Friday, August 31, 2012

MYP/VIX/New Investment Strategy: The $500 to $1,000 Flyers Basket Strategy"/Bought 50 Vale at $15.9/Bought 50 FVL at $12.95

After several closes below 15, the VIX is starting to make a strong move back to 20. VIX: 17.83 +0.77 (+4.51%) I noted in a recent post that the VIX was still in an Unstable Vix Pattern formed by an August 2007 Trigger Event. I noted then that the movement below 15 could be a sell signal accompanied by a need to buy hedges for long positions. If the trend below 20 continued until September 25th, then the movement below 15 would be a long term buy signal VIX Asset Allocation Model Update It remains to be seen which way the worm will turn under this model.

There are reasons to be pessimistic about the near and intermediate term future, but there are always good reasons for pessimism. I recall August 1982, the start of the last long term secular stock bull market, and the pessimism then was both prevalent and easily a majority position. But, the deep thinker types would see that the framework for a long term bull market was already in place. The Federal Reserve had squeezed inflation out of the economy, interest rates were still high but going down, and the computer revolution would drastically improve productivity. The investor did not need to focus on the here and now, but simply digest those big picture events and then act accordingly.

The underlying main problem now is not inflation but debt, both at the consumer and government levels.  Underlying Cause of the Current Long Term Bear Market is Too Much Debt (June 2010 Post) That problem involves a few developed nations rather than the primary emerging market nations. The U.S. government is one of those offenders and has made no progress in reducing its out of control budget deficits. There is progress being made in several European nations, the other primary offenders in the government category. American consumers, the primary offender in the consumer category, are making decent headway in improving their balance sheets. It would be extremely important for housing prices to continue an upward trend.

Unlike August 1982, however, I can not say now that the underlying problem has been whipped, since one of the primary offenders, the U.S. government, has yet to address its debt and deficit problems. Our government is the whale in a china shop, not Greece. I may be overestimating the near and intermediate term dangers associated with U.S. government debt levels. My perception of the risk is way out of line with investors who are showering the U.S. government with money, willing to accept rates that will probably fail to earn them any return after inflation.  

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One "principal protected note", Citigroup Inc. 3.00% Minimum Coupon Principal Protected Notes based on S&P 500 (MYP), has been exhibiting bizarre and irrational behavior worthy of a commitment proceeding. I would place a current maximum value on that note of $10.4. I personally would not buy it at $10.40. Maybe I would buy a 100 at $10.20 to $10.3. If I owned 100 shares, I would have sold the entire position at the prices prevailing on either 8/29 or 8/30. MYP had no trades on 8/28 and traded just 400 shares on 8/27, all of which were at a $10.75 price. MYP Historical Prices  On 8/29, the price surged to $12.30 with 9600 shares exchanging hands with an intraday high of $12.38. Yesterday, the shares closed at $13, a 30% premium to the $10 per share par value. Bizarre does not begin to describe this action.

MYP is a senior unsecured note issued by Citigroup Funding that matures on 5/12/14 at $10. The note only has two more annual coupon payments left before redemption. This note pays the greater of 3% or up to 32% based on the performance of the S & P 500. Pricing Supplement For the current coupon period, the following is a summary of the relevant data points:

Starting Value= 1,371.97 on 4/24/12  S & P 500 Historical Price
Maximum Level= 1,811 (1,371.97 x.1.320)
End Date: 4/23/13
Yesterday's closing Value=1,399.48

A single close in the S & P 500 above the Maximum Level (1,811), on or before the End Date, would cause a Maximum Level Violation and a reversion to the minimum coupon, irrespective of the S & P's value on 4/23/13. The S & P would have to be above 1,413.13, as of the 4/23/13 close, to even trigger an increase in the 3% annual coupon ($30 per 100 shares), and that would occur only when there is no Maximum Level Violation during the coupon period. The S & P is not even above that level now.

This is just simple math, with a small dose of common sense. To justify a $13 price now, an investor would have to be 100% certain that the S & P would close almost at its maximum level of 1811 on 4/23/13 without a single close above that level during the current annual coupon period. Even if one assumed that would happen, and no one in their right mind would, this security would pay only $3.12 on its $10 par value at a End Date price of 1800 on the S & P 500 with no Maximum Level Violation. Even if you knew in late April 2013 that MYP was going to pay $3.12, based on a S & P 500 close of 1800 on 4/23/13, an investor would not be getting a good deal at all by buying 100 shares at $13 even in an IRA. An investor can not value these securities based on such an asinine and absurd assumption about a future event almost eight months away. This security could end up being worth only a few cents more than its $10 par value at maturity if it ends up paying just its minimum 3% annual coupon for the two remaining annual payments!

