Monday, May 16, 2011

CPI-Cash Inflation Is Accelerating Rapidly/Dean Foods (DF)/Sold JNJ @ 66.88/Harland Clarke/First Data/SOLD 50 KRBPRE @ 25.96/SOLD 2 Alon Refining Krotz Springs Bonds @ 107/Bought 1 Dillards 7.75% Senior Bond Maturing 5/15/2027

Why am I not surprised that the head of the IMF, Dominique Strauss-Kahn, a French Socialist, thrice married, whose knickname is "the great seducer", was arrested yesterday for "allegedly" emerging naked from the bathroom of a luxury 3 thousand dollar a night hotel room in NYC to chase a maid, before sexually assaulting her, and whose recent affair with a subordinate probably aided his chances to become the next French President?   NYT

Treasury bonds experienced a robust rally Friday after the Labor Department reported another robust CPI number.  The government reported that CPI rose .4% in April on a seasonally adjusted basis. The core index rose .2%. Consumer Price Index Summary  Cash inflation, which excludes the phony owner's equivalent rent, was up .5% in April and has accelerated at a 7.8% annual pace over the past 3 months:  First Trust Economics Blog

I read an article in the WSJ that referred to this release as a good inflation report. CPI increased 3.2% year over year.  The ten year note ended the week with a yield of around 3.15%, giving it a negative real rate of return before taxes based on the prior year's inflation rate.  Some hypothesize that inflation will cool in the months ahead, or that the current treasury yield is supported by a slowing economy.

In a NYT  article published over the weekend, it was reported that all of the major credit card companies reported increases in card spending for the 2011 first quarter.

Apparently, there is a considerable amount of circumstantial evidence that the Chicago Cubs lost the 1918 World Series due to one or more of their players being bribed by gamblers.  NYT One CUB player was picked off twice in the same game and a reliever later barred from baseball fielded a sacrifice bunt and threw the ball wildly into the stands.  This allowed the winning run to score.

As a result of technical problems with Google's Blooger, ZDNet, one of my posts describing trades from last week was destroyed and I do not intend to write the post again.  The post had been written and saved during the period of instability, which led access being denied to bloggers for over a day.  I am not going to write that post again.  I will simply mention a few of the trades in passing:

I sold my shares of Johnson and Johnson at $66.88, with the intent of buying them back at a lower price. Common Stock Dividend Growth Strategy.  I bought 30 shares of SUSQ as a Lottery Ticket at $8.75.  I had previously bought and sold the common shares as part of the Regional Bank Stocks' basket strategy.  I also still own some shares of its TP, SUSPRA, in the Roth IRA.

I bought one senior 7.75% Dillards' bond maturing in 2027 at a total cost, including commission, of 98.625, giving me a current yield of 7.834%.  Junk Bond Ladder Strategy This is the link to the FINRA information on that bond. FINRA This is a link to the prospectus: www.sec.gov

Dillards' stock has been on a tear since hitting a low of $3.35 in October 2008, closing at $56 last Friday, DDS Interactive Chart up $7.41 for the day after reporting better than expected earnings. Dillard's, Inc. Reports I previously traded for a profit an exchange trader TP from Dillard's Capital Trust I  (DDT). The senior bond that I bought has a better yield, shorter maturity, and a higher priority than DDT, plus the TP does permit a deferral of interest payments which is not a possibility for a senior bond. I did buy shares of DDT $5.82, generating at that price an annualized yield of around 32%. (March 2009 Post).

I do not intend to discuss further any of those trades or any of the other trades where my saved discussions were lost by Blogger's mishap.  I may mention them when an if I sell the securities.

1. Dean Foods (DF)(own senior bonds onlyJunk Bond Ladder Strategy): Dean Foods reported net income of 25 million for the first quarter, a decrease from the 43 million earned in the first quarter of 2010. SEC Filed Press Release The company raised its guidance for 2011 to a range between $.67 and $.75 per share. Dean continues to be adversely impacted by commodity prices and pricing pressures in its private label milk business, as the company is being squeezed by grocery stores who use milk as a loss leader to drive store traffic.  I have never been in a grocery store where the milk was anywhere near the front of the store.

This earnings report is discussed at  Reuters and  Motley Fool. The market responded favorably to this news on the day of its release, driving both the common stock and bonds up in value.  The common stock increased 11.48% in value on 5/10 to close at $12.24. The guidance for the year makes me more comfortable holding the senior unsecured bonds.

