Thursday, February 17, 2011

Update on MOU/PaIred Trade: Sold 100 BMLPRL at $19.14 & Bought 100 BMLPRJ @ 19.32/Added 50 CBU @ 25.19/Bought 50 of the ETF DLN at 48.24/KO MDT CBB/CPI

CPI increased .4% in January, with the core index rising .2%.  Food prices increased .5%. Consumer Price Index Summary  Over the prior 12 months, CPI has increased 1.6% before seasonal adjustment. Energy rose 2.1%. 

The Philadelphia Federal Reserve reported that its region's manufacturing index rose to 35.9 in February from 19.3 in January. Firms Firms Report Stronger Activity (February 17, 2011) - Philadelphia Fed  The prices paid index component increased 13 points in February and has increased 55 points just over the past five months.  www.phil.frb.org .pdf

This is the Friday's post, which I am publishing early since I finished with it, and this is the second post for Thursday.  

1. Medtronic (MDT)(own): Barrons has a favorable article on MDT.  While the firm has issues, who doesn't, the author notes that MDT is selling at 11 times earnings and has rarely been "this cheap". I have been making the same point periodically in this blog, over the past two years, after grabbing some shares during the Dark Period at $26.94 (3/4/2009), soon after the RB dethroned the Nerd Machine LB as Head Trader here at HQ. As long time readers may recall, LB was hiding under the sheets crying for its mama at that time. I have been adding to the position since that initial foray and have been reinvesting the dividends. RB adds 50 MDT at 36.25 ADDED TO MDT at 38.99 Added to Medtronic at 37.58  My position is now close to my limit of $10,000 for securities issued by one company. 

Barron's also noted that sixty new products are expected to launch in 2011, and MDT's ample cash flow would continue to support dividend hikes. The current dividend yield is around 2.24% at a $40.2 price. 

Paulson's hedge fund recently disclosed that it had acquired 9.1 million shares.   SEC Form 13-F 

2. Duke (DUK)(own)(core electric utility strategy):Duke Energy (DUK) reported earnings per share of 32 cents for the 4th quarter, including gains from asset sales, on 3.445 billion in revenues. The adjusted E.P.S. number, which excludes one time items, was 21 cents per share, missing the consensus expectation of 23 cents.  

My average cost per share for DUK shares is $15.91. I am not likely to buy more shares in the open market since such a purchase would be well in excess of my average cost.  However, my highest cost shares have a cost basis of $18.14, a fifty share purchase. Those shares were also the first bought. I may dispose of those shares at some point to lower my average cost.  I purchased most of my shares during the Dark Period, with the last open market purchased made in May 2009. Added to Duke (DUK) at $13.56 {see also: Bought DUKE ENERGY (DUK) at $15.79 (Oct 2008); Bought 50 Duke (DUK) at 16.25 (April 2010; and some shares were bought at a total cost of $14.42 in February 2009}  So, the only candidate for a pare under my trading system is the first 50 share lot, and I am not likely to dispose of those shares at less than $19 which means that I will not be selling them anytime soon. 

Duke Energy closed at $18.12 today, up 2.37% or 42 cents. 

3. Cincinnati Bell (own senior bonds only:Junk Bond Ladder Strategy): Cincinnati Bell (CBB) reported earnings of 3 cents per share, excluding items, down from 7 cents in the year ago period, missing expectations by 4 cents.  CBB predicted 2011 revenues of 1.4 billion dollars. It further predicts free cash flow of just 5 million dollars in 2011, but a slight increase in adjusted EBITDA compared to 2010. The cash flow is apparently going into the expansion of CBB's data center operations.  Data center operations increased revenues in the 4th quarter by 118% to 44 million, producing adjusted EBITDA of 22 million for the quarter, primarily due to the acquisition of CyrusOne. I am still concerned about this credit. HK has prohibited the purchase of another bond.   

The bonds that I bought are deservedly rated junk: Bought 1 Cincinnati Bell 8.75% Senior Subordinated Bond Maturing 3/15/2018 at 94 Bought 1 8.375% Cincinnati Bell Senior Bond Maturing in 2020 at 96.8. I have added one more of the 2018 bond, bringing the total to 3 bonds at a total cost, excluding accrued interest, of $2,874. {FINRA Investor Information on 2020 Bond FINRA Investor Information on the 2018 Bond).   

