Monday, February 13, 2012

JFK's Rubber Duckies/Bought 1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 at 92.69/Sold 50 CSCO at $20.4/Bought 100 MPW at $9.9-ROTH IRA

The TC PJA was ex interest for its semi-annual interest payment last Friday. I currently own 150 shares in a taxable account. Trust Certificates: New Gateway Post

The VIX surged last Friday, rising 11.65% to close at 20.8. It spent 16 days under 20.

The Greeks are upset and very angry that conditions are being place on their reckless consumption of other people's money. Yesterday, several buildings were burned, as 100,000 delusional Greeks protested the austerity measures later approved by their Parliament. The protest was as expected violent. Riots Continue NYT  WSJ Rioters Burn Buildings

Among other things, the Greeks are upset about 15,000 government jobs being cut when there are 750,000 full time government employees, including 10,000 priests on the public dole (CBS), and another 150,000 employed part time, in a nation with just 10.8 million people. (Demographics of Greece)

The government employees receive 14th months of salary per year. The extra two months are called bonuses. BBC News  IMF on Greece -- Frequently Asked Questions

Many of those job cuts, assuming that they actually occur, will probably involve those close to retirement. The generous benefits and salaries of Greece's government employees have in large part been paid for by international creditors who are going to take a bath on money lent to Greece. Tax evasion in Greece is widespread, where tax collectors are fired for actually collecting taxes as reported by Michael Lewis. The politicians gave the people what they wanted and the Greeks did not want to come close to paying for it themselves. They will not look in the mirror and blame themselves. It will always be someone else's fault. Private creditors are expected to take a 70% haircut on the face value of their loans. Maybe it is their fault for refusing to take a 100% haircut and then lend more without a whimper.

Only a fool would loan the Greek government money.

The latest revelation of JFK's infdelity comes from Mimi Alford, an intern, who allegedly carried on an affair with JFK for 18 months, losing her virginity to the President while Jackie was away. Personally, I was more concerned about her revelation that JFK had a collection of rubber duckies and would play with them in a bathtub. 'We had races with rubber ducks in the bathtub' Maybe if Nikita knew about JFK's rubber duckies, he would not have backed down during the Cuban Missile Crisis. I would not tell anyone about my collection of rubber duckies.

Members of the Tea Party will complain about government spending but will frequently be feeding at the governments trough in a variety of ways. I would be tempted to call that hypocrisy. The reality is that many of them lack the necessary information about their dependence on government programs and benefits. The NYT published an article in yesterday's paper on this subject. One common misconception is that the medicare premiums cover the cost of Medicare. Possibly, the member of the Tea Party will get their wish when the GOP has enough votes to adopt their Medicare plan, turning it into a voucher system likely to bankrupt most of middle class within a few years after retirement. Item # 1 GOP's Plan To Bankrupt the Middle Class

1. Bought 1 RR Donnelley 8.875% Senior Bond Maturing on 4/15/2021 at 92.69 Last Wednesday-Satellite Brokerage Account (Junk Bond Ladder Strategy)(see Disclaimer): This brings me to three RRD bonds, and that is my limit.  RRD, a commercial printer, is a big fish in a declining industry. It has a lot of debt (3.42B as of 9/30/11), and most of it will have to be refinanced between 2014 to 2021: 

Form 10-Q at page 19. RRD did float $600M in senior unsecured notes with a 7.25% coupon back in May 2011, Final Prospectus Supplement.

Another issue is that RRD's pension plan is underfunded by $700M.  

The market did not respond well to RRD's guidance for 2011, released on 1/16/2012: Press release Sales and margins were forecasted below analyst expectations. WSJ 

Given the earnings prospects and debt load, I believe that RRD needs to substantially reduce its leverage by paying down debt, possibly by as much as 1B, using all of the cash now devoted to the common stock dividend and share buybacks. The common dividend is $1.04 annually. The bond market is giving the company a serious warning now.  

According to FINRA, this bond is currently rated Ba1 by Moody's and BB+ by S & P. FINRA However,  the current yield and YTM for this bond is substantially higher than other BB rated debt, and is higher than the average "B" rated debt, suggesting that the market has already priced into this bond at least one, and possibly a two notch downgrade.

I performed a simple analysis of Ba1 rated bonds maturing in 2021. This is some of the comparisons that I found:

Limited Brands 6.625% Maturing 2021: FINRA
Ball Corporation 5.75% Maturing 2021:  FINRA (less than 5%)
Ford Motor Credit 5.875% Maturing 2021: FINRA (less than 5%)

Each of those bonds are similarly rated and yield less than 6% on a YTM basis. This kind of analysis suggests that the current ratings for RRD bonds are not correct and need to be lowered by the rating agencies.

