Thursday, February 16, 2012

JUNK BOND LADDER TABLE/Husky Energy/MPEL/Sold 50 CPP at $24.93/Bought Back 50 CSCO at $19.95/Bought 50 FCBC at $12.5

The NY FED reported yesterday that manufacturing activity expanded in NY with the general business conditions index rising to 19.5, the highest reading in over a year. Empire State Manufacturing Survey (overview)

Over the past several days, there have been a number of articles quoting knowledgeable sources that European politicians are fed up with the Greeks and do not trust Greek politicians. (e.g.  Bloomberg) That is understandable. After all, the entire crisis started when the Greek government admitted that it had lied about its deficits.

Given the loss already built into the Greek government bonds, I doubt that there would be a significant difference now between an orderly and disorderly default. I regard the current proposal for a 70% haircut to be an "orderly" default. The market would probably have a short term negative reaction to a disorderly default, but the long term economic impact would not be that different. And, there are some advantages in visiting upon the Greek government the consequences of irresponsibility and dishonesty.

Late yesterday, some were expressing cautious optimism that an accord could be reached soon on Greece's bailout.  WSJ

The FED released the minutes for its January 24-25, 2012 meeting: FRB: FOMC Minutes, January 24-25, 2012 The market reacted negatively since those minutes revealed a division on whether the Fed should launch QE3.

I was tempted to sell my Melco Entertainment shares, recently bought as a LT. Bought 30 MPEL AT $9.32 as LT I decided to wait after reading this article at TheStreet, authored apparently by a technician who claims that the stock is poised for a breakout move. Melco recently released better than expected earnings:  SEC Filed Press Release Melco rose 18 cents yesterday to close at $12. Melco Crown Entertainment Ltd. ADS  (MPEL)

The VIX rose 8.19% yesterday to close at 21.14. This could presage an even more substantial spike into the high 20s which would be associated with a market decline. The VIX closed at 17.1 on 2/3/12. ^VIX Historical Prices As a result of this recent spike, which started in earnest on 2/9/12, I have sold some recently purchased equity positions. If the VIX moves up strongly today, I will likely sell another one. The whipsaw movement in the VIX between 20 to 30, with temporary movement below 20 and above 30, is the defining characteristic of an Unstable Vix Pattern, Phase 1. Mark Hulbert and the Use of the VIX as a Timing Model

1. SOLD 50 of the TC CPP at $24.93 Last Thursday (see Disclaimer):  This security is a trust certificate (TC) containing a trust preferred (TP) security as its underlying security. I suspect that many investors who know of it are afraid to buy it because the underlying bond in that TP originates from Countrywide. I delve into the successor liability issue in an earlier post: Item # 1  Bought Back 50 CPP at $21.35

2012 CPP 50 Shares +$163.02

2011 CPP 50 Shares +$114.07
I have held this security long enough to receive only one semi-annual interest payment, the one paid on 12/15/11.

I would note that it makes slightly more sense for me to take a short term capital gain rather than to receive an interest payment. While both forms of income are taxed the same at the federal level, I do not have to pay a Tennessee income tax on stock profits, whereas I would have to pay a 6% state tax on the interest payment made by CPP. While that may not sound like much, it is a significant total amount for me at year end.

Snapshot of TC trades can be found at the end of Trust Certificates: New Gateway Post.

Merrill Lynch Depositor Inc. PfdPLUS 8.05% Trust Ctf. CCR-1 (CPP) rose 19 cents yesterday to close at $25, its par value.

2. Bought Back 50 CSCO at $19.95 (Large Cap Valuation Strategy)(see Disclaimer): I sold 50 shares shortly before the recent earnings release. I was sufficiently impressed with that report that I decided to buy back those shares.  Sold 50 CSCO at $20.4

Cisco Systems closed yesterday at $19.91. I am not likely to buy more than 50 more shares.

3. Bought 50 FCBC at $12.5 Last Monday (REGIONAL BANK BASKET STRATEGY)(see Disclaimer): I jettisoned shares in First Community Bancshares  at a small profit last June: Sold 100 FCBC at 14.44 I discussed this bank when making my first purchase last April. Item # 2 Bought 100 FCBC at 13.89 As noted in that post, FCBC did participate in TARP and paid back the government in 2009 (page 11 2010 Annual Report)

This bank owns 56 branches in four states: Virginia, Tennessee, West Virginia and North Carolina. This may sound like a large geographic area, but the branches are not that far apart as one would imagine. The bank is headquarterd in Bluefield, Virginia, located in Western Virginia. Bluefield is near the border between Virginia and West Virginia and is close to western Tennessee and North Carolina. bluefield va - Google Maps

I decided to re-enter the position with just 50 shares after reviewing the latest earnings report. The stock just went ex dividend on 2/8/12. First Community Bancshares The bank is currently paying a 10 cent quarterly dividend which gives me about a 3.2% at a total cost of $12.5.