On the day of the earnings release, the common shares fell 10% or 31 cents to close at $2.79.  At some point, I may add CBB common shares in the LOTTERY TICKET category, using the first interest payment on the 3 bonds. The data center strategy is interesting even though it is risky. 

4. One of LB's Paired Trades: Sold 100 of BMLPRL at $19.14 and Bought 100 BMLPRJ at 19.32 on Thursday (Inflation/Deflation Strategy)(see Disclaimer): I have been buying and selling Bank of America (BAC) equity preferred floaters for a couple of years now. I have realized a number of trading profits from them, along with several dividend payments. Mostly, the gains have been small, with the largest gain in this grouping of five securities coming from the sale of 100 BMLPRH at 17.42 which netted a profit of $363.48 (see snapshot in Item # 1 Bought 50 BMLPRG at 16.04)

I discuss in that last link post how I compare the five BAC equity preferred floaters which pay the greater of a guarantee or a percentage above the 3 month LIBOR rate on $25 par values.

All five of these securities pay non-cumulative qualified dividends. None of them have a maturity date. All of them are senior only to common stock and junior in priority to all BAC bonds. BAC is needless to say a bank, a large one capable of making a large number of really stupid mistakes. All of those points, other than "qualified dividend", spell the same word-RISK.

The five BAC equity preferred floaters are as follows: 

BACPRE 4% or .35% above the 3 month Libor Bank of America Corporation
BMLPRG 3% or .75% above the 3 month Libor  Prospectus Supplement
BMLPRH 3% or .64% above the 3 month Libor Final Prospectus Supplement
BMLPRJ 4% or .75% above the 3 month Libor Final Prospectus Supplement
BMLPRL 4% or .5% above the 3 month Libor Term Sheet

The securities starting with the prefix BML were originally issued by Merrill Lynch, later acquired by Bank of America. BAC pays the greater of the guarantee or the percentage float for each of these securities. 

I bought the 100 shares of BMLPRL in two fifty share lots: Bought  50 BMLPRL @ 17.35 (Dec 2010) and Bought: 50 BMLPRL at 18.17 (Oct 2010). 

I have previously traded BMLPRJ for a small profit: Sold 50 of the 100 BMLPRJ at $19.25 (Sept 2010)  Bought 50 BMLPRJ at 18.50 (August 2010) Added 50 BMLPRJ at 17.74 (August 2010)

Some other trades for this grouping of five securities can be found in the following posts:  Bought BMLprg at $8.8 Sold BMLPRG at 12.45 Bought 50 BMLPRG at 16.04 Sold BACPRE AT $15 Bought: 50 BMLPRH at 16.2

Another discussion on how I compare these securities can be found at BMLPRH vs. BMLPRJ.

The only difference in terms is that BMLPRJ has a .25% higher float than BMLPRL. Both have a 4% guarantee. LB thought that the .25% difference in the LIBOR float in favor of BMLPRJ was worth more than 18 cents a share, at least for someone other than a trader who wants to hold the security long term.

LB refused to disclose its computations to justify its conclusion. The description of a long term holder does not fit the Nerd Machine, of course, who prides itself on its self-proclaimed trading acumen. And RB just added, its linear, short sighted tunnel vision. Anyway, the OG made this trade at LB's insistence, not caring whether the LB was correct in its comparative assessment, since the OG recognizes that the only workhorse in this organization is the LB, everyone else is charitably described as a slacker or worse, and sometimes, as HK has noted many times, it is important just to humor the worker bees. 

For BMLPRJ to prove its value over BMLPRL based on their current prices, there will need to be a return to more normal LIBOR rates,  more than 3.25% which is the level where BMLPRJ's float will be activated.  Historical LIBOR RATES  At a 5% Libor rate, the difference in income would by about $6 annually, for 100 shares. So to justify the trade, and the two commissions, I will need to keep the BMLPRJ shares for many years to recoup the difference in cost, and have the LIBOR rates yield over 4% during those years.  (or, I could sell BMLPRJ on a pop which is what the LB really intends to do).

The floaters that pay the greater of a guarantee or some percentage over a short term rate are part of my Inflation or Deflation strategy, confined to a narrow group of securities that can swing both ways, irrespective of whether there is deflation or  inflation. The main issue is CREDIT RISK.  These securities have been discussed since the earliest days of this blog, when their pricing presented what may end up being a once in a lifetime opportunity:  Item # 4 LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK (October 2008); LIBOR AND THE AEGON FLOATING RATE PREFERRED STOCK (October 2008).

