Wednesday, February 22, 2012

AMAT/Bought 1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 at 84.95/Sold 100 TY at $15.65 & Bought 200 FOFI at $6.77/Sold 1 Telecom Italia Capital 5.25% Senior Bond at 101.328 Maturing 11/15/2013

Macy’s reported 4th quarter adjusted E.P.S. of $1.74, beating the consensus estimate of $1.65, and up from $1.57 in the year ago quarter. Same store sales increased 5.2% during the quarter. I own 1 bond. Bought 1 Macy's 7.851% Senior Bond Maturing in 2030 @ 99.5 That bond was originally issued by May Department Stores. This bond trades infrequently. FINRA It is the probably the only bond purchased as part of the Junk Bond Ladder strategy that is now rated investment grade at Baa3 by Moody's and BBB- by S & P.

Xerox, one of the few LT selections with a recognizable name, was upgraded to buy by TheStreet's rating system.

The GOP front runner for President, Preacher Rick Santorum, who is apparently on a personal mission from GOD to save the U.S., gave an interesting speech about how Satan has been attacking the U.S. for 200 years and will continue to do so. There is no question who, in Santorum's mush of a mind, is carrying Satan's water in the political arena.

All of my 1099s from brokerages are delayed due to reporting issues. I received a notice last night that the first one was available for download into TurboTax. I quickly noticed one error where the broker reported a zero cost basis for security and treated the entire sales price as a gain. The security was bought via that broker and the gain was actually $16.55 rather than the reported $1250. I just wanted to warn everybody to check each item.

I also found out quickly that even the deluxe TurboTax requires an override entry to deal with accrued interest paid to bond sellers. That program is entirely silent on how to deal with the issue which is negligent on their part. If I did not know better, I could easily have paid several hundred more in taxes that was not owed by me.

When I buy a bond in the bond market, I have to pay accrued interest to the seller. The total sum was close to $2,000 for 2011. My broker included the interest that I paid to the sellers in the amount reported as interest paid to me in the recently reviewed Form 1099. In other words, say I paid $30 in accrued interest to the bond seller and then received in three months $60 in interest from the company. The broker would include the entire $60 as paid to me.  Accrued Interest on Bonds

It is my understanding that I can deduct those interest payments made to the bond seller as a line item in schedule B, provided I received the interest payment in 2011, and the broker included the entire amount in the 1099. I could only make that entry in TurboTax by entering an override in that schedule. I discuss this issue more fully in Item # 1 Tax Accounting For Bonds Purchased and Sold in the Secondary Market. I made a snapshot of accrued interest paid in 2010 in that post, which could not be used then as an offset because I had not been paid interest by the bond issuer yet.

See: IRS Publication 550 (2010), Investment Income and Expenses

1. Added 1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 at 84.95 Last Thursday (Junk Bond Ladder Strategy)(see Disclaimer): This bond was originally issued by First American. I explain in a prior post why this bond is now a CoreLogic obligation. Item # 3 Bought 50 of the TC PJS at 24.84 Corelogic is a publicly traded company: Profile and Key Developments

This bond is also the underlying security in the trust certificate PJS which also has a 7.55% coupon. The par value of that TC is $25. On the day of my purchase, Merrill Lynch Depositor Inc. PreferredPLUS 7.55% Trust Cert. Series FAR-1 for First American Corp., (PJS) closed at $24.91. At that price and a typical online commission, the current yield and the YTM for PJS would be very close to its 7.55% coupon. I receive a better deal by buying the bond rather than this TC. My confirmation states that the current yield at my cost 8.804% and the YTM is 9.268%:

The bond lacks liquidity however. As shown by the data at FINRA, trading is infrequent. I could probably sell PJS virtually any trading day provided I was willing to hit the bid price. I have traded that security successfully, booking several interest payments and a number of gains. The following are snapshots of the two best trades, and all of them have been profitable:

2010 ROTH IRA 100 PJS +$ 1,079.22

2010 Taxable Account 250 PJS +$1,10018 
This bond was trading infrequently before a large quantity was redeemed by the issuer.  Originally, there was $100 million outstanding. As of 9/30/11, there was only $59.645M left. The smaller quantity contributes to the illiquidity. There is another senior note, with a 7.25%, maturing in 2021, FINRA, with $400M outstanding and a 8.5% subordinated note in the amount of $34.768M due this April. {Page 15 CLGX-9.30.11-10Q}

The current consensus estimate is for a 2012 E.P.S. of 95 cents. 

2. Sold 100 of the Stock CEF TY at $15.65 and Bought 200 of the CEF FOFI at $6.77 (see Disclaimer): The OG wanted to add some spice to the portfolio, though only in a small dose, by buying 200 of FOFI and selling 100 TY. The OG needs to limit the intake of spice  to avoid hyperventilation. Tri-Continental is a more staid investment fund than the First Opportunity Fund (FOFI) which is traded on the pink sheet exchange. FOFI 

While TY sells at a significant discount to its net asset value per share, FOFI has one of the largest discounts among closed end funds. This fund reports NAV weekly, rather than daily, and the last number prior to my purchase originates from 2/10/12. At that time, the net asset value was reported at $9.02 per share and the closing market price that day was $6.65. The discount to net asset value was therefore -26.27%. That kind of discount would inform  investors that something is unusual about this fund. As of 2/17/12, the net asset value per share was reported at $9.1, creating a -25.82% discount based on a closing price of $6.75.

