Thursday, August 30, 2012

YMLP and BPT/10 Rich Old White Men & the GOP/SHLD/Decline in Household Debt Service Payments to Disposable Income/ADDED 50 Alcoa at $8.51/BOUGHT 50 BZH at $2.92-LT Category/

The improvement in home prices, as reflected in the recent Case-Shiller indexes, is a major event for a U.S. recovery. WSJ The rise in home prices will allow more households to refinance their mortgages at the current abnormally low rates. The average rate for a 15 year loan is currently 2.89% and 3.66% for 30 years. Primary Mortgage Market Survey-Freddie Mac While there are federal programs available to help those underwater homeowners, (Making Home Affordable), many households are not taking advantage of those programs for one reason or another, including an inability to qualify or simple inertia. Refinancing at current rates will drastically increase their disposable income for years to come and will consequently add fuel to a durable consumer led recovery. There has already been a dramatic decline in the ratio of household debt service payments as a percentage of disposable income. Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP) - FRED - St. Louis Fed

Negative home equity, a product of the housing bubble, is certainly a drag on the U.S. economic recovery. (Kellogg School of Management Insight: Housing’s Albatross - Negative equity weighs on the market)

An article in Kiplinger summarizes some of the requirements for refinancing underwater homes.

Sears Holdings (own bonds) announced that it will distribute transferable subscription rights to purchase common stock of Sears Hometown at $15 per share to the owners of Sears common stock. The distribution of the subscription rights will be made to Sears stockholders of record on 9/7/12. Sears hopes to receive $446.5M relating to this offering, of which $100 million would be a dividend paid by Sears Hometown to Sears Holdings prior to its separation. I own 4 senior secured Sears Holdings bonds maturing in 2018.

SHLD: 57.45 +2.49 (+4.53%)

The government revised its estimate for 2nd quarter GDP to an annual rate of +1.7% from 1.5%. News Release: Gross Domestic Product

The government sold five year notes yesterday with a yield of .708%.

Dennis Gartman sold his stocks last week.  CNBC

There is an ETF, traded on the Toronto exchange, that attempts to follow Gartman's  investment strategy.  HAG Horizons Gartman ETF The performance has not been good. The ETF lost 16.9% in 2011 and is up only 3.1% or so this year which is not inspiring either. The IPO was at $10 back in March 2009 and the shares are trading below $8 now. There have been no distributions. I do not own it, and have no plans to buy it.

Citigroup agreed to settle a class action suit for $590M that accused the bank of hiding its toxic assets. Citigroup had some of the dumbest Masters of Disaster before the onset of the Near Depression. There is no question that those nitwits would have sunk the bank without massive government assistance. Some of that idiocy is explore in a 2008 article published by the NYT. A long term chart reveals the damage done by those Masters of Disaster: Citigroup Interactive Chart  The prices in that chart are adjusted for a 1 to 10 reverse split. Needless to say, Masters of Destruction will profit from their annihilation activities, a result that goes far beyond disgusting. I do not own the common but I do have exposure to ten $1,000 par value, senior unsecured "principal protected" notes issued by Citigroup Funding, and guaranteed by Citigroup, that mature in 2014 (see list in yesterday's post).

When I last purchased the Yorkville MLP ETF, I mentioned that Jason Zweig  had written a negative article about royalty trusts. ADDED 100 YMLP at $18.7 Zweig referred to a recent SEC filing by BP Prudhoe Bay Royalty Trust (BPT), wherein the trust estimated that the present value of its income distributions was $1.4 billion. Royalty trusts do not have employees, nor will there be any effort to replace production. The investor only has a future income stream that will be depleted over time.

At the time Zweig's article was published, the market value of this royalty trust was $2.13 billion. I mentioned that YMLP owned BPT and another royalty trust called San Juan Basin Royalty Trust. Yesterday, BP Prudhoe Bay Royalty Trust fell 16.69% to close at $76.77. Even with that decline, the market cap still exceeds the $1.4 future value of the current estimated income stream Before the publication of Zweig's article, BPT closed at $108.87 on 8/24/12, BPT Historical Prices

I would point out that BPT is only making an estimate of future value. That estimate will depend on a number of factors that are calculated in accordance with FASB 932. The future net revenues were estimated by BPT to be $2.460.5 billion with a present value of $1.433.1 billion as of 12/31/11:

BPT 2011 Annual Report Excerpt at pages 18-19


While I would profess ignorance about FASB 932, and have zero interest in learning more about this accounting rule, I would assume that the present value calculation would be similar to a bond's make whole calculation. The interest rate used in that discount calculation will change as will the price of oil. Production amounts may also change. All of those factors would increase or decreases the estimate value of the future income stream discounted to present value. Having made that statement, I would judge the present value estimate made by the company to be a useful yardstick in evaluating the current value of BPT shares. It would be hard to justify paying more for that income stream than the current estimated present value in my opinion, unless the investor is both a yield hog and a trader.  I do not own any royalty trust directly. I would not have selected either BPT or SJT for inclusion in the MLP ETF YMLP, at anywhere near the prices that the managers of that fund had to pay for those securities.