In the 4th quarter of 2011, the bank reported net income of $2.95 million or 17 cents per share, down from 27 cents in the 4th quarter of 2010. That is not as bad as it sounds. The bank reported only a $26,000 profit from securities sales in the 2011 4th quarter, compared to $4.248 Million in the 2010 4th quarter. So the 17 cents is more of a clean number from the bank's operations.

I found the following to be supportive of a new purchase. The 4th quarter efficiency ratio improved to 54.93%, compared to 64.82% in the 2010 4th quarter. The net interest margin increased to 3.93% from 3.78% in the year ago quarter. Tangible book value per share increased 13.66% from the year ago quarter to $11.4 per share.  As of 12/31/11, the total capital ratio was 18.15%; the tier 1 risk based capital ratio was 16.89%; the tier 1 leverage ratio was 11.5%; NPAs to total assets stood at 1.57%; and the coverage ratio was 94%.

This stock did poorly during the Near Depression period as the bank reported steep losses. The five year chart shows channel trading mostly between $25 to $35 until early 2009 when the price cratered to $8.25 fairly quickly. FCBC Stock Chart Since March 2009, the stock price has stabilized in an uninspiring way, moving mostly in a channel between $10 to $15.

First Community Bancshares closed yesterday at $12.04.

I may average down at below $11.5, thereby buying back all of the 100 shares previously sold.

4. Husky Energy (own: Canadian Dollar (CAD) Strategy): While I have traded Husky shares profitably in the past, my current position of 200 shares is slightly in the red.

200 Shares of HSE:CA
I will receive Husky's dividends in CADs after a 15% Canadian withholding tax. A reader recently asked me whether that tax reduced my return.  U.S. taxpayers can deduct or receive a credit for foreign income taxes. I.R.S. publication 514 discusses the issue. I do not own foreign securities in a retirement account. {for more information, see 514.pdf or Publication 514 (2010), Foreign Tax Credit for Individuals} It is my understanding that no credit is available in that circumstance. (AARP Online Tax Assistance Frequently Asked Questions) I rely on TurboTax to do the calculation for me, and  have received for the most part a credit on my U.S. taxes for foreign taxes paid on dividends.

My general goal for all of my Canadian securities is to increase my CAD stash over time. I will invest only in securities that pay dividends and Husky has a quarterly dividend of 30 Canadian cents. In addition to the dividend, I hope to realize some profit on the shares, though I am in no hurry to do so. When I sell my Husky shares, I will sell them on the Toronto exchange and receive the proceeds in CADs.

I was neither pleased nor disappointed with Husky's 4th quarter results.  Husky Energy Increases Net Earnings 135% in 2011 as Production Grows 9% On an adjusted basis, the company reported adjusted earnings of 50 cents per share. I am interested in the progress being made in the Liwan Gas Project in the South China Sea, and the company claims "good progress" in bringing that field online for its first delivery in late 2013 or early 2014. The company also has an oil sands project called Sunrise that is continually to "process towards planned first production in 2014". Assuming those projects come to fruition, Husky may look a lot better in 2014 than now.  

Husky Energy (TOR: HSE) rose two cents in trading yesterday to close at 25.51 CADs. The shares available on the pink sheet exchange in the U.S., HUSKF, closed up 21.62 cents to close at $25.4962 USDs. (CAD/USD) The CAD rose slightly in value against the USD in trading yesterday.  At a total cost of 25.51 CADs, the dividend yield is approximately 4.7%.

5. JUNK BOND LADDER TABLE (Junk Bond Ladder Strategy): This is easily the riskiest strategy being followed at the present time. This strategy was initiated late in 2010 in response to the continuation of the Fed's Jihad Against the Savings Class. I anticipate several defaults and have already suffered three. I have liquidated my 1 General Maritime bond at a total loss. Realized Gains Junk Bond Ladder Strategy I also own two bonds issued by Eastman Kodak and 1 by American Airlines, both of whom have defaulted. I am keeping those bonds until I have a better idea of their recovery potential, but fully expect to take a substantial loss on them.

Since I am buying junk bonds at discounts to their par values, I have had and will continue to have realized gains resulting from redemptions by the issuer or sales by me. The goal is to break-even on the bonds over time, thereby capturing their much higher yields without diminution from trading losses. The estimated yield to worst for this bond ladder is currently 13.31%. It remains to be seen whether that goal can be achieved.

In addition to the defaults already experienced, I have considerable concerns about my 1 Reddy Ice, 3 Travelport, and 1 AGY Holdings. I would not average down on any of those bonds and would have preferred to have avoided them altogether. I am really disgusted with Travelport. Item # 3 Update on TravelportTravelport Update on Secured Credit Facility

This is what my junk bond table looks like for those securities still making their interest payments:

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