Tuesday, March 15, 2011

HPQ/ BAC/Bought 1 Appleton Papers 2nd Lien Bond at 95.75/Sold 100 PHB at 18.55/Pared 50 DUK at 18.42/Added 50 GGN at 18.31

I do not see any long term economic impact on the world economy from the unfolding tragedies in Japan.  There will be a stimulus effect from the rebuilding that needs to be done.  There will clearly be short term disruptions in the operations of several manufacturing plants, and a substantial decline in Japan's GDP for at least one quarter,   due to the interruption in power generation, disruptions in manufacturing and other economic activities, and the shock associated with such a multitude of tragedies that seem to be escalating with the problems at several nuclear reactors.  I suspect that the slowdown in the Japanese economy will last for most of 2011.  I do not have any direct exposure to Japanese stocks.

Japan needs to do a fundamental re-evaluation of its heavy reliance on nuclear power, with so many plants located near a major fault zone. And that re-evaluation can not be done by politicians or executives at Tokyo Electric Power  At least with gas turbines, you will not have a potential catastrophe when something goes wrong.  Solar stocks reacted well to the news, and uranium mining companies went into the crapper.   I am not about to buy a solar company stock, but I will at least contemplate the possibility of buying  Guggenheim Solar ETF (TAN). 

The downdraft in the Japanese market, along with the troubles in the Middle East, may easily be enough to cause a 10% or greater correction in the U.S. stock market. I have been raising my cash level.

Hewkett Packard's Board took an important baby step toward an adequate dividend policy, increasing the quarterly dividend from 8 to 12 cents   More importantly, HP stated that it currently intended to increase the dividend yearly "in the double digits". I have been very critical of the miserly dividend paid by HP and believe that the Board's statement of intention will bring dividend growth investors into the stock.  I currently own 50 shares of HP and was looking for a reason to buy more.  {Bought 50 HPQ at 41.57 (12/23/2010 Post)(see also Bought 50 HPQ at 38.2 (Sept. 2010)-Sold: 50 HPQ @ 43.11 (Oct 2010)}.  More about HP's strategy is discussed in Tiernan Ray's column in Barrons.com.

Bank of America is the subject of a favorable article in this week's Barrons.com, where the author assert that BAC shares could rise 40%. The article was written by Jacqueline Doherty.  I always like the word "could", sort of a good lawyer word that really conveys nothing much of substance. Maybe it would be better to merely say BAC shares could gain "up to" 40%.  Or it could lose up to 40%.

While I own some BAC common shares, around 150, my larger positions are in  floating rate equity preferred stocks, two TPs, and senior "principal protected" notes, issued either by BAC or one of the companies acquired by this bank during the acquisition spree of its former CEO, Ken Lewis.  I certainly hope BAC "could" earn 35 to 40 billion in normal times, as claimed by its current CEO Brian Moynihan.  This could make me feel more secure as the owner of non-cumulative equity preferred floaters with guarantees, originally issued by Merrill Lynch.   Pared Trade: Sold 100 BMLPRL at $19.14 & Bought 100 BMLPRJ @ 19.32 (2/17/2011);  Bought 50 BMLPRG at 16.04 (1/27/2011);  Bought: 50 BMLPRH at 16.2 (9/28/2010).  Those securities are only senior to common stock in the capital structure. I own them in a taxable account.  All of them have $25 par values, pay qualified non-cumulative dividends at the greater of a guarantee or a spread over 3 month LIBOR and are perpetual. I am less concerned about receiving the amounts owed on my senior "principal protected notes" that are owned in retirement accounts, due primarily to their short maturities and senior status in the capital structure. (e.g.  Bought 100 SDAFinal Term Sheet No. 286).

