Thursday, September 29, 2011

Moody's Cuts EK Bonds Further into Junk/ Bought: 50 LXPPRD at $23.8 & 200 WIW at $12.63/Sold 137+ Duke Energy at $19.925

Reuters reported that Best Buy has cut holiday hiring about in half from last year, in response to a consumer slowdown in spending.

Martin Feldstein believes that Greece's situation is hopeless and that country must be allowed to default on its dead with a least a 50% cut in the principal value.  Maybe he is right. I suspect that he is from the perspective of the Greek people. The problem is whether his recommendation, if adopted, would be the spark that lights a conflagration, quickly spilling into the already vulnerable Spanish and Italian government bonds.

Durable goods orders fell .1% in August.

The treasury sold $35 billion in five year notes at a yield of 1.015% (, a record low yield for an auction. Historical data can be downloaded from the FRB website.  The five year treasury note data starts in 1962.  In 1981-1982,  five year note auctions producing yields over 14% were common, and some auctions exceeded 15% and even 16% in 1981.

Shiller said in an interview that real housing prices may not hit bottom for years.

An author of this column appearing in Forbes has the "same" growing fears about European governments and banks, as he did in 2008 about the U.S. banking system which almost collapsed back then.  A successful outcome of that issue will simply avoid a financial meltdown. It will not restore growth.

Earlier this morning, the German lower house of Parliament approved giving enhanced powers to the the European Financial Stability Facility, a bailout fund, one additional necessary step toward a resolution of this problem, at least on a temporary basis for the next year or so.

Moody's cut Eastman Kodak's debt ratings further into junk yesterday. The outlook remains negative. The senior unsecured 2013 bond was reduced from Caa2 to Caa3. I had already increased my risk ratings.  EK 9/27/11 Post  This bond, which matures in November 2013, has plummeted in value this week (FINRA) after EK announced that it had drawn $160 million on its credit facility.  I would question EK's ability to survive to November 2013 unless it receives a huge cash infusion from the sale of its image patents and/or a huge settlement in its pending ITC case against RIMM and Apple. If that does not occur, then EK will have to have an unexpected return to profitability from its operations. The market price of EK's common shares and its bonds (FINRA) suggests a lack of confidence in any favorable outcome. Until I have more clarity about the potential revenues from those patents, I intend to hold onto my two 2013 bonds.  I would not buy more.

Fitch also cut EK's issuer default rating by two notches to a level indicating a default of some kind "appears" probable.

Added 9/30/11 Update on Eastman Kodak Bonds: Eastman Kodak (EK) Bonds-Own 2013 Senior Bond

If EK has the right to buy back the 2013 bond under its bond indentures, which I have not checked, I would hope that it buying that bond now at 50 cents on the dollar. published an article examining Rick Perry's claim that the poverty rate has hit an all time high under the Obama administration. That claim is false. What is interesting is that Perry's claim is demonstrably false.  PolitiFact examines Perry's assertion that he never advocated abolishing social security as a federal program and move it "back to the states".

I discussed yesterday whether a TP issued by Susquehanna needed to be phased out as TIER 1 capital. Bought 50 SUSPRA at $25.25 ROTH IRA

There are two primary benefits to a bank in keeping a TP that will so qualify. First, unlike equity preferred stock, the interest paid in connection with a TP is tax deductible, so the actual cost is reduced by the tax savings. And, the capital rules allow the grandfathered TP to be treated as Tier 1 equity capital, in effect classifying a bond as equity. I believe SUSPRA falls under the grandfather provision in the Dodd-Frank law, permitting its continued use as Tier 1 equity capital.  While SUSQ may call that the underlying bond due to its high interest rate, sometime on or after 12/12/2012, there are reasons for keeping it too which is the only point that I am making here.  My purchases have been sufficiently close to par value that I am not concerned about an early call.

1. BOUGHT 200 WIW at $12.63 Last Monday (see Disclaimer):  WIW is a bond CEF that invests primarily in U.S. government inflation protected securities. Dividends are paid monthly at the current rate of $.0335, which is not much. WIW - Historical Distributions  The only positive comment about that rate is that the 10 year TIP was auctioned with virtually no coupon yield at all. I would not call a coupon yield of .078% a yield. (auction results at Might as well call it zero. Assuming no cut in WIW's current monthly dividend, which is an assumption that I would not make, the yield is around 3.18% which is better than zero.     