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I review the Dividend page at the WSJ every weekday night. I noticed that France Telecom will go ex dividend on 9/4 for a $.70941 distribution. I will only own French companies in either my Fidelity or Vanguard brokerage accounts. Item # 2 FTE Dividend-Withholding Tax; Item # 2  Sold 105+FTE. Those were the only two firms that applied for tax relief at the source that reduced France's withholding tax to 15% from 30%. I currently own 100 shares of FTE. I also own several CEFs that will go ex dividend on 9/4/12, including RVT, FUND and RMT for quarterly dividends and two (IGD and FAM) that pay monthly. One of my regional banks that pays a good dividend, UVSP, will also go ex dividend on 9/4.

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I decided to create a new investment category which I will call "The $500 to $1000 Flyers Basket Strategy ". Just what the world was waiting for, another investment strategy hatched by the OG and the Nitwit RB.

Due to the considerable uncertainty about the near term future, and an overall positive view about the intermediate and long term, a number of selections are likely to fall into this price range. My VIX model may flash a green light in about a month or the VIX may surge again to over 20 based on the usual list of fears. As with the Lottery Ticket Basket Strategy, which as a maximum of $300 plus any prior profits from the security, this strategy will control risk by limiting the amount of the investment to an insignificant amounts for me.

The strategy will include both ETFs and individual security selections. Some of the ETFs may be in sectors or investment styles that are currently out of favor with the crowd.

The individual security selections will generally be higher quality names than those selected for the LT strategy. However, as with LT selections, some of those selections will justifiably look like I am trying to catch a razor sharp falling knife, including the one discussed in Item # 2 below.  

As with other basket strategies, the success will be dependent on how the overall portfolio performs rather than one or even a few components. Given the small amount devoted to each selection, I can afford to be patient in case it takes a long time for the investment to pay off. 

Since a few recent selections fit within this category, I will include some of those in this basket. An example would be the ETF TDIV. Bought 50 TDIV at $19.95 (8/28/12 Post). I will not post a table until I have at least 20 selections. I may include a couple of more ETFs after I sell 50 shares to bring them within the dollar limit of this basket strategy. An example would be the ETF LIT which contains a large number of companies that are currently way out of favor, including all of the battery companies owned by that fund. 

1. Bought 50 of the ETF FVL at $12.95 Last Wednesday (The $500 to $1000 Flyers Basket Strategy)(see Disclaimer): This ETF is certainly out of favor and has an ignominious 1 star rating from Morningstar. That may be a tad harsh. I would not give it more than 2, however, given its past performance. 

This ETF will include the 100 stocks rated 1 in timeliness by Value Line, hence the name First Trust Value Line (R) 100 Fund. For those unfamiliar with this system, VL ranks 1700 stocks with a timeliness ranking of 1 (highest) to 5 (lowest). One hundred stocks are given a timeliness rank of 1, and VL will make changes to those rankings on a weekly basis. The fund will rebalance quarterly. 

Link to Sponsor's Website: First Trust Value Line® 100 (FVL)

Link to Current Holdings: FVL Holdings 

FVL will be rebalanced on the last Thursday of each quarter. 

The expense ratio is high at .7%. I suspect some of that  money has to be paid to VL for the use of its name and index. 

The Value Line method for picking stocks has its detractors. It is a quantitative method. While I do not know all of the factors used by that firm or the weight given to each factor, I believe that VL is using a momentum based model that relies heavily on price and earnings. This model seems to work better in long term stock bull markets and is less desirable during long term secular bear markets. That is just a personal observation/opinion. 

I am not now, nor have I have been, a "quant" or a "momentum" investor. Actually, most people would describe the OG as a "deep value" and "anti-momentum" investor, which also has its drawbacks including but not limited to the "value trap". 

