Monday, October 3, 2011

Update on Travelport/Bought More CADs/Copper Price Plunge/China PMI/Bought 1 United Refining 10.5% Senior Secured Bond Maturing 2/18/2018 at 97.25/Sold 204+ NPF at $14.02 and 100 NPP at $14.45

One reader wanted to know why I call this blog "Stocks and Politics", when I mostly discuss bonds. I have renamed the blog in response to that query.  I am sitting at the very bottom of my stock allocation range at the current time after paring the allocation earlier in the year, with the final pares made in late July.  While I may change my mind, my current thinking is to wait for the S & P to decline to around 950 before purchasing stocks in any meaningful way. If another recession is coming, and that is a risk, then the vast majority of stocks will decline when that becomes evident.

Fidelity calculates personal rates of returns for the accounts that I have with them.  The cumulative  personal rate of return is shown in the top column, and the bottom column is the cumulative return for the S & P 500. The calculation includes YTD, 1 Year, 3 Years and 5 Years through August 31, 2011. The September data is not yet available. I have had withdrawals from this account, primarily to fund the IRAs with the maximum contribution amount.

In that account I am currently sitting on a cash balance, earning nothing, of close to 15%.  The cash balance is much higher in taxable accounts where preservation of capital is a primary objective. The three year period shown in the above chart would be 9/1/2008 to 9/1/2011, so that would start shortly before the Lehman failure. I suspect that the inclusion of the September numbers will increase my advantage over the S & P due to going down less during that month, but will send my return for the 2011 YTD into the red.   I am not satisfied with the foregoing.  I am probably a better bear market manager of my money than a bull market, bet the farm manager.

My primary problem in September was my junk bonds. Randall Forsyth opines in his column that the deterioration in high yield bonds are signaling a much worse economy ahead than what actually may happen. Based on the recent decline in my junk bonds, I do know for a fact that it would be a lot cheaper to purchase them today than when I actually did.

Goldman Sachs sees a 40% chance of a great stagnation for developed markets. (see ZeroHedge which copies the report) I would go higher than 40%, maybe somewhere in the 60% to 70% range.  The more debatable issue is how long will the stagnation last.

UBS increased its 2012 prediction for gold to $2,075 per ounce.  If that comes to pass, I will sell one or two ounces. I sold 1.875 ounces when gold hit $1900. That sale involved a 4 piece U.S. mint gold proof set. Recent Gold and Silver Sales

The copper charts are not looking so good. Spot Copper Historical Charts  A technical analyst, Katie Stockton, says that copper has had a technical breakdown. MNBC Video  She would look for stabilization in copper's price before calling a bottom in the S & P 500. Randall Forsyth wrote a column arguing that investors need to pay attention to Dr. Copper's warning. A more upbeat article about copper's prospects can be found in this  Barrons' article.

The December future's contract for copper closed last Friday at 3.10. It closed at 4.50 on July 29, 2011, or a 31% decline in just two months. 

Where does one find a risk free return now?  By risk free, I am referring to a 100% assurance that my capital will be returned in full, with the payment of sufficient interest to offset inflation and taxes.  

Given the events over the past three years, I can not say that a longer term, sovereign debt issue provides me with a 100% assurance of a return of capital.

HSBC's PMI for China sank below 50 for September, indicating contraction in China's manufacturing.

According to Reuters, credit default swaps on Morgan Stanley debt rose 71% over the past month, ending last Thursday, to 452 basis points.  Investors are reportedly concerned about MS exposure to European banks. Part of the increased concerns about MS were fueled by the blog at ZeroHedge. The MS common shares declined 10.47% to $13.51 last Friday. I own the equity preferred floater, MSPRA, that fell 4.23% last Friday to close at $15.85  MS.PA. That security went ex dividend on 9/28/11, shortly after my last purchase. Bought 50 MSPRA at $16.6

The  Europe 600 Index index closed down 17.1% for the third quarter.

I did buy some more Canadian dollars last Friday, as the USD continued to gain strength on a flight to safety.  Canadian Dollar (CAD) Strategy  I view that as a knee jerk type of response, no one asks whether the USD is really that safe when they are scared.

This is what a currency confirmation looks like at Fidelity:

I could have effectuated this exchange Saturday morning and received slightly more CADs. The fee is 1% of the principal value of the exchange up $100,000:

I will use  CADs to purchase income generating securities on the Toronto exchange. Dividends will be paid to me in CADs, thereby increasing my CAD stash over time. I will not buy CADs using USDs unless I can buy at least 1.03 CADs for 1 USD, and then I will add only in small amounts.

The Washington Post reported that Rick Perry's hunting camp is called "niggerhead", the name appearing on a flat rock near the entrance, still visible after being painted over.

