Tuesday, October 18, 2011

Bought 100 FFEX at $1.4-Lottery Ticket/Bought 200 XTR:CA at 11.9 CAD/Bought 50 HBAPRG at $16.8/Cash Flow Snapshots One Account

The market turned south after the German Finance Minister, Wolfgang Schaeuble, stated that he sees no definitive solution to Europe's sovereign debt and bank problems coming out of the 10/23/11 EU summit. Yes, there is no magic wand to wave that would solve everything, no ruby slippers to click three times for a return to normalcy.

General Mills (own) was the subject of a positive article in Barrons.com.

The Tax Policy Center estimates that 46.4% of American households will pay no federal income tax in 2011. 

The government reported that seasonally adjusted retail sales rose 1.1% in September from the previous month and 7.9% above September 2010.  www.census.gov/retail.pdf

Walmart announced last week that Walmart U.S. has delivered 3 months of positive same store sales.

Vulcan Materials (own senior bonds only) cut its quarterly common share dividend from 25 cents to 1 cents per share, a move that will "improve" available cash by approximately $124 million annually. At the same time, VMC announced a five year $500 million dollar credit facility. Vulcan's common share price fell 6.16% yesterday to close at $30.14. I view this kind of move as a positive for the unsecured senior bond owners.

IMAX signed a license agreement with Eastman Kodak (EK) for exclusive rights to EK's next-generation laser projection technology. While IMAX's press release did not specify how much EK will receive, Bloomberg reported that the upfront fee was more than $10 million, plus a milestone payment and ongoing royalty payments.  This news had no material impact on the pricing of the 2013 senior unsecured EK bond.

1. Bought 100 FFEX at $1.4-LT Last Thursday (LOTTERY TICKET strategy) (see disclaimer)Frozen Food Express Industries is a trucking company and has fallen on hard times. The market cap at the $1.4 share price is just under $26 million. The shares touched $5 per share January 2011. An all time high was hit in January 2006 at over $13 per share. The stock was selected as a LT based primarily on these two statistics: Price to Sales Ratio at .07 and Price to Book at .4. FFEX Key Statistics

The company recently announced that it was going to sell 435 dry van trailers. The company estimates that the proceeds from those sales will total approximately $15.5 million. It intends to use the proceeds to reduce debt.The company intends to upgrade its fleet of tractors to improve efficiency.  SEC Filed Press Release  As of 6/30/11, the company had long term debt of $15.021 million. Form 10-Q for the Q/E 6/2011 That long term debt originates from a credit facility. The company reported a loss for that quarter of $3.305 million.

The company also recently lost an arbitration case, arising out of vehicular accident. The company had reserved $1 million but the award was $3.5 million.

There are a lot of negatives with this stock. If it survives, and the economy improves, the upside potential is worth the downside risk, but only for a 100 share purchase as a Lottery Ticket.

Frozen Food Express Industries closed at $1.48 yesterday.

I will generally refrain from discussing LT purchases after my initial purchase until I sell the shares.  Given the insignificant exposure, I can hold the position until the company fails or succeeds, and either result will not have any material impact on me. The LT strategy is designed solely to entertain the RB.

Lottery Ticket Strategy: New Gateway Post

2. Bought 200 XTR:CA at 11.9 on the Toronto Exchange Last Friday (Canadian Dollar (CAD) Strategy)(see Disclaimer): iShares Diversified Monthly Income Fund is an ETF sponsored by iShares Canada. This purchase is an average down from my prior purchase of 300 shares. Bought 300 of the Canadian ETF XTR

Dividends are paid monthly in Canadian dollars at the current rate of 6 Canadian cents per share. This will give me around a 6% yield at a total cost of 11.9 CAD.  

XTR is a fund that owns other Canadian ETFs, using a balanced portfolio approach. This is a snapshot of its holdings as of last 10/12/11:


According to the sponsor, there were 1700 holdings, with a 53.88% weighting in stocks and 44.74% in bonds.

iShares Diversified Monthly Income Fund fell one cent in trading yesterday.

3. Bought 50 HBAPRG at $16.8 Last Friday (see Disclaimer): I would not profess to know the reason why this security has plummeted in value, or what is motivating those who are unloading their shares. Last Friday, HBAPRG fell 3.11% to close at $16.85, on almost three times normal volume. In mid-July this security was trading over $23 per share.  HBA-PG Historical Prices I sold some shares at $24.02 last April.

The issuer is HSBC USA, an indirect wholly owned subsidiary of HSBC Holdings. This is a link to the last SEC Form 10-Q for HSBC USA/ 2nd Quarter of_2011.pdf  This is a link to the 2010 Annual Report:  SEC Form 10-K The capital ratios can be found at page 221 of that report. The preferred stock, which includes HBAPRG, is referenced in note 19 at page 197.

HBAPRG is an equity preferred floating rate stock that pays the greater of 4% or .75% above the 3 month LIBOR calculated on a $25 par value. Prospectus: www.sec.gov

Given the Federal Reserve's Jihad against the saving class, the applicable coupon for this security is the 4% minimum.  The 3 month LIBOR rate would have to rise above 3.25% during the applicable computation period to provide a greater coupon than the 4% minimum, and that is not likely to happen anytime soon. If the Fed maintains the federal funds rate near zero into 2013, its current stated intention (FOMC statement--August 9, 2011), then I would not expect a 3.25% LIBOR rate until at least 2014. Conditions may change and alter this Fed policy however.

Even if the floater is not activated, the 4% coupon would provide a yield of 5.95% at a total cost of $16.8. The dividend paid by HBAPRG would be treated as a qualified dividend and consequently subject to a maximum tax of 15% making it more desirable for U.S. taxpayers who are in the highest marginal tax rate, compared to non-qualified dividends and interest payments.

HBAPRG pays non-cumulative dividends. Like common stock, it is a perpetual security with no maturity date.  It is senior only to common stock.  All three of those traits are unfavorable to an investor. Advantages and Disadvantages of Equity Preferred Floating Rate Securities

HSBC USA Inc. Dep. Shs (Rep. 1/40th of a share of Fltg. Rate Non-Cum. Pfd. Series G (HBA.PG) rose 47 cents yesterday to close at $17.42.

This kind of security will be subject to unusual and relatively high degrees of volatility, particularly on days of market stress. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities (August 9, 2011 Post)

4. Snapshots of Cash Flow into One Taxable Account over the Weekend and on Monday: My most basic strategy is to produce a constant stream of dividend and interest payments and then to reinvest those funds irrespective of economic conditions or my opinions about the market.  For the most part, I will reinvest those funds into other income generating securities. At the moment, I am buying stock market Lottery Tickets with that cash.

I will produce that stream of income from a large variety and types of securities. The following are snapshots of that income received yesterday and over the weekend in one taxable account.

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