Another problem is that there is frequent movements out of, and into the 1 timelessness ranks. This will cause a fund based on those ranks to incur significant trading costs and potentially large short term realized gains during strong cyclical up moves. The Morningstar page shows the following capital gain distributions during 2005-2007 which illustrates the problem:

12/19/05: $2.4 capital gain distribution of which $1.49 was the tax inefficient short term capital gains (STCG)
06/01/05: $.826 capital gain distribution of which 54.6 cents was STCG
12/20/06: $1.053 capital gain distribution-no STCG
12/06/07: $1.055 capital gain distribution of which $.958 was STCG

In addition to the Morningstar site, the historical distributions can be found at FVL Distributions.

Having noted this problem, one cure for tax inefficiency is to have a large capital loss carryforward that would shelter future gains. The 2011 annual report shows that FVL manage to realized capital losses of $91.553M, of which $47.8+M expires in 2016 and another 29.477+M in 2017. ftportfolios at page 111 The downside is that realized capital gains will probably not be distributed to FVL shareholders to the extent they are offset by the loss carryforwards. At least the loss carryforwards could make the fund more tax efficient for several years, assuming it can start generating large profits rather than losses. And to generate those large profits, the fund would need a lot more money than it has now. Outflows have been the recent norm. 

Another issue is that the selections are not good dividend plays for the most part. There were no dividends paid by FVL between 2008-2010. And only a very modest income dividend was paid in 2011 and so far in 2012. 

Many of the selections would not be discarded by a fundamental analyst based simply on a movement into a 2 or 3 timeliness ranking.s

FVL: 12.83 -0.12 (-0.96%)

I will probably hold this one for several years, just to see how the VL system works in practice.

I have not owned this ETF since I started this blog back in October 2008. I do recall trading it several times after holding it for a few days or 5 weeks at the most. When I discuss a security for the first time, I will check my trading history going back about six years to see how I handled the security in the past. For FVL, it was never viewed as anything other than a clip. This first trade shows that I had more confidence in the First Trust Value Line Dividend Fund:

2006 FVL 100 Shares +$68.96/FVD 400 Shares +$764.43
2007 FVL 100 Shares $42.96
2008 FVL 100 Shares $50.59 (5 days)
The 2008 FVL trade was typical for that time period. I would stick my head up whenever it seemed opportune, buy some stock,  quickly sell the positions, and then burrow back into the ground. I kept my head above water that way for the year. I took some snapshots of trades made in 2008 from the same taxable account as the FVL trade, a real hodgepodge of securities:






I really just do not remember any of the foregoing, just one big blur, but I can see now what I was doing and why.

2. Bought 50 VALE at $15.9 Last Wednesday (The $500 to $1000 Flyers Basket Strategy)(see Disclaimer): The bear case for Vale is well understood. There are two major problems. Its main product is iron ore which is crashing in price. This article at Seeking Alpha goes into details.

Iron Ore delivered to Qingdao China - 62% Ferrous Content - USD/dry metric ton Chart
Iron Ore 62% Fe, CFR North China (Platts) Swap

Vale is the world's largest producer of iron ore

Prices for other metals have also been hurt by a deceleration in China's economy and the ongoing recessionary conditions in Europe coupled with sluggish U.S. growth.  Vale is the second largest producer of nickel, manganese and ferroalloys. It also has coal, copper, fertilizer, cobalt, and steel operations. It is the largest provider of logistics and transportation in Brazil due to its ownership of railroads and ports.

The other problem involves Brazil's government and that issue caused me to sell 100 shares last year. Item # 2 SOLD 100 VALE at $34.6 I never view a significant government stake in a private company positively. And, when the government has a controlling stake, the potential for mischief and undesirable meddling is high. This concern will become acute in Latin America, where leftist governments will frequently use companies as a source of funds and political patronage. As shown by some recent activities in Argentina, a government takeover is not out of the question.

Vale was privatized in 1997. The government has retained 12 golden shares that gives it some limited veto powers. A controlling shareholder is Valepar, which has the right to appoint 9 out of 10 directors, and Valepar can be influenced by the Brazilian government through the Banco do Brazil's pension fund Previ, and the Brazilian government's development bank known as BNDS which is both a Valepar shareholder and a lender to Vale. (see page 110-113 SEC Form 20-F, 2011 Vale Annual Report)

I view the Brazilian government's hostility to capitalism to be comparable to Argentina's government, though not as extreme at the present time. Argentina is possibly a notch or two better than the Hugo Ch├ívez administration in Venezuela.

