Monday, February 28, 2011

Bought 100 of the CEF PEO at 29.77/MOU AEG Vale/Bought AGNC at 29.29-Sold 50 STDPRB at 19.64 in the Roth IRA

The Commerce Department revised down its estimate for 4th quarter GDP to 2.8%.  The prior estimate was inflation adjusted growth of 3.2%.  The consensus estimate was for a revision up to 3.3%.  The revision down was caused by lower estimates for consumer and local government spending. News Release: Gross Domestic Product  It was estimated that state and local governments spent 5.8 billion dollars less than the first estimate.

For reasons that are not clear, the WSJ Dividend page lists the interest payment for the principal protected note MOU under the heading "foreign".  This page does confirm the annual interest payment on this $10 par value note as $2.79 per share and the ex date was last Friday.  Interest will be paid on 3/2/2011.  So my calculations were correct,
MOU Ends Second Annual Coupon Period With a 27.93% Gain.

If I invested in a typical Citigroup fixed coupon senior note with a similar maturity, the yield to maturity would be between 3% and 4%.  An example would be 5.5% fixed coupon note maturing in October 2014 that had a YTM  at last Friday's closing price of just 3.15% and was then selling at almost a 7% premium to its par value. FINRA MOU is about to pay me almost 28%. Fidelity does not allow their customers to buy exchange traded principal protected notes.

The DJ UBS Commodity Index closed at 165.34, up 2.99 on Friday.  I have previously calculated the maximum level on MKZ at 165.8198 on a closing basis for this index. Item # 1  MKZ and MKN Now  It would be a miracle, actually a divine miracle of biblical proportions, if that note avoided a reversion back to its 3% guarantee.  MKN, the other note that I own whose interest payments are linked to this commodity index, is still in a little better shape, though in need of some breathing room since its maximum level is 176.45.  The current coupon period for MKN ends on 3/30/2011.  I bought that one  at $9.85 and received $1.8 in interest on the $10 par value note for its first coupon period.  Item # 7 MKN & MKZ

1. AEGON (own hybrids AEH and AEB/Common as an LT):   Aegon raised last week €903 million to pay back part of the remaining state aid received from the Dutch government in October 2008.    WSJ.com This was done by selling 173,604,912 common stock shares at EUR 5.2 per share. SEC Filed Press Release

The repurchase of the junior securities necessary to effectuate this repayment triggers the Mandatory Payment clauses contained in Aegon's prospectuses for its hybrid securities.  I interpret that to mean that Aegon has to pay the next four quarterly dividends, starting with the next payments.  More on how the repayment of the Dutch government triggers this mandatory payment, and the period for such mandatory payments, are discussed in several earlier posts.  Aegon and the European Commission (August 2010) Summary of Arguments for Mandatory Payment Triggers: ING and Aegon Hybrids (8/27/2009) Aegon Hybrids   Aegon Mandatory Payment Event? (8/29/2009 Post) More on ING and AEGON Mandatory Payment Events/Alternative Payment Mechanism (8/27/2009) Pay Back Dutch Government=Buying Junior Security=Mandatory Payment Event/Bond Investing Process (8/25/2009)  This was a hot issue back in 2009. 

Aegon also reported last Friday that its net income for the 4th quarter was 318 million Euros.    SEC Filed Press Release  A more detailed report can also be found at  SEC web site.

The remaining 200 shares of the Aegon hybrid AEB were bought between $4 and $8 during the dark period.  The 100 shares bought in the regular IRA have a total cost of $6.05 per share (see first snapshot at Bought 50 MSPRA @ 19.57.  The 100 shares remaining in the taxable account, with an average cost of $6.92.



The unrealized gain on those shares, excluding dividends, is $1,543.5 as of last Friday or 223.21%.  And I still own AEH bought at $4.63, up 366.64% as of Friday's close excluding quarterly dividends since the purchase on 3/12/2009.   I have harvested gains in a number of Aegon hybrids including AEH, AEF, and AEB.  I am not interested in any of them at their current prices.

2. Bought 100 of the stock CEF PEO at 29.77 on Thursday (see Disclaimer): The Petroleum & Resources Corporation is a closed end fund that invests in energy and natural resource stocks. The fund is weighted in large energy companies.  Exxon and Chevron account for almost 24% of the fund's assets as of 12/31:



December 31, 2010
(unaudited)


TEN LARGEST EQUITY PORTFOLIO HOLDINGS

  
  
Market Value
    
% of Net Assets
Exxon Mobil Corp.
  
$
96,038,002
  
    
12.6
Chevron Corp.
  
85,775,000
  
    
11.3
  
Schlumberger Ltd.
  
39,662,500
  
    
5.2
  
Occidental Petroleum Corp.
  
38,621,970
  
    
5.1
  
Freeport-McMoRan Copper & Gold Inc.
  