As noted in a recent Bloomberg article, ten old white men are contributing 1/4 of the $350 amassed so far by "conservative" PACs who are trying to elect Romney and other republicans. Those individuals claim to be interested in GOP "principles" but it would not be outlandish to postulate that their true interest is to receive a huge return for themselves on that investment.

An article in the NYT highlights how the GOP has moved further to the right by simply comparing their 1980 and 2012 platforms. The GOP is no longer a conservative party, but an extreme reactionary one. In that context, reactionary means rolling back progressive legislation by decades. In many cases, the rollback would be at least 60 years. The embrace of True Conservative principles is lacking and frequently in name only.

Being closed minded and intolerant are not conservative principles. There are more conservative principles embodied in the Bill of Rights than just the right to bear firearms. There is nothing conservative about Mitt Romney having a similar tax rate as a factory worker, or allowing the Koch brothers to pollute the environment to earn more profit for themselves.

Then you have the Glen Beck wing who view regulations about safe food adopted over a 100 years ago during the Republican administration of Teddy Roosevelt to be an interference with their freedom to eat contaminated meat.  Item # 5 The Reactionary Philosophy of Glen Beck

Then there is the clearly reactionary wing of Michele Bachmann types who also view anyone disagreeing with their philosophy as anti-American (Bachmann: "I wish the American media would take a great look at the views of people in Congress and find out, are they pro-America or anti-America", (Transcript of interview at

I will give equal time to watching both the GOP and Democrat conventions. I will not watch a second of either. I will read what fact checkers have to say about the misrepresentations and outright falsehoods made by the politicians at those confabs. Lying works in politics because millions are ignorant, stupid and/or gullible. It took a long article for to summarize the GOP's false and misleading statements from just the first day.

Half of retirees die with less than $10,000 in savings. MarketWatch The GOP's Medicare Plan will improve on that statistic by increasing the number to almost 99%. GOP's Plan To Bankrupt the Middle Class

I spent some time last Tuesday buying shares in companies where long term and patience are the operative words.

1. Bought 50 BZH at $2.92 Last Tuesday (Lottery Ticket Basket Strategy)(see Disclaimer): I do not have much faith in Beazer Homes turnaround potential. I would only guess that such potential exists over a long period of time. This homebuilder's stock was deservedly crushed during the Near Depression period. No sector of the economy was hit harder than the market for new homes. And, at the present time, I would just say that there is some light flickering at the end of a dark tunnel for homebuilders. Possibly, the worm is starting to turn in their favor, but it will take several years before the market returns to something resembling the boom years.

I am obviously not expressing much confidence with a 50 share buy at $2.92.

One characteristic common to lottery ticket buys is a smashed share price. Beazer's stock certainly qualifies under that criteria. During the last boom period, the stock rose from around $6 per share in early 2000 to a high near 73 before the housing bubble burst. BZH Interactive Chart If Beazer can survive the current slump, I seriously doubt that it will return to its former highs in my lifetime. It does not have to repeat that move for this LT buy to be successful. I would be extremely pleased with a $10 share price in five years.

There is not any optimism that BZH will turn a profit anytime soon. The current consensus estimate is for a $1.12 loss in the F/Y ending in September 2012 and a 61 cent loss in 2013 fiscal year. BZH Analyst Estimates It would not take much of a profit, along with a surge in new orders, to cause a pop in the stock given this kind of pessimism. (a recent example of a 100%+ pop after a quarterly profit would be Frozen Food Express). While I would not expect that to happen this year, I would not be completely shocked to see the company return to profitability in 2013.

Company Website: Home Builders | New Homes from Beazer Homes As shown on a map at BZH's website, it has operations in Middle Tennessee.

Key Developments at Reuters

Profile page at Reuters

There was much of a positive nature to say about the last quarter. BZH-6.30.2012-Q3 Document The company lost $39.056M or 38 cents per share from continuing operations, which was a major improvement from the 75 cent loss in the year ago quarter. The company has a lot of debt (p.15).  On a brighter side, backlog increased 32.8% and new home orders rose 29.8%, see page 37.

I am aware that JP Morgan recently raised the stock to outperform from underweight.

