Thursday, October 11, 2012

FED Beige Book/Bought 150 ARR at $7.46 & Bought 50 ARRPRA at $25.50/Warning from Chevron/INTC, FB, WMT

The VIX had an unusual day yesterday:

VIX: 16.29 -0.08 (-0.49%)
S & P 500: 1,432.56 -8.92 (-0.62%)

For about 75% of the time historically, the VIX is negatively correlated with the S & P 500 index. When there is positive correlation, as there was yesterday, that will normally occur when there is a negligible change in the S & P 500.

S&P cut its rating on Spain's sovereign debt to BBB-, one notch above junk. Spain's benchmark 10 year bond closed yesterday at a 5.76% yield. ES 10Y Govt Bond Benchmark

The EPA did file a petition for a rehearing en banc, requesting the entire U.S. Court of Appeals to rehear and overrule a 2-1 panel decision vacating the EPA's cross state air pollution rules. Item # 3 EPA Emissions Rules for Coal Plants Struck Down in 2-1 Decision Those rules have caused several utilities to shut down coal generating stations rather than to make costly environmental retrofits to comply with the new rules.

Maureen Dowd has her finger on the psychological underpinnings for Obama's poor debate performance, largely due to the Beanpole's superiority complex, arrogance and pomposity. NYT He also clearly underestimates the power of lies when they are told repeatedly and with a serious face. Having said that, I view Romney as clearly worse.

For those investors burned by the Facebook IPO, an article published in Bloomberg yesterday would be a must read. Unknown to those investors, Facebook and the SEC were in a tussle about the adequacy of Facebook's disclosures prior to the IPO.

The FED Beige Book, released yesterday, was mildly encouraging. Ten out of the 12 regional banking districts reported economic growth, helped by housing and auto sales. Loan demand was steady to stronger in most districts. Manufacturing was mixed but, on balance, "somewhat improved since the last report" in August. FRB: Beige Book - October 10, 2012

South Korea's central bank cut its benchmark rate by .25% to 2.75%. Brazil's central bank cut its rate to 7.25% from 7.5%/

Chevron declined yesterday (CVX: 112.45 -4.91) after issuing a warning that third quarter earnings would be "substantially lower" than the 2012 second quarter.

Wal-Mart's stock bucked the downtrend yesterday (WMT: 75.42 +1.28) after its U.S. merchandising head stated that the back-to-school season was "very strong". Comments made by the CEO at the 19th Annual Meeting for the Investment Community are summarized in this press release.

Costco reported net income for its Q/E 8/31/2012 of $609M or $1.39 per share, up from $1.08 in the year ago quarter. The estimate was for $1.31. Net sales rose 14% to $31.5B. Same store sales, excluding currency conversion and changes in gasoline prices, rose 6%. SEC Filed Press Release;  Earnings Call Transcript - Seeking Alpha An increase in the membership fee added 26M pre-tax or $.04 per share. Currency headwinds cost 3 cents per share after tax. I do not have a position in COST which has done well, most of the time since early 1995: COST Interactive Chart I did recently buy a stock CEF that has this stock as one of its top five holdings, as of 6/30/12, along with the retailer TJX, which has a good looking long term chart too. TJX Interactive Chart; Item # 3 Bought 100 of the Stock CEF GAM at $29.52

I thought that the news from WMT and Costco was far more important than the warning from Chevron which was caused in part by a fire at a large refinery in Richmond, California, lower natural prices and a tropical storm in the Gulf of Mexico.

Intel (own) hit another 52 week low yesterday. The stock topped out earlier this year at $29.27 and started to slide in earnest after the company issued a warning. INTEL Warning (9/10/12 Post) The downdraft accelerated after a Bernstein analyst reduced the price target to $20 from $24 and changed his recommendation from Market Perform to Underperform. If the stock declines below $20, I will change my dividend option back to reinvestment. The dividend yield at yesterday's close is over 4%.

Both IDC and Gartner disclosed that PC sales fell by more than 8% in the third quarter, compared to the 2011 third quarter, the worst decline in 11 years. Gartner Press ReleaseWSJ While some of that is due to the upcoming release of Windows 8, cannibalization by tablets probably accounts for most of the PC's problems. I do not own a tablet and do not plan on buying one. I have to have a fully functional desktop with a large screen. Possibly, many first time buyers of tablets will continue to buy desktops and/or laptops as they gain more experience with the tablets' limitations.


If Obama wins reelection and raises taxes on the rich, CEO David Siegel told his employees at Westgate Resorts that he will likely lay off workers or even shut the business down. CNBC Siegel resents that people "like him", who made all of the right decisions, "are being forced to bail out those who didn't" Mr. Siegel was known for building the largest new house in America, called Versailles, which allegedly went into foreclosure after Siegel's company buckled under the one billion in debt during the recent financial crisis. CNBC  Siegel claims that his company is doing well and the home is not in foreclosure The Wrap Movies He sued the makers of a documentary film about him for defamation for claiming that he has not paid his bills. NYT

According to the NYT, part of the documentary footage shows Mr. Siegel sitting on what will later be described as a throne, discussing the "cratering of his business and how banks started foreclosure proceedings on his new home". (see also: WSJ and The Economist) A subsequent article asserts that the producers deleted any reference to foreclosure in reference to Versailles and inserted a phrase that Siegel's business faltered due to the economic crisis. Film

Incidentally, a recently released study that shaved heads are perceived to be more dominant and have greater leadership skills. Video I would add more intelligent too.

