Tuesday, January 4, 2011

Alcoa and Intel/Sold 100 GGN at 19.36/Bought 1 Senior USG Bond at 89 Maturing in 2016/Junk Bond Ladder Strategy

The ISM index for manufacturing increased in December for the 17th consecutive month rising to 57 from 56.6 in November. The new orders component rose 4.3 to 60.9.  Employment, however, fell 1.8 to 55.7.

Cramer believes that the DJIA will hit 13365 in 2011, and claims that estimate was not pulled out of an orifice.   CNBC.com  He believes that 2011 will "be the year of the banks". He further opined that the top three DJIA stocks will be Alcoa, Intel and American Express in that order.

1. Alcoa (owned): I own Alcoa with the last purchase made at $5.6 in March 2009.  Additional shares were purchased at around $11 along with fractional shares purchased with dividends.  My intention was to sell those shares for around a $1500 profit and use the proceeds at some point to buy an Alcoa bond.  I was critical in a post from last March of a J P Morgan analyst who reduced Alcoa to neutral and cut his earnings forecast for 2011 to just 48 cents per share based on a 2011 forecast of aluminum prices at $2027 per tonne.  Many investors no doubt sold AA in response to that forecast and downgrade.  This was my comment at the time about it:

"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? The current spot price is around $1.08 per pound if the Reuters numbers are correct from a story published last Friday. (Reuters says the current price is $2400 per tonne and there are 2204.622 pounds in a metric ton)

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 

Alcoa (AA) closed at $15.8 per share yesterday, up 41 cents.   Aluminum Prices, London Metal Exchange 

2. Bought 1 USG Senior Bond Maturing in 2016 at 89.8 with Concession-89 limit order (see Disclaimer):  This may be the riskiest of the junk bonds that I have bought over the past few weeks.  While the other companies also have troublesome debt levels given their current operating performance,  they at least have earnings.  USG is estimated to lose $3.12 per share this year, and $1.8 next year.  USG has been shellacked due to the recession and the nationwide problems in housing that has resulted in anemic new housing starts.   USG sells building materials primarily under the "Sheetrock, Durock, and Fiberock" brands.  These are products used in buildings to finish the interior walls and ceilings.   Profile | Reuters.com

This is a link to the last earnings report for the third quarter of 2010, where the company lost $1 per share:  Form 10 Q  The company then had 400 million in cash and 1.952 billion in long term debt.  The maturity dates of the debt are referenced at pages 10-11.

I bought the senior note maturing in 2016 that has a 6.3% coupon.  There is a 9.75% coupon note maturing in 2014 and a 7.75% note maturing in 2018.   As stated in this 10-Q, all of those notes are senior, unsecured debt obligations that rank equally with one another.

This is a link to the FINRA information on the 2016 bond.  It matures on 11/15/2016.  Moody's rates it at Caa2 and S & P has it at B, both well within junk territory.

This is a link to the bond's prospectus:  USG 2016 6.3% Senior Notes Prospectus

At $89.8, my current yield is around 7% and the YTM would be higher due to the purchase at a 10+% discount to par value.  At the time of the trade, I estimated the YTM at around 8.55%.  My confirmation statement has 8.546% as my YTM.  

This one was bought primarily for diversity.

3. Junk Bond Basket Strategy:  I have been building a basket of junk rated bonds, maturing in the 2012 to 2020 time frame with one exception, which is an Albertson's bond maturing in 2029.  Except for two Cincinnati Bell bonds maturing in 2018 and 2 Alon Refining Krotz Springs bonds maturing in 2014, I have limited my purchase to just 1 bond for the other individual bonds in this basket.

All of the bonds in this basket were bought at discounts to their respective par values. I am using a ladder approach for this particular basket. This basket now includes the following junk bonds arranged by maturity date:

1 United Refining 10.5% Senior Bond Maturing 11/15/2012 (Redeemed at Par by Company 4/2011)
1 SNV 4.875% Junior Bond Maturing in 2/15/2013   Sold 1 Synovus Bond 
1 Circus Circus 7.625% Senior SUB Bond Maturing 7/15/2013 (added 2/12011)  Sold: 1 Circus Circus 
1 Eastman Kodak 7.25% Senior Bond Maturing 11/15/2013 (Added 1/27/2011)
Added 1 Eastman Kodak 7.25% Senior Bond Maturing 11/15/2013 (added 5/18/2011) FILED FOR BANKRUPTCY JANUARY 2012
1 Cenveo 7.875% Senior Sub Bond Maturing 12/1/2013 (added 3/23/2011) Sold see below
1 Cenveo 7.875% Senior Subordinated Maturing 12/1/2013 (added 11/10/11) Sold 2 Cenveo 
1 Solo Cup 8.5% Senior Sub Bond Maturing 2/15/2014 (added 3/17/2011) Sold 1 Solo Cup 
1 Warner Music 7.375% Senior Sub Bond Maturing 4/15/2014 (Added 2/28/2011) Redeemed at 101.229 by issuer on 8/19/11
1 Travelport 9.875% Senior Bond Maturing in 9/1/2014 (added 3/8/2011)
1 SuperValu 7.5% Senior Bond Maturing 11/15/2014 Sold 1 SuperValu 
1 AGY Holdings 11% 2nd Lien Senior Bond  Maturing 11/15/2014 (Added 5/16/2011)
1 Edgen Murray 12.25%  Senior Secured Bond Maturing 1/15/2015 (Added 3/22/2011)
1 Select Medical 7.625% Senior Subordinated Bond Maturing 2/1/2015 (added 8/2/11) 
1 Hawker Acquisition 8.5% Senior Bond Maturing 4/1/2015 (Added 2/3/2011) SOLD 1 Hawker
1 Harland Clarke 9.5% Senior Bond Maturing 5/15/2015 (added 2/10/2011)
2 Harland Clarke 9.5% Senior Bonds Maturing on 5/15/2015 (added 6/21/11)
1 Forest City Enterprises 7.65% Senior Bond Maturing 6/1/2015 (added 5/2012)
1 Gray Television 10.5% Second Lien Bond Maturing 6/29/2015 (added 11/3/11)
1 Nextel 7.375% Senior Bond Maturing on 8/1/2015  (added 8/16/11) SOLD 1 Nextel  
1 Quicksilver Resources 8.25% Senior Bond Maturing 8/1/2015 (added 7/12)
1 ArvinMeritor 8.125% Senior Bond Maturing 9/15/2015 (added 1/2012)
1 Reddy ICE 13.25% Second Lien Senior Bond Maturing 11/1/2015 (added 3/29/2011) Filed For Bankruptcy/1 Bond Later Exchanged for 43 shares of new common shares
1 Norcraft 10.5% Senior Second Lien Bond Maturing 12/15/2015 (added 3/2012) Sold 1 Norcraft 
1 Appleton Papers 11.25% 2nd Lien Bond Maturing 12/15/2015 (added 3/11/2011) Sold 1 Appleton Papers
2 OfficeMax Senior Bonds Maturing 2/1/2016 (Added 1/10/2011)
1 Regions Bond 7.5% Sub Bond Maturing 5/15/2018   Sold 1 Regions Junior Bond at 105.5 
1 Vulcan Materials 7% Senior Bond Maturing 6/15/2018 (added 8/23/11)  Sold 1 Vulcan Materials  
1 MetroPCS 7.875% Senior Bond Maturing 9/1/2018 (added 8/24/11)
1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 (added September 2011) SOLD 3 Sears 6.625% 
1 Sears Holding 6.625% Senior Secured Bond Maturing 2018 (added May 2012) 
2 Sears Holding Senior Secured 6.625% Bonds Maturing 10/15/2018 (added August 2012) Sold (see above)
1 Boyd Gaming 9.125% Senior Bond Maturing on 12/1/2018 (added October 2011)
1 GMAC 6.25% Bond Maturing 5/15/2019 (added 4/4/2011) Sold 1 GMAC  
2 Windstream 7% Senior Bonds Maturing on 3/15/2019 (added 8/10/11) Sold Winstream 2019s 
2 RadioShack 6.75% Senior Bonds Maturing 2019 (added 3/2012)
1 Quicksilver Resources 9.125% Senior Bond Maturing 8/15/2019 (added 2/2012)
1 Quicksilver Resources 9.125% Senior Bond Maturing 2019 at 97-ROTH IRA (added 5/12)
1 J.C. Penny 5.65% Senior Bond Maturing 6/1/2020 (added 6/2012) Sold 1 J.C. Penney 
1 Senior Texas Industries 9.25% Bond Maturing 8/15/2020 (7/14/2011)
1 Goodyear Tire 8.25% Senior Maturing on 8/15/2020 (added 10/7/11) Sold  Goodyear Tire Senior Bond
1 United Rentals 8.37% Senior Subordinated Bond Maturing 9/15/2020 (added 8/29/11) Sold 1 United Rentals 2020 
1 Cincinnati Bell 8.375% Senior Bond Maturing 10/15/2020 Sold  Cincinnati Bell Senior 
1 Windstream 7.75% Senior Bond Maturing 10/15/2020 (added 8/11/11) Sold Winstream 2020 
1 Cricket Communications 7.75% Senior Note Maturing on 10/15/2020 (added 6/27/11)
1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 (added Feb 2012) Sold 1 RRD 
1 R.R. Donnelley 8.875% Senior Bond Maturing in 2021 (bought back May 2012)
1 Vulcan Materials 7.5% Senior Bond Maturing 6/15/2021  (added 6/15/2011) Sold 1 Vulcan Materials 
1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 (added 6/2011)
1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 (added 9/2012)
1 U.S. Steel 7.5% Senior Bond Maturing in 2022 (added 9/2012)
1 Brunswick 7.375% Senior Bond Maturing 9/1/2023 (added 3/31/2011)
1 Senior 7.5% HCA Bond Maturing 12/15/2023 (added 5/4/2011)
1 Senior 7.69% HCA Bond Maturing 6/15/2025 (added 4/29/2011)
1 Tenneco Packaging7.95% Senior Bond Maturing 12/15/2025  (added 3/4/2011)
1 Wendy's Int 7% Senior Bond Maturing 12/15/2025 (added 2/17/2011) Sold 1 Wendys  
1 Albertsons 7.75% Senior Bond Maturing 6/15/2026 (added 2/7/2011) SOLD: 1 Albertsons 
1 Albertsons 7.75% Senior Note Maturing 6/15/2026 (bought back 4/2012)
Bought 1 MBNA Capital Series A 8.278% TP Maturing 12/1/2026 (added 11/7/11) Redeemed by Issuer at Premium to Par Value July 2012
1 Belo Senior 7.75% Senior Bond Maturing 1/1/2027 (added 4/13/2011) Sold 1 Belo 7.75%  
1 Cooper Tire 7.625% Senior Bond Maturing 3/15/2027 (added 4/6/2011)  Sold 1 Cooper Tire 
1 Tenneco Packaging 8.375% Senior Bond Maturing in 4/15/2027 (added 3/16/2011)
1 Dillards 7.75% Senior Bond Maturing 5/15/2027 (added 5/12/2017) Sold 1 Dillard's  
1 Albertsons 7.11% Senior Bond Maturing 7/22/27 (added 2/2012)
1 7.55% CoreLogic Senior Bond Maturing 4/1/2028  (added 4/26/2011)
1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 (added 2/2012)
1 R.R. Donelley 6.625% Senior Bond Maturing 4/15/2029 (added 5/16/2011) Sold 1 RRD 
1 Hercules 6.5% Junior Bond Maturing on 6/30/29 (added 6/23/11)
I also have some investment grade corporate bonds that fill some of the gaps in this ladder.  For example, in 2007 when I was buying investment grade corporate bonds, I bought 2 Prudential 5.6% senior internote bonds maturing on 7/15/2012, and that note pays monthly. (Cusip: 74432ATU4).  That bond is infrequently traded now.    The investment grade bonds are not part of this strategy.   The Prudential bond was the type of short term bond that I was buying in 2007 as I moved out of stocks.

