Friday, February 11, 2011

Bought 1 Harland Clarke Senior Bond Maturing 2015/Sold 50 WSBC @ 20.01/Bought 50 of the TP NPBCO at $24.93/Sold 100 of the LT OPXT @ 3.15/KFT

Kraft Foods (owned) reported an operating E.P.S. of 46 cents for the 4th quarter and $2.39 for 2010.  The 4th quarter operating earnings per share met the consensus expectation.  Kraft predicted organic net revenue growth of "at least" 5% and operating E.P.S. growth of 11%-13% in 2011.  Sales in the 4th quarter rose to 13.773 billion, exceeding the consensus of 13.47 billion according to YF.  Operating margin declined 240 basis points from the year ago quarter due to commodity inflation. Input costs rose almost 500 million dollars in the 4th quarter.  I have traded Kraft shares on several occasions since starting this blog, and currently own 100 shares bought  at $29.86  (see, e.g. BOUGHT Kraft at $22.26 SOLD 100 KRAFT @ 26.75 SOLD 100 KRAFT at $28.06).  I will be content to collect the dividend and then to sell the shares for a 15% profit within two years after purchase.

Cisco does appear to be losing market share in switching and router sales, as noted by the Piper Jaffray analyst. Reuters  While I would agree that Cisco's stock needed to be hammered yesterday, I thought the reaction was overdone, with the stock falling 14.16% in price on 559,970,914 shares. I placed an order to buy 50 shares late in the afternoon at $18.75, which was not filled.

1. BOUGHT 1 Harland Clarke Holdings Senior Bond Maturing 5/15/2015 at 98.875 (99.675 with Concession)(Junk Bond Ladder Strategy)(see Disclaimer):  The coupon on this bond is 9.5% which will be close to both my current yield and my YTM, assuming the issuer makes all interest payments on schedule as well as the principal amount on 5/15/2015.  This fixed coupon note is discussed by Harland in its last filed Form 10 Q at page 12.  Harland also has a floating rate senior due in 2015 discussed at the same page.   Harland also has a senior secured debt facility which matures in June 2014, and that is one of the major negative issues for me. The amount outstanding on that facility as of 9/30/2010 was 1.7415 billion dollars. (see page 11)

As of 9/30/2010, the company had 239.3 million in cash.  It reported net income of 27.6 million for the Q/E 9/2010 and 87.8 million for the first nine months of 2010. (page 2 e10vq) I did not see a report filed yet for the 4th quarter.  

The main business is check printing but the company has expanded into other businesses in the past few years. Harland Clarke | Integrated payment, marketing, and security solutions

Interest on this bond is paid semi-annually in May and November. The Cusip number is 412690AB5. 

This is the link to the FINRA information on this bond.  It is rated junk.  Moody's rates it Caa1 and S & P is at B-. 

This is a link to the prospectus for both the floating rate and fixed coupon senior bonds maturing in 2015:

Harland Clarke is an indirect, wholly owned subsidiary of M & F Worldwide (MFW). Page 4  M & F Worldwide Form 10-Q for the Q/E 3/31/2011/

Some individual investors have never bought a bond in the bond market.  Unlike most exchange traded bonds, where the par value is $25 and the investor can buy any number of shares, the par value of the bond purchased in the bond market is $1,000.   Prices are not quoted in units of $1000, however.  Instead, the bid/ask quotes are made at 1/10th of the $1000 principal amount.  So, for the Harland bond purchased yesterday, I entered an order to buy 1 bond at the limit of 98.875, and the broker increase that limit to 99.675 to account for its "concession", i.e., commission.  At this broker, I would pay less in concession as I buy more bonds.  I pay the most by buying just 1 bond.  I also have to pay the seller accrued interest, and I will get that sum back when Harland makes its next interest payment.  Exchange traded bonds trade "flat" which simply means that the seller is not entitled to receive accrued interest.  Just to show what a confirmation looks like for a 1 bond purchase, I took a snapshot of my confirmation on the Harland bond purchase:

{I do not have any trouble buying junk bonds online at either Fidelity or Vanguard. Vanguard charges more for some reason.  I do not believe that TD Ameritrade and Schwab allow their customers to buy junk bonds online.  Although I have not tried yet to buy junk bonds at those brokers,  I have noticed that bond searches are limited only to investment grade issues.  TD Ameritrade does have the benefit of providing its customers with Moody's reports.}

If I bought 1 bond at 80 with the commission, then the total cost would be $800 plus any accrued interest.

