Wednesday, August 10, 2011

FED's Jihad Against the Saving Class/Earnings: Colt Defense, Edison Mission, First Data, Travelport, Harland Clarke, CoreLogic/Bush Tax Cuts and Jobs/Bought: STDPRB at 13, USBPRH at 18.12, AEF at 19

The Federal Reserve stated yesterday that its Jihad against the Saving Class will continue at least until June 2013 given its current negative view of the U.S. economy. FRB: Press Release--FOMC statement--August 9, 2011 Their evaluation of the economy was certainly downbeat. Economic growth has been "considerably slower than the Committee had expected". Household spending has "flattened out".  Indicators suggest a "deterioration in overall labor market conditions." The housing sector remains "depressed". I have no reason to disagree with this assessment and fail to see how it would be comforting to stock investors.

The market must have liked the idea of keeping savers in Money Market Hell for two more years, as the market swung wildly again yesterday, with the DJIA closing up 429.92 points or 3.98%.  The ^VIX closed  at 35.16, down 12.84 or 26.75%. Boy, this is fun. Better than any roller coaster that I have ever been on.  One thing about roller coasters, though, there is a lot of up and down, and all around, but you ultimately end up at the same place from which the journey began.

When I heard the statement by the FED, of their need to flog me for another two years and to rub salt into the wounds, I decided to buy more of an investment grade bond in TC form yielding around 7.6%, which I will discuss in the next post, figuring in a somewhat simpleton train of thought that 7.6% was better than zero. Perhaps I will start a new society to be called "The Society for the Prevention of Cruelty to Savers".

While the market liked the Fed's sadistic measure, the USD did not care much for it. The Swiss Franc currency ETF (FXF) rose $5.68 yesterday. The U.S. Dollar Index (DXY) fell 1.23%, indicating dollar weakness against a basket of major currencies. Gold is in a parabolic upward move.

Eric Cantor, the Speaker of the House of Representative, reiterated his opposition to revenue increases after S & P downgraded U.S. debt and the stock market tanked on Monday. Time  Although I have looked hard, and try to be fair, I have yet to find a House GOP member who has any balance whatsoever.  If anyone knows of a balanced GOP House member, please leave a comment.

The GOP insists that tax breaks for the Job Creators is the magic elixir for a resumption of economic growth. This quasi-religious doctrine does not take into account historical events occurring over the past decade. Facts are of course irrelevant to them. And none of them would be convinced by anything that I am about to point out.

The Bush tax cuts for the Job Creators were enacted in 2001 and 2003. Did those cuts usher in a Golden Era of Job Creation by the Job Creators? I frequently mention data that I found at the WSJ which shows the number of jobs created going back to Harry Truman's administration. The following is a summary of the data for the 8 years under Clinton and George Jr.:

Jobs Created George W. Bush = 3 million
Jobs Created Bill Clinton= 23.1 million

Tax rates were increased under Clinton. George Junior left office in January 2009 and the job losses occurring in 2009 were unavoidable. They would have occurred irrespective of the party in power. I tallied the 2009 job losses from the Labor Department data from 2009:

January 2009: -598,000
February: -651,000
March: -663,000
April: -539,000
May: -345,000
June: -467,000
July: -247,000
August: -216,000
September: -263,000
October: -190,000
November: -11,000
December: -85,000  
Total: -4,375,000
Employment Situation Archived News Releases

If I credit Junior with those -4,375,000 job losses, then his total becomes -1,375,000 jobs "created" by the Job Creators in exchange for their tax cuts. I was never a whiz in math but I do know that a negative jobs number is not consistent with job creation by the Job Creators.

By focusing so much attention on taxes for the Job Creators, an analysis of the real underlying problems never takes place.

I try to be fair to both political tribes. To be fair to Junior, I would need to take away the job losses occurring during the first year of his first term which were impacted by a recession too.  So, I took the time to that:

January 2001: +145,000
February: +135,000
March: -86,000
April: -223,000
May: "little changed"
June: -114,000
July: -42,000
August: -113,000
September: -199,000 (more of an impact from 9/11 than prevailing effects Clinton economic policies)
October: -411,000
November: -331,000
December: -124,000
Credit for George Jr.= 1,191,000
Bush Revised Total for Eight Years: - 184,000. 

I believe that is still a negative number for Junior and the Job Creators over an eight year period.

Has the actual historical evidence caused a single member of the GOP to even question their quasi-religious doctrines? Facts do not matter to them, so the answer is-of course not. The main result of the Bush tax cuts was to substantially increase the budget deficit problem by depriving the government of several trillion dollars in revenues.

