Monday, August 27, 2012

ADDED 100 YMLP at $18.75/Lithium ETF/HP-Masters of Destruction/Hospitals as Breeding Grounds for Disease/EPA Emissions Rules for Coal Plants Struck Down in 2-1 Decision

Hospitals are breeding grounds for all kind deadly bugs. I recall one incident a few years ago when my father caught a drug resistant infection soon after being admitted to a Nashville hospital. After being told about that infection, a cleaning person came into the room, with a bucket of dirty water, dipped a clearly dirty mop into that bucket and mopped the floor. 

An article in the WSJ disclosed how six patients, probably more, died at the National Institute of Health's "elite" hospital in Bethesda, Md. soon after one patient was transferred to that hospital with a drug resistant Klebsiella pneumonia. The hospital only had 243 beds and that patient was put in isolation upon arrival.  


I own 100 shares of the Global X Lithium ETF. ITEM # 7 Bought 100 of the Stock ETF LIT at $13.72 I noted in that post that four lithium companies control about 95% of the market. Two of those four are Rockwood Holdings (ROC) and a small Canadian company called Talison Lithium (TOR: TLH). Last Thursday, Rockwood Holdings announced that it would acquire Talison for an all cash price of C$6.5 or C724M. As of 8/22/12, the Lithium ETF has a 5.8% weighting in Talison. Global X Funds; Quote: LIT: 14.88 +0.05 (+0.34%)

Royce Micro-Cap Trust (own) declared a $.12 per share quarterly dividend, with a 9/4/12 ex dividend date.

Royce Value Trust (own) declared a $.18 per share quarterly dividend, with a 9/4/12 ex dividend date.

Royce Focus Trust (own) declared a $.09 per share quarterly dividend, with a 9/4/12 ex dividend date

S & P upgraded the senior secured Edgen Murray bond to B+ from B last Friday. FINRA; Item # 1: Bought 1 Edgen Murray Senior Secured Bond Maturing 2015 at 97.5 Please note that Edgen is no longer a private company. EDG I bought 50 shares of its common stock after the shares nose dived after an IPO. BOUGHT 40 EDG at $7.28-LT Category (July 2012 Post)

First Opportunity Fund (own) reported a net asset value per share of $9.49 as of 8/24/2012. CEFA Based on a closing market price of $7.15 that day, the discount was -24.66.

Community Bank System (own) raised its dividend for the 20th consecutive year. The new quarterly rate will be 27 cents per share, up from 26 cents. I became aware of this bank for the first time when it made an offer to acquire Wilbur which I owned as part of the regional bank basket strategy. GIW- Being Acquired by CBU I thereafter investigated CBU and decided to buy some shares. After selling my highest cost CBU shares, I currently own 50 bought at $23.18. Hopefully, the bank will keep raising the dividend every year which will incentivize me to keep those shares. At a total cost of $23.18, the yield rose to 4.66% with the latest dividend raise. CBU: 27.77 +0.06 (+0.22%) 

My most basic investment strategy is to generate a constant flow of income. I will then reinvest that cash flow to buy more income producing securities. Most dividend and interest payments are received on the 1st, the 15th and the last business day during each month, but I do receive an income stream on other days. The following is a snapshot of the cash flow received in my main taxable account on 8/24/12:

Cash flow 8/24/12-Main Taxable Account
I received less than the foregoing on 8/23, so it varies from day to day. The foregoing snapshot includes two monthly distributions from CEFs (GDV and GGN); one monthly distribution from a BDC where I recently quit reinvesting the dividend (PSEC); one quarterly dividend from a REIT (CWH); and a quarterly dividend from a LT holding (BNCN).  

Has HP ever made a successful acquisition? After a long series of failed acquisitions, it would be impossible to conclude that HP's Board of Directors is even capable of making a single good decision. The latest quarter included a $8 billion write-off related of HP's 2008 acquisition of EDS. Autonomy has been underperforming since HP acquired that company for $11B. A good chunk of that investment is likely to be written off soon. TheStreet HP also overpaid for Palm, just another dud in a long series of mistakes. Palm was acquired in 2010 for $1.2B. HP to Acquire Palm for $1.2 Billion

And, does anyone know of a single successful new consumer product originating from HP over the past decade? How many employees does that company have anyway, something like 350,000 after the recent job cuts. Out of that many employees, why can't HP find one or 10 who would invent the next big consumer gadget? Why are all of those products coming from Apple?

While HP may successfully turn around its businesses over the course of several years, there is no sign yet of a turnaround based on the latest earnings report. SEC Filed Press Release Anyone purchasing HP stock, even after its recent shellacking to a seven year low, will have to be extremely patient and have a multi-year time horizon. Even with that patience and long term time horizon, it is far from clear that the investor will be rewarded to any significant decree. HP could easily fail. I would not assume another IBM type turnaround.