29,722,275
  
    
3.9
  
ConocoPhillips
  
23,835,000
  
    
3.1
  
Royal Dutch Shell plc (Class A) ADR
  
21,815,824
  
    
2.9
  
Apache Corp.
  
20,865,250
  
    
2.7
  
Noble Energy, Inc.
  
20,659,200
  
    
2.7
  
Dow Chemical Co.
  
20,484,000
  
    
2.7
  
  
    
Total
  
$
397,479,021
  
    
52.2
  
    


Financial reports can be found at this PEO web page.  The last SEC filed shareholder report report is the 2010    Annual Report.  If I want to establish a position in large cap energy companies, at a discount, as a trade, I will frequently consider buying PEO, depending on its relative discount compared to the other CEFs investing in that sector.   

PEO closed at $29.86 on Thursday.  The net asset value as of 2/24/2011 was $33.45 per share creating a discount of -10.7.   On Friday, PEO gained back what it lost on Thursday, closing at $30.3, up 44 cents, and had as of that day a net asset value per share of $ 33.96, creating a -10.8% discount.  

Net asset value information can be found at the Closed-End Funds section of the WSJ's market data center under "Specialized Equity Funds" or at the web site for the Petroleum & Resources Corporation.  

This fund has a large amount of unrealized gain.  As of 12/31/2010, the cost of PEO's common stock positions was 381.295 million and the value of those positions was slightly over 733 million.  That unrealized gain number has most likely significantly increased since the end of last year since this fund has a relatively low turnover percentage and the main holdings have increased in value.

I own 357 shares of another CEF, Blackrock Real Asset (BCF). which invests in natural resource stocks, but that CEF closed last Thursday at a 2.5% premium to its net asset value (web page of sponsor:  BCF : Fund Profile)  Some of my discussions about BCF can be found in the following posts: Added to BCF in Roth IRA at $9.69 (July 2009) Buy 50 BCF at $6.6 (February 2009) Closed End Funds: Energy and Natural Resources Funds (June 2009)

I have bought another CEF that invests in this sector, IRR, which closed at a 5.35% premium to its net asset value last Thursday:  IRR BUY at $12.5 (12/2008)  Sold 100 IRR at $16.92  (8/2009) Sold 100 IRR at $17.4 (8/2009) (sponsor's web page:  ING Risk Managed Natural Resources Fund - Fund Profile)

I regard PEO as a trade.

3. Bought 35 AGNC  at $29.29 and Sold 50 STDPRB at $19.64 in the Roth IRA on Thursday (see Disclaimer):   AGNC was viewed as too risky for more than a nibble in the Roth IRA.  Yet, the firm is currently paying a quarterly dividend of $1.40 per share.  If continued for an entire year at that rate, the dividend yield would be about 19.12% at a total cost of $29.29.  AGNC Stock Quote  In the Roth, that would be 19.12% in tax free income.    This kind of dividend is not likely to be sustained over either the intermediate or long term.  It is highly dependent on the current low short term borrowing cost and the ability of the managers to realize capital gains.

AGNC is similar to Annaly Capital Management  (NLY), in that AGNC borrows a lot of money short term and uses that leverage to buy agency securities with longer terms.   The primary source of income is the interest rate spread between the yield on the purchased assets and the cost of the borrowed funds. AGNC is a REIT.  Profile | Reuters.com  In January, AGNC sold 23.4 million shares at $28: Key Developments | Reuters.com  As shown at the Reuters Key Developments page, this firm was busy selling shares last year.  This is a link to a recent discussion on Annaly Capital's share issuance and how that impacts its existing shareholders.

AGNC  reported net income of $2.5 per share for the 4th quarter and a book value of $24.24 per share.   SEC Filed Press Release  During that quarter, AGNC's annualized weighted average on its assets was 3.48% and its annualized cost of funds was .9%.  The fund is a beneficiary of the currently low short term rates.  A large part of the AGNC's net income for the quarter included gains from trading activities.    The firm netted 10.4 million from the sale of agency securities and another 20.6 million on derivative and trading securities.

AGNC is discussed briefly in this article at the TheStreet.  The stock has a 3 star rating by Morningstar.

I sold the shares of STDPRB held in the Roth IRA, an equity preferred floater issued by Santander.  I still own 150 shares in a taxable account.  It makes more sense to hold STDPRB in a taxable account, since it pays qualified dividends, and to hold a bond or a stock like AGNC in a retirement account.   I bought those 50 shares   at $18.6 about a year ago.  I have an  unrealized profit in the remaining shares held in the taxable account:   Bought 50 STDPRB @ 17.96 (January 2011)  50 STDPRB at $18.5 (April 2010)  Sold 50 STIPRA at $20.90 and Added 50 STDPRD at $18.54 (March 2010)

I have had one profitable trade in the taxable account to date:  Bought 100 STDPRB at $15.3 (September 2009) Sold 100 STDPRB at 18.11 (August 2010)

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

4. VALE (own):   Vale reported net income of 5.92 billion USDs,  beating the consensus estimate of a 5.54 billion dollar net profit.  For the year, Vale's net profit was 17.26 billion USDs.  Vale reported 15.21 billion USDs in revenues for the 4th quarter, up from 6.54 billion in the year ago quarter, and higher than the consensus estimate of 13.96 billion.  Average iron ore prices surged to USD 121 a metric ton,  more than doubling the $56 average from last year's 4th quarter.  www.vale. pdf

Vale's shares initially popped in trading on Friday in response to this earnings report, but ended the day up only 6 cents.