I have traded in and out of the TPs (e.g. Buy of 50 MJH at $7.51 (3/9/2009 POST) Sold 50 MJH at 23.6).  I currently own shares in KRBPRE and KRBPRD and do not expect much, if any, capital appreciation in the shares, given the prices paid for those shares. Those TPs were bought solely for the income generation :Added 50 of the TP KRBPRE at 25.19 Bought 50 KRBPRE @ 25.07 Bought 50 KRBPRD @ 25.14 Bought 50 KRBPRE at 24.62 in Roth IRA

 Trust Preferred Securities: Links in One Post

It would be foolish for individuals to place any reliance on America's large financial institutions as a reliable source of dividends.  Their propensity to commit incredibly stupid mistakes that threaten their viability is one of their enduring and innate qualities.   As noted in the Barron's article, BAC may start to increase its dividend from 4 cents per share on an annual basis. I would prefer to see the bank forget about raising the dividend from 1 cent to five, or some other absurd and paltry amount.  Instead, if BAC is able to generate the kind of earnings that many are now predicting, I would prefer to see all of the surplus used to buy back all of the five billion shares that were issued over the past two years.  Then, when that is done, BAC could restore a meaningful dividend.

1. BOUGHT 1 Appleton Papers Second Lien. Senior Bond Maturing in 2015 at 95.75 Last Friday (Junk Bond Ladder Strategy(see Disclaimer): Appleton produces carbonless papers, thermal papers, and "Encapsys" products.  It is a private company that is employee owned. 

This Appleton bond matures on 12/15 /2015 and has a 11.25% coupon. This secured bond is second in priority to the first lien note that has an original principal amount of 305 million and matures in June 2015. (pages 21-23 of the Form10-Q for a description of these notes) The company repaid in November 2010 the 17.5 million note due in 2013 shown in the table at page 21.  

My confirmation states that the current yield at my cost is 11.651%, with a YTM of 12.217%.

This is the link to the indenture for the 2nd Lien 2015 note: www.sec.gov 

Appleton recently reported results for its 4th quarter ending on 1/1/2011: www.sec.gov Net sales increased 8.4%, compared to the year ago quarter, to 204.2 million. Net sales for the year increased 11.6% to 849.9 million. Operating income was 8.7 million but the company reported a loss of 7.79 million.  The 8.7 million in operating income did not include the substantial interest expense of 15.802 million dollars. The loss did decline from the 17.362 million dollars reported for the 2009 4th quarter.  The company is being hurt by high commodity costs, but the CEO expressed cautious optimism for 2011. The company was  profitable in 2006 and 2009 due to income from a debt extinguishment, and has had lower losses as in 2005 and 2007 even with the hefty interest expense (see page 24 of the 2009 form10-k

I view this to be very high risk. I am at my limit with just 1 bond. The total long term debt stood at 540.131 million dollars as of 1/1/2011.      

This is a link to the FINRA Information on this bond.  The bond is currently rated B3 by Moody's and CCC+ by S & P.  Interest is payable in June and December.  

2. Sold 100 of the Junk Bond ETF PHB at 18.55 (see Disclaimer): I already own way too many individual junk bonds, many of which are owned by this ETF. (Compare  Holdings  PHB with Junk Bond Ladder Strategy)

 To lessen my exposure to this bond sector, I decided to pare my position in PHB by one-half.  I sold the shares held in the taxable account and will keep for now the 100 shares owned in the ROTH IRA, where the yield on this taxable bond ETF is in effect a tax free yield.  I made a small profit on the shares plus some dividends.  Bought 100 PHB at 18.15 (9/16/2010 Post).  This ETF has a monthly dividend. PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB)

3. Pared Duke Energy by Selling 50 Highest Cost shares at $18.42 Last Friday (core electric utility strategy) (see Disclaimer):  While Duke is a long term core holding among my electric utility stocks, I will occasionally pare a core position  to book a profit and to lower my average cost per share.  For Duke, the highest cost shares were the first bought, over two years ago, and their disposal at a small profit will lower my average cost for the remaining shares.  I am reinvesting the dividend to buy additional shares.   Bought  DUKE ENERGY (DUK) at $15.79 (October 2008)   Added to Duke (DUK) at $13.56 (May 2009). 