True Believers live in a world of their reality creations. A GOP judge from Texas warned last week that a civil war could erupt if Obama is re-elected this November. This deep thinker believes that Obama will give away U.S. sovereignty to the United Nations. And when those United Nations tanks roll into Lubbock, he will stand in front of those tanks, along with the sheriff and the Texas militia, and fight just like the patriots did at Concord and Lexington.

It is not possible to have a rational and factual discussion with TBs who live in a world of their own reality creations or creations given to them for those unable to form their own. Their opinions, even the most outlandish and bizarre ones, are viewed as facts that are not subject to dispute.


1. Added 100 YMLP at $18.7471 in the Main Taxable Account Last Friday (see Disclaimer): In a taxable account, this 100 share purchase brings me up to 150 shares of the Yorkville High Income MLP ETF (YMLP). I previously bought 50 shares in that account and another 50 shares in an IRA. I have already received one quarterly distribution on those 50 share lots. BOUGHT 50 of the ETF YMLP at 19.08-Taxable AccountBought 50 YMLP at $19.05-Regular IRA

As previously discussed, this is a new ETF that invests in energy MLPs. A list of its holdings can be found at Yorkville High Income MLP ETF Holdings. The holdings are primarily energy producers, unlike other ETNs and ETFs that invest in MLPs that concentrate their holdings in infrastructure companies such as pipelines. The energy producers will generally have a high yield, but also have the additional risk that their assets could be depleted over time unless replaced by new production. The prospectus for YMLP discusses that risk and others.   YMLP_Prospectus.pdf

The depletion issue is a major issue with royalty trusts, as explained by Jason Zweig in his WSJ column. Royalty trusts include BP Prudhoe Bay Royalty Trust (BPT) and the San Juan Basin Royalty Trust (SJT) which cut its dividend last week. The Yorkville ETF owns both of those royalty trusts. A list of Royalty Trusts can be found at Bloomberg. I would prefer that the fund just sell SJT and replace it with a non-royalty trust name.

The fund has paid two quarterly distributions to date, both a tad over 40 cents per share. Yorkville High Income MLP ETF Distributions Assuming a continuation of that rate, the yield would be close to 8.53% at a total cost of $18.75.

The first distribution was classified as a 100% return of capital. IRS Form 8937.pdf It appears to me that the fund is receiving distributions from its holdings sufficient to support that dividend or close to it. I have not performed the actual calculation, but the holdings are high yielding MLPs paying mostly between 7% and 13%. I would not call that kind of return of capital as destructive. A destructive return of capital is when the fund simply returns the investors capital since it has not earned the dividend either by the receipt of distributions from its holdings or by realized gains from those investments. In that later case, the fund is depleting its asset base with the return of capital to the extent it is paid in cash to its shareholders.

With the ETF ownership structure for MLPs, I avoid the considerable hassles associated with tax return preparation, and I do not face the creditor risk issue inherent in the ETN form of ownership. There is a downside trade-off that some investors may not want to pay. The ETF has to pay taxes and to hold reserves against potential tax obligations. WSJ Motley Fool (see prospectus at pages 5-6). That will cause underperformance compared to the ETN form of owning the same securities.

So, it is really just a question of picking your poison. I am not going to fool again with the tax return headaches associated with MLPs, and this requires me to own them in a fund that avoids the K-1 hassle entirely. And, I will take the lower performance due to taxes with the ETF structure over the credit risk of the issuer that exists with the ETN form of ownership. If the ETN issuer becomes bankrupt, the owners of that ETN are in the same position as all other unsecured creditors, maybe looking forward way, way down the line of receiving 20 cents on the dollar. If I owned a Lehman senior unsecured note, and fortunately I did not, I may not live long enough to receive that 20 cents.

Some of the higher yielding MLPs owned by the fund, with current yields over 8%, include the following:

Navios Maritime Partners L.P., NMM
Natural Resource Partners L.P., NRP
Capital Product Partners L.P., CPLP
BreitBurn Energy Partners L.P., BBEP
Martin Midstream Partners L.P., MMLP
Rhino Resource Partners L.P., RNO
QR Energy L.P., QRE
Suburban Propane Partners L.P., SPH
CVR Partners LP, UAN
Penn Virginia Resource Partners L.P., PVR 
Vanguard Natural Resources LLC, VNR
BP Prudhoe Bay Royalty Trust, BPT
Enduro Royalty Trust, NDRO
Global Partners LP, GLP

I view this investment to be a short term investment, not likely to be held for more than two years. The goal is to exit the position for any profit on the shares before the return of capital adjustment, thereby harvesting several dividend payments. I may sell the higher cost 50 share lot when and if the price falls in the $19.3-$19.5 range.

