Tuesday, March 1, 2011

MKZ Reversion to Its 3% Guarantee/Sold 100 of the stock ETF VV at $60.69/Added 100 TRST at 5.94/Bought 50 PAR at 5.44 as LT/Bought 1 Warner Music Senior Sub Bond Maturing 2014/Update CEF Table

The DJ UBS Commodity Index closed at 166.15 yesterday. Java Chart - WSJ.com According to my calculations, that close will cause a reversion back to the 3% interest guarantee for MKZ, a $10 par value unsecured senior note from Citigroup Funding.  This will be the second coupon period that MKZ has paid its minimum guarantee.

My other senior note, MKN, still has some room before exceeding its maximum limit in its second coupon period.  MKN paid me 18% in its first coupon period.  It is important to remember that one close above the maximum level is sufficient to trigger a reversion back to the guarantee.  I am using 176.45 on the commodity index as the maximum level for MKN, and the current period closes on 3/31/2011.   So, I just need to get through March with no closes above that maximum number.  If there is no close above 176.45 at anytime between now and the close on 3/31/2011, MKN will have another good pay day.  Assuming no close above 176.45,  a close at 166.15 on 3/31/2011, for example, would mean a 25.23% interest payment on the $10 par value.  So, you roll the dice and take your chances.  I am willing to accept the guarantee provided I have a chance at much more in each annual period until these notes mature in 2014.

The Goldman Sachs' economist, Alec Phillips, predicts that the GOP's plan to cut federal spending by 60 billion in F/Y 2011 would reduce GDP by 1.5pp to 2pp in Q2 and Q3.  Another drag on GDP will be reductions in spending by state and local governments.  Consumers appear to be more reluctant to spend and have been saving more.  Consumer spending increased by .2% in January according to the Commerce Department. Personal savings as a percentage of disposable income rose to 5.8% in January, up from 5.4% in December.  News Release: Personal Income and Outlays, January 2011  With increases in energy and food prices, their discretionary income will be reduced and the fear of losing their jobs is likely to restrain spending further.  The rise in GDP is not sufficient to make much of a dent in the current unemployment rate.  Long term, I view it as a positive that consumers are repairing their balance sheets by saving more and spending less.  However, with the reductions in government spending and less than robust consumer spending, I would anticipate that GDP growth in 2011 will not be sufficient to make much of a dent in unemployment, and U.S. GDP could easily surprise economists on the downside.  In short, I now view the risk for stocks to outweigh their near term appeal, notwithstanding the positive signals being flashed by my Vix Asset Allocation model.  That model is restraining me, however, from conducting now a serious pare of my stock positions.    

In an earlier post RVT and RMT, I mentioned that two CEFs managed by Royce (RVT & RMT) had re-initiated a managed distribution policy. Royce Value Trust, Inc. (NYSE - RVT) recently declared a 18 cent quarterly dividend. Royce Micro-Cap Trust, Inc. (NYSE-RMT) declared a 12 cent quarterly dividend. I will be reinvesting those dividends to buy additional shares. These two CEFs are long term holdings.  I have never sold a share.

This is a table of my current CEF holdings as of 2/28/2011:

This CEF is now, and will always be for as long as the OG remains on this earth, a balanced world portfolio.  I will constantly change the balance between bonds and stocks and the weight of each sector within those broad classifications.  Bonds would include both international and domestic, taxable and tax-free, junk and investment grade, and TIPs.  I have been moving in and out of TIP CEFs and do not currently have a position, nor do I have a position in a CEF that invests a majority of its assets in investment grade government debt.

My goal is modest, a 7% annualized and compounded after tax return over a long period of time.   For the most part, that goal can be accomplished by selling the positions with negligible gains and simply collecting the income dividends and capital gain distributions thrown off by this collection of CEFs.  I will also need to trade a few positions annually for 5% to 10% annualized gains which I have been doing.  Some of those trades over the past few months include multiple round trips on the bond CEFs IMF and WIW, as well as ACG discussed below.  This portfolio has a good dividend yield when I add the yield generated by capital gains distributions to the yields shown at a financial web site like YF which generally only includes regular income dividends in the yield calculation. (e.g. compare the yield based on total distributions made by ADX or PEO with the yields shown at YF).

