11.58 price.   That consensus estimate is made by 2 analysts.  For the last quarter, ORIT earned 14 cents, up from 8 cents in the 3rd quarter of 2009. 

The bank is currently paying a quarterly dividend of 10 cents, giving it about a 3.5% yield at a total cost of $11.58.  

The following table is current for my regional bank basket: 

Regional Bank Basket As of 12/8/2010

I am keeping track of the realized gains  in Item # 3 2010 Realized Gains Regional Bank Stock.  That total is currently $3,121.31. 

4. Bought 100 of the stock CEF ETO at $20.14 (see disclaimer):   This is a link to the last filed shareholder report for the  Eaton Vance Tax-Advantaged Dividend Income Fund (ETO).   As of 8/31/2010, the fund had approximately 68% in common stocks,  26% in preferred stocks, and the remainder in corporate bonds.  I would call it a balanced world fund.  The fund does use some leverage.  For stocks, the fund has significant weightings in higher yielding sectors, such as energy, telecommunications, energy and pharmaceutical companies.  Perusing through the list of preferred stocks, I recognized a number of securities that pay qualified dividends.  Some of the bonds are trust preferred securities that are in effect junior bonds.  

The fund is classified at the WSJ as a "World Equity Fund".  As of 12/7/2010, the net asset value was $22.05 per share and the closing market price that day was $20.18.  The discount to net asset value was -8.48% as of Monday's close. 

The fund pays monthly dividends at the current rate of $.1167.   Eaton Vance Investment Managers - Tax-Advantaged Global Dividend Opportunities Fund   As shown in the above reference shareholder report, the fund is back in the black, realizing almost 17 million in gains for its fiscal year ending in August, as well as increasing its unrealized appreciation by over 25 million for that F/Y.   

Unlike pure equity funds with managed distributions, who need significant realized gains to support a high dividend, this fund probably can support most of its distribution through common and preferred stock dividends and interest payments. 

The expense ratio is shown at 1.04% excluding interest and 1.43% including interest at page 11. 

Some of the remaining trades will be discussed in the next post. 

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