1. Bought 1 United Refining 10.5% Senior Secured Bond Maturing 2/18/2018 at 97.25 Last Wednesday (Junk Bond Ladder Strategy)(See Disclaimer):  I discussed this bond in an earlier post and mentioned  then that I might buy it when and if it started selling below its par value. United Refining (July 2011). I owned a United Refining bond that was redeemed from the proceeds realized from the sale of this 2018 bond. United Refining 2012 Bond Redeemed at Par Value The 2018 was originally sold in a private placement and that bond was later exchanged for one registered with the SEC. Prospectus

This is a link to the FINRA Information on this bond. According to FINRA, it is currently rated B3 by Moody's and B by S & P. Interest is payable semi-annually in August and February. 

The 2018 is a senior secured bond. The collateral for the note is a mortgage lien, subject to certain exceptions explained in the prospectus, on United's refining in Warren, Pennsylvania and the pledge of the capital stock of a pipeline subsidiary. United has other assets that are not covered by the lien (see pp. 7, 44-48 of the Prospectus) This note is discussed by the company at page 9 of its most recently filed Form 10-Q. This is a link to an SEC filed press release discussing the results for the Q/E 5/31/11.

All of the Company's "wholly-owned subsidiaries fully and unconditionally guarantee on an unsecured basis . . . the Company's Senior Secured Notes". Form 10-Q at page 10.

I discussed this private company when I purchased the 2012 bond, later redeemed by United.  Bought 1 United Refining Senior Bond at 95.5 

Company website: URC - United Refining Company

My confirmation states that the current yield at my cost is 10.708% and the YTM is 10.926%.

I am assigning a 6 risk rating to this bond. Personal Risk Ratings For Junk Bonds

This is basically the replacement for the two Edison Mission bonds sold last week at a loss.

With a recession looming, I would anticipate junk bond prices to remain under selling pressure and to further weaken in price until investors have more confidence in an economic recovery.  The spreads between junk and investment grade bonds have risen sharply over the past several weeks. The spread over treasuries rose to 8% last week. Part of that is due to the rally in treasuries but junk bonds have also cratered in price.

As a result, I will only buy 1 junk bond in the bond market per month until I am far more comfortable than now about a durable economic recovery. I have not yet bought that 1 bond for October. 

2. SOLD 100 of NPP at $14.45 Last Wednesday AND 204+ NPF at $14.02 last Thursday  (see Disclaimer): I ended up with so many leveraged municipal bond funds that I had to count them using the fingers of both hands.  I decided to narrow my list some and to bunch it up. 

NPP closed at $14.33 on the day of my sale, and at a -4.85 discount to its then existing net asset value per share of $15.06. 

My purchase was made last November @ 14.05. I realized a small profit on the shares plus several TF monthly dividends.  I had too many municipal bond CEFs. I will probably use the proceeds to add to another leveraged municipal bond CEF.

Similarly, I sold 204 shares of NPF, another leveraged municipal bond CEF that was bought last November at @ 13.55  I had bought the shares in two 100 lots in different accounts. In one account, I reinvested the dividends.

3. Travelport (own 3 bonds): As previously discussed, Travelport Holdings Limited, the parent of Travelport Limited (Travelport) borrowed a lot of money to pay to its hedge fund shareholders.  I own bonds issued by Travelport who did not receive any of those funds. The parent is unable to pay back the PIK notes that are coming due in March 2012 without a restructuring.

While all of this is complicated, and I only spent a few minutes trying to understand it, the proposed restructuring would involve Travelport paying $85 million dollars to the owners of those PIK notes and granting a second term lien loan. Item # 1 Travelport

A large law firm, claiming to represent owners of the 2016 senior unsecured Travelport bond (own 1), wrote a letter claiming that those transfers would constitute a fraudulent transfer and a potential default under the indenture. This is a link to a copy of that letter filed with the SEC: 9/22/11 Letter from Dewey & LeBoeuf to Travelport  This is a link to another letter sent by the same lawyer: 9/27/11 Letter from Dewey & LeBoeuf to Travelport

I have no comment on those legal claims, other than to note that Travelport is helping to bailout the parent's shareholders and receiving nothing in return. What do you expect from private equity folks, who some refer to as worse than leeches? Instead, I would just note that Travelport recently paid back $655 million of its secured credit facility from the proceeds realized from the sale of  Gullivers Travel Associates:  SEC Filing

Travelport announced on Friday that it had obtained consent from the owners of the PIK notes for the restructuring. Travelport Limited and Its Parent Holding Company Successfully Obtain Consents to Complete Debt Restructuring - Sep 30, 2011 According to that release, the PIK loan maturity was extended from March 27, 2012 until December 1, 2016. I have not attempted to verify that statement from Travelport.  

This is a link to the FINRA information on the senior bond maturing in 2014. I will just monitor how the market reacts to this news today and for the remainder of this week. 

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