Tuesday, October 23, 2012

Household Debt Service Payments as a Percentage of Disposable Income/Earnings: GE, MSFT, MS, FNFG, CAT/SVU/SOLD 209 Stock CEF JSN at $12.49-ROTH IRA/Edgen Murray 2015 Bond Redeemed

Berkshire Hills (own) completed its acquisition of Beacon Federal Bancorp for $60M in cash and 2.7M shares of BHLB stock. The cash portion was funded by selling $75 Million in subordinated fixed-to-floating rate debt. The fixed coupon will be 6.875% for the first ten years.

Even with home price declines, the median income household can afford the median price home in 14 out of the top 25 metropolitan areas. Homes| Interest.com That site is owned by Bankrate.com (RATE), whose stock took a beating in the market last week after a warning. RATE Interactive Chart; SEC Filed Press Release As a consequence of that decline, I have placed RATE on my both my LT and Flyers monitor lists. Yesterday's Close: RATE: 10.88 -0.09 (-0.82%)

SupervValu shares rose from the dead yesterday, based on reports that Cerberus Capital Management was lining up bank support of at least $4 billion to acquire the company and to invest $800M to 900M of its own money. Yesterday's Close: SVU: 3.17 +0.98 (+44.75%)

The SuperValue/Albertson's long term bonds barely budged in response to this possible LBO bid. The shorter term 2016 bond started to rise last week after SVU revealed there were several interested buyers. Bloomberg Adding a ton of  senior secured debt to an already highly debt ladened balance sheet is certainly not a positive for owners of senior unsecured debt, unless the indenture for that unsecured senior debt has a "change of control" provision requiring the repurchase of that debt generally at 101% of par value and that provision is triggered by the buyout. Change of control provisions will vary. Some may require a debt downgrade by all three agencies from investment grade to junk as a condition to bond owners forcing the debt repurchase, while other indentures may contain no such limitations. The 8% 2016 bond does have a "change of control" provision. Prospectus I sold this bond  at 104.125 back in November 2011.

Caterpillar reported earnings of $2.54 per share, excluding items, up from $1.71 in the 2011 third quarter, on revenues of $16.45B. SEC Filed Press Release CAT cut its full year forecast to $9 to $9.25 from $9.4, due to sluggish economic conditions. CNBC Yesterday's Close: CAT: 85.08 +1.22 (+1.45%)

Yesterday's Closing Prices:
VIX: 16.80 -0.26 (-1.52%)
S & P 500: 1,433.81 +0.62 (+0.04%)
TLT: 120.96 -0.78 (-0.64%)
LQD: 122.51 -0.29 (-0.24%)
GLD: 167.58 +0.61 (+0.37%)

I last took a snapshot of this data back in early August 2012 when the ratio was 10.98%:

Household Debt Service Payments as a Percent of Disposable Personal Income FRED - St. Louis Fed

The continued decline in this ratio is viewed as a positive for future U.S. economic activity.

With some more light selling yesterday, the OG has relieved his anxiety that was building up after reviewing earnings reports.

1. Microsoft (own 100 shares: Common Stock Dividend Growth Strategy and Large Cap Valuation Strategy): For its F/Y 2013 first quarter, MSFT reported quarterly revenues of $16.01B, and net income of $4.47B or 53 cents per share. Those results reflect the deferral of $1.36B in revenues and $.13 in diluted earnings per share, due to Windows Upgrade Offer, pre-sales of Windows 8 to OEMs prior to general availability and the Office Offer: SEC Filed Press Release; Form 10-Q for the Q/E 9/30/12 In the year ago quarter, MSFT reported revenues of $17.372B and an E.P.S. of $.68.

Earnings and revenues, adjusted for the deferrals, were below expectations of $16.4B in revenues and an E.P.S. of $.56.

The server and tools business was a bright spot, with a 12% increase in operating profit to $1.75B on a 8% increase in revenues.

Cash and short term investments totaled $66.644B as of 9/30/12.

This position has slid since my recent repurchase  at $29.81

This report is discussed in articles published by the BloombergWSJ.com,  Reuters and MarketWatch.

This report was released Thursday after the market's close. Last Friday, MSFT declined to $28.64, down $.86 or -2.9% for the day. I thought the decline was unjustified unless those sellers know already that the new product launches will be a disappointment. A typical sour note is sounded in this week's  Barrons cover story, titled "Bye-Bye, PCs", where the author Tiernan Ray states that "tech investors, long accustomed to a lift from Windows, are primed for disappointment".

