Tuesday, May 22, 2012

EK/Sold LT HUN at $14.65/ Bought Back 50 KRBPRE at $25.06-ROTH IRA/Bought 50 NOK at $2.88-LT Category

There was a vigorous bounce yesterday off 1295 in the S & P 500, which I noted as an important level in the previous post.

For the 2012 first quarter, RRsat, a LT selection, reported GAAP net income of $2.3 million, or 13 cents per share, up from 5 cents in the 2011 first quarter. Cash increased by $1.2 million to $34.4 million. Bought 50 RRST at $3.95-LT Category

KeyCorp, a LT selection, increased its quarterly dividend to 5 cents per share from 3 cents.

An article at Forbes compares the valuations of Facebook and Google at the time of their respective IPOs. A similar article was published in the WSJ yesterday, where the author noted that Facebook's P/E was four times greater than the 14 P/E for Google.

I did not participate in the FB IPO. I viewed the stock as over-valued at $38 per share. Apparently, Nasdaq screwed up the Friday trading in a big way according to news reports. I noticed this warning on Fidelity's website yesterday morning:

I do not recall ever seeing a similar message. Facebook Inc. Cl A (FB) fell $4.2 in trading yesterday to close at $34.03.

Until I read a NYT article, I did not realize that the founder of T.D. Ameritrade, Joe Ricketts, is a True Believer of the right wing variety.

RadioShack is paying too much in dividends to its common shareholders. The RadioShack Board recently declared a quarterly dividend of 12.5 cents per share. Based on the current price, the dividend yield would be about 10.75%. I own two senior RSH bonds. Bought 2 RadioShack 6.75% Senior Bonds Maturing 2019 at 80

JPM suspended its stock purchase plans yesterday. The stock closed at $40.74 on 5/10/12, and is now hovering just above $32. I would not make an assumption that the Masters of Disaster know what they are doing. It is also evident that they lack common sense. Possibly, more of them need to undergo Nerd Therapy and ReEducation. Paul Wilmott & The Need for Nerd Therapy (June 2009). I have no position in JPM but will consider a nibble near $30. JPMorgan Chase & Co declined 97 cents yesterday to close at $32.52 per share.

Eastman Kodak lost its ITC patent infringement case against Apple and RIMM at the ALJ level. usitc.gov/.pdf  The ALJ found infringement but held that the EK patent was invalid. The ALJ found that the EK patent did not pass the test of being "non-obvious". An invention must be more than an obvious variation of prior art in order to merit patent protection.

{Link to latest Supreme Court decision on patent obviousness: KSR Intern. Co. v. Teleflex Inc., 127 S. Ct. 1727 - Supreme Court 2007; and to the Court's decision in  Microsoft Corp. v. i4i Ltd. Partnership, 131 S. Ct. 2238 - Supreme Court 2011 which made it clear that patent invalidity must be shown by clear and convincing evidence. That is a higher standard of proof than mere preponderance of the evidence}

Kodak will appeal the ALJ's decision on the validity of EK's patent. If the ALJ's decision is upheld on appeal, this will be a major blow to EK's recovery potential after its reorganization in bankruptcy and would consequently have an adverse impact on the unsecured senior bond owners. It might also pose a problem in the ongoing sale process  (NYT) of 1,100 EK digital patents.

In addition, the 2012 first quarter report was embarrassingly pathetic, another bright red emblem of management's ineptitude, and their unquestionable failures to transition this American icon into successful new businesses after more than a decade of effort. {ekq12012_10q net loss was $366 million for the quarter}.

Hopefully, at some point in my lifetime, corporate America will quit rewarding those who engineer colossal failures. Perhaps, under the circumstances, this may be too much change   from the past to even contemplate as a remote possibility.

I had predicted a recovery of 20-30 cents on the dollar for the unsecured senior bond owners provided EK was successful in this litigation and generated a settlement north of $2 billion. Eastman Kodak Bankruptcy The price of the 2013 bond declined yesterday in response to this development, closing at 15.

1. Sold 30 of HUN at $14.65 Last Monday (Lottery Ticket Basket Strategy)(see Disclaimer): I do not spend much time analyzing whether it would be better to hold or to sell a LT selection. Either way, it really does not matter given the size of the position. The thought process behind this sell was relatively simple. Huntsman is a cyclical company, and the evidence suggest an economic slowdown worldwide.   

2012 HUN 30 Shares +$126.29
The shares were bought @ 9.91 last January.

Huntsman closed at $13.1 yesterday.

2. Bought Back 50 KRBPRE at $25.06 Last Monday-ROTH IRA (see Disclaimer): MBNA Capital E is a Trust Preferred security originally issued by MBNA Capital, a Delaware Trust, that owned a junior bond issued by the credit card company MBNA which was later acquired by Bank of America. The underlying security in this TP is currently an obligation of BAC and has the same credit rating as TPs originally issued by Bank of America.