This last junk bond purchase does beef up my 2015 maturities to 2 bonds, both highly speculative, with the other one, Hawker, being easily the riskiest of all the junk bonds in my junk ladder in my opinion.   This brings me up to $30,000 in principal amounts of junk bonds bought in the bond market, as opposed to exchange traded junk bonds.  There is an additional $2000 principal amount in one investment grade bond from Prudential that matures in 2012 which has been included in the graphs and tables previously shown in earlier posts.

My total out of pocket costs, including commissions/concessions but excluding accrued interest, is precisely $27,072.03 for the $30,000 in principal amount of junk rated bonds.  The average discount would be close to 10%, but the average was helped by several purchases at below 90 (e.g. Edison Mission, 1 Synovus, USG, Boyd) and two below 80 (e.g. 1 Albertsons and 1 Hawker).   So those are important numbers in this strategy.  By buying the bonds at a discount, I could have 3 out of 30 bonds go to zero in value and still break-even on the group while receiving interest payments that would range 4% to 5% higher annually than a similar maturity investment grade bond ladder, mostly BBB rated bonds.  I would not be surprised to lose $3000 in principal amount on this grouping of bonds.

For anyone seeing why I decided to go with the junk rated securities in the ladder, at least for the first thrust, I would recommend spending about an hour or two checking the yields on investment grade bonds.  Many investors may be content with a five percent yield on a ten year bond. I am not one of them.  I mentioned that Public Service of Oklahoma, a BBB S & P rated credit, has called a 6% coupon senior bond maturing in 2032, an exchange traded bond (POH). AEP Subsidiary Public Service Company of Oklahoma to Redeem Senior Notes   I did not mention that it had just sold a 4.4% senior bond maturing in 2021.  PSO Prospectus  I would prefer eating dirt to buying a 4.4% ten year bond.

2. Sold 100 of the LT OPXT at $3.15 (LOTTERY TICKET strategy)(see Disclaimer):  RB noted that it hit another home run with this LT buy, and would have made over a million dollars if the Nerd Machine had bought a million shares at $1.6 as the RB tried to do. Instead, the LB nixed that plan and bought 100 shares @ $1.6.  How can Headknocker buy Canada, all of it, with these small purchases, RB said in exasperation.   The RB admits that it knows nothing about Opnext, so what, why sweat the details, when everyone has to admit that all of the "blue light" stuff is really cool.  Now, how much money would Headknocker have made by buying a million of Opnext whenever the Real Man of the trading operation said buy.  Bought 100 OPXT @ 1.6 Sold at $3.15 Yesterday/ Bought 100 OPXT at 1.89 Sold 100 OPXT at $2.47Bought 50 OPXT at $1.91 Sold LT Opnext at $3.1 RB rests its case against the LB, Mama's Boy, Wimp Extraordinaire.

3. Sold 50 WSBC at $20.01 (Regional Bank Stocks' basket strategy) (see disclaimer):  Every quarter, after reviewing about 50 or so regional bank earnings reports, I vow to reduce the number of stocks in my regional bank basket.  The time involved in just reading those reports probably runs over 10 hours per quarter.  So, I am going to eliminate some of my positions in this basket, which I have done in the past.  Though,  when the memory fades about the amount of work necessary to keep track of them, I have a tendency to add more to the list, which is why I still have over 40 names in the basket after vowing several quarters ago to reduce the number to below 30 permanently.

Wesbanco (WSBC) was bought over a year ago  at $13.3 so that was a good percentage gain on the shares plus a good dividend too.  This security was bought in one of the two satellite taxable accounts, where the principal objective is to generate more income via stock investments than I can currently receive in a bank certificate of deposit, which was the case for the entire period of time that I owned Wesbanco, plus I realized a long term capital gain of $315.6.  Eventually, all of the stocks bought in that account will be sold and the proceeds reinvested into bank certificates of deposit when rates return to more normal levels.    I will also sell some of the other bank stocks held in that account to lock in profits.

I am keeping track of the realized gains for my regional bank stock basket strategy in Item # 3 Realized Gains Regional Banks.  With the WSBC transaction, I am up to $4,431.75 in net realized gains and over $6000 in unrealized gains. (the largest unrealized gain is on 50 shares of WBS bought at 4.58 and now selling at close to $23, over $900 in unrealized profit on that one 50 share lot).   With the dividends added to the unrealized and realized gains, this has been without question a successful strategy so far, even though I have had a couple of disappointments which is to be expected in all of my basket strategies.