More about this strategy can be found in a subsequent post: Item # 5  More on Rationale for Junk Bond Ladder Strategy

I am tracking realized gains and loss in Item # 5 Realized Gains Junk Bond Ladder Strategy.  My  Personal Risk Ratings For Junk Bonds can be found in a later Post from May 2011. See also:  FINRA Links to Bonds in Junk Bond Ladder Strategy

I am excluding all GMAC bonds from consideration since it is against my religion to buy one of those.   I am also excluding all American General Finance bonds. (added 5/3/2011: Please note that the OG's religion has changed since there are now 3 GMAC bonds in the preceding list)

I also own a few trust certificates containing longer term junk rated bonds.  For the most part, those securities have either been sold (e.g. DKR) or redeemed by the call warrant owner (e.g. KRH).   I would view my current holdings of TCs as containing higher quality junk such as the junior bond from Hanover Insurance maturing in 2027 (PKM), a senior Goodyear Tire bond maturing in 2028 (XKK), a senior CoreLogic bond maturing in 2028 (PJS), a senior Liberty Media bond maturing in 2030 (PIS), a senior Qwest Capital bond maturing in 2031 (PJA), a senior Sears Acceptance bond maturing in 2032 (SSRAP),  and a senior Sprint Capital bond (DHM) maturing in 2028.   I have bought and sold many of these bonds and currently have an insignificant position in them as a group.  I also own 50 shares of the junk rated TPs ZBPRB and RFPRZ {I am not counting the KRBPRE and KRBPRD since Moody's rates those TPs as investment grade while S & P have them still at junk: Bank of America | Investor Relations | Credit Ratings.   The same applied to 150 shares of SIVBO and to 150 shares of the exchange traded CPI floater OSM which matures in 2017}.   These junk rated exchange traded securities start to fill out the 2020 to 2032 time frame and are far easier to trade:

2027 PKM 150 SHARES   Hanover Junior Bond Bought 150 TC PKM
2028 XKK 100 SHARES  Goodyear Tire Senior Sold: 100 of the 200 XKK at 9.96
2028 DHM 50 Shares Bought 50 DHM @ 24.51
2028 PJS 150 SHARES  CoreLogic Senior (formerly  First American, see  #3  Bought 50 of the TC PJS at 24.84)
2030 PIS 50 Shares  Liberty Media Senior Bought 50 PIS at 24.88 in Roth IRA
2031 PJA 100 SHARES  Qwest Capital Senior  Bought 50 PJA at 19.45
2032 DKQ 50 shares Macy's Senior  Bought 50 DKQ at 22.06 
2032 SSRAP 100 SHARES  Sears Acceptance senior Bought 100 SSRAP at $17.25
2032 ZBPRB 50 SHARES  Zions Junior /bought 50 zbprb in roth at $19.9
Trust Certificates: Links in One Post 
Exchange Traded Bonds: 
Trust Preferred Securities: Links in One Post

The post references are just as a starting point for anyone interested in reading about those TCs and exclude many buys and sells for several of these securities. In this grouping I have realized the most profit from PJS (one buy at an unbelievable $7.2 during the Dark Period) and to a lesser extent a variety of TCs containing Sprint Capital bonds, including DHM, DKI, and GJD.  I hope with a little luck to be playing with the house's money on the junk bonds maturing in 2020 to 2030 that are exchange traded before the end of this year.

I will add to this list when I purchase a new security under this strategy or discover one that I already own that is not included already which is highly likely.  

4.  Sold 100 GGN at $19.359 on Monday (see Disclaimer):  This is one of RB's "feel" trades.   There is a dispute among staff about the sustainability of gold's parabolic move.  LB wanted to hold GGN, even though it was probably selling at over a 5% premium to its net asset value when the shares were sold yesterday.  Headknocker sided with RB who felt that gold was overdue for a significant pullback.  HK was heard to say what goes up a lot can come down a lot.   This is the second round trip on GGN shares.  The 100 shares sold yesterday were bought at  17.85 about 1 month ago.

GGN closed at $19.25 which represented a 5.89% premium to its net asset value.   WSJ.com

5. Intel (own): A Piper Jaffray's analyst, Gus Richard, believes that Intel is "less relevant" and is being left behind in the fourth wave of computing which consists of smart phones and tablets according to this analyst.  Otellini recently represented that it had secured 35 design wins for its Atom chip for tablets.  Richard reduced his rating on Intel from Overweight to Neutral while cutting his price target to $21 to $25. Barrons.com

The phrase "less relevant" sounds like one of those less than transparent musings of a trial lawyer arguing a case before a jury.  The jury thinks that they heard "not relevant" or "irrelevant" when the actual meaning of the phrase is so ambiguous as to be meaningless.  If I judged relevancy on a scale of 1 to 100, and Intel was at 90 before the tablet introduction by Apple, then it could be a 89 now, by way of example, and be "less relevant".   I wonder what that makes AMD, lesser relevant I suppose. 

I am certainly no tech nerd.  But I wonder whether those who use a laptop consider the tablet to be a substitute?   Some may for awhile, but I suspect most will not abandon their laptop for a tablet.  Maybe Mr. Richard needs to write a blog on an IPAD or IPhone keyboard, or anything other than one of those text messages that use a letter or two as substitutions for words. 

I have bought Intel shares between $14.46 and $19.08. Bought INTC at 14.46 Bought Intel at 15.25 Bought Intel at $15.87 Added to Intel at $19.08. The last two purchases were in late August at 18.35 and at 19.16 last  October.  I have been reinvesting the dividends. 

Cramer was critical of the Piper analyst in his show last night, CNBC.com, as he picked Intel to his second largest Dow gainer for 2011.  

I will discuss the remaining trades from Monday in the next post. 

1 comment:

  1. Accidently found your url today and love it. I'm a senior making my own decisions and it looks loke we think alike. I also own some Edison Mission 7.75%, and some Cinc Bell 8.75%. Looking forward to your future decisions.