Thursday, July 5, 2012

BOUGHT 40 EDG at $7.28-LT Category/IPB/Bought 1 Telefonica Emisiones 4.949% Senior Bond Maturing on 1/15/2015 at 96.075

Many republican governors are refusing to set up state insurance exchanges that are required by Obamacare. Those exchanges would allow consumers to compare private insurance plans.

Bobby Jindal, the republican governor of Louisiana and possible V-P candidate, states that such information exchanges will interfere with the state's ability to control costs (?) I am sure that is a winning argument for TBs.

The federal government is offering technical assistance and grants to assist the states in establishing these state managed information exchanges. Prior to the ascendancy of the current generation of radical ideologues and extremists in the GOP, most republicans would have recognized such an exchange as furthering republican principles. They would enhance private competition and inform customers of the available alternatives.

The republican governor of Florida, Rick Scott, will also refuse to set up a Health Exchange. Scott claims that insurance sold through such exchanges will cost more without providing any support for that statement.  And, of course, Scott fails to mention the tax credits, which may be available for such purchases depending on the purchasers income.

Rick Scott was running Columbia/HCA when the government launched a fraud investigation of that company. Scott was pressured to resign from the Board, and the company later entered into the largest fraud settlement in U.S. history. All of the activities were done during Scott's tenure as the CEO. PolitiFact Florida

According to the Kaiser Foundation, Louisiana has about 653,000 uninsured adults and another 105,700 children without health insurance. Health Coverage & Uninsured - Louisiana - Kaiser State Health Facts

Rick Scott's state has about 3.171 million adults and 687,300 children without health insurance. Health Coverage & Uninsured - Florida - Kaiser State Health Facts

Rick Perry's state has the highest uninsured rate in the nation.

Scott will not expand Medicaid which will deny those benefits to about 1.38 people in Florida. WSJ Under a provision in Obamacare, the federal government would pay for  most of that cost, estimated to be in a range between $20.1 billion to $24.3 billion by the Kaiser Commission between 2014-2019 with Florida having to pay an estimated $1.2 billion to $2.5 billion. The expansion of Medicaid was one way to extend insurance coverage to the working poor under Obamacare. Part of the Supreme Court's recent decision allowed the states to opt out of that extension.  {This is explained in more depth in this article at The Washington Post.} Those republican governors are really hurting, intentionally, the working poor in their states. The political calculation is that the only voters who care about those people are unlikely to vote for Scott anyway, while their supporters have unwavering aversion to anything in Obamacare regardless of merit.

The University of Chicago seems intent on foisting economic theories on the world divorced from reality. One such argument, made by Professor Casey Mulligan, can be found in his NYT opinion column, where the Professor argues that extending Medicaid benefits to the working poor who make up to 133% of the federal poverty level would cause them to quit their jobs. How much is that federal poverty level? For a single person it would be $14,404 and $29,326 for a family of four. Those people are not exactly in the market for private health insurance and are currently uninsured. Basically, they are able to survive on their current incomes with the help of some safety net programs. To argue that they would quit their jobs or work less once they qualify for Medicaid is just a ludicrous opinion, even for an academic. While GOP politicians would latch onto his opinion to justify their position to deny Medicaid benefits to the uninsured working poor, Mr. Mulligan's opinion would be recognized as absurd by anyone living in the real world, as noted by several individuals providing comments to his other worldly opinions.

There is some merit to Mulligan's theory in different contexts. There is a significant segment of the population who would like to be paid not to work, and sometimes that desire makes sense economically for them. Sometimes, the benefit package for not working is close enough to the after tax wage that the naturally lazy person opts for the non-work benefits package. And, unfortunately, that benefits package can be augmented by gaming the system,  and could include unjustified claims for social security disability benefits or fraudulent workmen's compensation claims.

As of 2010, 1 out of 21 Americans between 25-64 were receiving social security disability benefits totaling $115 billion, NYT. While many of those individuals are unquestionably disabled, perhaps as many as 70% to 80%, their ranks are filled with individuals gaming the system, preferring to be paid not to work than to work at a low paying job. It is really not that difficult into today's legal system to find doctors, chiropractors or other healthcare professional who will find a disability almost 100% of the time after talking to a patient sent to them by a lawyer.

In any community, you could talk to defense lawyers who handle workmen's compensation claims, and they could readily identify those healthcare professionals. A medical finding of disability, when there is no physical evidence of one (e.g. MRI), is common. And, when there does not have to be any physical evidence of a disability, the possibly for fraudulent claims increase. A recent example would be the criminal charges brought against certain individuals who were receiving disability benefits from the Long Island Railroad, Fraud Complaint. Virtually all employees who retired from that company were receiving disability benefits after receiving favorable medical opinions. Item # 1  Unfunded Pension & Disability at State & Local GovernmentsNYT

Another context where Mulligan's theories would have some relationship to the real world involves extended unemployment insurance for white collar workers or other employees receiving decent incomes before being laid off due to the Near Depression. As a result of extended unemployment benefits for those making good incomes, it would make sense for those individuals to accept those benefits rather than to find a relatively low paying job which would be available. A laid off white collar worker would not accept a job as a caregiver for an elderly person at a buck or two above minimum wage for example. It would be more rational to be paid not to accept those types of lower paying jobs while unemployment benefits continued to be paid for an extended period of time. Professor Mulligan refers to his testimony before Congress in his opinion column that explains his theory in greater detail.

