Friday, January 14, 2011

Sold 101 MRK at 34.95/Sold: 50 MWR @ 22.98, 50 PSEC @ 11.5 and Bought 70 JZV @ 24.14-Regular IRA/Sold 100 JBI at 26.5/Sold 50 FPCPRA @ 25.47 in Roth IRA

The average earnings of a Master of Disaster, who is a trader with ten years experience, is 1 million per year, 400 thousand more than a brain surgeon.  Bloomberg  The traders are complaining about their decline in pay.  

Nicholas Marshi, who writes frequently about Business Development Corporations, has a new article discussing Prospect Capital (PSEC) at Seeking Alpha. I own 200 shares in a taxable account and 50 shares in an IRA which I sold yesterday.  My most recent discussion can be found when I purchased those shares in the IRA.  Item # 6  Bought  50 PSEC @ 9.97 in IRA I mentioned in that post that I will trade those 50 shares for a small profit since I view PSEC as "too risky for a long term hold" in my retirement accounts.  My last purchase in the taxable account was at 9.5 last July. 

I had a discussion earlier this week with a young man that has the same last name as Headknocker, who is allegedly attending Northwestern University. I say allegedly only because he seems to have a lot of money to invest in stocks for an unemployed student.   He was talking about buying shares in F5 Networks and Riverbed Technology.  While those stocks are certainly in a parabolic move, and have been worthy speculations over the past year or so, both companies are selling at multiples of earnings that suggest a long term growth rate that can rarely be sustained by any company.  RVBD has a forward P/E of 50 and FFIV is at 33 based on F/Y ending in September 2012.  The trailing P/E on FFIV is around 77.  Earnings estimates are generally "pro forma" for tech companies, rather than GAAP earnings.   FFIV reported non-GAAP profits of 79 cents per share for its 4th quarter ending in 9/2010, beating the 71 cent estimate. GAAP earnings were reported at 59 cents per share.   SEC Filed Press Release The tech companies have convinced investors that their pro forma numbers, which exclude stock based compensation and a variety of "one time" charges that generally occur every year, are better reflections of their performance than the significantly lower GAAP numbers.  

If a large competitor, such as Cisco, decides to devote a lot of research money in the niche of an FFIV or RVBD, then I suspect that these high flyers will suffer a serious multiple contraction.  In my lifetime, only one company was able to grow at a 20% compounded rate for a decade, and that was Microsoft starting in the 1980s.   So, as I mentioned to Tyler, I do not have a problem about speculating in these risky companies, provided one realizes that the worm can turn quickly against them and ultimately they will be priced at levels that can not be supported by reasonably anticipated, long term earnings growth.

There are many reasons why I missed the rise of the Nasdaq stocks in 1999 and their crash.  One reason is refusing to buy stocks that require an irrational prediction of growth that is almost never achieved by any company. 

I wish that someone had told me to buy a consumer staples stock, like General Mills, and to reinvest the dividends to buy additional shares, when I was 20, more than a few moons ago.  I had to scrounge around and find a chart of GIS that went that far back in time.  In 1971, the split adjusted price of GIS was $1.34 per share.   Apparently, my discussion had some impact, since Tyler bought GIS as a long term holding, meaning I suspect until his junior year.    I also passed along the story of how I passed on a purchase of 100 of the Berkshire "A" shares in 1974, somewhere in the $30 range per share as I recall.   

Marathon Oil rallied over 10% yesterday to close at $42.98, up 6.04%, after announcing plans to spin off its refinery business.  Headknocker wants to know what happened to the 100 shares of MRO purchased at 28.15 less than a year ago.  The Old Geezer replied that he could not remember what he had for lunch yesterday.  RB added, ask "the Nerd Machine, tunnel vision LB, Lame Brain extraordinaire".  As noted in the post discussing the purchase, RB bought the shares as a long term core position in the energy business. 

1. Sold 101 Merck at $34.95 on Thursday (see Disclaimer):  I sold Merck at  break-even with the dividend, after the company disclosed that it had halted one Phase III trial of vorapaxar and modified another, due to safety concerns. Merck Statement on Changes to Clinical Studies of Vorapaxar   Bloomberg That drug's success in earlier clinical trials was the motivating factor in my decision to purchase shares.  I do not like being surprised in this fashion. Bought MRK at 35.55   Bought 50 MRK at 34.78   Merck closed down 6.62% in trading yesterday. 

2. Sold in Regular IRA 50 MWR at 22.98 and 50 PSEC at 11.5 and bought 70 of the TC JZV at $24.14 (see Disclaimer):  When an investor is concerned about the onset of a long term bear market in bonds, as I am, some of that concern can be alleviated by tweaking the investment strategy.  Some of that tweaking, at least for the moment, involves selling long term bonds selling near par value and yielding less than 7% and substituting a higher yielding bond with a shorter maturity.   