Some of the political risk in Brazil is demonstrated by the government claiming an additional $15.19 billion in taxes on Vale's overseas profits, and a demand for $1.98 billion in additional royalties. Reuters In short, Brazil views the company as a honey pot to raid whenever the leftist politicians want more money.

The tax issue is currently before Brazil's Supreme Court. An adverse decision by Brazil's Supreme Court could easily send the shares down significantly. Conversely, the price could also jump if Brazil's Supreme Court squashed the government's effort to collect that $15.19B. I believe that Vale lost in the lower courts (SEC 6k) and is arguing that the government's position is violation of Brazil's Constitution which prohibits double taxation. That would be a good amendment for the U.S. Constitution.

This kind of political climate will cause investor's to head for the exits in droves, and that stampede will only accelerate if and when Brazil succeeds in crippling Vale's expansion prospects with these kind of demands. The downturn in profitability adds fuel to the fire. Given this extremely adverse political climate and a significant downturn in prices for the commodities produced by Vale, I would not buy more than 50 shares even at the current depressed price.

On the day of my purchase, the price had fallen almost 4% below my target re-entry price of $16, so I bought just 50 shares knowing that the near term outlook is negative. Hopefully, most of that negative outlook, relating to Vale's operations including the price of iron ore, is already priced into the shares, which have fallen from a 2008 high near $44. VALE Interactive Chart

The last bottom after a huge downdraft was hit near $10 late in 2008. I suspect that bottom may be tested if Vale has to pay another $15B in taxes. The most recent top was around $36 in January 2011 and it has been mostly downhill since that high. Possibly, it would have made more sense to pick up this small position with the share price nearer $10. When catching a falling knife, sometimes it pays to wait until the point of maximum pessimism is reached by investors, marked by a wholesale dumping of the security. It is hard to know one way or the other. I do know that a buy of 50 shares at $15.9 looks a whole lot better than continuing to hold until now those 100 shares sold at $34.6 last year.

Some share price support is provided by the dividend which will fluctuate with earnings. The next ex dividend date is 10/17/12 and the approximate amount of the dividend is $.59 per ADS share according to Marketwatch. According to Deloitte, Brazil does not levy a withholding tax on dividends. This is a link to a Deloitte summary of withholding tax rates by country: deloitte.com. pdf

Given the uncertainty about Vale's profitability and the political situation, however, I would not count on future dividends being paid, let alone paid at the current rate.

I did read a few reports before purchasing the shares. S & P rates the shares at 4 stars with a $24 12 month price target. That target is probably to high for 12 months. A $24 price in 24 months may be more realistic.

Morningstar has a 4 star rating on VALE and a consider to buy price, which may prove to be about right, at less than $13.9.

This is a link to the 2012 second quarter report filed with the SEC. Net sales fell 21% to $11.9B. Operating earnings per ADS fell to 60 cents from $1.22.

VALE: 16.04 -0.06 (-0.37%)

If I receive a decent pop in these shares to over $20 within the next six months, I would seriously consider harvesting that profit plus the one dividend payment.  

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

FORM 10-K

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.

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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 NBCNews.com)

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 FactCheck.org 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%) 

Wednesday, August 29, 2012

KWK, FFEX/Added 100 MOL at $9.78/Case-Shiller/Canadian Dollar

The Case-Shiller 20 city home price index rose 2.3% in June. Along with the upwardly revised number for May, the two month gain was the strongest advance in home prices since this data series started over a decade ago. All twenty metropolitan areas showed price gains for the second consecutive month. Several areas experienced more than 4% increases in June compared to May, including Atlanta (+4.4%); Chicago (+4.6%); Detroit (+6%); and Minneapolis (+4.8%).

For the Savings Class, who are having to cope with abnormally low interest rates over an extended period of time, the fourth anniversary of a near zero federal rate is coming up this December. The near zero federal funds rate started mid-December 2008:  FRB: FOMC Minutes, December 15-16, 2008

S & P revised its debt rating outlook for Quicksilver resources from negative to positive. TEXT-S&P I own 3 unsecured senior bonds. S & P kept both its CCC+ rating on those bonds and its 5 recovery rating. A 5 recovery rating is S & P's estimate that the senior unsecured bond owners would recover 10-30% after a default which is far from comforting.