The double short for the Russell 2000 had a 1 for 4 reverse split last Friday.  I initiated a position as a hedge.  The OG is becoming more nervous than usual, even after staff increased his daily dose of chill pills and Maalox.  As previously discussed, I view the large caps to be relatively undervalued compared to the small caps that have enjoyed a robust move since the market bottom in March 2009.  I would consequently agree with the opinion expressed by Stephanie Pomboy of MacroMavens to sell or under-weight small caps and to "definitely" overweight the large cap companies compared to the small caps.   Stephanie has a Bachelors Degree in economics from Dartmouth:  Macro Mavens: About

Friday, February 25, 2011

Bought 100 of the Bond CEF AWF @ 14.42/CWH HNZ MBC/ Bought Back 100 GGN at $18.65

1. Bought 100 of the Bond CEF AWF at $14.42 on Thursday (see Disclaimer):  This purchase is just part of my continuous effort to increase cash flow, which is used to buy more income producing securities.  


AWF is a world bond fund that is concentrated in junk rated securities issued by corporations and governments.  Holdings and Characteristics:    


Quality Breakdown
(Highest of S&P/Moody’s/Fitch)**
%
1
AAA2.60
2
AA1.79
3
A5.71
4
BBB18.29
5
BB24.20
6
B33.89
7
CCC11.56
8
CC0.09
9
C0.24
10
D0.03
11
Short Term Investments0.34
12
Not Rated1.26


Everything below BBB is characterized as junk.

This fund is slightly leveraged.  The expense ratio with interest expense is 1.01% and .97% without that expense, according to page 73 of the last filed shareholder report for the period ending 9/30/2010.  AllianceBernstein Global High Income Fund, Inc.

As of the close on Friday, 2/18/2011, the net asset value was $15.51 and the discount to net asset value was -5.54.  This information can be found each business day at the Closed-End Fund section at WSJ's Market Data Center, at the sponsor's web site, and at the Closed-End Fund Association.

Morningstar currently rates AWF at 4 stars.  Dividends are paid monthly at 10 cents per share as shown at that Morningstar page. The next ex date is 3/2/2011:   Monthly Distribution  The Morningstar page on this CEF shows that none of the dividend has been classified as a return of capital, starting with the one paid in March 2010, the latest data point provided by that service. 

At a $14.41 price, and assuming a continuation of the current dividend rate, the yield would be about 8.33%.   AWF Fund Quote

AWF closed yesterday at $14.43 and had at that time a net asset value of $15.45, creating a discount of -6.6 as of yesterday's close.

2. CommonWealth REIT (CWH)(own senior bond and Common shares): CommonWealth REIT reported funds from operations of 88 cents for the 4th quarter.  There were a number of special items in that number including gains on the sell of some properties, offset in part by impairment and other charges on others.   As of 12/31/2010, 87.7% of CWH's square footage was leased, an improvement over 86.4% at the end of the last quarter.

3. Heinz (HNZ)(own: Dividend Growth strategy):  Heinz expects to report earnings for its fiscal third quarter of "around 84 cents", with organic growth of about 2%, "driven by continued robust growth organic growth of approximately 14% in Emerging Markets."  Heinz expects to report free cash flow of about 440 million in the quarter.   Heinz further raised its estimate for the F/Y to $3.04 to $3.10, up from a prior forecast by the company of $2.95 to $3.05.  Prior to that release, the consensus estimate was for 80 cents in the quarter and $3.09 for the F/Y ending in April 2011.

HNZ shares did rise in response to this press release by the company, crossing above $50 during the day before closing up 64 cents  at $49.58.  I do not anticipate HNZ shares will move much above current levels over the near term.  At $49 per share, the P/E is 15.85 based on estimated earnings of $3.09 for the current fiscal year and  around  14.63 based on the consensus estimate of $3.45 for the F/Y 2012.

Heinz was bought during the Dark Period at $31.67 (3/11/2009 Post).

