Thursday, October 4, 2012

Hapless HP/Bought 50 SANPRB at $16.93-Roth IRA/Added 70 KEY at $8.77

The ISM September services index rose to 55.1, better than expected. The new orders index rose to 57.7 from 53.7.

ADP reported a private sector job increase of 162,000 for September, with the consensus estimate at 152,000.  Of that amount, 144,000 jobs were added in the service sector. adpemploymentreport

Australia's central bank cut its benchmark rate from 3.5% to 3.25% last Monday. RBA: Media Release-Statement by Glenn Stevens, Governor: Monetary Policy Decision That decision has led to a two day decline in the Aussie against the USD (AUDUSD), which has caused a slight decline in my position in the WisdomTree Australia & New Zealand Debt Fund (AUNZ).

France Telecom announced earlier this year a new dividend distribution policy, as previously discussed in this blog. FTE will distribute between 40% to 50% of its operating cash flow. FTE Dividend That kind of policy will necessarily require a variable dividend. An article at Seeking Alpha discusses this new policy.

T-Mobile USA and MetroPCS agreed to a merger yesterday. It is being structured as a reverse merger which will give T-Mobile a publicly traded stock. My 2018 PCS bond did not react to the news, but the common stock declined in value after Tuesday's 17+% surge. PCS: 12.24 -1.33 (-9.80%)

Cutwater Select Income Fund was ex dividend yesterday for its quarterly distribution of $.265 per share. I own 100 shares in the ROTH IRA. Bought 100 of the Bond CEF CSI at $19.54-ROTH IRA (8/6/12 Post)(Yesterday's Close: CSI: 20.64 +0.15)

I have to wonder what is really happening in the oil market when the price falls over 4% in a day. I am not able to trust the price. While a further decline would be negative for energy companies, it may produce some relief at the pump which would be an overall positive for consumers and consequently for the U.S. economy. I have managed to improve my gas mileage by almost three miles per gallon by simply changing again some driving habits. I may be the only driver in the SUV Capital of the World, for example, who does not keep their foot on the gas when approaching a red light. I have also started coasting again on downhills when I can maintain speed at or slightly below the speed limit. This is very helpful since there are a number of hills near HQ.

The City of Brentwood, TN does have a AAA credit rating. I just received my 2013 city property tax bill for $354, no joke. Along with the property tax owed to Williamson County, the total will be about $2,000.


Bloomberg reported that the earnings gap between the rich and poor in the U.S. reached its highest level in four decades, surpassing such nations as Uganda and Kazakhstan. In that article, it was also noted that the top 1% captured 93% of the income growth in 2010. You would never know that after listening to them whine and complain about Obama and the government. Perhaps, they need to capture more than 95% to motivate them to create jobs, but they would still bitch even when paying less than 15% on 1 million plus annual incomes.

Obama recently claimed that his administration was only responsible for 10% of the budget deficit during his term. That is just false, as documents. A third of the cumulative deficit during his term can be traded to just two bills signed by Obama, the 2010 tax cut and the 2009 "stimulus" bill.


As previously mentioned, SuperValu has hired Goldman Sachs to find a buyer. Item # 3 SuperValu's Earnings and Debt Problems-Raising Risk Ratings for SVU Bonds (7/13/12).

Bloomberg reported that several potential purchasers have expressed interest in parts of SVU's operations.  I own 3 unsecured senior bonds. From my perspective, I would prefer seeing the company close unprofitable stores, continue to pay down debt, decline to pay a common stock dividend for at least a decade, keep the Save-A-Lot stores though slow its expansion to a crawl, and to sell some non-essential operations in order to raise cash for debt repayments such as the distribution business which could bring $800M.

Bond investors are not expressing much confidence in SVU's long term recovery.  For example, I own one 2030 senior 8.7% bond (originally issued by Albertsons) that is currently trading near 60 for a YTM of 15%. That says a lot in today's low yield environment. The price is not consistent with SVU's bond ratings, which are currently B- from S & P and Caa1 from Moody's. {Examples: A Columbia HCA 7.05%, maturing 2027, is rated B-  by S & P and is currently selling at over par value; An ArvinMeritor 4% bond maturing in 2027 is currently selling with a YTM of 6.5% and rated at B-; A Wendy's 7% coupon bond, rated at B-, is selling near 95 with an approximate 7.6% YTM and a 2025 maturity.} I would pay attention to such discrepancies.

Stock investors are even more pessimistic. Yesterday's Close: SVU: 2.27 -0.02 (-0.87%)


Hewlett-Packard is one of the worst managed large cap companies in the U.S., simply unable to make an acquisition that does not significantly destroy shareholder value or to produce innovative products with several hundred thousand employees.

Meg Whitman met with investors yesterday, providing a synopsis of the latest turnaround strategy for the hapless HP. She warned that F/Y 2013 earnings will suffer a "broad decline" to an adjusted E.P.S. of $3.4 to $3.6. HP Details Turnaround Strategy, Provides 2013 Outlook

The 2013 F/Y ends in October 2013. Prior to this warning, the consensus analyst estimate was for $4.18. It is possible that Whitman is low balling that forecast to give herself a low bar to jump over.