When you ignore the evidence, then you are likely to prescribe the wrong solution, since you have not even identified the source of the problem.

1. Earnings from Companies Where My Position is in a Bond:  The following bonds are part of the Junk Bond Ladder Strategy, a risky strategy given the credit quality of the issuers. Most of these bonds have relatively short durations, however. I am far more concerned about credit risk than interest rate risk for these bonds. If an investor owns these bonds, there is no excuse for failing to keep up with company developments.  I am in the hole on all of the forgoing bonds, due in significant part to the junk bond market going down recently based on increasing concerns about the U.S. economy and the S & P downgrade.  On Monday, the prices for junk bonds caved and bids disappeared from the screen.   

First Data reported that consolidated revenues rose to $2.7 billion in 2nd quarter, up $135 million, compared to a year ago, based primarily on increases in debt network fees and favorable impacts from currency conversions. The company generated $161 million in operating cash flow during the second quarter after interest payments. The company continued to lose money on a GAAP basis, reporting a net loss of $175.8 million. The company is excessively leveraged due to a leveraged buyout and has made no progress paying that debt down. Total long term liabilities stood at an absurd $22.584 billion as of 6/30/11, up from $22.438.8 billion on 12/31/2010.  I own just one bond. Bought 1 First Data 11.25% Senior Sub Maturing 3/31/2016 at 98.75

Colt Defense reported another disappointing quarter and its 2017 bond fell 8 points in response to it.  When commenting on its first quarter, I mentioned that I would limit my exposure to just one Colt Defense bond. Colt Defense (May 20.2011). The report for the second quarter confirmed the wisdom of that decision.  Bought 1 Colt Defense 8.75% Senior Bond Maturing on 11/15/2017 at 85.24.

Harland Clarke reported net income for the second quarter of $33.1 million, up from $28.1 million in the year ago quarter. However, revenues for the last quarter were $325.1 million, down from $340.1 million in the year ago period, which highlights this firm's problem. It is operating in a declining industry, which is check printing, though the company is attempting to move into growth businesses. The expansion into new businesses via acquisition has not yet proven to be a winning strategy in my opinion, but at least their is a potential for growth in those businesses.  Check printing revenues declined $24.6 million. Harland is way over leveraged in my opinion. Bought 2 Harland Clarke 9.5% Senior Bonds Maturing on 5/15/2015 at 91.375

Mueller Water (MWA) had a slightly disappointing second quarter report. The company reported a loss of $2.7 million on $366.7 million in revenues. The CEO commented on the cautious spending patterns of its municipal customers. As a result of the lower than expected results, the common shares dived from $2.9 to $2.19 in the days after the release, MWA Historical Prices, rendering them once again potentially interesting as a  LOTTERY TICKET selection. Bought 50 MWA as a Lottery Ticket at $3.62 (May 2009); Sold LT MWA at $5.61 (April 2009); Bought 50 Mueller Water (MWA) at $3.74 (August 2010); Bought 50 MWA @ 3.04 (November 2010); and Sold 100 of the LT MWA at 4.25 (February 2010). After reviewing this trading history, I decided to buy 50 shares of the common as an LT again.  I have also bought and sold 1 Mueller Water bond. Bought 1 Mueller Water 7.375% Senior SUB Bond Maturing 6/1/2017 at 94.5 Sold 1 Mueller Water Sen Sub Bond at 100.625 I decided to buy that one bond back. Bought Back 1 Mueller Water 7.375% Senior Sub Bond Maturing on 6/1/2017 at 94.5

Edison Mission Energy reported another loss, I own too many EMI bonds (5 altogether) and intend to cut back to just 3.  EMI reported a net loss of $32 million on revenues of $536 million. I have a wide variety of concerns about this company, including the sheet size of its debt load, the lack of profitability, the maturity schedule of the debt and the environmental issues.  In a prior post, I mentioned that the EPA had adopted new emissions rules that would impact EMI.  Anyone owning one of EMI's bonds needs to read the material about the impact of these new regulations, which starts at page 41 of EMI's quarterly report.  1 Edison Mission Energy 7.75% Senior Maturing 6/15/2016 2 Edison Mission 7.75% Bonds Maturing 6/15/2016 1 Edison Mission 7% Senior Bond Maturing on 5/15/ 2017 Added 1 Edison Mission 7% Senior Bond Maturing 5/15/2017