4. Bought Back 100 of the CEF GGN at $18.65 (see Disclaimer):  The turmoil in the Middle East is making the Old Geezer nervous.  That is the main reason for buying back shares in the CEF Gabelli Global Gold Natural Resources & Income Trust (GGN) whose portfolio contains gold and natural resource stocks.  The other reason was to increase cash flow for future reinvestment.  GGN pays a 14 cent monthly dividend and has about a 9% yield at a total cost of $18.65.  As previously discussed, my main problems with this CEF is that it is selling at a small premium to its net asset value, and the dividend has been supported to a large extent by returning investor's capital to them.   That later problem may change in the coming quarters, as the fund now at least has the option of selling securities at a profit and capital gains have to be the main source for supporting such a liberal managed distribution.

This is a link to the last filed  SEC Form N-Q which contains the fund's holdings as of 9/30/2010.  As shown in that filing, the fund does write calls on many of its individual stock positions.     The fund does show close to a 55 million dollar unrealized profit in its securities as of 9/30/2010, excluding its options' positions, and I suspect that has risen since then.

The last  SEC filed shareholder's report is for the period ending in June 2010.  I would anticipate a new filing soon.

The fund does use leverage, a 6.625% preferred issue with a liquidation amount of about 99 million.  Morningstar states that the leverage percent is 10.84%, but that number is probably stale.

Over the few months, I have traded 100 shares twice:  Sold 100 GGN at 19.36 (1/4/2011 Post)  BOUGHT: 100 GGN @ 17.85 (11/20/2010 Post) Sold: 100 GGN @18.13 (11/17/2010 POST)  /Bought 100 GGN at 17.41 (10/4/2010)

GGN closed yesterday at $18.69, a 4.12% premium to its net asset value: WSJ.com

5. MBC (own):  The recent market slide has firmed up pricing of the "principal protected" note MBC whose interest payments are linked to the price change in the Russell 2000.  I own 200 shares.  I do not recall why I bought 200 of MBC, rather than more of MOU.  The only explanation, and it is not really a good one, is that I was able to buy MBC at less than the $10 par value.   Bought 100 MBC at 9.78  Bought 100 MBC at 9.84

Both MBC and MOU are senior unsecured notes issued by Citigroup Funding, guaranteed by Citigroup, that mature in 2014.  Both have a 3% guaranteed interest payment for their respective annual periods.  Both at least have the potential of paying a great deal more than the guarantee based on the percentage gain of the Russell 2000 in their respective annual coupon periods.

As noted in yesterday's post, MOU just finished with a 27.93% gain:  MOU Ends Second Annual Coupon Period With a 27.93% Gain  So that will be my interest payment on the $10 par value of that note.   MOU is better than MBC simply because it allows for a 37% increase, compared to MBC's 30%, in the Russell 2000 index over its starting value per annual period, before triggering a reversion back to the guarantee of 3%.

The firming in pricing for MBC was due to it approaching its maximum level for the second annual coupon period which ends on 5/20/2011, and the recent slide in the Russell 2000 gave it some breathing room.  So that is a lot of time to stay under the maximum level, which I previously calculated as 844.07 in the Russell 2000 index.  ITEM # 8 MBC  There was a maximum level violation in the first coupon period which triggered a reversion back to the 3% guarantee.

No shares of MBC traded yesterday.

Added: MOU MAY BE EX INTEREST TODAY.  I noticed this morning that the shares were trading up $1.86 to $12.07 after closing at $13 yesterday. 

I will discuss the remaining trades from Thursday  in the next post.  

Thursday, February 24, 2011

United Refining/RVT and RMT/HPQ/Sold 50 FTE AT 22.27/Sold LT FRD at $10/MOU Ends Second Annual Coupon Period With a 27.93% Gain

An article in the WSJ summarizes the efforts of Hewlett-Packard and Juniper to take market share away from Cisco in its switching business. According to the journalist, HPQ offered a small business its switch for $361 whereas Cisco's switch was priced at $4,987.  One of the comments to the article points out that Cisco has switches that cost less, and consequently the comment author claims that the foregoing comparison is specious.  

The technical analyst for Barrons points out that a number of commodity stocks have started to break down.

MOU's second annual period ended yesterday with the Russell 2000 closing at 799.65.   Java Chart - WSJ  That number will be the ending value for MOU's second annual interest period and the starting value for the third annual period. If the Russell 2000 has one close above 1095.52 during the third annual period, which started yesterday, there will be a reversion to MOU's 3% guarantee. The third coupon period ends on 2/23/2012. Pricing Supplement  If the index does not gain more than 3% during the third annual period, then MOU will pay the 3% guarantee as its coupon for that period.  But, if there is a gain of more than 3% in the Russell 2000 index and no reversion back to the 3% guarantee caused my a maximum level violation, then MOU will once again pay the percentage gain over the starting value of 799.65 as its coupon payment for the third annual period.