The Lottery Ticket Frozen Food Express has done well since reporting a profit for the second quarter. Frozen Food Express Industries, Inc. Announces Profit in Second Quarter 2012 Financial Results (Nasdaq:FFEX)  On the day prior to that earnings release, the stock closed at $1.07. FFEX Historical Prices The stock closed at $2.39 yesterday. The volume was unusually heavy at 564,020 shares compared to an average daily volume of 67,872. FFEX: $2.39 +0.26 (+12.21%); Bought 100 FFEX at $1.4-Lottery Ticket

Two of my Canadian bond funds were ex dividend yesterday for their monthly distributions. iShares 1-5 Year Laddered Government Bond Index Fund (CLF-TOR) (own 700 shares); and iShares 1-5 Year Laddered Corporate Bond Index Fund (CBO-TOR) (300 shares). Another Canadian ETF, which is weighted in bonds, was ex dividend on 8/24/12 for its monthly distribution. Diversified Monthly Income (XTR) Distributions - iShares Canada ETFs (own 500 shares).

Generally, I will not convert my USDs into CADs unless I can buy at least C1.05 for each USD. (a USD will now buy less than 1 CAD: USD/CAD) The initial step in the Canadian Dollar (CAD) Strategy is to wait for a favorable exchange rate before buying any CADs with my USDs. I will then use those CADs to buy income producing securities on the Toronto stock exchange that increase my CADs which are then plowed back into more Canadian income producing securities. I will use the same strategy for AUDs provided I am able to buy at least 1.05 AUDs with each USD. (a USD will now buy around .963 AUDs: USDAUD) For now, I am just concentrating on increasing my CADs by collecting dividends paid in CADs and harvesting a few gains paid in CADs when I sell a position). One wild card is whether Quebec will eventually vote to succeed from Canada. Reuters

The Federal Reserve has turned into a money making machine for our destitute Uncle Sam. In 2011, the Federal Reserve returned to the treasury a $76.9 billion profit Forbes The Federal Reserve reported that it realized a profit of $47.5 billion for the first half of 2012. Federal Reserve Quarterly Financial Report for the Q/E June 30, 2012  The RB had an idea. Why not let Uncle Ben do his thing for another ten years and maybe he will be able to create a budget surplus, assuming the GOP is successful in throwing the middle class and the poor under the train with their spending cuts, for their own good to be sure, and that more tax cuts for the Koch brothers and other billionaire "Job Creators" actually  creates jobs this time around. 

1. Bought 100 MOL at $9.78 Yesterday-Roth IRA Gold is starting to show some life again as investors grow more confident about more central bank money creation.

One of the less desirable "principal protected" notes is the Citigroup Funding Inc. 2.00% Min Coupon for Gold (MOL). The reason for adding 100 shares will be discussed near the end of this section.

This unsecured senior note has a $10 par value and matures on 11/26/2014. The coupon is the greater of 2% or up to 19%, based on the price of gold.

Gold's Starting Value For MOL's Current Annual Period= $1,742.5
Greater than 2% of Starting Value=$1,777.35 (1.02 x. Starting Value)
Maximum Level= $2073.57 (1.19 x. Starting Value)
End Date= 11/19/12

The relevant gold price is the P.M. London fix. There has not been a Maximum Level Violation during the current annual coupon period. If there is a single close above $2,073.57 per ounce on or before 11/19/12, this security will pay its minimum 2% coupon. The minimum coupon will also be paid for any close below $1,777.35 per ounce. Any close between $1,777.35 and 2073.57, with no Maximum Level Violation, will increase the coupon by the percentage gain over the Starting Value of $1,742.5 (e.g. a close at 1942.5 on 11/19/12 would increase the coupon to 11.48%, computed by dividing 200 by $1742.5)

The 8/24/12 London P.M. gold price fix was $1,667. Past Historical London Fix

The fix yesterday was at $1,668. LBMA | Gold Fixings

This note is less desirable due to its low permissible percentage gain. This low number of just 19% will more likely result in a Maximum Level Violation during a coupon year compared to one with a 30% or 35% maximum gain. MTY is a similar note to MOL with a 3% annual coupon and a 35% maximum. Final Pricing Supplement I own 200 of MTY.

