Wednesday, January 5, 2011

Bought 50 GIS at 35.53-Sold CEF ETO at 20.75/Sold 50 of 100 WASH @ 22.44/Bought 50 DKQ at 22.06/Bought 1 SNV Junior Bond Maturing in 2013 at 94/New Exchange Traded Senior Note From GS-GSF

Intel is on Credit Suisse's top ten stocks for 2011. 

HK wants to give the RB  kudos for calling the plunge in gold yesterday. The LB was heard to say, in an uncharacteristic soft voice, that it had heard a rumor that Headknocker was overdue for an extended stay at the Old Folk's Home. And LB will not mention that the RB also predicted yesterday that the Sun would go supernova after  gold sold off.   

In Pakistan, there is a blasphemy law that will give the death penalty to anyone convicted of insulting the Prophet, about what you would expect from that country. The governor of Pakistan's largest province, who was a critic of that law, was assassinated by one of his own bodyguards, a typical religious zealot and True Believer of the Islamic extremist variety. That law is used as a weapon to attack those who practice a different religion. The most famous recent case involves a Christian woman, Asia Bibi, sentenced to death, allegedly for touching the water bowl of her co-workers.   

1. Sold 100 ETO at $20.75 and Bought 50 GIS at $35.53 on Monday (see Disclaimer): I forgot to include ETO in the CEF table included in Monday's post.  I had just forgot about it.   In any event, I no longer own it, having bought the shares  at 20.14 a few weeks ago. So I do not need to revise my CEF table now. The  only reason for selling the shares was to increase my cash position some after using some of the proceeds to buy 50 shares of General Mills at $35.53. Admittedly, this purchase is a contrarian type purchase by the naturally contrary LB, our acting Head Trader here at HQ. Many believe that the packaged food companies will be lackluster performers this year, whose earnings will be nipped by commodity prices and competition from store brands.  

An example is Byron Wien’s prediction that  corn will rise to $8, wheat to $10, and soybeans to $16 (#6 Prediction) Those factors are certainly negative and are probably already built into General Mill's  share price. Personally, I think that it is absurd to value a company like GIS based on the ebb and flow, up and down movement of commodity prices.  But my 50 share purchase is not going to convince those who think irrationally in milliseconds of time. 

The General Mills  brands are well known. 

This is another purchase where our RB claims Headknocker would have better off keeping shares bought during the Dark Period at $48.52 before a 2 for 1 stock split. Freedom from Regulations and Irresponsibility/ Sold KXI and Bought GIS Those shares and many more were bought by our RB after its coup d'etat at the trading desk in early March 2009. The price paid for those shares adjusted by the stock split, which were purchased by the RB during its month long "frolic and detour", as LB calls it, would be $24.26. OG remembered that coup which made him nervous as the RB went on a month long spending spree, causing the the OG to up his Maalox infusion to a gallon a day.  

I did realize a nice profit, selling the shares at $60.47 or a split adjusted $30.24. RB just said that the Nerd LB thought that it had accomplish something with that short term profit, particularly since the shares were owned for about 3 months in 2009, which is  a tunnel vision, trading mentality, so characteristic of the Nerd Machine. And LB replied that it has better things to do then hold a boring stock like GIS after it received such a quick pop in price.   And LB bought some of those shares back in any event, so what is the fuss all about?   LB needs to get back to crunching the infinite number of variables and alternated scenarios. 

The current quarterly dividend rate for GIS is 28 cents per share. Based on a total cost of $35.53, the current yield would be about 3.15%, barely above the 3% minimum for any purchase under the dividend growth strategy. The payout ratio generally hovers slightly above 40% which indicates that dividend increases are supported by earnings growth. 

Another negative factor, however, under the dividend growth strategy is that GIS has not raised the dividend in some years. The annual dividend rate remained 55 cents in 1999, 2000, 2001, 2002, 2003, and 2004 according to the S & P data. This is a major negative under the dividend growth strategy. (See Item # 6 at  Common Stock Dividend Growth vs. Long Term Investment Grade Bonds for criteria) Since 2004, the annual dividend has more than doubled to $1.12.

GIS and its predecessor has paid dividends for 112 years. The dividend history can be found at General Mills - Dividends and Stock Splits

S & P currently rates GIS stock five stars with a 12 month price target of $41.  

