Tuesday, June 28, 2011

HYS/EK/Bought 50 AMAT at $12.45/Bought 1 Cricket Communications 7.75% Senior Note Maturing on 10/15/2020 at 96.5

The Greek Parliament is scheduled to vote tomorrow on the austerity package. This vote is apparently only for the general goals of tax and spending targets, along with the creation of a privatization agency.    BBC News  The Deputy Prime Minister is not exactly brimming with optimism about securing the necessary votes to actually implement those general goals.   George Soros is quoted in that BBC story saying that the world is on the "verge" of another collapse.  The word "verge" is one of those amorphous words that suggest a certainty of a particular outcome, but actually predicts nothing.  I could say that the OG is on the verge of running around the block here at HQ.  Or, I could say that the OG is on the verge of eating some Hershey Kisses, possibly a more likely scenario than a jog around the block.

The market may rally in the event Greece's Parliament approves the general goals of austerity, but that could easily end up being a head fake.  

PIMCO has launched a short term high yield bond ETF.   HYS  As of 5/31/2011, the fund had a yield-to-worst of 6.8% and a duration of 2.2 years. www.pimcoetfs.com /HYS .pdf   This ETF will attempt to track the BofA Merrill Lynch 0-5 High Yield Index. Historically, this segment has produced returns in line with equities but "with approximately half the volatility", according to PIMCO.

Although the FED will end this month QE2, it intends to keep its bloated balance sheet stable by reinvesting principal from maturing assets. FRB: Press Release--FOMC statement--June 22, 2011 This policy could result in the purchase of up to 300 billion in treasuries over the next year, according to Bloomberg. That Fed policy has been called QE3 Lite. The FED had a record $2.86 trillion in assets as of 6/22.  It is far from clear who will emerge to buy U.S. debt, in the quantities needed to pay off maturing debt and to finance the budget deficits, once the FED stops buying in bulk.

The personal consumption expenditure (PCE) index, viewed by the FED as a more accurate gauge of inflation than CPI, rose .2% in May and is up 2.5% over the past year.   Excluding food and energy, the PCE index rose .3% in May. News Release: Personal Income and Outlays, May 2011

The Dallas Fed manufacturing survey reported the results of its June manufacturing survey in Texas.  Texas Manufacturing Outlook Survey, June 2011 - Economic Data - FRB Dallas The general business conditions index fell to -17.5. A -3.2 was the consensus estimate.

The treasury sold $35 billion in two year notes yesterday with a yield of .359%. www.treasurydirect.gov.pdf Yes, that is a period before the numbers.  There is no doubt in my mind that the real rate of return will be negative before taxes.

The London P.M. fix for gold on 6/27/2011 was at $1,498 in USDs.

The International Trade Commission has postponed its decision in Eastman Kodak's patent infringement case against Apple and RIMM until 6/30/11.  The decision was scheduled to be announced on 6/24. usitc.gov.pdf I would anticipate that this ruling will have some impact on the pricing of my 2 EK 2013 senior bonds.  A ruling favorable to EK, followed by a substantial cash settlement, would provide considerable comfort to the owners of EK's 2013 senior bond.   Bought 1 Eastman Kodak 7.25% Senior Bond Maturing 11/15/2013 Added 1 Eastman Kodak 7.25% Senior Bond Maturing 11/15/2013 The last post cited contains a more thorough discussion of this legal proceeding.

1. Bought 50 AMAT at $12.45 (Large Cap Valuation Strategy)(see Disclaimer): Do I care about my opinion on AMAT stock? Of course, I could care less about my opinion since I am simply not capable of forming an informed judgment about AMAT's business.  Somehow, I have avoided losing money so far in this stock. Recognizing my total lack of expertise in technology in general, I will wait to buy large cap tech stocks only when the valuations appear compelling to me.  As a result, I have never paid over $15 per AMAT share and all of my recent purchases were at or below $13.   Bought 50 AMAT at 12.48 (January 2010 Post); Added 50 AMAT at 12.28 (March 2010 Post ); Bought 50 AMAT at 11.95 (July 2010 Post);  Bought 50 AMAT at $13 (September 2009 Post) I have sold those shares for small profits.  I intend to hold onto this latest purchase for a least a year to see whether I can improve upon my prior percentage gains.  