Travelport reported a loss of $6 million on $530 million in revenue for the second quarter. As of 6/30/11, the  company had $288 million in cash equivalents. The company claimed to have EBITDA during the quarter of $123 million. 1 Travelport 9.875% Senior Bond Maturing in 9/1/2014 1 Travelport 11.875% Senior Sub Maturing 9/1/2016 1 Travelport Senior 9% Maturing 3/1/2016

Corelogic (CLGX) common shares were smashed after the company reported its 2nd quarter earnings, with the shares falling 30.87% last Friday to close at $9.92. CLGX reported net income of $31.5 million but those results included a gain of $58.9 million on an investment based on nearly a 4% decline in revenues from the year earlier quarter.  The company also revised its EBITDA guidance down for the second half of 2011.  Earnings Call Transcript - Seeking Alpha  I am down to owning 50 shares of PJS, TRUST Certificates, and  1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 The results and the share decline might make Corelogic an acquisition target.

I do not see any reason to be pleased with any of the reports discussed above.

2. Bought on Monday: 30 of USBPRH at $18.12, 30 STDPRB at $13 and 30 AEF at $19 (see Disclaimer): These securities were smashed on Monday.

AEF is an Aegon Hybrid, a type of security adequately discussed in that Post.   I disposed of my position in AEF at higher levels. SOLD 100 of 300 AEB at 19.72 & Sold 50 of 100 AEF at 23.43-Both in Taxable Account  Sold 50 AEF at 22.25 in Roth IRA. The last sale occurred in February 2011:  Sold 50 AEF @ $24.71.

The shares were bought in higher amounts than my re-entry on Monday which was just a 30 share buy: Bought 50 AEF at $16.82 Added 50 AEF at $18.38  Bought 50 AEF at 22.29 in Taxable Account This means that I consider it more likely that the price will fall rather than rise from $19. AEF pays qualified dividends at a fixed coupon of 7.25% on a $25 par value. Prospectus: At a total cost of $19, the yield is around 9.54%. As explained in more detail in my Gateway Post on Aegon hybrids, AEF is in effect a perpetual junior bond.  Another consideration is that Aegon triggered in my opinion four quarterly mandatory hybrid payments when it repaid the Dutch state recently. Aegon Repays Dutch Government-Mandatory Payment Event (June 2011 Post).

AEF rose 15.73% yesterday to close at $21.7.AEGON N.V. 7.25% Perpetual Capital Secs., AEF

STDPRD is an equity preferred floating rate security with a minimum payment. These securities were smashed last Monday. Advantages and Disadvantages of Equity Preferred Floating Rate Securities STDPRD is a non-cumulative equity preferred stock issued by Santander Finance that pays the greater of 4% or .52% over 3 month LIBOR on a $25 par value. Prospectus: Given the Fed's ongoing Jihad against savers, the applicable rate is now the 4% minimum and that is likely to continue for some time. I bought just 30 shares at $13. The yield at the 4% minimum is around 7.69% at a total cost of $13. Based on my 1099s the dividend is treated as a qualified dividend. Dividends are non-cumulative.  My last three transactions were to sell shares: Sold 50 STDPRB at 19.64 in the Roth IRA Sold 50 STDPRB at 20.2 Sold 50 STDPRD at 20.34 My prior lowest purchase was 100 shares at $15.3 (September 2009), and those shares were sold at $18.11. The small purchase of just 30 shares indicates that I believe that there is downside risk, and more shares could likely be bought at lower prices.

Santander Finance Preferred S.A. Unipersonal Floating Rate Non-Cumulative Series 6 Grd Pfd Securities rose 11.6% yesterday to close at $15.6.

USBPRH is an equity preferred floating rate preferred stock with a minimum payment. It originates from U.S. Bank (USB). I bought just 30 shares at $18.12. I would consider adding 30 to 50 more at below $15.  I previously bought and sold this security.  BOUGHT 50 USBPRH at 17.47 Sold USHPRH at 20.35 This security pays qualified, non-cumulative dividends at the greater of 3.5% or .6% over the 3 month LIBOR rate. At a total cost of $18.12 and the minimum coupon, the yield is around 4.83%. Prospectus  According to (free site, registration required), this security is rated A3 by Moody's.

USB.PH closed at $20.34 yesterday.

All three of these securities pay qualified dividends on a quarterly basis.

I discuss in more detail the use of volatility to make purchases in equity preferred stocks. They are extremely volatile in periods of significant market stress. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities

On down days, I am likely to buy several securities, spending anywhere from $750 to $1250 per trading day, with the orders spread out over the day. Orders will generally be well below the market.  

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