I started to take the monthly distribution made by IGR in cash last month.  I am taking cash distributions on 200 shares of BTZ in a retirement account and reinvesting the dividend on the other 200 shares in one of my taxable accounts.  For GDO, which yields over 8%, I am reinvesting the dividend on the 300 shares bought in a taxable account and taking the distributions in cash on the 220 shares held in the ROTH IRA.  I am reinvesting the dividends paid by SWZ and JQC.  

If and when I decide to add a weighting in U.S. government debt that is not inflation protected, one alternative would be to buy back shares of the CEF ACG which is heavily weighted in U.S. government debt.  I sold out of my position before the shares took a nose dive: Added 400 ACG at 7.85  Sold 200 ACG at 8.35   SOLD 200 ACG 8.45  The problem with ACG is that it uses leverage to buy a lot of low yielding assets.  The fund can make money on the spread in current market conditions. (see portfolio as of 9/30/2010, SEC Form N-Q for the AllianceBernstein Income Fund, Inc.)  I substituted the TC KTX for that position, as discussed in that last linked post, which pays me more and has held its value.    Given ACG's current discount, I may decide to take a small position, but have not yet made a decision.

1. Bought 50 of PAR Technology Corporation  (PAR) at 5.44 on Monday   (LOTTERY TICKET strategy) (see Disclaimer): Par Technology is a small company, with a market cap of around 82 million at a $5.45 price per share.   And, it would be fair to say that the stock has been going nowhere since experiencing a waterfall decline in early 2006 that took the stock quickly from $19.75 in March 2006 to $7.8 in August 2006:  PAR Interactive Chart   The stock has experienced a few trading opportunities, but the current price is close to the mid-point in a channel pattern over the past 3+ years.   I recall trading this stock at some point before starting this blog in October 2008.

A longer term chart reveals that the current price has returned to levels prevailing in 1993-1994.   Chart  This kind of action is acceptable for a Lottery Ticket purchase and is fairly typical for the speculative kinds of stocks selected in that category.   Another similarity with many LT purchases is PAR's price to sales ratio at .34 and price to book at .95. Many of the stocks selected in the LT category have both of those ratios below 1.

While PAR is not sitting on a lot of cash, it has a minimum amount of long term debt, less than 3 million with over 6 million in cash as of 12/31/2010:   form8k: SEC Filed Press Release  This kind of consideration is relevant to whether or not a firm is likely to survive long enough to turn its operations around and to report several consecutive quarters of earnings growth.  Only one analyst follows the company and provides earnings estimates.  That estimate is for an E.P.S. of 20 cents in 2011 and 30 cents in 2012.  For this LT to be successful, I would want to see better results than that forecast.  

A potential positive catalyst is that the firm returned to profitability in the last quarter, earning 8 cents per share on a 10.7% increase in revenue compared to the year earlier quarter.   Hopefully, the company will continue to report profits which may give the stock a boost. 

This is PAR's description of its business contained in that SEC filed press release announcing its 4th quarter results:

"PAR Technology Corporation creates and markets products that help hospitality operators around the world to better manage money, materials, people and the guest experience. PAR has provided hardware, software and services to the world's largest restaurant chains and their franchisees for almost 30 years.  Today the Company's extensive offerings include technology solutions for the full spectrum of hospitality operations, from boutique hotels and independent table service restaurants to international QSR chains, all backed by PAR’s global service network.  The Company has over 50,000 installations in 105 countries worldwide.  PAR is also a leader in providing computer-based system design and engineering services to the U.S. Department of Defense and federal and state government agencies." 

PAR closed at $5.36 in trading yesterday, down 10 cents for the day.  I do not expect much up movement until PAR puts together at least one, probably two, more quarters of favorable results and 10% or so revenue increases.

2. Bought 1 Warner Music Senior Subordinated Bond Maturing  4/15/2014 at 98.6 on Monday (Junk Bond Ladder Strategy) (see Disclaimer): The consensus earnings estimate for  Warner Music Group (WMG) is for a loss of 93 in the 2011 F/Y ending in September and another loss of 91 cents for the 2012 F/Y.  I doubt that this company will earn a profit before this senior subordinated bond matures in April 2014.   So, this bond is deservedly rated as junk.  The 2014 Warner bond is rated B1 by Moody's and B- by S & P.   I personally believe that a better and more accurate name for a "senior subordinated bond" is "junior bond", unless the firm has bonds more junior in priority than the "senior subordinated" which is junior to one or more senior bonds. 

