Monday, August 22, 2011

Sold AEF at 23.25/Warner Music 2014 Bond Redeemed at 101.229/HPQ: Another Floundering Beached Whale/Bought 50 GYB at 16.95 in Roth IRA/Travelport

Maybe in a few weeks, I can remove one of my 1 ounce gold coins from the bank box and buy a new Mercedes, one of the high end ones, and give my Saturn to Goodwill. I may need to do something in response to this parabolic rise in gold. 

A debate between Hayek and Keynes is made in the rap video linked in this article at Forbes and also found at YouTube.

According to the Bureau of Labor Statistics, private sector employment decreased .6% in Texas between December 2007 and June 2011, while public sector jobs increased 6.4%. Washington Post The population in Texas has grown more than 20% in the past decade, which requires the hiring of more public sector employees from police officers to school teachers.

Texas has been able to balance its budget until recently with the influx of almost $25 billion in stimulus money from the federal government. As previously noted, Texas used $6.4 billion of the Democrats' stimulus money from the Recovery Act to plug a $6.6 billion dollar budget hole for F/Y 2010. Federal Recovery Act State Budget Update  Due in large part to that population growth, and the influx of illegal immigrants, most of those private sector jobs created in Texas are "at or below" minimum wage  U.S. Bureau of Labor Statistics: Minimum Wage Workers in Texas - 2010 Rick Perry needs to be more grateful to the liberal Democrats rather than biting the hand that has made him look better during this economic downturn. Texas Miracle?

Last Wednesday, data from the ECB showed that a European bank borrowed $500 million from a facility that had not be drawn upon for months. 

J P Morgan joined the chorus asserting of a recession risk. U.S. GDP for the 2011 4th quarter was slashed to 1% from 2.5%. The 2012 first quarter estimate was reduced by JPM to .5% from 1.5%. Their chief economist, Bruce Kasman, estimates that there is a 40% chance of a U.S. recession. Money video

As noted by Randall Forsyth in his Barrons column, you do not need to be an economist to detect an "ill wind".

Travelport's senior bonds were downgraded by Moody's to Caa1 from B3 with a negative outlook. The senior secured debt was lowered to B1 from Ba3. I have viewed my Travelport bonds to be in my extreme risk category 1:  Personal Risk Ratings For Junk Bonds Since I view my current exposure of 3 bonds to be too high given the extreme risk, I may sell one at a loss. 

1. More Value Destruction at HPQ (own): Hewlett-Packard's stock price has returned to 1995-1996 levels, as the company looks more like a floundering and disoriented beached whale. Both the management and the Board of Directors continue to look idiotic, dysfunctional and extraordinarily incompetent. I do not see any reason to have any confidence in Leo Apotheker's judgment, and the market agrees with that assessment. I view the proposed acquisition of Autonomy to be very pricy at an asinine 10 times revenues. (see generally Bloomberg Businessweek Reuters MarketWatch). I would also anticipate more pricey software acquisitions in the future as HPQ attempts to buy growth in the software business, without much regard to the cost.

The decision to walk away personal computers (#1 worldwide) is just another boneheaded mistake in a long series. The problems with this strategy are summarized in this WSJ article. This is not to say that the original decision to buy Compaq could be defended by any non-brain dead individual. The decision by Carly Fiorina and HPQ's Board to buy Compaq for 24 billion in stock was just another idiotic decision, so typical for this company. {see article written by Carol Loomis in 2005 comparing the forecasted results with the actual results from this merger Fortune}

I would also expect a reversal of the decision to raise the dividend at double digit rates, or even to raise it much at all.

HPQ has turned into a value trap, and I believe that many large institutional shareholders will be existing their positions over the next several weeks.  I underestimated the ability of the Board and HPQ's management capacity to destroy shareholder value. I wonder whether it is intentional?

If they excel at anything, it is the destruction of HPQ's share price, and that can not be disputed by any rational person.  Once that capacity is shown, it can only be stopped by the shareholders replacing the Board and the CEO. It would probably be necessary to dismiss most of the senior management too, since the rot probably runs really deep in that company. I have been voting against the HPQ Board, viewing them as worse than worthless, and will continue to do so.  A list of those Board members can be found at HP Investor Relations - Board of directors.  

Some negative analyst comments about HP are summarized in Tiernan Ray's blog at Barrons.

After HPQ lowered its forecast for the F/Y ending October 2011 to a range between $4.82 to $4.86, the company is selling at less than five times that adjusted E.P.S. number and at around .3 to anticipated revenues. That valuation has to assume that HPQ's management and its Board will continue to engage in conduct detrimental to existing shareholders and to destroy shareholder value.  (see generally article at  MSN Money that argues HPQ manifests the worst features in corporate America)

I would anticipate that HPQ's shares will trade mostly in the $20 to $30 range over the next three years, with occasional spurts above and below that range.  There is room for upside surprises, such as HPQ becoming an acquisition target, or the new strategy actually adding to value rather than subtracting from it.  A buyer at $23 could conceivably close their eyes, reopen them in about ten years and be pleasantly surprised by the results.  I suspect that the only way for that to happen is for Oracle to buy HPQ with its stock. 