A recent report from Gartner estimated that 80% of corporations will take a pass on Windows 8 through at least 2014. While I have not tested the new operating system, several reviews suggest that users will need to spend time learning how to use it. Young people, used to navigating touch screens with their smartphones, will adapt to the software quicker than the old fogies. I suspect that corporations using Windows will more readily adopt the Windows 8 tablet for those employees who need it. 
2. General Electric (own 510+): Three weeks ago, GE was targeting 2012 revenue growth at 5%. In its earnings release last week, the company lowered that target to 3% growth, due to shrinking GE Capital. Revenue for the third quarter would have been $1.1B higher. Third quarter revenue rose 3% to $36.3B, compared to the 2011 third quarter, failing to meet the consensus estimate for $36.94B. Operating earnings of 36 cents were in line with the consensus estimate. SEC Filed Press Release

Revenue from GE's industrial businesses rose 6% to 24.8B and profit in those businesses grew 11% to $3.57B.

The earnings were released before the market's open last Friday and the shares declined more than the major averages. Friday's Close: GE: 22.03 -0.78 (-3.42%)

GE has bought back over $3 billion worth of shares during 2012. 

This report is discussed in article published by  BloombergMarketWatch, WSJ.com,  Bloomberg and Reuters

Earnings Call Transcript - Seeking Alpha

Yesterday's Close: GE: 21.70 -0.33 (-1.50%)

3. Morgan Stanley (own 250 MSPRA only): For the 2012 third quarter, Morgan Stanley reported $561 million in income from continuing operations ($.28 per share, excluding charges associated with the valuation of its debt. Tangible book value per share was $26.55. The Tier 1 capital ratio was 16.7% under Basel 1.

4. First Niagara (own: Regional Bank Basket Strategy)First Niagara reported non-GAAP E.P.S. of 19 cents per share (GAAP of 14 cents which includes acquisition and restructuring charges). The consensus estimate was for 18 cents. Excluding loans acquired through the boneheaded, idiotic and indefensible $1 billion acquisition of HSBC branches, average commercial loans increased by $463M, up 17% over the prior three month period.

As of 9/30/12, the net interest margin was 3.54%; the GAAP efficiency ratio was 71.69% and 64.71% non-GAAP (prefer less than 60%); tangible book value per share was $5.59; the NPL ratio was good at .75% with a 105.3% coverage ratio; the Texas Ratio was good at 14.16%; and the return on average equity was unexceptional at .83% non-GAAP and .66% GAAP (prefer over 1%).

Compared to other banks in my regional bank basket, the FNFG capital ratios are no longer viewed as satisfactory and have been declining due to events connected with the HSBC transaction:

FNFG Capital Ratios Taken from Press Release
First Niagara: Just Another Incompetent Bank Board of Directors (December 2011); First Niagara Dividend Slash (December 2011)

I do not view the FNFG Board of Directors as incompetent as the Directors of Bank of America, the ones who allowed Ken Lewis to acquire Countrywide Financial when the subprime loan problems were crystal clear to even a casual observer.

FNFG now has approximately 430 branches.

Earnings Call Transcript - Seeking Alpha

Yesterday's Close:  FNFG: 8.32 +0.08 (+0.97%)

5. Sold 209 of the Stock CEF JSN at $12.49 Last Friday-ROTH IRA (see Disclaimer): The primary goals of the retirement accounts are income generation and capital preservation. I do not need the accounts to grow, since I am unlikely to ever need them. The money must still be around, rather than in money heaven, in the unlikely event that I need any of those funds, hence the emphasis on capital preservation rather than growth. Nonetheless, the money has grown nicely with my mostly esoteric income investments over the years.

As previously noted, I had a gut feeling that the market was overbought, and far worse for the OG, a queasy feeling after reviewing several recent earnings reports, notably the ones from IBM and Google. It does not take much anxiety for me to jettison a stock fund position in an IRA, and that would include stock CEFs that generate good income.

The shares have generated $380.67 in income since 1/1/11, and that income is tax free when paid into the ROTH IRA.

JSN Vanguard History After Share Transfer from Fidelity Roth IRA
It would be too time consuming to compile the income generation from March 2009 (original purchase date) to 1/1/11 from the old Fidelity ROTH IRA account. I did take a snapshot of the historical dividend page at the sponsor's website, JSN - Nuveen Equity Premium Opportunity Fund:

JSN Historical Dividends

In addition I realized a gain of $84.37 on this last transaction;

2012 JSN 209 Shares +$84.37
Another  gain was realized from a July 2011 pare in the ROTH IRA:

2011 JSN 100 Shares Roth IRA + 327.42
Pared JSN-Sold 100 at 12.38 in ROTH IRA

Based on my objectives, the foregoing is more than good enough.

Yesterday's Close: JSN: 12.39 -0.04 (-0.32%)

6. Edgen Murray Redeems 2015 Bond at 108.83 (Junk Bond Ladder Strategy): The issuer redeemed this bond, using a make whole calculation. See Item # 1 Edgen Murray 2015 Bond Redemption

Proceeds from Edgen Murray 2015 Bond Redemption
I realized over a $100 gain on this one bond position plus interest. Bought 1 Edgen Murray Senior Secured Bond Maturing 2015 at 97.5

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