Tuesday, August 16, 2011

Added 30 MSFT at 24.92/Reddy ICE & Momentive Specialty Chemicals/Bought 50 GJN at 19 In Roth IRA

James Steward wrote an interesting column in the NYT discussing the parallels to 1937-1938, when the U.S. economy slipped back into a recession. Historical GDP data can be downloaded from the government at www.census.gov/.pdf  

The FED did engage in quantitative easing starting in 1933, and the government also started to engage in some fiscal stimulus after FDR's election lasting to 1937. Arguably, that stimulus was too small in relation to the nation's GDP and was countered by significant cut backs in local government spending. Historical federal government outlays can be found at census.gov//hist.pdf

Growth from 1933 to 1936 recovered and averaged 9% per year. The fiscal stimulus was opposed by the True Believers, sending them into apoplexy and a perpetual state of anger about the growing deficits. After FDR won re-election in 1936, the FED tightened and the government withdrew the stimulus, as noted in Steward's column. Those are just historical facts. The economy slipped back into a recession.

Bernanke, an expert on this period, is no doubt worried about the impact of withdrawing monetary stimulus. The True Believers who advocated reduced federal spending back then did not see any relationship between the recession that followed and their position on government spending. And, when the current generation of TBs look back on those events, they still do not see any relationship between the 1937-1938 recession and the withdrawal of federal stimulus, and still blame FDR for prolonging the Depression When both FDR and the Federal Reserve reversed those policies adopted in 1937, the economy soon started to turn back up before WWII. (see also: A Brief Peek At UCLA's Anti-FDR Propaganda and charts at  faculty.tcu.edu/jlovett/econ_data/Depression.pdf)

In Texas, state law requires utility customers to pay $1 per month to help the poor with their electric bills. Since the Texas legislature and Governor Perry are opposed to any tax increases, a substantial amount of those funds are diverted into the general fund and used for other purposes. CBS News

The NY Federal Reserve reported yesterday that its Empire State Manufacturing Survey remained negative for the third straight month. Empire State Manufacturing Survey While this kind of data is consistent with the slowdown scenario, it is also what I would expect to see when the economy is slipping into a recession.

A survey of economists, conducted by USATODAY, placed the chances of another recession at 30%. I would estimate that the chances are at least that much.   

1. Earnings: Momentive Specialty Chemicals and Reddy ICE (own Bonds: Junk Bond Ladder Strategy)

Momentive Specialty Chemicals, the successor company to Borden Chemical, reported revenues of $1.438 billion for the 2nd quarter, a 24% increase compared to the second quarter of 2010. Pro forma operating income (excluding items) of 146 million. Net income was $63 million, up from 52 million in the year ago quarter. Bought 1 Borden Chemical 8.375% Bond Maturing 4/15/2016

Reddy Ice (FRZ) reported a loss of $1.946 million, or 9 cents per share, compared to a $2.132 million profit in the year ago quarter. Revenues increased slightly to $106.493 million.  The company is highly leveraged, as shown in note 6 to its SEC Form 10-Q at page 14. This was a disappointing report. Bought 1 Reddy ICE 13.25% Second Lien Senior Bond Maturing 11/1/2015 Reddy acquired 6 ice companies for approximately $13.3 million in the first 6 months of 2011. I would suggest the cessation of all acquisition activities and more concentration on improving the profitability of existing operations. In the last quarter, $1.8 million was spent in connection with current acquisition expenses and on-going negotiations.  The company is also involved in some civil antitrust litigation, as a defendant, that cost the company $700,000 in fees during the quarter. This bond is very high risk. I am increasing my personal risk rating to 10+ from 9+, based in large part on this last earnings report, the costs of the  acquisition strategy, and the level of debt and the subordination of the 2015 bond. Personal Risk Ratings For Junk Bonds

2. Bought 30 MSFT at 24.92 Last Friday (see Disclaimer): A few days ago, I sold 50 MSFT at $27.9.  Stocks & Politics: SOLD: 100 EXC @ 44.67, 100 APF @ 17.47, 50 DLN @ 49.38, 100 PEO @ 30.62, 100 MSFT @ 27.9 (7/27/11 Post). As mentioned in that post, the target for buying some or all of those shares back was a decline to below $25. The current consensus estimate is for an E.P.S. of  $2.87 in MSFT's fiscal year ending in June 2012. MSFT Analyst Estimates  If that comes to pass, the P/E on those forward earnings would be 8.68 at a total cost of $24.92. The dividend yield is around 2.56%. Microsoft  MSFT has been increasing the dividend. Microsoft Investor Relations - Dividends and Stock History This brings me back up to 181+ shares, and I am reinvesting the dividend to buy additional shares. This was an automated purchase.

I agree with Eric Savitz that Google's acquisition of Motorola gives Microsoft an opening with phone manufacturers using Google's Android operating platform. Forbes

MSFT is ex dividend today.

3. Added 50 of the Synthetic Floater GJN at $19 in ROTH IRA Last Friday (see Disclaimer): This was an average down. I recently bought 50 shares in this account at $21.95. Item # 2 Bought 50 GJN at 21.95 I adequately discuss that security in that post.  I also discussed this security in a 2009. Bought 50 GJN at $12 (March 2009 Post)-Sold  50 GJN at 22.08 in the Regular IRA Due to the complex tax issues associated with Synthetic Floaters, a type of exchange traded bond, I will only buy them in an IRA. To date, I have realized gains of  $522.01 in two small trades, the largest being a $460.53 gain on a $635.50 investment. (snapshot of $460.53 gain at Item # 2 Sold Remaining SIVBO at $25/Bought 50 GJN at 21.95/Sold DRE at 15.31/Sold 150 CHW at 9.04)

GJN is a trust certificate containing as its underlying security a J P Morgan TP maturing in 2034. GJN pays the greater of 3% or 1% over the 3 month treasury bill rate. This type of floater took a hit, for obvious reasons, when the FED announced that it would likely continue its Jihad against the Saving Class until June 2013. The applicable rate is likely to be the 3% minimum on the $25 par value for at least two more years. At some point in the future, I would anticipate the float to be activated, providing a higher coupon. A mere increase above 2% in the 3 month treasury bill rate during the applicable computation period would trigger the float, and this is a low rate by historical standards. 

For as long as the swap agreement remains in effect, which creates the GJN coupon rate, the owners of GJN will not receive the fixed rate coupon of the underlying JPM TP. A termination of that swap agreement, for any reason, would result in the trustee paying that fixed coupon, which is 5.85%, rather than the greater of 3% or 1% above the 3 month month T Bill, subject to a maximum coupon of 8%. 

The owner of GJN is subject to the credit risk that JPM will defer payment on the TP or other events adversely impacting its credit. This bond is rated A2 by Moody's and BBB+ by S & P.  In effect, the TP is a JPM junior bond whose interest may be deferred provided there is no activation of the stopper clause. 

At maturity, the owners of GJN would receive the $25 par value plus accrued interest. The TP does have a "make whole" provision applicable for any early redemption that makes it less likely that JPM will elect to do so. (page S-7 of the Prospectus)

Interest payments are made monthly.  

GJN Prospectus:  www.sec.gov 
FINRA - Investor Information on Bond
Prospectus for Underlying TP in GJN: Prospectus Supplement

GJN closed at $20.1, up $1 in trading yesterday.  Trading was torrid at 2,919 shares.

Floaters: Links in One Post

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