I am generally aware that AMAT makes equipment for the semiconductor industry.  The latest purchase was motivated by the following factors:

a. The dividend yield at a total cost of $12.45 is around 2.57% at the current quarterly rate of 8 cents per share. News Release | Investors | Applied Materials

b. The price had declined from a high of $16.85 on 3/3/11, NASDAQ:AMAT, or close to 26% which seems harsh to me.

c.  The consensus estimate for the F/Y ending 10/11 is for an E.P.S. of $1.42, which gives me a P/E of less than 10, though earnings are of course very cyclical for this company.

d.  I am not qualified to judge the soundness of AMAT's proposed acquisition of Varian Semiconductor (VSEA).  I do know that part of the financing was raised at low interest rates (Prospectus) and VSEA is a profitable company.  The consenus estimate is for an E.P.S. of $3.97 for VSEA's current fiscal year ending in September 2011.  The large cash pile on AMAT's balance sheet was not earning much anyway.

e.  Morningstar rates AMAT's stock 5 stars. S & P currently has AMAT rated 4 stars with a $18 twelve month price target. S & P views Varian as providing some interesting growth opportunities and provides a good fit.  I am aware that Varian has a dominant position in the ion implantation market.

While AMAT did okay in its last quarter, many investors were disappointed with its forecast for the current quarter.
SEC Filed Press Release Announcing Results for Q/E 5/1/11 (see section on "business outlook")

2. Bought 1 Cricket Communications 7.75% Senior Bond Maturing 10/15/2020 at 96.5 (Junk Bond Ladder Strategy)(see Disclaimer):  This bond is normally unavailable for purchase in small lots.  With the recent retreat in junk bond prices, this bond had declined some in price, and a seller emerged willing to feed small investors with 1 bond sales.

Cricket is the brand name for wireless communication services provided by Leap Communications, whose stock is publicly traded under the symbol LEAP. Cricket Communications, the issuer of this bond, is the operating subsidiary of Leap Wireless. This is a link to Leap's last filed Form 10-Q for the Q/E 3/2011.  SEC  As of Q/E 3/2011, LEAP had long term debt of $2.8337 billion and was operating at a loss.  The long term debt is discussed starting at page 10 of that Form 10-Q.   The senior 2020 note is discussed at pages 12-13. This note was originally a private placement and that note was exchanged for a publicly traded one registered with the SEC. PROSPECTUS

This is a link to the Reuter's Key Developments page for Leap.

The bond is of course rated well into junk territory.  According to FINRA, Moody's rates it at B3 and S & P at CCC+.

I am assigning it a 6+ rating in my personal junk bond rating system. Personal Risk Ratings For Junk Bonds

Interest is paid semi-annually in April and October.

My confirmation states that the current yield at my cost is 7.965% and the YTM is 8.167%.

In the absence of the Fed's JIHAD against savers, I would not be taking so much risk with junk bonds.  I cried Uncle a couple of years ago, but Uncle Ben did not hear me wailing. So, when I ran out of other options, the junk bond ladder strategy was born late last year. Item # 5 More on Rationale for Junk Bond Ladder Strategy

I am tracking realized gains from this strategy in Item # 5:   Realized Gains Junk Bond Ladder Strategy

As previously discussed, I will be more than content to break even on the bonds, that is, profits on bond sales and redemptions netting out bond losses from sales and/or defaults. If I am able to accomplish that objective, which is dicey given the risks, I will have at least captured a good interest rate spread compared to similar maturity treasuries. The 10 year treasury note is now less than 2.9%.  My average weighted maturity in the junk bond ladder is slightly over 7 years with close to a 10% yield to worst.  I expect defaults which is one reason for using a basket strategy and to limit purchases to bonds selling at less than their par value.

I made two more bond trades on Monday that I will discuss in the next post.  

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