QUOTE: YMLP: 18.80 +0.02 (+0.11%)

2. AGY Holdings (own 1 senior secured second lien  2014 bond: Junk Bond Ladder Basket Strategy): AGY reported a second quarter loss of $4.8M on revenues of $46.5M. The loss for the 2011 second quarter was higher at $6.1M. SEC Filed PRESS RELEASE AGY U.S. had net cash of just $.6M. Long term debt stood at $199.5M. Total liquidity for AGY U.S., which includes borrowings available under its bank credit facility, stood at $18.7M. As of 6/30/12, the balance sheet showed $28.168M in inventories and another $155.926M in property, plant and equipment. The AGY Asia debt is reported as non-recourse. The amount of the first lien debt was reported at $27.655M.

I own the senior secured 2014 note which is described in note 8, at page 10, of the last filed Form 10-Q. That note is traded infrequently and the last trades were at more than a 50% discount to par value, which indicates considerable skepticism about AGY's ability to pay off the note at maturity. It appears more likely that investors are attempting to price a potential recovery after a default at that price level.

AGY is certainly one of my more problematic holdings in the junk bond basket strategy.

3. EPA Emissions Rules for Coal Plants Struck Down: In a 2 to 1 decision, the U.S. Court of Appeals for the District of Columbia struck down the EPA's emissions rules for coal plants. Those rules required utilities to spend billions to retrofit existing plants. A number of plants were been shutdown since it was not economical to install more pollution control devices.

Case Decision:

This does not end the matter. Most likely, the government will petition for a hearing by the full D.C. Court of Appeals, referred to as an En Banc hearing. There are thirteen judges in this Appellate Court. U.S. Court of Appeals - D.C. Circuit - Home

As noted in this article published by Fox Business, it is unclear how this ruling will impact Edison Mission. If the 2-1 decision is affirmed by the full D.C. Circuit sitting en banc, with no appeal granted to the Supreme Court, then it could relieve some liquidity strains on EME. Possibly, some costly retrofits could be delayed on those plants that EME had decided to keep.

The unsecured senior EME bonds did not react to this decision, which suggests to me that the company is just far gone to resurrect out of bankruptcy court. Edison Mission Statement SEC Form 10-Q on Bankruptcy Option

FINRA EME Unsecured Bond Prices:





The prices for all of these bonds have flatlined generally in a 54-55 range. When bonds flatline, regardless of maturity and the coupon, this indicates to me that investors believe that all of them will soon be in the same boat after a bankruptcy filing. Since the 2013 maturity is priced the same as one maturing in 2027, both at 54-55, investors are virtually certain that the bankruptcy filing will occur before the 2013 bond matures.  Investors are simply attempting to price the value of all senior unsecured bonds after the bankruptcy restructuring. 


  1. Hey OG. Just stumbled across your blog and will definitely be back on a regular basis. Good writing and sensible analysis. I know you don't give advice, but can you confirm that at this point there is no good reason for holders of the 2013 EIX bonds to do anything -- just sit tight and see what happens?

  2. There is no need to post a comment several times. I have to approve comments before they are published to keep spam out of the blog.

    I view it as highly likely that Edison Mission will file for bankruptcy. I would be surprised to see EME make interest payments on the bonds in December.

    In my opinion, the current pricing of all unsecured EME debt is based on a consensus market opinion of their likely value in a bankruptcy reorganization. That value may prove to be wrong. It is subject to change based on future developments, and the future is not knowable. The Eastman Kodak bonds were thought to be worth 30+ shortly after its bankruptcy filing and are now being valued at closer to 10 based on adverse developments since the filing.

    I would note that the pricing of some EME bonds have started to slip below 50 which may indicate that bond investors have started to reset their expectations lower. The 2016 bond closed at 49 and the 2017 at 49.5 (9/24/12) The 2013 closed about 4 points higher. In a bankruptcy, all senior unsecured debt would be in the same boat.

    A decision to sell now has to be done based on your assessment and situation. It is always an option to sell some but not all of the bonds. I sold 4 out of 5 EME bonds for a small loss and kept just 1, but my selling occurred when the price was over 70. I would consider selling my 1 remaining EME bond now if there was an online bidder willing to accept a one bond lot.

    I do not believe it is reasonable to predict an improvement in merchant power prices this year or in 2013.

    There is a SEC Filing today where EME is turning over the Homer station to GE. It plans to shutter two coal fired plants in Chicago this month.

    Possibly, EME could receive a benefit down the road, though it may be too late for it to avoid bankruptcy, from the recent D.C. Court of Appeals panel decision (2-1) striking down the EPA emissions rules for coal plants, assuming that panel decision is affirmed by the full Circuit en banc (or by the Supreme Court) The same result could be reached by the full U.S. Court of Appeals for the District of Columbia refusing to hear the case en banc and a certiorari petition being denied by the Supreme Court. That scenario would mean the 2 for 1 decision vacating the EPA emission rules would become the law of the land. At the moment, there is no word yet whether the panel's decision will be reviewed by the full Circuit. This would be something for you to monitor in making your decision. If I see something, I will note it in my blog.