1. Bought 150 ARR at $7.46 Yesterday-In A Satellite Brokerage Account  (See Disclaimer): Armour Residential REIT  (ARR) is a Mortgage REIT founded in 2008. 2011 Annual Report 

I noticed that this stock had declined from a $7.69 close last Monday, ARR Historical Prices, to $7.45 in early trading yesterday If I had waited another couple hours, I could have easily bought those 150 shares at less than $7.3.

I will not consider buying a dividend unless there is a decline in the stock price in excess of the dividend immediately before the ex dividend date. There is no reason to buy a tax event when the share price is about to be reduced by the amount of the dividend. ARR is ex dividend today for its 9 cent per share monthly distribution. After a two day share decline of $.24, that was more than enough to compensate me for the upcoming dividend (reflected in a price adjustment on the ex dividend date), the tax on that dividend, and my brokerage commission of $7, so there was no reason not to pull the trigger for a small buy even though the stock is ex dividend today. If I had bought at the low yesterday, which was $7.24, a dividend scalping strategy would have probably worked, where I could capture the dividend and sell the stock for a profit in a short period of time

Mortgage REITs had hit a downdraft since Bloomberg reported that mortgage prepayments in August were at their highest level in seven years. (see recent discussion in introductory section of 10/5/12 Post). The downtrend has accelerated over the past two days.   

For the Q/E 6/2012, the company reported an estimated core income of $57M. GAAP earnings, which includes an unrealized loss on derivatives, was a negative $13.6M. The core income represented an estimated 18% return on average weighted paid-in capital. The net interest spread was 2.15% for the quarter. Book value was reported at $7.04 per share. The average annual prepayment rate (CPR) was 9.1%. The debt to equity ratio was 9.04 to 1. SEC Filed Press ReleaseSEC Form 10-Q 

This company is currently paying a monthly dividend of $.09 per share which is ex dividend today. If that rate was continued for a year, which is doubtful, the dividend yield would be about 14.47% at a total cost of $7.46 per share. The monthly dividend was 10 cents per share earlier in the year and twelve cents between January-September 2011. Prior to then, the company was paying quarterly dividends. Dividend History 

As with other Mortgage REITs, the goal is simply to collect a number of dividends and to exit the position at any profit. I do have an expansive time frame on when that share profit can be realized, usually anywhere from 1 to 10 years. I would also cut my losses on a decline to near the 52 week low of $6.4. ARR Interactive Chart 

There are a number of helpful articles published at Seeking Alpha that discuss the risks associated with Mortgage REITs. One of those articles focus on ARR. A recent, fairly detailed discussion of ARR can also be found in this article.

Yesterday's Close: ARR: 7.51 -0.05 (-0.66%)

2. Bought 50 ARRPRA at $25.5 Yesterday (see Disclaimer): Armour Residential REIT also has an 8.25% cumulative equity Series "A" preferred stock with a $25 par value. Prospectus That security is traded on the stock exchange: Armour Residential REIT Inc. Pfd. Series A, ARR.PA This preferred is not redeemable prior to June 7, 2017.

No cash dividend can be paid on the common stock or any preferred stock ranking in parity with ARRPRA unless the ARRPRA dividend is paid or money set aside to pay that dividend. (S-14, a typical "stopper" clause) If a preferred dividend is deferred, no interest will be paid on the deferred amount.

The company recently released 4th quarter monthly dividend information for this preferred stock: It is likewise ex dividend today.

I really do not like buying any equity preferred stock for more than par value. The upside is limited and the downside is zero. The Fannie and Lehman equity preferred stock owners found out the hard way about that downside risk.

I decided to take a chance on ARRPRA by buying just 50 shares at a modest premium to its $25 par value. At a total cost of $25.5, the current yield will be about 8.09% and the security can not be called until 6/7/17. Armour is under no obligation to call the security after that date, but simply has the right to do so. This security is bought for its income generation, particularly its monthly payment schedule, and I would be satisfied to sell the security at a penny profit.

I am simply responding to a longer than expected Jihad Against the Saving Class, now likely to extend for another three years according to the Fed. Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans (August 2010 Post).

REITs do not pay qualified dividends on either their common or preferred stocks, since they are not taxed at the corporate level. Occasionally, I have seen a minuscule part of a common dividend being so classified, but that is unusual.

The market views ARRPRA to be riskier than a similar security issued by Annaly Capital Management, based on the prices/current yields of those two securities: Annaly Capital Management Inc. 7.875% Cum. Redeem. Pfd. Series A (NLY.PA){see also: NLY.PD (7.5% coupon) and  NLY.PC 7.625% coupon)}. Another Mortgage REIT preferred, MFA Financial Inc. 8.50% Cum. Redeem. Pfd. Series A, MFA.PA, has a similar current yield to ARRPRA with a price at $26. All of these securities have $25 par values and different start dates for the optional call right with NLY.PA subject to call now and the other two NLY preferred stocks reference above in 2017, the same year as ARRPRA)

Yesterday's Close: ARR-PA: 25.54 +0.02 (+0.08%)
Marketwatch: Armour Residential REIT Inc. Pfd. Series A, ARR.PA 

No comments:

Post a Comment