As with other LT purchases, it would not be rational to expect immediate gratification. These selections are dicey and their potential, if any, may take years to develop.

BZH: 2.93 +0.01 (+0.34%)

2. Added 50 Alcoa at $8.51 Last Tuesday (see Disclaimer): I had a $1,000 profit in my Alcoa position but let it slip away since my $20 target price was not hit. I could have sold the position at $18 in April 2011. AA Interactive Chart  Now, due to the mistake of grasping for an extra $2 per share, I am now sitting on an unrealized loss of close to $800. My average cost per share is $10.69. My first two purchases were made during the Dark Period at $11.49 and at $5.6. The first buy was made during the Apex of the Dark Period, October 2008, which just highlights how negative investors have turned on AA shares now.

I am reinvesting the dividend to buy more shares. The quarterly dividend is only 3 cents which is almost buying me one share at the current price. The dividend yield is about 1.4% at the current price.

{Alcoa had a 68 cent per share annual dividend rate in 2008. The quarterly rate of 17 cents per share was cut to 3 cents in March 2009. Alcoa: Invest: Financial Information: Dividend History I do not know how far one would have to go before finding a 3 cent quarterly rate. The history provided by Alcoa goes back to 2000 when the quarterly rate was 12.5 cents per share}

I have far more faith in AA's turnaround potential than the market which seems to be placing close to a zero chance that Alcoa will return to anywhere close to its 1999 and 2007 highs. The stock traded over $40 in both 1999 and 2007. For most of the decade starting in April 1999, the stock traded over $25. AA Interactive Chart

The main problem now for Alcoa shareholders is the steep decline in the aluminum price. For the period between 5/1/12 and 8/28/12, the LME average price was about $1,904 per ton. (TEXT-S&P: Alumina Ltd. ratings lowered to 'BBB-'; outlook stable: 60% owned by Alcoa). Part of the problem is that a number of Chinese smelters continue to operate notwithstanding their inability to earn a profit.

I view that price drop as temporary, not in the sense of weeks or months, but temporary when measured in a longer increment of time such as a year. Maybe 2013 will be start of a cyclical upturn in price, or maybe it will be 2014 or even 2015. I simply view it as likely that a cyclical upturn lasting several years will occur before 5 years and probably sooner. The market is pricing Alcoa shares as if that upturn could not occur during the next five years and probably will even start to happen within five to eight years as my rough estimate. So, we will see who is the better forecaster.

My second perspective on Alcoa is that it has become a better company now than when it was priced at $40 a share. An investor reading brokerage reports on this company will form that opinion quickly and easily.

Morningstar has a five star rating on Alcoa shares and a consider to buy price at $11.4 or less. The Morningstar report and others highlight Alcoa's downstream businesses (e.g. engineered & flat rolled products) are producing stronger profits and revenues now compared to the pre-Near Depression period. And, Alcoa has taken and continues to take measures to improve productivity and to shut or curtail unprofitable operations.

Another potential area for share price appreciation is price for Alumina, which is use by smelters to produce Aluminum. Alcoa is the largest seller of Alumina. It is vertically integrated in the production of Alumina given its bauxite mining operations. Alcoa: Worldwide: Markets: Alumina: Overview Bauxite is refined into Alumina. It would be important for the Alumina price to become more de-linked from the aluminum price, particularly since Alumina is a more scarce product.

At a $8.5 price, the shares are trading at .67 to book value and at a price to sales ratio of .37.  AA Key Statistics The current consensus estimate is for an E.P.S. of 29 cents per share in December 2012 and $.74 in 2013. Unlike a consumer staple company, where an E.P.S. forecast will likely be close, an estimate for Alcoa's 2013 earnings has be be taken with a grain of salt. A reasonable range might be anywhere from 40 cents to a buck per share. If you could tell me the average price for aluminum throughout 2013, I could narrow that range considerably.

I discussed AA's last earnings report at Item # 4 Alcoa, along with some negative analyst commentary that has helped sink the price.

Link to recent Fitch report on AA debt: TEXT-Fitch affirms Alcoa's IDR at 'BBB-'

Link to positive article at Motely Fool

Alcoa does have non-core assets that it can sell. I previously mentioned Alcoa's agreement to sell its Tapoco hydroelectric generating station, along with associated land and transmission lines, for $600M.

I going to revise my trading strategy for Alcoa. I will sell 50 shares when and if the price returns to $13+. I will sell all but 50 when and if the price returns to $18. And, if both of those events happen, I will try to keep the last 50 shares for a ride to over $25.

AA: 8.55 +0.05 (+0.53%) 

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