All of the securities discussed in this blog that fall within this strategy are exchange traded, which means that orders are placed in the same manner as an order for a common stock, and is executed on one of the stock exchanges. There are several that trade in the bond market and I have occasionally discussed them.  (see, e.g. Comparing Prudential Floating Rate Bonds Tied to CPI and Fixed Rate Coupon Bonds Maturing in 2018).  The exchange traded bonds that are capable of swinging both ways fall into three categories:  (1) floating rate equity preferred stocks (2) CPI Floaters and (3) Synthetic Floaters. Advantages and Disadvantages of Equity Preferred Floating Rate Securities Synthetic Floaters Floaters: Links in One Post

I am only aware of three senior exchange traded bonds that pay interest based on a spread to CPI: PFK, OSM and ISM. (see e.g. Bought 100 PFK at 18.47 Bought 90 PFK in IRA $18.94 Added 50 PFK at $17.83 Added 50 PFK in Roth at 20.88-Averaged UP  Bought 50 ISM in IRA at $11.85 Bought 100 OSM at 15.75-Regular IRA Added to OSM at 18.47//CPI and CPI Floaters-OSM-Dec 2008;  CPI Floaters PFK AND OSM-DEC 2008}.

5. Added 50 CBU at 25.19 on Thursday (Regional Bank Stocks' basket strategy)(see Disclaimer): I mentioned in an earlier post that I will be selling some stocks in my regional bank strategy and adding some to existing positions.  The regional bank basket has been hovering over 40 securities and that is too many for a basket strategy. It is more like a regional bank mutual fund. The fifty shares of Community Bank System bought on Thursday was an average up from the previous purchase at $23.18 (October 2010). I discussed CBU's 4th quarter results in Item # 3 CBU. The current consensus estimate, made by 5 analysts, is for an E.P.S. of $1.97 in 2011 and $2.08 in 2012. The current dividend yield is close to 4% at the $25.19 price. 

CBU closed at $25.21 in trading today, down 14 cents. It recently traded as high as $28.58,  CBU Stock Charts.  

I pared another position in the basket on Thursday which will be discussed in the next post.

Since I started this basket strategy, the realized gains are close to $5000 and the unrealized gains are over $6,400 as of today's closing prices.

6.  Bought 50 of the ETF DLN at $48.24 on Thursday (Large Cap Valuation Strategy)(see Disclaimer): I may pare this trade with a double short on another index. I have been discussing the relative valuation of large and small caps in several posts. LB wanted to buy the double short part of the pare yesterday but OG put the kibosh on it. The LB complained to Headknocker, saying again with emphasis this time that the Old Goat and its NitWit ally, the RB, are going to lose all of HK's money unless they are corralled and restrained soon. LB said that it "needs to be reappointed as the Head Trader of the storied trading operation here at HQ, while there is still time to save the day."

LB could not believe the junk bond that the OG bought on Thursday. The selection was made based on which available offering served the OG's favorite meal, his staple without which he could not survive, at least in his present form, RB helpfully added, the All American Cheeseburger and French Fries. LB howled in protest, just before the Old Goat entered the order, to no avail, since LB has been put out to pasture by the HK, told to work 24/7 with no pay of course, and to keep its mouth shut, unless spoken to first, and then to limit itself to a reply of less than 10 words. HK "will rue the day about mistreating the Stock Stud in such a disdainful manner", LB noted in closing. 

The large cap valuation strategy already has several ETFs in it. It is based on the premise that large American companies are still selling at reasonable multiples of earnings, and arguably present the best value in the market after the historic run in stocks since March 2009.  

DLN is the symbol for the WisdomTree LargeCap Dividend Fund. This ETF has an expense ratio of .28%. Total assets are currently close to 600 million. The weighting is 100% in U.S. companies. The dividend yield is close to 3% at the current price. As of yesterday, the fund had 301 holdings but the index is weighted in the top 20 names: 


This particular ETF would not include Google or Apple, which do not pay a dividend, but those companies would be included in the ETF OEF which is for the S & P 100, which includes some non-dividend paying companies. iShares S&P 100 Index Fund (OEF): Holdings 

Other ETFs currently owned that would be part of the Large Cap Valuation strategy include 100 shares of OEF and VV: Added 100 OEF at 49.11 (second 100 shares bought, reinvesting dividend) Bought 100 VV at 54 (November 2010). 