For comparison, my confirmation of this bond purchase states that the current yield at my cost is 9.492% and the YTM 9.97%.

I have seen this kind of divergence on several occasions and it was an ominous omen. I noted a significant yield divergence in CIT debt issues in 2007 compared to other similarly rated issues. CIT would later declare bankruptcy. A similar divergence was noted for American General Finance bonds in 2007. One of RRD's bonds automatically increases the coupon for downgrades (11.25% 2019 note, Prospectus, increased to 11.75% in May after a debt downgrade). Unless the company starts to make more prudent allocations of its cash flow by reducing leverage, I would anticipate at least one more debt downgrade, which is what the market is forecasting now based on the yield divergence.

This RRD bond, bought at 92.69 last week, was trading near 110 last June.

The common stock of R.R. Donnelley & Sons fell 57 cents last Friday to close at $12.44. The 52 week low is $11.24.  

2. Sold 50 CSCO at $20.4 Last Wednesday-Satellite Brokerage Account (Large Cap Valuation Strategy)(see Disclaimer): I have sold some CSCO shares just before an earnings announcement and then bought them back thereafter. SOLD 50 CSCO @ 24.42 (Nov. 2010)- Bought CSCO at 20.39 (September 2010); Sold Cisco Market Close at $24.31 (August 2010)- Bought 50 CSCO at $22.45 (June 2010). I made a negligible profit on the shares sold last Wednesday, having bought them at $18.75 almost one year ago.  After that purchase, the stock skidded badly again, falling to below $14 per share in early August before starting to recover. CSCO Historical Prices 

Last Wednesday, with Cisco reporting after the close, I sold 50 shares at $20.4 and hope to buy them back at a lower price sometime later. If that opportunity is not given to me, I am certainly okay with that result too. While I will invest up to $10,000 in the common stock of a company like Coca Cola, I am not likely to ever risk more than $3,000 in CSCO and will be content to trade that stock for relatively small gains. As a result, I have not yet lost money in this name, and this stock has never been a material position for me. I still own 50+ shares held in another account where I am reinvesting the dividends. I will likely buy back the 50 shares in that account soon.     

Cisco did report better than expected revenues and earnings for its second fiscal quarter ending 1/28/2012. Cisco reported a GAAP E.P.S. of 40 cents and an adjusted E.P.S. of 47 cents per share on a 11% increase in net sales to $11..5B. SEC Filed Press Release The consensus estimate was for a Non-GAAP E.P.S. of 43 cents. The Board also increased the quarterly stock dividend by two cents per share. Cash and cash equivalents were $46.7 Billion at the end of the quarter.  Net of debt, Cisco has $30.4 billion in cash and investments or $5.64 per share.  But only $5 of the cash is in the U.S.

CSCO estimates that it will report adjusted E.P.S. of 45 to 47 cents for the current quarter, with year-over-year revenue growth between 5% to 7%. Gross margin is expected to be in the 61.5% to 62% range, down from 62.4% in the second fiscal quarter.

Tiernan Ray summarizes some analyst comments on this earnings report in his Barrons blog.

Cisco Systems closed at $19.9 last Friday.

3. Bought 100 MPW at $9.9 Last Wednesday-ROTH IRA (see Disclaimer): Medical Properties Trust is a REIT that owns healthcare facilities. Profile Since REITs pay either no or negligible qualified dividends, I bought this security in the ROTH IRA, where the 8+% dividend becomes in effect a tax free dividend. The current quarterly dividend is 20 cents per share.

Holding this security in a taxable account would lower my yield after tax, since all or virtually all of the dividend would be taxed at my highest marginal tax rate. While Tennessee does not have a state income tax on earned income, it does levy a 6% income tax on dividends and interest, after a standard deduction, which would reduce my after tax yield even further. When held in the ROTH IRA, I eliminate both current and future taxation of those distributions, at least under current law which may change of course.

In MPW's Key Development's page at Reuters, I noticed that this company had just sold some senior bonds and common stock to finance the purchase of 16 hospitals from Ernest Health. The stock was sold at $9.75 per share.

The stock experienced a sharp downturn starting in late July 2011: MPW Stock Charts  After closing at $12.47 on 7/22/2011, the stock price sank quickly to $8.92 (earnings for the 2nd quarter were released on 8/4/11:  SEC Filed Press Release)

After a brief rally back up to $10.74, the stock quickly sank again to $8.39 and has steadied since that time with a slight upward bias, hitting $10.72 on 1/31/2012, whereupon it slid again after announcing the acquisition and the stock offering. Medical Properties Trust Announces Public Offering of Common Stock

10-Q for the Q/E 9/30/11
10-K for 2010

Medical Properties Trust closed at $9.84 last Friday.

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