For the second annual period, there was no maximum level violation.  The Russell 2000 gained 27.93%  during the second annual period, based on a starting value of 625.07 in the Russell 2000.  I calculate that MOU will make an interest payment of $279.30 on its $10 par value per 100 shares, or 27.93%, on March 2nd. (see for further information:   Bought 100 MOU at $10.12 (April 2010); Item # 8  Update on MOU (February 2011); Item # 1  Principal Protected Notes (April 2010); Item # 2  Principal Protected Notes (May 2010).  Since MOU is a senior unsecured note, its distributions will be classified as interest income.

Fidelity prohibits its customers from buying exchange traded principal protected notes. 

1. Hewlett-Packard Co (HPQ) (own:  Large Cap Valuation Strategy): After the bell on Tuesday, Hewlett-Packard reported GAAP earnings per diluted share of $1.17 for its fiscal first quarter ending on 1/31/2011.  The adjusted number, which excludes after-tax costs of 19 cents per share, was reported at $1.36, up 26% from a comparable number of $1.07 in the year ago quarter.  Revenues for the F/Y 1st quarter were reported at  32.3 billion, a 4% y/y increase.  HP generated 3.1 billion in cash flow during this last quarter.  However, sales from HP's personal systems group (PCs mostly) fell 1% and sales by the services segment declined by 2%. (see Tiernan Ray's comments at  Barrons

The company raised its full F/Y GAAP E.P.S estimate to a range between  $5.2 to $5.8 per share but trimmed the fiscal year's revenue estimate to a range of 130 to 131.5 billion. HP's guidance for the next quarter was below the street's consensus of $1.31 on 32.6 billion in revenues.  HP gave a range of $1.19 to $1.21 on revenues of 31.4 billion to 31.6 billion.

After trading HPQ, I have now decided to hold my shares for at least a year, and may add to the my current 50 share position when and if the shares fall below $40.  Bought 50 HPQ at 41.57  Prior to that purchase, I had bought 50 shares at $38.2 last September and sold those shares within a month on a pop @ 43.11

A discussion of this report can be found at Bloomberg.

If HP had a 4% dividend, a history of providing shareholders with a meaningful and rising cash dividend, this kind of volatility in the share price could be muted considerably in my opinion.  Unfortunately, HPQ pays a measly 8 cents per quarter.  I agreed with a column written by Andrew Bary last September who maintained that HPQ needs to dramatically raise its dividend.  Item # 1 Explaining Low Valuations of Large Cap Tech Stocks

I will simply vote against the Board until such time as HPQ implements a reasonable distribution given its size, financial resources and growth prospects.  I received my proxy yesterday, and voted against every member of the Board of Directors last night.

HPQ fell $4.64 or 9.62% in trading yesterday, closing at $43.59.  The stock fell as low as  $42.57.  Over 96 million shares were traded, well above the average volume of 17+ million.  I thought that the decline was just absurd.

2. RVT and RMT (own):  RVT and RMT are two stock CEFs that I have own through the Dark Period, adding to positions occasionally, and I am reinvesting the dividends.   Some of the discussions concerning these two CEFs, both specializing in smaller companies, can be found in the following posts: Added to RVT at 9.69 (August 2009)  Added to CEF RMT at 7.64 (Jan 2010) Bought RJA and RMT at 6.73 (August 2009)  Added 50 ADX at 9.7 and 50 RMT at 7.82 with Cash Flow (July 2010)

Until 2008, however, both funds have done well over the years and I have a favorable opinion of their managers from the Royce mutual fund group. Royce Value Trust (RVT)  Royce Micro-Cap Trust (RMT) Small and micro caps have recently been out performing large caps, but these smaller companies will crater hard during a recession as selling accelerates and buyers disappear.

Both of these funds ceased paying their managed distributions during the Near Depression period, as their unrealized capital gains turned into unrealized and realized capital losses.  It was a rough period for small cap funds, but I had a small feeding frenzy buying shellacked companies with cash flow being generated during that period. 

I supported the funds' decisions to cease paying dividends back in early 2009, since the distributions had to be supported almost entirely by capital gains to avoid a return of capital classification. I would prefer to be paid nothing than to have a dividend classified as a return of capital.  Unfortunately, one result of the dividend elimination was that many individual investors sold their positions, an erroneous response to a dividend cut under those circumstances in my view. Many undoubtedly sold at the worst possible time as the funds' net asset values plummeted during the Dark Period, and further losses were caused by the widening of the discounts to NAV,  the so called double whammy effect. (the "triple whammy" can occur for CEFs that use leverage)

As a consequence, these funds started to sell at greater than normal discounts to their respective net asset values.  The net asset values and discounts can be found at the sponsor's web site or at the Closed-End Fund section at the WSJ under "General Equity Funds".   The discounts are still quite large compared to the average discounts prevailing before the Near Depression.  As of 2/23/2011, RVT closed at 13.44% discount, and RMT at a 14.5% discount, to their respective net asset values. WSJ 

I did not notice until recently that both funds have resumed a managed distribution policy, though at lower levels than the policy in existence before 2008.  The new policy will result in quarterly distributions equal to 1.25% of the firms net asset value or 5% annually. Royce Closed-End Funds to Resume Managed Distribution Policy While I am not sure, I believe the prior policy was for 10% annually.  I use those dividends to buy more shares.  