The fund originally invested in financial stocks. The fund management changed when the Horejsi family and their related trusts acquired a substantial stake in the fund. FOFI.PK Major Holders Stewart Horejsi is one of the largest individual investors in Berkshire Hathaway. Phoenix Business Journal Forbes Mr. Horejsi started out as an owner of welding supply business in Salina, Kansas. THE WELDER

The primary change so far has been large investments in four hedge funds affiliated with Wellington Management Company. As of  9/30/11, those 4 hedge funds accounted for 52.5% of the fund's assets:

FOFI Hedge Fund Investments as of 9/30/2011
First Opportunity Semi-Annual Report I do not know anything about those hedge funds. I did read an interview with a mutual fund manage who asserted that the Bay Pond Partners fund, run by Nick Adams, was "highly successful" and closed to new investors. TheStreet The fund also has a sub-advisory agreement with Wellington to manage the "legacy" individual securities.

So, the interesting feature for me at least is that I am buying, indirectly of course, an interest in those hedge funds at a discount.  It would not be correct to say that I am buying those hedge funds at a discount, since I have no control over what the fund does with those positions. If the discount does not narrow, and it may persist at high levels, I do not realize a benefit from that discount, unless the fund sales those positions for a profit and then distributes the capital gains to its shareholders.

List of Holdings at Sponsor's Website:  Fund Holdings
CEFA Page for First Opportunity Fund
Morningstar currently has a 3 star rating on FOFI.

This is a link to the 13G filings made by Bay Pond Partners, one of FOFI's holdings. The first one in that list was for Old Line Bancshares (OLBK); the second one was for Monarch Financial Holdings, (MNRK); and the third one in a long list was for Citizens Republic Bancorp,  (CRBC) I randomly checked a few more, and they were small banks or mortgage REITs. I would not pay anyone to make these selection when HQ has LB running our REGIONAL BANK BASKET STRATEGY for free.

First Opportunity  is traded on the pink sheet exchange after the NYSE delisted it in the "public interest". This was due to the fund's decision to invest significant amounts in private equity funds.

First Opportunity Fund closed at $6.77 in trading yesterday.

A recent detailed discussion of another Horejsi controlled CEF, Boulder Total Return, can be found at Morningstar. I would pay particular attention to the points made by the author on page 2 of that article. Those points warrant, in my opinion, a cautious approach to Horejsi controlled CEFs. I have bought and sold the Boulder Total Return fund and currently have no ownership stake. Please note that my position in that fund was just 100 shares:

3. SOLD 1 Telecom Italia Capital 5.25% Bond Maturing 11/15/2013 at 101.328 Last Thursday (see Disclaimer): While this bond is barely investment grade, I was not enthusiastic about its yield.  When I bought this bond at 96.429 (12/23/11 Post), I noted that the current yield was 5.399% at my cost, with the YTM at 6.829% which is actually good for any investment grade bond with a similar maturity. By selling the bond at over its par value, I more than captured that part of the YTM associated with the profit on the bond at the 11/15/2013 maturity.

Still, I am not interested in that kind of yield, notwithstanding the Fed's Jihad Against the Saving Class and its likely duration. This is particularly the case when held in a taxable account where the interest is taxable by both the Feds and by Tennessee's 6% income tax on dividends and interest.  So I took my $32.99 gain, plus interest, and will take more risk elsewhere for a better yield. 

4. Applied Materials (own: Large Cap Valuation Strategy): For its 2012 fiscal first quarter, Applied Materials reported a non-GAAP E.P.S. of 18 cents (9 cents GAAP) on net sales of $2.19B. The consensus estimate was for non-GAAP E.P.S. of 12 cents on $1.97B in revenues. Revenues were down 18.5% year over year.

The company sees "solid order momentum and improved outlook for our second quarter." SEC Filed Press Release AMAT expects second quarter sales to be up 5% to 10% sequentially, with non-GAAP E.P.S. falling in a range of $.20 to $.28. Prior to that forecast, the consensus estimate was of 16 cents.

I have traded AMAT profitably, always in small lots, and currently own just 50 shares. Bought 50 AMAT at $12.45 AMAT is currently paying a 8 cent per share quarterly dividend.

Applied Materials fell 20 cents in trading yesterday to close at $12.71. 


  1. can you tell me about the SVU/ Albertsons LL bonds due in May 2012- it's $300 mil - wondering if they refi using credit facilities? tia.

  2. Too much debt is the problem with the SuperValu. According to the last 10-Q, this May 2012 issue had 282M outstanding. The company does not have enough cash on hand to pay off the bondholders. SVU has two options. It can sell before May a longer term bond which is what I suspect will happen, possibly less than a five year maturity, or it can draw down its credit facility, see note 5 at page 11 to the last filed 10-Q for remaining credit available under that facility.

  3. Thanks for the clarification!