4. Bought 50 of the TP NPBCO at 24.93 (see Disclaimer):  Again, a trust preferred stock is not a traditional preferred stock. It is a "preferred" stock, but it is issued by a Delaware Trust.  That preferred stock represents an undivided interest in the assets owned by the trust.  Those assets would be a junior bond purchased with the proceeds from the sale of the TPs to the public.  Generally, the TP will have the same coupon and maturity date as the underlying bond owned by the trust.  Distributions will be taxed as interest. The bond will be the most junior bond obligation of the issuer, but that bond will be senior to all common and equity (traditional) preferred stock.   This has become an important issue to understand due to the Near Depression and its aftermath.

First, the government's TARP money was used to buy equity preferred stock in the banks who accepted those funds.   In order for the bank to defer interest payments on its TP, it would first have to eliminate the dividends for both the common stock and any non-cumulative equity preferred stocks, and then defer payment on the government's cumulative equity preferred stock.

Second,  most of the equity preferred stocks issued by financial institutions, except to the U.S. government in exchange for TARP funds, are non-cumulative.  The TPs would pay cumulative distributions and interest would accrue on any deferred distribution at the coupon rate.

Third, equity preferred stocks have no maturity dates.  A TP, being in effect a bond, will have a maturity date.  And lastly, equity preferred stocks, other than ones issued by REITs,  pay qualified dividends, whereas TPs pay interest.

I decided to repeat all of that after reading another article written by a financial journalist who has no idea of what he is talking about on this subject.

I previously bought and sold 50 shares of NPBCO and will merely quote from my earlier discussion from April 2010:

"NPBCO is a Trust Preferred from NPB Capital Trust II, a Delaware Trust, that has as its underlying security a junior bond issued by National Penn Bancshares (NPBC). National Penn is primarily a regional bank operating in Pennsylvania and has 127 offices.

NPBCO is a typical bank TP. The coupon is 7.85%. Par value is $25. The bond matures on 9/30/2032. At a total cost of $23.09, the yield is around 8.5%. I do not believe this TP is rated. The bid/ask spread early this morning was 23/23.09, when I placed the order, so I just placed a limit order to buy 50 shares at $23.09.

A link to the prospectus can be found at Provided no cash dividend is being paid on a junior security, the TP's interest payments may be deferred up to 5 years. The interest payments are cumulative and deferred payments earn interest at the coupon rate (see p. 47). The stopper provision is standard.

Since National Penn still has outstanding equity preferred stock issued to the government, the TP interest payments can not be deferred unless National Penn first eliminates its common share dividend and defers the cumulative preferred dividend payable to the government. National Penn is currently paying a quarterly stock dividend of 1 cent. Any cash dividend is sufficient to activate the stopper provision.

I have been reluctant to pay this TP until recently due to the large losses suffered by this bank in 2009. The bank reported a 356.379 million dollar loss shown for 2009. The total net income for the preceding four years was 219.276 (see page 31 Annual Report npb10k.htm) Part of the 2009 loss was a goodwill impairment charge of 275 million. The bank did raise some equity capital in 2009 through a common stock issuance of 31 million shares, raising a net 153.3 million. The bank has not paid back the 150 million in TARP funds received from the government.

The bank did report a small profit of 2 cents per share in the 1st quarter of 2010: ex99-1.htm The total capital ratio was 14.17% as of 3/31/2010. Allowance for loan losses to nonperforming loans was at 127.8%. Net interest margin was 3.44%.

Quote is from  Bought 50 NPBCO at 23.09.  I later sold those shares at $25.2

I decided to nibble on the shares again after reviewing National Penn's latest earnings report for its 4th quarter, which relieved some of my concerns about the credit risk.  National Penn Bancshares, Inc. Reports Fourth Quarter 2010 Results  I am still concerned about both the credit and interest rate risks, which explains the small purchase. 

The common stock symbol is NPBC. The current estimate is for the bank to earn 60 cents in 2012 and 43 cents in 2011.  

I will try to discuss the remaining trades, around 9 of them, made on Thursday in the next post.   The sheer volume of trading activity now overwhelms my alloted time to summarize them in this blog. 

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