The last earnings report was slightly disappointing. Excluding mark-to-market of certain commodity positions, GIS earned 76 cents compared to an expectation of 78 cents. Form 10-q Q/E 11/28/2010 GIS reaffirmed its F/Y 2011 guidance of $2.46 to $2.48 per share excluding that item. SEC Filed Press Release  This gives me a modest 14.33 P/E on F/Y 2011 estimated earnings. For F/Y 2012, ending in May 2012, the current estimate is $2.69 which reduces the P/E to 13.2  at a total cost of $35.53.

2. Sold 50 of 100 WASH at $22.44 on Monday (Regional Bank Stocks' basket strategy)(see Disclaimer): LB would like to sell all of the regional banks, take the money and run.  HK has forbidden that sensible option. So, instead, LB was allowed to pare one of the large percentage gainers in the regional bank basket.

I had bought 100 shares of Washington Trust at $15.26 last January. If LB had waited a few days, Headknocker observed, the shares in Washington Trust would have turned into a long term capital gain. LB noted that it is being distracted by the RB, a constant nuisance and noisemaker of ceaseless gibberish,  whereupon the RB asserted that the LB continues to help our Uncle Sam in his hour of need by selling for short term capital gains. HK let it be known that he was not in favor of making charitable contributions to our destitute Uncle.

WASH 50 Shares +347.03
While HK gave serious consideration to firing LB as the acting HT for the storied trading operation here at HQ, he thought that might make him appear fickle, possibly even lacking in understanding or sympathy to a few of our readers, having just appointed the Nerd as Head Trader after sending the Old Geezer to the Old Folks Home for mental rehabilitation and electric shock therapy, in order to energize the OG's ten remaining functioning brain cells.   

3. On The Cusp Of A Long Term Secular Bear Market in Bonds-Our LB and Louise Yamada:   Byron Wein  predicts that the 10 year treasury bond yield will rise close to 5% this year.  # 2 at Wien’s Ten Surprises for 2011 That will cause a lot of pain to bond investors. The current yield is close to 3.35%. 

Part of that will be due in Wien's opinion to a stronger than expected growth rate in the U.S. and to foreign investors wanting more yield to feed the beast.   

The bond market has been in a long term secular bull market since 1982. While it is impossible to predict the precise time of that bull's demise, it would be fair to say that bond bulls are pushing the envelope now. I thought that Randall Forsyth's column, titled Bond Yield Spike a Surprise for 2011?, was interesting in that it gave me some information about Louise Yamada's technical take on the bond market. As she points out, the current bull run in bonds is already the longest secular bull market in bonds since the founding of the U.S., and she believes that a structural bear market is in the offing.   The only question is the precise time. 

Her test for the commencement of that bear market is whether or not the 10 or the 30 year treasury bond breaks 5.5% to the upside. 

I have been emphasizing in this blog for months the carnage that can happen to bond investors in a long term structural bear market in bonds. Page 8 of this newsletter from the mutual fund company T Rowe Price shows the impact of rising rates on vintage U.S. treasury bonds and notes.  In their example, a ten year treasury with a coupon of 3.83% (higher than now) would lose 14.89% of its value with a 200 basis point rise in rates. The 30 year treasury with a 4.71% coupon would lose 24.55%. 

When I own an individual bond, I at least have the option of holding until maturity and then hopefully receiving the bond's par value provided the company is still solvent. With a bond fund, I do not have that option. The bond fund has no maturity date. In a long term secular bear market for bonds, the net asset value of the fund, particularly one investing in longer maturities, will continue to decline, possibly in an amount greater than the distributions paid by it. And that would not be hard considering what many of them are paying now.   

4.  Bought Back 50 DKQ at 22.06 Last Week (see Disclaimer): I neglected to mention this small purchase.  DKQ is a trust certificate that contains a senior bond originally issued by May Department Store, now part of Macy's.   

I believe that there is a decent chance that the ratings agencies will upgrade Macy's senior debt based on its improving operating performance. The current rating is junk by both S & P and Moody's according to FINRA. The underlying bond in this TC has a 6.9% coupon and is trading near its par value. There is a call warrant attached to this TC. The TC has a lower coupon at 6.25%:  Both the TC and its underlying bond mature on 1/15/2032.  Par value for the TC is $25. 

