Tuesday, March 13, 2012

Modification of Lottery Ticket Strategy/EXC/Sold 100 OSM at $23.34/Bought 30 ING at $8.79 as LT/Sold 30 MPEL at $13.12 and Bought 100 LMLP at $1.8-LT Category

Exelon (own) closed its acquisition of Constellation Energy yesterday. Investors responded positively to this news yesterday. Exelon rose 90 cents per share in trading yesterday to close at $39.81.

The Treasury Department reported yesterday that the U.S. budget deficit for February 2012 was $231.7 billion. fms.treas.gov/pdf The U.S. government's fiscal year ends at the end of September. The budge deficit for the current fiscal year is currently estimated at $1.08 trillion which will be the 4th consecutive year of budget deficits in excess of 1 trillion dollars. Prior to the first year of the Reagan Presidency, the entire debt of the U.S. government was less than $1 trillion dollars.

1. Sold 100 OSM at $23.34 Last Friday (see Disclaimer): These shares were sold by OG who did not want to risk his unrealized profit which could exceed the income generation produced by this bond until it matures in 2017. I bought the 100 shares in two fifty share lots. The total average cost for the 100 shares was $15.93:

2012 OSM 100 Shares LT Gain +$733.05
The first lot was purchased in August 2008, shortly before I started this blog, at a total cost of $15.96. The second lot was purchased in May 2010. Item # 9 Bought 50 OSM at 15.74 I have now sold out of this security but I still own 100 shares of a related bond, ISM, that was recently bought within the past year Bought 50 of the CPI Floater ISM at $20.62 (8/31/2011 Post); Bought 50 ISM at 19.5 (October 11, 2011 Post). 

OSM is a senior, unsecured bond issued by SLM, also know as Sallie Mae. Interest is paid monthly at a variable rate. The rate is linked to CPI. OSM pays a 2% spread over a CPI computation which uses a 12 month period with a 3 month lag. Prospectus The CPI data used in that computation is the non-seasonal CPI that can be found at the stlouisfed. 

I show how the interest rate is calculated in Item # 1 OSM.

SLM Corp. CPI-Linked Medium Term Notes Series A 2017 fell 4 cents yesterday to close at $23.2.

2. BOUGHT 30 ING at $8.79 Last Friday-LT Category (Lottery Ticket Basket Strategy)(see disclaimer): My last transaction regarding ING's common stock was to liquidate my position at $35.49. I was able to generate a profit with that trade made on 2/26/2008. As explained in my April 2009 Gateway Post on ING Hybrids, I transitioned to buying ING hybrids when their prices were crushed by the market. It is almost unbelievable now, but I was able to buy some of those $25 par value hybrids at single digit prices. (e.g. Bought 50 INZ at 6.52 February 2009 BUY OF ISF at $4.6 February 2009 Buy of 50 INZ at 7.82 February 2009)

ING lost a lot of money investing in U.S. mortgage securities pedaled by the Masters of Disaster. As a result, ING receive a €10 billion infusion from the Dutch state late in 2008.   ING to strengthen core capital by EUR 10 billion | ING To receive EC approval of the state aid received by it, ING had to agree to a restructuring program that required the company to become much smaller. 

ING has gradually repaid the aid received from the Dutch government. The Dutch government purchased preferred stock, and ING pays back the Dutch government by buying back those securities at a premium to their face value. The premium is 50%, a bad deal for ING shareholders to say the least. The last repurchase occurred in May 2011, and involved a €3 billion Euro payment to the Dutch state to repurchase €2 billion in those securities plus the 50% premium. ING pays EUR 3 billion to Dutch State for second tranche of core Tier 1 securities, including a 50% premium | ING  That is one reason to classify this purchase as a Lottery Ticket. The fact that ING had to receive such a large capital infusion is one huge negative factor, and the terms of repayment just make it worse from a common shareholder's perspective. 

ING also receive an Illiquid Assets Back-Up Facility from the Dutch government in January 2009. This assistance related to the Alt-A mortgages that an ING U.S. operation had unfortunately bought in large quantities. Transactions with Dutch State | ING

Recently, ING completed the sale of ING Direct to Capital One for approximately $6.9 billion in cash and 54 million shares of Capital One.  SEC Form 6-K

The 2011 4th quarter results were adversely impacted by a charge in ING's insurance operation relating to the U.S. annuity business:  Form 6-K  

This is primarily a statistical selection based on information found at the YF Key Statistics page for ING:

Trailing P/E=7.67
Forward P/E=5.89
Price to Book=.55
Five Year Estimated P.E.G.=.35

Morningstar has the common rated 3 stars.

As with all LT selections, ING's stock chart looks awful. ING Interactive Chart The stock topped out close to $45 per share in late 2007. The 52 week range is $5.8 to $13.41. 

ING eliminated its common share dividend in 2008. Eventually, I would expect a resumption of that dividend, but would not anticipate its resumption this year. 