Notwithstanding the negative earnings, Warner has valuable assets that could be sold for substantial sums.  One such asset is its music publishing company, Warner Chappell, that has ownership interests in a vast catalog of songs. According to its last filed FORM 10-Q at page 8, Warner Chappell owned or controlled the rights to more than 1 million musical compositions  I read recently that BMG Music Publishing has hired J P Morgan and Deutsche Bank to advise and finance a potential offer for Warner Chappell. 

In addition to music publishing, the Warner music labels have ownership rights in a vast catalog of master recordings.  Artists rarely own the recordings made by them and instead grant ownership rights to the masters to the record company.   

As of 12/31/2010, Warner Music had 263 million in cash on its balance sheet and had 1.943 billion in long term debt.   Of that debt, 1.066 billion was senior secured debt with a fixed rate coupon of 9.5%, maturing on 6/15/2016. This note is still rated junk at Ba2 by Moody's.   FINRA   

The 1 bond that I purchased is a "senior subordinated" note maturing in April 2014.  It has a 7.375% coupon.  So, in the event of a bankruptcy filing, the 2014 bond would be junior to the senior secured debt.   The bonds from this company are listed at page 11 of the last filed FORM 10-Q and are discussed by the company at pages 36-37. 

This bond was registered with the SEC in an exchange for debt issued in a private placement:  www.sec.gov  Interest is payable semi-annually in April and October.

According to my confirmation, my YTM is 7.419%. 

3. Bought 100 TRST at $5.94 on Monday (Regional Bank Stocks' basket strategy)(see Disclaimer):  The primary reason for buying more of TrustCo (TRST) is its dividend yield, close to 4.5%.  TrustCo Bank Corp NY, TRST Stock Quote I bought the 100 shares in the account where I am reinvesting the dividend to buy additional shares, bringing my total in that account to 270 shares excluding shares purchased with dividends.  I own another 50 shares in another taxable account where I am taking the dividends in cash.   

This stock was trading at over $10 prior to the Near Depression.  The long term chart shows a steady, 45 decree angle rise from around 1983 to June 2002, followed by a channel pattern mostly in the $10 to $13.75 range thereafter until 2009 when the shares collapsed to establish a new channel mostly in the $5 to $7 range.   TRST Stock Charts  All of my buying has been after that new channel was formed and mostly below the $6 per share mid-point in that channel.Bought 50 TRST at 6.3  Added 70 TRST at 5.9 Bought 50 TRST at 5.45 Added 50 TRST @ 5.48

I was not impressed with the last earnings report: Item # 4 TRST  I changed my mind about adding shares given the dividend and the relatively good NPLs and capital ratios.  Also, with 153 branches mostly in NY state, with several in Florida, I view this bank as a potential take over target. (see branch list at    Trustco Bank: Branch/ATM Locator - Home). 

TRST closed at $6.03 yesterday, up 9 cents.

4.  Sold 100 of the ETF VV at $60.69 on Monday (see Disclaimer):  The Old Geezer is becoming increasingly concerned by the day about the sustainability of the market's upward trajectory.   To relieve his anxiety, the ETF VV was sold yesterday for a good profit.   Bought 100 VV at 54 (November 2010)  This sale marked the second successful round trip on this ETF: BOUGHT VV at $41.45  Sold 102 VV at 49.43 Apparently, I am in a trading mode on this particular ETF.

VV closed at $60.95 yesterday, up 35 cents.

RB said "go all-in, and send that Old Goat back to the Old Folk's home to play checkers and listen to Frank Sinatra music".   LB agreed that the Old Goat was well past his prime, an embarrassment to the LB, and it was time for the Real Man to assume Head Trader duties, the Stock Stud LB, who has nerves of steel and no need for a steady IV drip of chill pills and Pepto-Bismol.  "B.S". replied the RB, "the Nerd Machine was hiding under the covers, crying for its mama in early March 2009 and the Real Real Man, RB, had to save the day by overthrowing the Mama's Boy LB and selling those damn bonds to buy a boatload of stocks, as documented in these minutes of the storied trading operation here at HQ.  RB wants to buy some Google " 

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