3. SOLD 50 FTE AT 22.27 (SEE DISCLAIMER):  This sale was due to my ongoing stock re-allocation.  I recently bought those shares at $20.8.

4. United Refining (own senior bond only: Junk Bond Ladder Strategy):  I noticed in a recent SEC Filing that United Refining intended to commence a private offering of $350 million of senior secured notes and to use the proceeds to repurchase or redeem the 10 1/2% senior notes maturing in 2012.  I own the 2012 note.    Bought  1 United Refining Senior Bond at 95.5  I recently received a semi-annual interest payment.   I checked the prospectus, and United may redeem the 2012 note now at par value plus accrued interest.  (see page 32:  Form S-4).   So I will likely need to find a replacement in my Junk Bond Ladder Strategy relatively soon.  I will of course wait for the redemption proceeds rather than attempting to sell 1 bond.

5. Sold 50 FRD at $10 (LOTTERY TICKET strategy)(see Disclaimer): I bought my shares in Friedman Industries   at $5.76 over 1 year ago ($5.95 cost with commission).  With the dividends, including one special 50 cent per share dividend (FRD), the total realized gain was over 70%:

Earnings for this mini-cap have been trending up in recent quarters, but I nonetheless decided to harvest my profit while I still had one.   Form 10-Q  

Wednesday, February 23, 2011

SOLD 100 QQQX at $14.96/Sold 100 KFT @ 31.33/Sold 200 IMF at $17.15/MDT Hawker WMT/Case Shiller-Double Dip in Housing Prices Well Underway/

The  VIX exploded to the upside yesterday, rising 26.6% or 4.37 points to close at 20.8. For anyone interested, this is not sufficient for me to restart the count relevant to the formation of a Stable Vix Pattern. It is sufficient to cause me to perform a minor adjustment in my stock allocation.

On the bright side, I do not have to worry about a reversion to the 3% guarantee for the "principal protected note" MOU, which ends its second annual period today. (see page PS-2-Pricing Supplement) The Russell 2000 index hit an air pocket yesterday and declined 2.62% or 21.86 points to close at 812.96.  Java Chart - WSJ  I calculated the maximum level at 856.349: Item # 8 Update on MOU One close above that maximum level in the Russell 2000 during the second annual period, which ends today, would have triggered a reversion back to the 3% guarantee for the annual interest payment. So that one is about to have a good pay day. {Bought 100 MOU at $10.12 (this security closed at $13.36 yesterday)}

I believe that this note has the highest maximum of the Citigroup Funding exchange traded "principal protected" senior notes at 37%. The annual interest payment is scheduled to paid on 3/2.  I will know by the close of trading today what the coupon will be for the second annual period.  A close at 813 in the Russell 2000 today, by way of example, would create close to a 30% coupon payment, which is what makes this type of security worth the gamble. Where else am I going to get a 30% interest rate on a senior note, maturing in 2015, from an investment grade credit?

Many investors who bought "principal protected" notes issued by Lehman Brothers claim that they were misled by their brokers into buying those unsecured senior notes, and they found a champion for their distress in the NYT's Greta Morgenson, who called these securities convoluted and difficult to understand. NYT  I thought that her article, written in the vein of an advocate rather than a journalist, sounded like one of the plaintiff's attorneys representing purchasers of Lehman notes, which I never touched by the way.  Principal Protected Notes  It is not surprising to me, nor to anyone else,  that most financial journalists, financial planners, brokers, and individual investors do not understand these securities, because none of them have ever taken the time to read a prospectus before buying or recommending one. I do not find them difficult to understand, nor are they convoluted, but I made an effort to understand the terms by reading the prospectus.

The cover story in Barrons this week, titled "King of Bonds", is about Jeffrey Gundlach, who apparently knows no bounds in praising himself. After reading the article, I wanted to preserve for future reference some of his predictions emanating from his brilliant mind.  He believes the S & P 500 "will hit 500 in the next couple of years". He does not see a surge in inflation since he believes that a rise in the 10 year treasury note to 4% to 4.5% would "cause economic growth to short-circuit".  He expects U.S. housing prices to fall another 10% to 15%, which is not an outlandish prediction.  He appears to be more bearish on the municipal bond market than Merideth Whitney. (see Steve Kroft interview of Whitney at State Budgets: The Day of Reckoning) He predicts a collapse in municipal bonds and hopes to acquire municipal bond CEFs at 40% of their net asset value.  

Possibly the most worthwhile piece of information in the article is his statement that the spread of 300 basis points between the 20 year treasury and junk bonds is the lower than at anytime in the prior credit cycle.  This implies to me that he believes the run in junk bonds is over, given his views on treasury yields.  