The current yield at a total cost of $22.06 is around 7.1%. The YTM is about 7.67% according to the Morningstar Bond Calculator: Yield to Maturity.  

I last sold this TC at 23. I first discussed it in this blog when it was trading near $10: TRUST CERTIFICATE MACY'S BOND DKQ (October 2008). 

This TC is scheduled to make its next semi-annual interest payment in a few days. Today's dividend page at the shows an ex interest date for DKQ on 1/10, payable on 1/18. That same page shows that the TC JZH, which I also own, goes ex interest on 1/12 as does the Nexen subordinated note with its quarterly interest payment. 

I will include this bond for now in my junk bond ladder in the 2020 to 2032 time frame. Junk Bond Ladder Strategy For a discussion of using a ladder to create a bond portfolio, see Thornburg Articles: A Laddered Bond Portfolio and Laddering.

For the exchange traded bonds like DKQ which are in the junk bond ladder, I will trade them frequently, adding to or subtracting from positions, sometimes eliminating one. My transaction cost is very low for those exchange traded bonds since I pay the same low commission as stock purchases. For those bonds in the ladder bought in the bond market, my transaction cost is very high, for no good reason in my opinion.  So I will probably hold most if not all of those bond until maturity.   

FYI, when I was looking at the WSF dividend page last night, I noticed a new exchange traded debt security, GSF, that just went public. That security is a senior note from Goldman Sachs with a $25 par value, a 6.125% coupon, and a 2060 maturity. Goldman Sachs Group Inc. 6.125% Notes 2060 Stock Quote - GSF I have included it in the relevant section of my Gateway Post on Exchange Traded Bonds. This is a link to the prospectus. 

5. SUPERVALU (SVU)(Own Senior Bonds only): Morgan Stanley downgraded SVU and Safeway to underweight yesterday.  BMO Capital markets cut Whole Foods and Safeway to market perform and Fresh Market to underperform. The concern is the food inflation would hurt grocer results by either margin compression or demand declines. Kroger noted last month that it was passing through price increases on national brands to consumers and would continue doing so. A Kroger also stated during the conference call that it was experiencing deflation in its grocery business of 50 basis points excluding milk. That is when the executive stated that Kroger intended to continue passing along price increases on the national brands. (comments by Rodney McMullen, Seeking Alpha) So, at least for now, it would be speculative to predict that grocery stores will not pass on most of those price increases. 

SVU fell 6.56% in trading yesterday to close at $8.98. 

6.  Bought 1 Synovus Junior Bond at 94 Maturing in 2013 on Tuesday (see Disclaimer): I have a low opinion of the management of Synovus, who are responsible for the improvident loans and losses suffered by this banking institution. The common stock hit 33 in 2007 and is hovering now near $2.65: Synovus Financial Corporation Chart | SNV The current consensus estimate is for a loss of $1.32 per share in 2010, but the expectation is for an improvement in 2011 to just a 20 cent loss. So, if that estimate proves to be more or less accurate, it is at least moving in the right direction. 

The bond purchased on Tuesday is a junior bond, which simply means it is junior in priority to senior bonds. Unlike a junior bond that is the underlying security in a trust preferred stock, however, this Synovus bond does not permit the bank to defer interest. Synovus would be in default under this note for failing to pay interest after a thirty day grace period (see page 15 of the Prospectus)

This junior bond will mature is about two years. The maturity date is 2/15/2013. The coupon is 4.875%. According to FINRA, the bond is rated B3 by Moody's and B+ by S & P, firmly in junk territory. Interest payments are made semi-annually in February and August.  While my current yield is around 5.18%, the YTM is much higher, given the discount and the short period of time to maturity. My confirmation for this purchase shows the YTM at 7.589%.

SNV has a high concentration of residential real estate construction loans.   

This bond would also be senior to the government's preferred stock, still on SNV's balance sheet in an abundant amount. (see balance sheet at page 3  FORM 10-Q, close to 968 million dollars)

SNV is frequently mentioned by pundits as an acquisition target. That would be find with me, just put their shareholders out of their misery and provide me with a more solvent institution to pay the interest and principal on my small loan to the bank.  

For those unfamiliar with this bank, it is a large regional bank in the Southeaster U.S. operating 324 branch locations in 5 states. 

I will discuss some of the remaining trades from Tuesday in the next post.    

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