Friday, December 30, 2011

SOLD 50 KCW at $25.44/Sears/Bought 30 of TEX at $12.68-LT

Jim Cramer provides his opinions about the Dow 30 stocks next year in this article found at  TheStreet.

Medtronic (own) rose 91 cents yesterday to close at $38.34, apparently based on a favorable research report from a Citigroup analyst, who raised the price target to $44 from $40. The report is summarized in Barrons.

Yesterday, an SUV passed me as I was coasting into a red light. I was not approaching the red light at a sufficiently high rate of speed. The general idea among drivers in the SUV Capital of the World is to keep the peddle to the metal until you have to hit the brakes to avoid a collision with the stationary vehicle in front of you. It has always been my belief that those drivers have some sort of brain malfunction, possibly misfiring brain synapses, that probably explains a great deal more than their driving habits. Possibly, they will donate their brains to science for further study.

1. SOLD 50 of the TC KCW at $25.44 Last Tuesday (see Disclaimer): I am not comfortable holding long bonds and will be content to sell them at any profit when purchased near their par values. The TC KCW matures in 2043, so there is a ton of interest rate risk in that security. I collected one semi-annual interest payment and made a small profit on the bond.
Bought 50 KCW at 24.9 August 2011 The underlying security in KCW is a senior bond originally issued by U.S. West Communications (FINRA), which later merged into Qwest in 2000, who was then acquired by CenturyLink (CTL) in 2011.   

KCW has a 7.5% coupon on a $25 par value. Qwest's bonds were rated junk before its acquisition by CTL. The underlying bond in KCW is now rated at the bottom rung of investment grade. The TC has a higher coupon than the underlying bond, which has a 7.125% coupon. There is a call warrant attached to this TC. CTL may redeem the underlying bond after 11/15/2013 at 102.740% plus accrued interest. Thereafter, the call option continues as the premium declines gradually. 

I still own other TCs issued by companies that are now part of CTL. 

Trust Certificates: New Gateway Post

I replaced this security with a purchase of a senior bond issue from U.S. West, which yields about the same as KCW, but matures about 20 years sooner. This kind of swap reduces my interest rate risk, while keeping my cash flow about the same. I will discuss this substitute purchase in the next post. 

2. Sears (own 100 SSRAP and 1 Sears Holdings Senior Secured Bond-FINRA): Sears announced on Tuesday its intention to close 100 to 120 Kmart and Sears full-line stores. The company expects to generate $140 to $170 million in cash as the inventory in those stores is sold. Sears Holdings Press Releases The same store sales number for the eight week Christmas period were disappointing, falling 6% for Sears Domestic and 4.4% for K Mart. The common shares, SHLD, fell 27.2% on the day of this announcement and the bonds took a hit too. The longer term bonds fell the most. The common shares fell $12.47 to close at $33.38 last Tuesday.  Yesterday, Sears Holdings (SHLD) continued to slide falling 43 cents to close at $32.9. 

An article in the WSJ, which discusses this latest negative development at Sears, mentions one of the root causes. Typically, according to an ISI analyst, retail companies spend $6 to $8 per square foot updating their stores every year, while Sears spends $1.5 to $2. Rather than updating the stores, Eddie Lambert has been using cash to buy back stock, spending 5.2 billion dollars over the past five years. Needless to say, that $5.2 billion could buy a lot more shares at today's price. 

I have personal stories about the local Sears store in Cool Springs, near HQ, that illustrate the problem. Item # 1 Sears; Item # 4  Sears

Doug Kass has a Sears bankruptcy as one of his 2012 surprises,  TheStreet. By surprise he means a "possible improbable event".

After the close yesterday, Fitch downgraded the senior unsecured debt to "CCC".  MarketWatch Fitch kept its rating outlook at negative. The second lien 2018 notes were downgraded to B+ from BB.  That is the bond that I own: Item # 2 Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 at 83.25.

Floyd Norris makes an excellent case that the problem with Sears is Eddie Lambert.  NYT

3. Bought 30 TEX at $12.68 As LT Last Wednesday (Lottery Ticket Strategy)(see disclaimer): As with all LT purchases, this is not a serious buy. I was able to exceed the $300 limit on LT purchases due to prior profits. My last trade of TEX shares netted $116.38 profit on a quick turnaround of 30 shares:

2011 TEX 30 Shares
Bought 30 TEX at $13.59 (9/20/11 Post); Sold 30 TEX at $18 (10/31/11 Post). I also recently bought 1 Terex bond. Bought: 1 Terex 8% Senior Subordinated Bond Maturing on 11/15/2017 at 96.947 (8/31/11 Post). I do not have much to add to those posts.

Morningstar currently rates TEX shares at 5 stars. The consider to buy price is $19.8 or lower.

Terex profile page at Reuters.

Terex key developments page at Reuters

LT purchases are invariably financed with cash flow. Snapshots of the trades made pursuant to this strategy, managed exclusively by the RB, can be found in the Lottery Ticket Strategy: New Gateway Post. The current, total realized gain is $8,922.07 for the LTs since 1/1/2009.

Terex rose 46 cents yesterday to close at $13.09.

I will be using some of my year end cash flow to buy more LTs. 


  1. Happy New Year, and thank you for your insights throughout.

    Just one note: you use the phrase "peddle to the medal" - I always thought the phrase was "pedal to the metal" being the accelerator pedal to the metal of the car floor....?

    Whatever - I hope 2012 is a great one for you and yours..