For its prior annual coupon period, MOL suffered a Maximum Level Violation and consequently paid out its minimum 2% coupon. That violation was suffered in June 2011 and the annual period ended in November 2011. Item # 2 MOL

Provided Citigroup Funding survives to pay par value at maturity, the worst outcome would be to receive three more 2% annual coupon on a $10 par value unsecured senior note. The note is guaranteed by Citigroup as provided in the prospectus. MOL Prospectus

I still own 100 shares in a satellite taxable account after selling 100 for a small profit: Bought 200 MOL at 9.95-Sold 100 MOL @ 10.3 November 2010

Since this note has at a minimum three 2% annual coupons between now and November 2014, the minimum annualized yield is close to 3% at a total cost of $10. My minimum yield is juiced slightly by buying the note at a small discount to its $10 par value.

This is a link to two fixed coupon Citigroup senior bonds maturing in 2014:
FINRA Information: 5.125%

As shown by the recent trading activity on those fixed coupon bonds, their YTM is less than 2%.

So why fool with MOL with its 2% minimum coupon and a 19% maximum limit? I pick up more yield than the fixed coupon Citigroup senior notes and at least have the potential to earn anywhere from the 2% minimum coupon to 19%. While the future is uncertain, there is at least a reasonable possibility that gold will be above $1,777.35 on 11/19/12 which would trigger an increase in the minimum 2% coupon. I will also make a small profit at maturity assuming Citigroup pays off the note.

I am now past my comfort level in these Citigroup Funding "principal protected" notes maturing in 2014. I currently own $10,000 in principal amount. Why is the OG uncomfortable? It must be remembered that the OG is naturally riddled with anxiety and in need of a constant infusion of chill pills. And, it does not help that the OG knows that "principal protected" does not mean safe. It only means that I will receive $1,000 per note provided Citigroup survives to pay the note at maturity, just like any other unsecured senior note.

Item # 5  Exchange Traded Bonds: New Gateway Post
Item # 1 Principal Protected Notes
Item # 2 Principal Protected Notes

In addition now to MOL's $2,000 principal amount, I also own the following Citigroup Funding senior unsecured notes maturing in 2014, each with $10 par values and 3% minimum coupons:

Bought 100 MKN at 9.85-Linked to Commodity Index (DJ-UBS Commodity Futures)
100 MKZ bought at 9.96-Linked to Commodity Index
Bought 100 MKZ at 9.91 in the Roth IRA-Linked to Commodity Index
Bought 100 MOU at $10.12-Linked to Russell 2000
Bought 100 MBC at 9.84-Linked to Russell 2000
Bought 100 MBC at 9.78-Linked to Russell 2000
Bought 100 MTY at $10.03-Linked to Gold (London P.M. Gold Fix)
Bought 100 MTY at 10.49-Linked to Gold

In each case, the investor needs to review the prospectus, and calculate the Starting Value for the current annual coupon period and the Maximum Level, as shown above for MOL. It is also important to monitor the health of Citigroup which requires a review of both its quarterly earnings report and major news events. 

Tuesday, August 28, 2012

The GOP's Retrogression-Please Bring Back the Eisenhower Republicans/Nokia/HCBK/Bought 50 TDIV at $19.95

An article in this week's Barrons ranks state debt by combining debt and unfunded pension liabilities relative to each state's GDP. I would rank the debt of California, Illinois, and New Jersey near the bottom using mostly my judgment. Using the Barron's criteria, Illinois was second from the bottom, but Connecticut's debt was the least safe. Tennessee was ranked third, and I would expect my state to be the near the top. Tennessee's debt plus its pension liability was 1.5% of its GDP, while Connecticut's ratio was 17.1%. New Jersey's debt was ranked at #42 and California at #34. I was surprised by Kentucky being ranked near the bottom. Municipal bond investors need to pay more attention to unfunded pension liabilities when evaluating the safety of longer term bonds.