Another advantage is that this bond CEF is selling at greater than a 10% discount to its net asset value per share. On 9/26/11, the day of my purchase, the net asset value per share was $14.23. WIW closed at $12.63, creating a discount to net asset value at that time of -11.24.  Morningstar shows the 3 year average discount at -7.86.

My last transaction was to sell 300 shares at $12.85.  Sold 300 WIW at 12.85 August 4, 2011 Post  Those shares were bought in mid-July  at $12.47. I will treat this bond CEF as functionally equivalent to another one, IMF, and will frequently move into and out of one or the other.

2011 Realized Gains WIW +$212.45
2011 Realized Gain IMF $146.82

2010 Realized Gains WIW $266.07

2010 Realized Gain IMF +$215.77
Total: $841.11. That number dwarfs the $155.6 in dividends received during the foregoing time frames.  The dividends do of course add to the total return from this trading activity. 

Sponsor's web page: WIW

SEC Filed Shareholder Report for Period ending June 2011:

Cascade Investment (a/k/a Bill Gates) reported owning 13.1% of this fund in a Schedule 13D filing dated 8/16/11.

Western Asset/Claymore Inflation-Linked Opportunities & Income Fund closed yesterday at $12.58.  The net asset value per share, as of yesterday's close, was $14.21, creating a discount to net asset value of -11.54.  IMF closed yesterday at a -10.12% discount.  

2. Bought Back 50 LXPPRD at $23.8 Last Monday (see Disclaimer): LXPPRD is a cumulative preferred stock issued by Lexington Realty Trust  (LXP) that pays a 7.55% coupon on a $25 par value. Prospectus Dividends are paid quarterly with the next distribution date on 10/17.  

LXPPRD was ex dividend yesterday. Lexington Realty Trust 7.75% Cum. Redeem. Pfd. Series D, LXP.PD Stock Quote  The quarterly penny rate is $.471875 per share. Lexington Realty Trust Announces Quarterly Dividends At that rate and at a constant total cost of $23.8 per share, the yield is approximately 7.93%.

Generally, REITS will pay cumulative dividends, but any deferred dividend does not earn anything, unlike the trust preferred that would generally require the accrual of interest on the deferred interest amount at the coupon rate of the TP.

As you would expect, Lexington can not defer paying the dividend on its preferred stocks unless it eliminates its common dividend. To maintain its REIT's tax status, the company has to pay out at least 90% of its income as dividends. During the Near Depression, a few REITs did eliminate their common stock dividends and defer their cumulative preferred dividends. LXPPRD did not defer its preferred stock dividends. It did reduce its common share dividend. I believe that part of that dividend was in stock for several quarters, but the company is now paying an all cash dividend again.

REITs do not pay qualified dividends, though occasionally I might see a $1 or so per year so treated on a 1099.  

The largest prior realized gain came from 50 shares sold in the ROTH IRA:

2010 ROTH IRA Realized Gain 50 Shares LXPPRD $807.03

Other gains were much smaller, also on 50 share odd lots:

2009 Taxable Account Realized Gain on 50 shares= $98.99 
2011 Realized Gain 50 LXPPRD= $40.57

Total=$946.59.  With any purchase near par value, I do not anticipate making much, if anything, on the shares. This kind of security is purchased for its generation of cash flow, compared to the zero cash flow produced by a money market fund used to finance this purchase. 

Company Property Portfolio: Lexington Realty Trust - Property Portfolio

3. Sold All of Duke Energy Last Monday (see Disclaimer): I decided to harvest my long term capital gain in Duke Energy shares, selling 137 last Monday at $19.925.

$622.39 LONG TERM AND $13.69 SHORT TERM=$638.28

Duke was one of the stock positions sold in 2007 as I pared my stock allocation:

2007 DUK 250+ Shares +$147.57

S & P has a $19 target price.  Morningstar has a two star rating on this stock with a fair value estimate of $17.

Duke Energy closed yesterday at $19.88 yesterday. 

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