Forest City priced an additional $125 in principal amount of its senior exchange traded bond (FCY) at $24.1078. That bond matures in 2034 and has a 7.375% coupon. I no longer own it. Instead, I bought a Forest City senior bond maturing in 2015. Bought 1 Forest City Enterprises 7.65% Senior Bond Maturing 6/1/2015 at 100 (May 2012)

1. Bought 40 Edgen Group (EDG) at $7.28 Last Friday (Lottery Ticket Basket Strategy)(see Disclaimer): Edgen Group is a global distributor of speciality products for the energy industry, including steel pipe, valves, and heavy plate.  

Profile at Reuters

For what is worth, there are six analysts contributing to earnings estimates and their consensus  estimate is for an E.P.S. of 87 in 2012 and $1.69 in 2013. EDG Analyst Estimates If those numbers are actually hit, the stock would then be cheap at a $7.28 price, with a forward P/E of less than 5.

Price to sales is around .13. EDG Key Statistics 

Edgen Group had its IPO in April 2012. Shares were sold to the public at $11, below the prior indicated range of $14-$16. ReutersProspectus for IPO At $7.28, a 38% decline from the April IPO price, EDG shares started to look tempting enough to buy some in my Lottery Ticket category. The chart looks like that I may be catching a falling knife, but that is normal for LT selections. 

I am already familiar with the company due to my ownership of 1 senior secured bond issued by the Edgen Murray Corporation, an indirect wholly owned subsidiary of EDG. Bought 1 Edgen Murray Senior Secured Bond Maturing 2015 Even when I own just one  bond, I will make an effort to monitor the company. This bond is referenced in note 8 to EDG's last filed Form 10-Q at page 10.

For the 2012 First Quarter, EDG reported pro forma net income of $4 million, compared to a loss of 6 million in the year ago quarter. SEC Filed Press Release 

This is a link to an SEC filed investor presentation.

Edgen Group Inc. Cl A (EDG) rose 18 cents last Tuesday to close at $7.85.

2. IPB (own 150): IPB is a Trust Certificate. The trust owns 15 corporate bonds and U.S. treasury strips. Those bonds mature between 2029 and 2033. Prospectus The trustee filed its distribution report for the recent semiannual interest payment. This report shows the ratings of each bond from both Moody's and S & P.

There is no call warrant attached to this TC.

Since this TC owns treasury strips, I own shares only in a retirement account. The reason  is made clear in this excerpt from the prospectus:

Trust Certificates: New Gateway Post
Bought 100 of the TC IPB at $16.99 August 2009
Sold 50 IPB at 20.28 February 2010
Bought 50 of the TC IPB at 21.3
Bought: 50 of the TC IPB at 23.11 in IRA

I still own the shares bought at $16.99 with an unrealized gain of over $900:

150 IPB Roth IRA as of 7/3/12 Unrealized Gain +$1,106.8
In a 2009 Post, I provided links to the FINRA information on each of the corporate bonds. Calculations On How to Recreate Trust Certificate IPB

3. Bought 1 Telefonica Emisiones 4.949% Senior Bond Maturing on 1/15/2015 at 96.075 (see Disclaimer): I have recently discussed two other bonds issued by Telefonica Emisiones and guaranteed by Telefonica (TEF) as provided in the prospectus. The main discussion is in this post:  Item # 2 Bought 1 Telefonica Emisions 5.877% Senior Note Maturing 7/16/19 at $91.067

This is a placeholder type of investment. The main advantage is that the bond will mature in less than 2 1/2 years. For an investment grade bond, the yield and YTM is also good for such a short maturity. My confirmation states that the current yield at my cost is 5.108% and the YTM is 6.306%:

Confirmation 2015 Telefonica Emisiones Senior Unsecured Bond
Fidelity includes the brokerage commission in the price. I had to pay $23.51 in accrued interest to the seller. I will need to subtract that sum, along with all other accrued interest payments made to bond sellers by me, as a line item in Schedule B. This bond was purchased in a taxable account. Accrued Interest on Bonds; Item # 1 Tax Accounting For Bonds Purchased and Sold in the Secondary Market;

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

Accrued Interest Paid to Seller: IRS Publication 
All of the Telefonica Emisiones bonds have declined significantly since March, based on the deterioration in Spain's economy. However, as noted in the preceding linked post, Telefonica has substantial operations in Latin America and elsewhere in Europe.

FINRA Information on 2015 bond.

For now, I am at my limit in bonds issued by Telefonica. I also own 1 maturing in 2019, as referenced above, and another maturing in 2016. Bought 1 Telefonica Emisiones 6.421% Senior Bond Maturing in 2016 at 95.178.


  1. The high current yield you are getting on Telefonica is a bit of a trap. While you are likely getting better spread than any other part of the TELEFO curve, you are exposed to a massive wall of debt due between 2014-2017 that significantly exceeds their current free-cashflow and liquidity.

    I think TELEFO probably makes it, but if they do your 2015 bonds incurred all of the downside risk with only 4 points of price upside.

    I liked your 2019 buy better and would go longer in duration if you are bullish (if they make it to 2015, they will have solved refi issues and whole curve will have tightened substantially)

    Just a thought

  2. Thanks for the comment. I admittedly do not have much upside in the 2015 bond, and the downside risk is conceivable though not very likely. TEF has a lot of assets that could be sold to provide any needed liquidity. The generous common stock dividend could also be cut or even eliminated as a source of funds. Defaulting on a senior bond would have to be last option. In short, I would bullish on the bonds being paid at maturity.

    In 2011, TEF had no trouble in refinancings, see page 85-86 of Form 20-F filed with the SEC. This included €1.3 billion in 6 year bonds at 4.75%; €1.25 billion of five year bonds at 3.992%; €1.5B ten year at 5.462%; and €1 billion in five year notes at 4.967%.

    As the bonds have fallen in price since those were issued last year, it would cost more to refinance but not that much more, and the prices of the bonds may have bottomed. Several of them have recently risen some in value.