See list of BAC TPs at Bank of America | Investor Relations | Capital Issuances.

All of BAC's TPs are rated in junk territory: BB by Fitch; Ba1 by Moody's; BB + by S & P. Bank of America | Investor Relations | Credit Ratings

The TP has a 8.1% coupon on a $25 par value. It matures on 2/15/2033. Prospectus As noted previously, this TP is a typical trust preferred security. BAC could defer interest payments for up to 5 years, provided no distribution is made on a junior security. So, for as long as BAC pays a common dividend, it has to pay the interest on this TP in full. If a interest payment is lawfully deferred, the deferred payment will accrue interest at the coupon rate. (see page S-4)

Interest is payable quarterly on 2/15, 5/15, 8/15 and 12/15. This security trades flat.

This security may be redeemed now at par value plus accrued interest. BAC will have to phase out the use of TPs at TIER 1 equity capital. Trust Preferred Securities & Financial Reform There is a good chance that this security will be redeemed by BAC, so I would not want to pay much more than par value for it.

I have bought and sold this TP for small gains after harvesting more two or more quarterly interest payments. Bought 50 KRBPRE at 24.62 in Roth IRA (June 2010); Bought 50 KRBPRD @ 25.14 (October 2010); Bought 50 KRBPRE  @25.07 (November 2010); Added 50 of the TP KRBPRE at 25.19 (February 2011); SOLD 50 KRBPRE @ 25.96 (May 2011); Sold 100 KRBPRE at $25.13-ROTH IRA (November 2011) (later shares sold shortly after 11/9/11 ex-interest date)

I also own one MBNA TP bought in the bond market: Bought 1 MBNA Capital Series A 8.278% TP at 94.5 Maturing 12/1/2026FINRA. That bond has a $1,000 par value, whereas the exchange traded TP's originating from MBNA Capital have $25 par values. Moreover, unlike the exchange traded TP's KRBPRD and KRBPRE, that bond pays semi-annually, and I had to pay the seller accrued interest.  (BAC assumed MBNA obligations for that 2026 bond in Third Supplemental Indenture dated as of December 21, 2005). Most indentures that I have seen contain a provision requiring an acquiring company to expressly assume the obligations. If one is inclined to search long enough, it is possible to find a filing whereby that assumption is set forth.

I view this kind of purchase to be merely a "placeholder" kind of holding, where I am just trying to capture the coupon yield without suffering a loss of principal over a holding period likely to be in the six month to one year range, absent a call by the issuer.

MBNA Capital E 8.10% TOPrS Series E (KRB.PE) rose 19 cents yesterday to close at $25.35.

3. Bought 50 NOK at $2.88 Last Wednesday (Lottery Ticket Basket Strategy)(see Disclaimer): Many investors have declared NOK to be dead. Good as gone- all is lost-road kill-Apple and Google have won the smartphone war. Maybe so. But, as Mark Twain once said, the "report of my death was an exaggeration".

I am not confident in NOK's ability to resurrect itself. With a 50 share purchase, I am not expressing any noticeable level of confidence. I can, however, sit on those shares until either NOK is buried or I am. 

The long term chart is ugly, and highlights the importance of never falling behind the curve in a fast changing industry. NOK Interactive Chart 

I have a dumb phone. No teenager would be caught dead using it. I did look at NOK's latest smartphone releases, the Lumia line, and those phones appear competitive on both price and function. Cell Phones and Smartphones - Nokia - USA A note from a Raymond James analyst claims that AT & T, which recently lost exclusivity on the IPhone, has been pushing the Lumia 900. That report is summarized in the Tech Daily blog at Barrons.com. In other words, it is not clear that all is lost, at least not yet.  

The latest downdraft was probably linked to a poor earnings report for the 2012 first quarter. sec.gov

Recently, SocGen threw fuel on the selling conflagration by reducing Nokia to a sell. So, overall, investor sentiment is extremely negative. Institutional investors, for the most part, want to avoid looking foolish by reporting a stake in NOK. 

Besides the new products, Nokia is still sitting on a sizable chunk of cash, which will give it breathing room to implement a turnaround. As of 3/31/12, Nokia had €9.8 billion in gross cash and €4.9 billion of net cash after subtracting its debt. I would, however, anticipate a fairly rapid burn rate through that cash. Nokia's bonds, trade in the U.S., have also taken a big hit in value. 

As with many LT selections, both price to sales and price to book are below 1. NOK Key Statistics 

Another positive is that Nokia has a very strong patent portfolio. (see discussion at  Zacks.com Reuters and  Seeking Alpha)

Long term and patience are the operative words for this LT.

The Lumia has had initial success after its launch in China, but skeptics believe that pop will be short lived. The author of an article at Seeking Alpha is more upbeat about sales in China.

Nokia Corp. ADS  (NOK) shares rose 5.79% or 17 cents per share to close at $3.02 yesterday. 

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