The restructuring program will continue until the end of fiscal 2014. What does restructuring mean for a company like HP? It really means taking all kinds of charges for the large number of past mistakes committed by the Board and top management.

The WSJ noted a problem, which would not be possible in a well-managed company. Field selling costs increased by $1 billion in 2011 while revenue shrank by $5B. Another indication of mismanagement is that HP had $10 billion in cash and no debt in 2007, and now has $9.5B in cash and $20B in debt. Whitman did not join the HP Board until January 2011 so she can not be blamed for the fiascos that preceded her tenure.

By fiscal 2016, the company "expects" to grow revenues in line with GDP. Pathetic is the only possible description of this goal. Is that the reward for continuing to hold onto the shares for another three years? Worse still, is it even rational for an investor to accept that modest F/Y 2016 goal as achievable given HP's long history of bondheaded decisions?

The market's disdain for HP grew exponentially soon after this presentation started with the stock getting hammered yet again. The 2 year stock chart shows in stark terms the level of shareholder destruction caused by the inept HP's Board and management. HPQ Interactive Chart

The stock was trading over $15 in January 1995, adjusted for subsequent stock splits. HPQ Interactive Chart

Yesterday's Close: HPQ: 14.90 -2.23 (-13.02%)

It is impossible to justify paying anyone anything to accomplish this result. To be fair about it, every member of the Board of Directors since 1995 should forfeit all of their compensation by returning those funds to the corporation. Failure should never be rewarded. It is really disconcerting to see ineptitude and stupidity associated with large pay packages.

There can be no question that HP has to be booted from the DJIA and replaced by Apple.

At least Dell Computer, another company unable to adapt, is not included in the DJIA. Yesterday, I added DELL to my monitor list for a possible Lottery Ticket purchase. Dell is another company that lost its MOJO many years ago, but has some turnaround potential, particularly at the current valuation (DELL Key Statistics) and a share price below $9.5. Since I have not owned Dell previously, and consequently have no prior realized gains, the LT classification limits my potential purchase to no more than $300 (e.g. 30 shares at $9). Yesterday's close: DELL: 9.43 -0.47 (-4.75%) Needless to say, a LT classification does not express much confidence in Dell.
1. Elevated Keycorp (KEY) from Lottery Ticket Basket Strategy To Regional Bank Basket Strategy: Added 70 Shares at $8.77 Last Tuesday (see Disclaimer): By changing the category, I can increase my investment. A primary way to control risk is to vary the amount of the investment. The Lottery Ticket category is viewed as the highest risk and consequently has a $300 exposure limit, plus any prior realized gains on the security. The Regional Bank Basket Strategy has no current limit on the initial investment devoted to each security, other than the usual $10,000 per company applicable to all companies. 

By removing KEY from the LT category, I am expressing an opinion that there is less risk to the investment than when I made the initial LT purchase of 30 shares. Item # 2 Bought 30 KEY at 8.75 (January 2011 Post). As noted in that post, I had one round trip transaction in KEY common shares at lower levels: Bought 50 KEY at $5.88-Lottery Ticket-Sold KEY at 8.12

Keycorp is a large regional bank, headquartered in Cleveland, Ohio and had 1,062 branches in 14 states. 

KeyCorp (KEY) Profile Page at Reuters

KeyCorp (KEY Key Developments Page at Reuters

While the stock has not done anything since my January 2011 purchase of 30 shares, the bank has made significant improvements since that time in its asset quality numbers: 

Asset Quality Numbers
In the 2011 2nd quarter, net loan charge-offs were $134M and have fallen in every quarter through the 2012 second quarter. Non-performing loans (NPLs) to total loans have declined from 1.76% to 1.32% during that same period. The allowance for loan and lease losses to NPLs stood at 135.16% as of 6/3/12.

Even though Key has been redeeming its trust preferred securities, which could still be treated as Tier 1 Capital this year (and phased out in subsequent years), as well as the government's equity preferred stock in March 2011, the capital ratios have remained good:
Capital Ratios
SEC Filed Press Release As of 6/30/12, the tangible common equity to tangible assets ratio was 10.44%; and the total risk based capital ratio was at 15.89%.

KeyCorp still had $1.201B outstanding in TPs as of 6/30/12, page 64 Form 10-Q.

A problem, which is not unique to KEY, is the decline in the net interest margin to 3.06%.  

The long term KEY chart shows the value destruction occurring during the Near Depression. KEY Interactive Chart The stock topped out at over $38 in December 2006 and closed at $5.36 on 3/6/09. KEY Historical Prices As shown in the 2011 10-K (page 37), the underlying details which explain the share destruction are set forth in the bank's operating data for 2006-2011. The dividend was slashed from an annual rate of $1.46 in 2007 to just 4 cents in 2010. The bank had net income of $1.055B in 2007, with losses ballooning to $1.51B in 2008 and $1.619B in 2009. Those losses, and the reasons for them, explain the original LT classification. The bank reported $813M in net income for 2011.    

The bank is currently paying a 5 cent quarterly dividend. KeyBank Dividend History Possibly, in my lifetime, the bank will return to the 2007 quarterly rate. 