I discussed the TC JZV in yesterday's post. Sold 100 REPRA at 24.11 and Added 50 JZV at 24.23 The underlying bond is a senior CNA Financial Bond maturing in 2023.  My current yield at a total cost of $24.14 is around 7.25%. I decided to exit the position in MWR, which is yielding less than 7%, and has a 2033 maturity. Bought 50 MWR in regular IRA at 22.25 MWR is also in effect a junior bond with rights of deferral.  This is the same rationale as expressed in yesterday's post which involve selling REPRB. 

I decided also to exit the 50 share position in PSEC after receiving a couple of monthly dividends and a decent percentage gain. Bought   50 PSEC @ 9.97 in IRA I am holding a long term a 200 share position in a taxable account. My last purchase in the taxable account was  at $9.5.   This is the second round trip for small gains in the regular IRA:  Bought 50 PSEC at $10.48    Sold 50 of the 200 PSEC at $12.16-regular IRA   

I will take far less risks in the retirement accounts.  I view JZV to be overall less risky than PSEC and MWR.  

PSEC closed at $11.53 in trading yesterday, up 3.41%. 

However, the only positives about JZV at its current price is its intermediate maturity (at the long end), its investment grade quality, and the fact that money will double in 9.9 years at 7.25%.  And that doubling is in a tax deferred retirement account. I would prefer to own this security in the ROTH, but I used up most of my available Roth funds buying JZV yesterday in that account, as well as the earlier purchase of 100 GJP.  I have some funds in reserve to buy synthetic floaters in that account, when the opportunity arises. 

The last trustee's distribution report for JZV can be accessed at Trustee's Distribution Statement.  The trust owns 29 million in face amount of the CNA senior 7.25% bonds maturing on 11/15/2023.  

I do not know who owns the call warrant attached to the TC JZV. The most likely owner is the brokerage firm responsible for creating the trust that owns the bonds.  In the case of JZV, the brokerage company was Lehman.  I have owned four TCs that have been called in whole or in part by the warrant owner, where Lehman originated the trusts. The most recent was XFJ and the others were XFL (full), JZE (full) and JZJ (partial).

Possibly, the Lehman bankruptcy estate sold the warrants to another party or the trustee is exercising those rights to make a profit for the estate. In each of the four Lehman originated TCs, Lehman would have bought the bonds in the secondary market, deposited them in the trust, and the trust would have paid for those bonds by issuing trust certificates to the public. Lehman would deliver all documents necessary to transfer ownership of the deposited assets. (see, e.g., page 45 of the JZV prospectus) The TC represents an undivided beneficial ownership interest in the bonds deposited into the trust. 

Since Lehman declared bankruptcy, all of the TCs originating from that firm continued to make distributions to the owners of the TCs. The trustee is independent and is responsible for collecting the bond payments from the issuer, in this case CNA Financial, and then for distributing the payments proportionally to the owners of the TCs.

I did receive today the redemption payout for XFJ, which was called by the owner of the call warrant:  Call Warrant Exercise for XFJ. It would be useful to know the identity of the call warrant owner for these Lehman ABS originations.   

3. Sold 100 of the 150 JBI at 26.5 on Thursday (see Disclaimer):  JBI's par value is $25.  There is a call warrant attached to this trust certificate (page S-8 and the underlying bond is trading  above its par value even though it has a lower coupon than the TC. FINRA A price in excess of JBI's par value, plus accrued interest, is in my view too high, given all of the recent call warrant redemption activity. The $26.5 price is not so high to justify selling the 50 shares owned in the ROTH IRA which is generating a good TF income stream.  

This is another Lehman originated There have been a number of recent call warrant exercises for TCs originating from Lehman and Morgan Stanley. 

I first started to discuss JBI when it was selling at around $16 to $17 per share. TRUST CERTIFICATES JBI DUKE (October 2008).

4. Sold 50 FPCPRA at 25.47 in the Roth IRA on Thursday (see Disclaimer): Later in the day, in keeping with the approach that I am taking now with my individual bond holdings, I decided to sell my 50 shares of FPCPRA, a TP with a 2039 maturity and a 7.1% coupon.  The underlying bond was originally issued by Florida Progress, an electric utility, that is now part of Progress Energy.  PGN has agreed to be acquired by Duke.  If that is consummated, then this obligation will pass to Duke. I am not concerned about the credit risk on this one, but the interest rate risk.  I received several quarterly interest payments and realized a small profit on the shares. Bought 50 Shares of FPCPRA (Oct 2009). Generally, I am pleased to make any profit on my individual bond sales in the retirement accounts, since their primary purpose is to generate income.  For the last two years, I have realized unusually high profits from bond trading. I believe those days are long gone.  

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