I would add that Aegon, another Dutch financial institutions that received state aid, has repaid back the Dutch government in full and has resumed a common stock dividend. Aegon NV (AEG) Dividend History - Nasdaq.comAEGON  I also own AEG as a LT.  

Throughout 2009-2010, when discussing the relative risks of Aegon and ING hybrids, I argued that AEG was in better financial condition to weather the storm than ING who digested too much cooking from American Masters of Disaster. 

ING Groep N.V. ADS fell 8 cents in trading yesterday to close at $8.69.

3. Bought 100 LMLP at $1.8 Yesterday-LT Category (Lottery Ticket Basket Strategy)(see Disclaimer): LML Payment Systems is a micro cap company involved in payment processing and other activities. Its primary profitable activity has been patent litigation. Recently, it settled a patent case against JPM for $4.5 million. SEC Filed Press Release JPM was the last defendant in LMLP's patent case filed in the U.S. District Court for the Eastern District of Texas in 2008. As noted in that press release, the company has received in excess of $45 from settlements in its patent litigation. Just prior to the settlement with JPM, the company settled with Deutsche Bank Trust Company Americas for $450,000. SEC Filed Press Release I did not note any other settlements in 2012.

As of 12/31/11, the company had $23.928642 million in cash and cash equivalents and $3.211665 in short term investments.  SEC Filed Press Release: 4th quarter 2011 Earnings  The total cash was at that time roughly $27.15 million.  As of 12/31/11, the cash per share was .96. LMLP Key Statistics With the settlements with JPM and Deutsche in the 2012 first quarter, totaling $4.95 million in total, the balance would be higher now. Depending on the amount of taxes associated with those payments, I suspect the number is closer to 1.1 now. 

The fiscal 2011 3rd quarter, which ended 12/31/2011, had minimal revenue from patent settlements. The success or failure of this LT investment will depend mostly on the performance of LMLP's payment processing business, the TPP segment of its operations (see description at page 39 of SEC Form 10-Q) This segment reported revenues of $4.297 million, an increase of 21.7% from the 3rd quarter of 2010. Earnings were reported at just 1 cent per share. The stock reacted negatively to this earnings report. LMLP Interactive Chart The earnings were released Friday morning, 2/10/12. On 2/9/12, the stock closed at $3.17 per share and has been on a downhill ride since this release.  LMLP Historical Prices The announcement made on Tuesday, 3/6/12, about the $4.5 million settlement with JPM did not result in a gain that day. Instead, the stock declined 19 cents on 3/6 or 8.9%. 

Besides the TPP and patent litigation business segments, the company also has a unit, called the CP Segment, that generated $525,000 in revenues for the 3rd quarter, a 15% decrease from the fiscal 2010 3rd quarter. Apparently, this segment helps merchants collect on dishonored checks. I would not place a significant value of this business segment. And, the patent litigation business may be nearing an end. It remains to be seen whether the company can profitably grow its TPP business and/or successfully deploy its cash to expand its business.  

This company is headquartered in Canada. Its TPP business currently serves a merchant base of over 12,000 customers primarily in Canada.  
Profile page at Reuters
Key Developments page at Reuters

Based on 12/31/2011 Data:
Price to Book: 1.07
Price to Sales: 1.06

This company really just needs to be acquired by a larger firm in the payment processing industry. That would probably be the best way for its shareholders to receive fair value.

LML Payment Systems declined 3 cents in trading yesterday to close at $1.82.

4. SOLD 30 MPEL at $13.12 Last Friday-LT Category (Lottery Ticket Basket Strategy)(see Disclaimer): This concludes my second round trip in MPEL as an LT. I bought these shares at $9.32. Bought 30 MPEL AT $9.32 as LT (1/3/2012).  

2012 MPEL 30 Shares +$98.09

Melco Crown Entertainment Ltd. ADS rose 14 cents in trading yesterday to close at $13.27.

The prior round trip consisted of a 40 share buy at $7.36 (Jan 2011), with those shares sold  at $11.46 (June 2011).

5. Modification of Lottery Ticket Basket Strategy: I am going to modify my Lottery Ticket Basket Strategy with a new wrinkle. The OG has started playing Blackjack at casinos. As part of the new strategy, a LT selection sold for a $100 or greater profit during 2012 will warrant the playing of one Blackjack hand with a black chip. Usually, the OG plays with the green chips since his hand starts to tremble playing with black chips. The $100 hand (s) will be the first hand (s) played during the session, usually five hours. If the hand is won, the two black chips will be placed in the OG's pocket. In the event of a double down or split for that hand, the money will be advanced from the profit of the next $100+ LT realized gain.   

While it is the subject of some debate, the OG has decided that any winnings at the end of 2012 will be used to play one session with only black chips. The RB voted with the OG with the LB casting the only "no" vote to that investment plan. Headknocker refuses to become involved in staff disputes unless the amount in question exceeds $5,000. 

As shown in the snapshots at the end of the Lottery Ticket Strategy Gateway Post, there is only one LT sold in 2012 for more than a $100 profit so far. 

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