John Hussman pointed out in his most recent missive that the Shiller P/E (S & P 10 year average earnings adjusted for inflation) is now in excess of 24.  Unless the reader misses his drift, Hussman adds that, prior to bubble mania in the late 1990s, the Shiller P/E had hit such lofty levels only once once, just prior to the Great Crash of 1929.  Hussman provides a long term chart of the Shiller P/E. going back to 1871. Generally a spike to the current level or higher would be a signal to reduce or even to eliminate stock positions.  Those spikes occurred just prior to the 1907 crash (Panic of 1907), the 1929 crash,  and the advent of the long term secular bear markets starting in the mid-1960s and the late 1990s. Virtually everyone other than me dates the start of the current long term bear cycle in 2000, whereas I start it in October 1997 for the reasons discussed in several prior posts.  Dating the Start of the Current Long Term Secular Bear Market   The Roller Coaster Ride of the Long Term Secular Bear Market/Unhelpful Comments By Important People   Underlying Cause of the Current Long Term Bear Market is Too Much Debt I would add that Hussman has been bearish for one of the most unprecedented rallies in U.S. stock market history and his mutual funds have badly underperformed the market since March 2009:  HSGFX - Fund returns   HSTRX - Fund returns 

I would note, as a counterpoint, that the current 10 year period includes the 2001 recession, nber.org/cycles, and the recent Near Depression. What will the Shiller P/E be in two years, assuming earnings growth of 10+%, and the numbers from 2001 and 2002 are no longer included in the ten year computation?  After all, the market is principally forward looking.

Still, a cautious approach is appropriate in my opinion, given the elevated Shiller P/E number and its accurate signals over the past 100 or so years when it reaches the current level or higher. The Shiller P/E can be interpreted too narrowly on the entry point by Professor Shiller and many who use the Shiller P/E as a justification to avoid stocks.  (see interview with Shiller in late February 2009 at Tech Ticker) The S & P 500 is up 93.8% as of last Friday's close, since hitting its bottom in March 2009: dshort.com The professor is still waiting for his buy signal. 

LB wants to emphasize that it wanted to add a double short for the Russell 2000, last week, as a form of hedging, an noted in Item # 6 Bought 50 of the ETF DLN at 48.24. The Nit Wit RB and its slacker ally the Old Geezer put the kibosh on it.  The small caps have enjoyed a very robust rally since March 2009. The Russell 200 is currently selling at a large valuation gap compared to the DJIA and the S & P 500, and even the Nasdaq Composite: P/Es & Yields on Major Indexes - WSJ.com

It is not surprising that the GOP, in its current configuration, is hostile to the Environmental Protection Agency and virtually any regulation that inhibits the pollution or the air and water in pursuit of profits.  The republicans in the House of Representatives want to cut the EPA's budget by 1/3 GOP, saving about $21 for each person filing a tax return in the U.S. USATODAY.com  The House Republicans are also proposing rules to limit the EPA's power to stop hazardous pollutants from being released by power plants.  Ralph Hall (R) from Texas, whose district includes a number of refineries, want to compel the National Academy of Sciences to study the harmful effects of arsenic  for two years before allowing the EPA to implement a rule regulating emissions.  MiamiHerald.com  The GOP also wants to block the EPA from regulating emissions of mercury. Times Union  The GOP does not like a proposed EPA rule that would limit mercury emissions to just 16,600 pounds by 2013.

1. Wal-Mart (own-Large Cap Valuation Strategy): Walmart reported diluted earnings per share of $1.41 from continuing operations for its Q/E 1/31/2011. Adjusting for a tax benefit of 7 cents per share, the company earned $1.34.  The expectation was for $1.31. The comparable adjusted E.P.S. number in the year ago quarter was $1.21.

Sales increased to 115.6 billion dollars, an increase of just 2.5% from the year ago quarter as U.S. comparable same store sales declined by 1.8% for the 13 week period ending on 1/28/2011. This marked the seventh consecutive decline in U.S. for the U.S. Walmart stores. Net sales in Walmart U.S. fell -.05%, but international sales grew by 8.9%. Sam's Club also experienced a 4.4% increase in sales and a 2.7% gain in same store sales.

Return on investment for the F/Y was 19.2% and free cash flow for the year was 10.9 billion.

For F/Y 2012, WMT forecasts that earnings per share of $4.35 to $4.5. WMT estimated profits in the first quarter between 91 to 96 cents. The consensus estimate was at $4.45 for the year and 96 cents for the 1st quarter.

The general consensus among talking heads on CNBC yesterday was to sell WMT shares, with the tone being only a fool would buy at current levels.  I bought 50 WMT shares at 53.52 last December, and will round the lot to 100 shares at or near $50.

Wal-Mart Stores' stock fell $1.71 in trading yesterday to close at $53.67.