I have also booked some profits from this particular ETF strategy. {BOUGHT 100 VV at $41.45 (MAY 2009)-- Sold 102 VV at 49.43 Bought 100 OEF at 49.61 (JUNE 2010) Sold: 100 of the 200 shares of OEF at 54.94 Bought 100 DHS at 35.32 Sold:  100 DHS @ 38.16}

Most of my positions are in individual large cap stocks. 
  
WisdomTree LargeCap Dividend Fund (DLN) closed at 48.37 in trading today, up .5% or 24 cents. 

7. Coca Cola (own)( Large Cap Valuation Strategy & Common Stock Dividend Growth Strategy): Buying KO at 38.72 did not require much courage in March 2009.  Since I am close to my $10,000 limit from the ownership of KO common shares, I am not allowed by one of LB's myriad rules to buy more except through reinvestment of dividends which I have been doing since making that purchase in 2009. I probably would not buy more at the current price anyway. 

KO is part of my dividend growth strategy. As noted in prior posts, this company has been on a long term historical trend of increasing its dividend every 7 years.  Item # 1 Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009 The criteria for new adds under this strategy are set out in Item # 6  Common Stock Dividend Growth vs. Long Term Investment Grade Bonds 

Coca-Cola Company announced today that it was increasing its quarterly dividend by 7% to 47 cents from 44 cents. At a 7% rate, the dividend will double in about 10.24 years, so a continuation of that rate of increase would alter the historical rate of dividend growth significantly.

Coca-Cola closed at $64.55 on Thursday, up $1.15.

8.  Update on  Citigroup Inc. 3% Principal Protected Note Linked to the Russell 2000 (MOU) (own): I bought 100 shares of the "principal protected note", issued by Citigroup Funding, at close to its par value last April: Bought 100 MOU at $10.12  This unsecured senior note pays the greater of 3% or the percentage increase in the Russell 2000 as its annual interest payment. I have not paid much attention to it, but did notice over the past few days that this security was trading at over $13. I could realize close to a 30% profit by selling the shares now:



If this security was in a retirement account, which unfortunately is not the case, I would keep it until maturity. The distributions made by MOU are taxable as, the security is a senior unsecured note.  In addition, Tennessee has no state income tax on any of my income other than most categories of dividends and interest (excludes Tennessee and Federal government interest, etc.). I would not pay a state income tax on the gain from selling MOU, but I would pay a 6% "Hall Income" tax on the dividends after exhausting my standard deduction which is usually exhausted before the end of January. So, it is slightly more tax effective for me to take a $300 gain rather than to receive a $300 interest payment. 

The second annual interest period is set to end on 2/23/2010.  Pricing Supplement  And Monday (2/21) is a holiday. The starting value of the Russell 2000 at the beginning of that period was 625.07. Fortunately, MOU allows for a 37% increase in the Russell 2000 index before triggering a reversion back to its 3% guarantee.  That places the maximum level at 856.3459. There has been no reversion up to today.  The index closed today at 834.02 RUT Historical Prices. Assuming no maximum reversion, this one is due for a big payday. A close at 850 on 2/23/2011, for example, would represent almost a 36% interest payment on the $10 par value.

MOU closed on Thursday at $13.48. 

I have decided to keep it until maturity, unless I become concerned about Citigroup paying off the note at maturity in 2014.  If an investor wants to buy this exchange traded debt obligation at Fidelity, you are out of look.  That firm prohibits new buy order of all exchange traded principal protected notes. Fidelity Prohibits New Purchases of SIPs  I would not buy MOU at its current price anyway. I have limited my purchase of PPNs to prices below their par values or slightly above.   

I made several more trades on Thursday which will be summarized in the next post. Headknocker reminded all traders here at HQ that no more than two trades per week can be made when and if a Stable Vix Pattern forms. That restriction will remain in place until the next Trigger Event. Vix Asset Allocation Model Explained Simply VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern VIX and S & P Compared 1990 to 1997 Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2  Current Status of Vix Asset Allocation Model (1/31/2011 Post)  More on the Vix Model: What it Does not Predict is as Important as What it Does/Parallels to VXO 1987-1988-Volatility Signals Before October 1987 Crash  More on VIX AND ASSET ALLOCATION

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