I may occasionally buy shares in a core holding like Duke in a satellite taxable account or in an IRA for a trade. I will not reinvest the dividend and will hold only for a brief period.  An example for DUK was the purchase of 50 shares at $16.25 last April that were sold on a pop.  

As previously discussed, I have a favorable view of the proposed acquisition of Progress Energy by Duke.  I have traded PGN on several occasions, though I no longer have a position,  and the merger makes sense to me as a Duke shareholder.   My discussion of the last earnings report can be found at Item # 2,  Duke Energy Needless to say, I do not expect much from this holding.  A good result would be an annualized total return of more than 8%. That is acceptable.  I am more likely to achieve an acceptable return by concentrating my buying during recessions and bear markets, and to pare higher cost shares when the stock recovers.   And, over a long period of time, I hope to make a decent return when I sale the shares bought with the reinvested dividends, which I could do now.

The sale of 50 shares reduced by average cost per share to $15.14 from $15.91. 

Another recent example of a pare, followed by a re-purchase of a core electric utility holding, involves FirstEnergy (FE):  SOLD 50 FE AT $40.7 (2/3/2011 POST) Bought 50 FE at 36.75 (3/4/2011 POST)

5.  Added 50 GGN in the Roth IRA at $18.31 Last Friday (see Disclaimer):  This brings me up to 250 shares of this CEF Bought Back 100 GGN at $18.65. I have nothing to add to my discussion about this CEF made a few days ago in two separate posts.  {Item # 4  Bought Back 100 GGN at $18.65 (2/25/2011 Post) and Item # 3 Added 100 of the CEF GGN at 18.84 (3/8/2011 Post)}  GGN is ex dividend today for its monthly distribution.

My management of the retirement accounts focuses on income generation.  The continuous generation of income provides me with a source of funds to invest, taking advantage of whatever opportunities may exist.  This strategy proved to be particularly beneficial during the Near Depression when I was able to buy with cash flow more income generating securities at what turned out to be absurdly low prices.

The two retirements accounts, a regular and a Roth IRA, are very heavy in bonds, mostly in the trust certificate form of ownership.   Some of the bonds are senior notes issued by Citigroup Funding, Merrill Lynch and Bank of America whose interest payments are tied to the performance of stock indexes.  I also own all of my Synthetic Floaters in those accounts.

In the retirement accounts, I have also a few high yielding stock CEFs  (e.g. GGN and JSN), and will occasionally buy a REIT common or preferred stock. I have sold all of the REIT preferred stocks in the retirement accounts bought during the Near Depression for profits in excess of 100%.  I did own some mutual funds in a Regular IRA which I have since sold.

I also bought shares of METPRA in the Regular IRA before starting this blog at a total cost of $13.26.  This security is also owned in a taxable account, at a lower cost basis.  METPRA is a floating rate equity preferred stock that pays qualified dividends. Dividends are non-cumulative.  That security was purchased with the build up of cash flow in the regular IRA,  on the day that Lehman's  failure was announced:

If I had invested in non-dividend paying stocks or low yielding stocks, I would not have been able to make the investments during the Dark Period that brought me back so quickly. Instead, I would have been hiding under the covers.

I am fortunate in that I do not need those retirement accounts. This gives me the flexibility to ignore the standard asset allocations advanced by financial planners and other who do not really have a clue.

I will buy some individual stocks when they are clearly been sold at a deep discount. Again, I was able to make those purchases mostly with cash flow being generated by the income securities.  An example would be the purchase of  DuPont shares at $16.68, now trading at over $50, a purchase made in early March 2009 when Alan Abelson and David Rosenberg were telling investor to avoid stocks.   Item # 3 Abelson and Rosenberg Again and Again

I am still running way behind in discussing my trades and may not catch up for another week or so. 

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