2. Sold 30 AEF at $23.25 Last Thursday (see Disclaimer): I just bought these shares at $19. Bought: STDPRB at 13, USBPRH at 18.12, AEF at 19 (August 10, 2011 Post) Why sell 30 shares? There is no good reason. I have two bad reasons. First, I have never bought more than 50 shares of this security and have a perfect record trading it for profits. I did not want to break that record. The second bad reason is that the OG has a bad feeling in his gut about European hybrids issued by financial institutions and wants to keep his powder dry, looking for a better buying opportunity in this sector down the road. The foregoing snapshots show my trades over the past two years for this security:

50 AEF 2010 Roth IRA +260.06
50 AEF 2010 Taxable Account  +236.59 
50 AEF 2011 Taxable Account +105.13
30 AEF 2011 Taxable Account +113.48

Total: $715.26 plus dividend distributions 

AEF closed last Friday at $23.21. 
3. Warner Music Bond Redeemed at 101.229 Plus Accrued Interest (Junk Bond Ladder Strategy): This bond was bought at a slight discount to its par value. Bought 1 Warner Music 7.375% Senior Sub Bond Maturing 4/15/2014 (February 2011).

At least I will not lose money on this one.  Just trying to be positive. I had rated it in Category 3 at "4": Personal Risk Ratings For Junk Bonds 


4. Bought 50 of GYB at 16.95 in Roth IRA Last Friday (see Disclaimer): GYB is a Synthetic Floater that has been bought and sold many times. Bought 100 GYB at 10.95 /Will Hold Synthetic Floaters In Retirement Account (April 2009); Sold 100 GYB at 18.09 (May 2010); Bought 70 GYB at 18.49 in Regular IRA (March 2010); Added 30 GYB in IRA at 17.97 (July 2010); Sold 100 GYB @ 19.4 (October 2010); Bought 50 GYB @19.07 (October 2007); Bought 50 GYB at 18.63 in the Roth IRA (January 2011); Sold 100 GYB at 19.7 in Roth IRA (May 2011). 

I am playing with the house's money on this one.  The largest gain was a $671.71 gain realized on a 100 shares purchase in an IRA. (see snapshot at Item # 3 Sold 100 GYB at 19.7 in Roth IRA)  

This security pays the greater of 3.25% or .85% above the 3 month LIBOR rate on a $25 par value, subject to a maximum coupon of 8.25%: Prospectus:

GYB is a Trust Certificate (TC). The TC represents an undivided beneficial interest in a Goldman Sachs Capital I trust Ppreferred security (TP). That TP represents an undivided beneficial interest in a 6.345% junior bond issued by Goldman Sachs, maturing on 2/15/2034. In effect, GYB represents a beneficial interest in a GS junior bond. 

This is a link to the FINRA Information on the underlying bond: FINRA That bond is currently rated A3 by Moody's and BBB- by S & P which is a big difference for this type of company. The Lehman Brothers and Bear Stearns fiascos need to be kept in mind--always. 

The owner of GYB does not receive the fixed coupon rate of the underlying GS junior bond, however, for as long as the swap agreement remains in effect. Instead, the trust, which owns the bonds, will receive the interest payments from GS and swap that amount with UBS, the swap counterparty, for the amount payable to the owners of GYB. Given the FED's Jihad against the saver class, the 3 month LIBOR rate is abnormally low, and the minimum rate is consequently the applicable rate. For now, UBS has the better part of this deal. It does not have the risk of a GS default, which remains with the owners of GYB, and in effect has risk free return of 3.145% now. 

I can figure my minimum and maximum rate based on a total cost number of $16.95.  The minimum yield would be about 4.79% (.0325 x. $25= $.8125 ÷ $16.95= 4.79%). The maximum yield would be 12.17% (.0825 x. $25=$2.0625 ÷ $16.95=12.17% rounded). The maximum yield would be reached when the 3 month LIBOR hit or exceeded 7.4% during the relevant computation period. 

And, if GS survived to pay off the TP at maturity in 2034, the owner of GYB would receive $25 per certificate. Needless to say, I am not likely to hold this security for that long.  

It is also important to keep in mind that GYB is likely to become worthless in the event Goldman does a Lehman.  Also, if the interest payments to the Trustee are deferred by GS, which assumes the common and equity preferred dividends have already been eliminated, GYB's payments would also be deferred in that event, as explained in the prospectus.

I would expect that GS would not defer paying the owners of its TPs short of bankruptcy, since exercising that right would probably put it out of business anyway as clients flee a firm so in trouble that it had to defer paying interest on its junior bonds. GS knows that so I would not anticipate a deferral unless it did a Lehman, who went from paying all bond and preferred stock owners to none of them, after filing a bankruptcy petition. In other words, I view the most likely scenario for an investment bank like GS or MS as all or none. 

GYB closed at $16.89 on Friday, down 55 cents. The security just went ex interest for its quarterly payment on 8/10/11. 

I will only buy synthetic floaters in an IRA due to the complex tax issues associated with this type of security.  

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