I currently own 3 Dean Foods' senior bonds:




2. Harland Clarke (own senior bond only: Junk Bond Ladder Strategy): At least Harland reported a net profit for the first quarter.  SEC Filed News Release  The problem is that both earnings and revenues are declining by significant sums.  For the 1st quarter of 2011, the company reported net income of $23.4 million on revenues of $403.9 million. Compared to the first quarter of 2010, net income declined 27.3% while revenues slipped 6.1%.  I did notice a small price decline in the 2015 senior bond after this release.  Harland also filed a  Form 10-Q for the 2011 1st quarter.  The balance sheet shows $107 million in cash and long term debt at $2.192.1 billion or way too much leverage in my judgment.  This debt is discussed at pages 11-13 of the 10-Q.  There is a senior secured debt facility, and $1.729 billion was drawn by the company as of 3/31/2011. That facility matures in 2014.   I own just one senior unsecured bond maturing in 2015 and may add 1 more at some point.  Bought 1 Harland Clarke Senior Bond Maturing 2015

3. Sold 50 of 150 KRBPRE at 25.96 Last Wednesday (see Disclaimer):  This sale was part of my ongoing bond allocation pare.  I am keeping for now the 100 shares of KRBPRE bought in the ROTH IRA. Bought 50 KRBPRE at 24.62 in Roth IRA (6/23/2010 Post)  Added 50 of the TP KRBPRE at 25.19 in Roth IRA (2/17/2011 Post) I sold the shares held in a taxable account which also contains the related security KRBPRD.   Bought 50 KRBPRD @ 25.14 Both of these securities are trust preferred stocks, originally issued by a Delaware Trust controlled by MBNA that was later acquired by BAC. I bought those TPs rather than others issued by BAC since they had a higher yield at the time of purchase.  They do have different ex interest interest dates.  KRBPRE went ex interest on 5/11, the day after my sale. As a Tennessee resident, I do not pay state income tax on a gain from a stock sale, but I would have to pay a 6% tax after exhaustion of a standard deduction on the interest payment made by KRPPRE.  The state tax is applied to most of my interest and dividend payments and is  material to me.  

These TPs were not bought during the Near Depression period, when their prices sunk to below $10.  MBNA Corporation Tr originated Pfd Secs Ser E % TOPRS MBNA Corporation 8.125% Trust Preferred Securities Series D (look at 5 year charts). Instead, all of the purchases were made near par value. Under those circumstances, I will manage the position for small profits on the shares after collecting one or more interest payments. I view the upside potential as limited at purchases near par value, and the downside risk is more pronounced-caused  either by new concerns about BAC's credit risk or by interest rate risk.  I would add a third risk: irrational actions by the herd.  My best buy of a BAC TP during the Near Depression was just 50 shares of MJH (a TP wrapped inside a TC) at $7.51, later sold near its $25 par value.  

Also, it is important to keep in mind that BAC TPs will have to be phased out as Tier 1 equity capital.  This may result in the redemption of several of them, particularly the ones with higher yields.  KRBPRE has a 8.1% coupon on a $25 par value. www.sec.gov

Trust Preferred Securities: Links in One Post

4. Sold 2 Alon Refining Krotz Springs Bonds at 107 Last Wednesday (see Disclaimer): I was surprised about how well this junk bond has done since my purchase a few months ago. This sale is simply profit taking and gives me a little more of a green cushion in my junk bond ladder strategy. Given the risks inherent in this strategy, I expect to lose money on some of the bonds and hopefully will offset those losses with some realized gains, achieved by some profitable trades and by capturing the discounts to par value through early redemptions or principal payments at maturity. For these two Alon bonds, I just harvested the gains.

I was not aware of potential flooding until the evening after I sold this bond.  The swollen Mississippi is the culprit. If the Corps of Engineers opens the Morganza Spillway to prevent flooding in New Orleans, the water will then spread to the Atchafalaya River Basin. The opening of this spillway is the subject of this CBS News' story. The Krotz Refinery is located in this basin.  Alon is building a levee to help protect the refinery from flooding. The spillway was opened over the weekend.

I compute the total return from these 2 Alon Refining Krotz Springs bonds as follows:

+151.77 Realized Gain on Bonds
+135 Interest Paid on 4/15
+23.25 Accrued Interest to be Paid by Buyer on Settlement Date
-18 Interest Paid by Me at Settlement to Seller on 11/9/2010 Settlement Date
 Total + $292.02


I discussed earlier the accounting for the accrued interest that I paid to the seller when I purchased these bonds.  Item # 1  Tax Accounting For Bonds Purchased in the Secondary Market-Too Complicated  

5. First Data (own 1 bond: Junk Bond Ladder Strategy):  First Data was taken private in a leveraged buyout and consequently has a horrendous amount of debt. SEC Filed Press Release  Most likely, I will sell my 1 senior subordinated bond before its maturity on 3/31/2016, as I lessen exposure to the riskiest credits in my junk bond ladder strategy.  Generally, there are five bonds issued by First Data available for purchase in the bond market, and the one that I own is junior to all of them.  But it has a 11.25% coupon and I was able to purchase it below par value.  

The market did bump up the prices for those bonds after First Data released its first quarter earnings, and the reasoning is not apparent to me.  The company did report a 6% increase in revenues to $2.5 billion.  The net loss was reported at 217 million, which is not surprising given the interest expense that has to be paid on the debt. The company did generate 108 million in operating cash flow after paying $353 million in interest during the quarter. The company claims to have $1.9 billion in unrestricted liquidity which includes $150 million in cash.  The long term debt is shown at $22.5792 billion as of 3/31/2011.  Bought 1 First Data Senior Sub at 98.75  I am not exactly living dangerously with 1 First Data bond.   

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