Nokia shares rallied strongly yesterday in response to Apple's patent victory against Samsung. The thinking is that Samsung will have to withdraw some smartphones from the U.S. market and that will give Nokia an opportunity to grab some much needed market share. The Washington Post MarketWatch It is also expected that Nokia will preview new devices in early September. I am not following the details, but new devices will use Microsoft's new Windows Phone 8. Bloomberg I own NOK common shares in my Lottery Ticket Basket Strategy. Item # 3 Bought 50 NOK at $2.88-LT Category

NOK: 3.26 +0.18 (+5.84%) 

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For amusement, the OG will frequently read comments made by WSJ readers, and it is not difficult to spot the TBs (see, e.g. WSJ). One person who left a comment argues that the government's budget problems originate from the Democrats showering free money on minorities. He does not say African Americans or anything that could easily be pegged as overtly racist. He is referring to food stamps and welfare. Those angry white men, along with assorted wingnuts, will eventually cause the GOP to become a minority party bordering on irrelevance. Give it twenty years at the most.

Do racists now vote for Democrats or Republicans? In the south, they were mostly voting for Democrats before that party started to support the civil rights legislation in the 1960s. Then, as part of the GOP's Southern  Strategy,  they changed their allegiance to the republican party and have never left.

The Southern Strategy has been a great success for the GOP so far at least. As pointed out by Michael Barone in an article published yesterday by the WSJ, the GOP is now receiving 60%-69% of its electoral votes from the South.

Barone points out that noncollege whites have been declining as a percentage of the electorate. Noncollege whites who are also evangelicals supplied 42% of McCain's votes in the last election. When that is kept in mind, the recent comment by Romney that no one has asked to see his birth certificate can not be construed as a bad joke, but as a sop to those core GOP votes who view a black President as foreign, someone who does not share their "American" values as Sarah was so fond of saying during the last Presidential election.

It is also not difficult to convince this crowd that the Vietnam War (LBJ-D) or the Second Iraq War (Bush Jr.-R) was in the nation's national interest. And they are also subject to easy manipulation with false campaign advertisements.

It is impossible to reason with the angry caucasians who feel that their country is slipping away from them. They do not recognize their own dependence on the government and are quick to stereotype the poor as non-working, who vote for Democrats in exchange for all of that free welfare and food stamp money.

The government could save far more money by eliminating all federal subsidies for Medicare, so that those angry middle age white men can support their parents as they slide into poverty.

Another source of funding for the government would be to eliminate the mortgage interest deduction which costs the government more than food stamps (WSJ), to treat premiums paid by employers for health care as income to employees, and to eliminate deductions for dependents and for state and local taxes. Elimination of those middle class entitlements would help the government narrow its budget deficits considerably. Maybe Mitt has those entitlements on his hit list. Romney's Tax PlanFactCheck.org

Or, perhaps, those angry whites, who blame the poor for everything including the Near Depression. Ideology and Facts: Coexistence Not Allowed, could be denied extended unemployment compensation when they are fired or laid off during a recession and are unable to find a job. No, the racist will not focus on their government benefits, or those received by their family members, and will instead focus entirely on the programs intended for the poor, particularly the non-white poor who fit within their stereotypes and racist perceptions. What do they see in their mind's eye? An overweight black woman standing in line for a welfare check with ten babies by eight different fathers in tow, using one of her eighty aliases to defraud white people of their hard earned tax dollars. The repetitive welfare queen's statements made by Ronald Reagan, which blew way out of proportion a case of welfare fraud involving $8,000, NYT, were intended for this audience. The Willie Horton ads had the same purpose, as did the ads run against Harold Ford by the RNC in Tennessee when that black man ran against Corker for the U.S. Senate. Harold call me!-YouTubeNew York Times Ann Coulter demonstrated their perspective on events when she said, in her usual incendiary way, that the mortgage crisis originated from giving loans based on a persons ability to hit a jump shot. HUMAN EVENTS All of the foregoing are mere extensions of the GOP's Southern Strategy, as they successfully took it national.

I have not mentioned two major sources of the government's current budget problems: (1) the trillion dollars sunk into Bush's Iraq War and (2) the trillions lost in the Bush Tax cuts that primarily benefited a few old white people, the major source of the GOP's campaign contributions, rather than those middle class white men who may still believe that those cuts were intended to help them. Both of the foregoing drains on the government's finances were supported by the TBs en masse.

I thought that I would just focus on one program which draws their collective ire-Food Stamps.