2. Case Shiller:  The Case Shiller index for home prices in 20 major metropolitan areas fell 1% in December, the fifth consecutive decline,  with prices falling in 19 of the 20 areas. Over the past year prices have fallen 2.4%. This data is consistent with a double dip in housing.

The National Association of Realtors is looking at whether it has over counted home sales going back to 2007. WSJ.com CoreLogic, which compiles data from registers' offices, concluded that the NAR data may have over-stated home sales by as much as 20%.

At the moment, my greatest concern is the future course of U.S. housing prices and the possibility that a continued decline could trigger another recession. The stimulus package, passed in the early days of the Beanpole's administration, is winding down, and there is no inclination to do anything more. There is also underway a strong political movement to cut government spending at every level, and that spending has provided a base for the anemic economic recovery out of the NEAR DEPRESSION period.

3. Medtronic (MDT)(Large Cap Valuation Strategy): MDT reported earnings for its fiscal third quarter, which ended on 1/28/2011, at $.86, on revenues of $3.961 billion dollars. The E.P.S. number beat the consensus estimate by 2 cents per share.  Revenues increased 2.9% year-over-year. The company stated that it is comfortable with the current consensus estimate of $3.40 for its current F/Y.  

MDT fell $1.05 yesterday to close at $40.22.

4. Hawker Beechcraft (own senior bond only: Junk Bond Ladder Strategy):  RB is responsible for the purchase of 1 Hawker Beechcraft senior bond, viewed by responsible staff members here at HQ as the riskiest purchase in the Junk Bond Ladder Strategy.  Hawker, a private company, recently filed a report summarizing its 2010 results.  The company reported a loss in 2010 of 304.9 million and an operating loss of 173.9 million dollars.  The operating loss for 2009 was 712 but that loss included 522.8 million in asset impairment charges. Hawker says that it generated 297.8 million in cash from operations in 2010 on sales of 2.643 billion. Bought 1 8.5% Hawker Acquisition Senior Bond at 75.5 Maturing 2015 S & P rates this bond CCC-. RB was encouraged that the rating could not go lower without a default.  "What a Nit Wit" was all the LB could say in response to that last comment.    

5. Sold 100 QQQX at $14.96 on Tuesday (see Disclaimer): QQQX is a CEF that owns Nasdaq listed stocks.  With the spike in oil yesterday, I elected to do a minor reduction in my non-energy stock allocation which was the only reason for selling this stock CEF.  I bought the 100 shares @ 14.08 last November. At the time that I disposed of QQQX, I intended to re-deploy the proceeds in an ETF containing energy stocks. Who knows what will happen in the Middle East and what those events will have on the supply of oil and oil prices?  I later bought 50 shares of ENY with the proceeds.

Last Friday QQQX closed at a 2.75% discount to its net asset value.

6. Bought 50 of the ETF Guggenheim Canadian Energy Income (ENY) at $22.44 on Tuesday (see Disclaimer):  I mentioned ENY, which is traded in the U.S., as an alternative ETF for Canadian Energy companies to the Canadian ETF that I recently bought which is traded on the Toronto exchange. See: Item # 1 Bought 100 XEG:CA at $21.1 CAD I previously discussed ENY when I purchased some shares  at $17.56 last June.

The expense ratio is relatively high at .65%:   Canadian Energy Income As of 2/18/2011, the fund own 36 stocks. A list can be found at ENY  Holdings. Needless to say, I am not worried about a Canadian civil war disrupting the operations of companies in Canada.

This is a link to a recent article at Seeking Alpha regarding ENY. Andrew Bary recently penned a column in Barrons about the Canadian oil sands play.

I would add that there is one ETF that focuses solely on oil sands companies, but it has only 13 positions:   CLO - Claymore Oil Sands Sector ETF The symbol at Fidelity for that ETF, available on the Toronto exchange, is CLO:CA.  I do not own it. Instead, as previously mentioned and discussed, I bought 100 of XEG:CA, which is broader in scope.

7. Sold 100 KFT at 31.33 (see Disclaimer): I have been disappointed in Kraft's performance since I purchased these shares  at $29.86 last March. In response to the surge in the VIX, I decided to slightly reduce my equity exposure and the underperforming KFT shares seemed like a candidate to sell.

8.  Sold 200 of the Bond CEF IMF at $17.15 on Tuesday (see Disclaimer): I had a GTC AON limit order to sell 200 of IMF at $17.15 which was filled yesterday.  I just bought those shares at $16.64 and will receive 1 monthly dividend payment.  (2/15/2011 Post). As discussed in that last linked post, I am in a hyper trading mode on the bond CEFs WIW and IMF, both of which contain treasury inflation protected bonds. The turmoil in the Middle East has caused many investors to run back to U.S. treasuries which has caused the rise in this particular bond CEF.

IMF closed yesterday at $17.16 and had a net asset value at that time of $17.95, creating a -4.4% discount.