The current consensus E.P.S. estimate is for $.85 this year and $.86 next year. KEY Analyst Estimates The lack of near term earnings growth would be a negative, as would the likely continued compression on KEY's net interest margin caused by the Fed's Jihad Against the Savings Class. Lastly, one negative consequence of the value destruction was the issuance of 70+M shares at $8.85. SEC Filing 

Those three negative factors justify in my opinion a small investment for now, which explains my trepidation reflected in just a 70 share add. I would be more optimistic over the long term, meaning the next five to ten years, than over the next  0-24 months. 

S & P gives the stock a 4 star rating with a $10 twelve month price target. Morningstar is more pessimistic near term with a 3 star rating and a consider to buy target at $6 or below. Without another significant recession soon, I seriously doubt that investors will be given the opportunity to buy this stock at less than $6 and would view that price as an unrealistic entry price. The stock was trading above that price except for a few days during the Dark Period (9/2008-3/2009).

My only other investments in a Keycorp security were the purchases of two TPs: Bought KEYPRA at $7 (October 2008); Bought 50 of the TP KEYPRB at $17.74 (November 2009). Both of those TPs were called by the issuer at their respective $25 par values back in September 2011.

KEY: 8.75 +0.06 (+0.69%) 

2. Bought 50 SANPRB at $16.93 Last Tuesday-ROTH IRA (see Disclaimer): This brings me up to 180 shares of SANPRB, a floating rate equity preferred stock with a 4% minimum coupon. The other 130 shares are held in two separate taxable accounts. 

SANPRB was issued by Santander Finance. The security pays non-cumulative dividends at the greater of 4% or .52% above the three month LIBOR rate on a $25 par value. Prospectus I would not expect the LIBOR float to trigger an increase in the 4% coupon prior to 2015. Even at the 4% rate, the dividend yield would be about 5.9% at a total cost of $16.93, which would be tax free in the ROTH IRA. I would turn to this type of security in the ROTH IRA due to a lack of suitable alternatives. After all the Fed's Jihad Against the Saving Class is almost four year old now. 

As discussed more fully in the Gateway Post for floating rate equity preferred stocks, SANPRB pays qualified dividends and provides some protection against deflation and inflation in the same security. Advantages and Disadvantages of Equity Preferred Floating Rate Securities The qualified dividend rate does not matter when the security is held in an IRA.

Since the qualified dividend cap of 15% is set to expire at year end, and no one knows what will happen thereafter, I may elect to sell 80 of my 130 shares held in a satellite taxable account before year end, provided it appears that (1) the favorable tax rate for dividends will end and/or (2) the long term capital gain rate will likely increase in 2013. I purchased 30 of those shares at $13 over a year ago, and the other 50 were purchased back in October 2011 at $15.44:

SANPRB Transaction-One Satellite Taxable Account
Those shares were purchased when the symbol was STDPRB: Bought: STDPRB at 13Added 50 STDPRB at $15.44

I have booked some profits in this security: Bought 100 STDPRB at $15.3-Sold 100 STDPRB at 18.11Sold 50 STDPRB at 20.2Sold 50 STDPRD at 20.34 (snapshots at the end of the Gateway Post). 

This security has been much weaker than comparable ones issued by U.S. banking institutions. For example, BMLPRL, which is a BAC obligation after being originally issued by Merrill Lynch, pays the greater of 4% or .5% above the 3 month LIBOR rate on a $25 par value. Prospectus That security was trading near $21.15 when I placed the SANPRB order last Tuesday. Bank of America Corp. Dep. Shs (Rep. 1/1200th interest of a share of Non-Cum Pfd Series 5) A similar security issued by Suntrust, STIPRA, was selling near $23, SunTrust Banks Inc. Dep. Shs (Rep 1/4000th Interest in a share of Perp. Pfd. Series A). That one pays the greater of 4% or .53% above the 3 month LIBOR rate on a $25 par value. 

So it is obvious that investors view Santander as having significantly more credit risk than Bank of America and Suntrust.  Is that justified? The credit rating agencies do not see that much difference in risk. According to quantomonline, SANPRB is currently rated at BBB- by S & P and Moody's at Ba3. The ratings for BMLPRL are BB+ and Ba3; BB+ and Baa3 for STIPRA. It would not be significantly abnormal for the market to be right, and the agencies wrong, about credit risk. 

Personally, and this is more of a gut and judgmental assessment, I believe that the market is overreacting to SAN's issues in Spain and failing to give that bank adequate credit for its substantial banking operations outside Spain, particularly in the U.S., Mexico, Brazil and other countries in Latin America with over 14,000 branches worldwide. About Santander | Sovereign Bank

The current analyst consensus E.P.S. estimate for 2012 is 62 cents per share and 84 cents for 2013. SAN Analyst Estimates This is a link to the last financial report for SAN: ‎ 

The SANPRB dividends are non-cumulative. I do not currently foresee the possibility of a dividend elimination on this preferred stock. The common dividend could easily be reduced next year from the currently high level.

Yesterday's Close: SAN-PB: 16.76 +0.06 (+0.36%) 

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