During deep recessions, expenditures for the food stamp program will rise, as a number of middle class families slip into poverty In 2007, there were 26,316 million participants receiving an average of $96.18 per month in nutritional assistance. That was a decrease from the participants during 2006. As one would expect, the severity of the last recession, the worst in the OG's lifetime, caused more participation in this program, by all races, and the number of participants ballooned to 44,709 million at an average cost of $133.85 per month or $1,606.2 per year. Supplemental Nutrition Assistance Program Annual Summary (formerly known as food stamps)

Three-quarters of SNAP benefits go to families with children. Almost one-third of the beneficiaries are senior citizens and the disabled. The House GOP plans to cut this program by 20%. House-Passed Cut in SNAP (Food Stamps) That is just their first whack at this program. CBO Report This would be done in conjunction with lowering the tax bills for the Koch brothers and other generous donors to the GOP. New Tax Cuts in Ryan Budget Would Give Millionaires $265,000 on Top of Bush Tax Cuts

The number of recipients will start to trend down once the economy more fully recovers from the Near Depression. Some of the increased costs are due to higher benefits originating from Obama's 2009 stimulus that are set to expire at the end of 2013. CBO | The Supplemental Nutrition Assistance Program The CBO estimates that about 20% of the increased cost is due to those temporary benefit increases. Arguably, those additional benefits should expire at the end of this year. I would agree with the republicans on that issue.

Over the weekend, I listened to a speech given by Eisenhower at the GOP convention in 1956. The speech was replayed on CSPAN. I was impressed by it. I was also reminded in stark fashion how much the GOP has changed for the worst since that time. I would have had no difficulty voting for Eisenhower.

The Modern GOP is no longer a conservative party but a reactionary one trying to appease the fringe elements in our society that have always existed in large numbers. It has retrogressed to a 19th Century parody of itself at it re-adopts a slightly more modern version of Social Darwinism that was fashionable, among the less enlightened set, over 120 years ago.

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While watching the season finale of the HBO series "Newsroom", written by Aaron Sorkin, a newscast ends with a criticism of the Modern Day GOP that could have been found in this blog, including the use of the phrase "American Taliban" to describe an important GOP voting bloc. I had never heard or seen a similar use of that phrase outside of this blog. I started using that phrase in 2009, usually in the context of stating that the GOP has been kidnapped by the American Taliban movement.

("american taliban" site:http://tennesseeindependent.blogspot.com/ - Google Search)

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1. Bought 50 of the ETF TDIV at $19.95 Yesterday (see Disclaimer): The First Trust ETF VI NASDAQ Technology Dividend Index Fund (TDIV) is a new ETF that focuses on dividend paying technology stocks. First Trust Launches Multi-Asset Diversified Income Index Fund and First Trust NASDAQ Technology Dividend Index Fund

If the OG was not nervous about the market, I would have bought 100 shares. One thing is for certain. A 50 share purchase is not going to help or hurt me, but creates the psychologically beneficial impression that I am doing something rather than just sitting on my behind doing nothing which is actually what I am doing now.

This new ETF includes technology and telecommunications companies that pay dividends. The weighting will be about 80% in technology companies and 20% in telecommunications. For inclusion, the company must have at least a .5% yield and must have paid a regular common within the past 12 months. That low minimum qualifies Oracle for inclusion. ORCL: 31.83 -0.12 (-0.38%) Apple will be eligible for inclusion in the index next year.

This ETF is discussed in a Barrons' article. The author of that article claims that this index currently has a 3.3% yield. To arrive at the fund's yield, it would be necessary to subtract the expense ratio. According to the Prospectus at page 9, the fund anticipates paying quarterly dividends.

I took a snapshot of the top 10 holdings as of 8/24/12:


First Trust NASDAQ Technology Dividend Index Fund Holdings (TDIV)

The expense ratio is .5%. The fund had 59 holdings as of 8/25/12. I decided to nibble at this one as several large technology companies have recently instituted dividends and/or started to increase existing payouts significantly (e.g. Cisco). Many of them certainly have the cash and capacity to increase dividends at a more rapid rate than companies in other sectors.

CSCO Key Statistics: Cash per share $9.14; Cash $16.33B as of 7/28/12
ORCL Key Statistics: Cash per share $6.28; Cash 37.12B as of 5/31/12
MSFT Key Statistics: Cash per share $7.28; Cash 62.08B as of 6/30/12
AAPL Key Statistics: Cash per share $29.5; Cash 27.65B as of 6/30/12
INTC Key Statistics: Cash per share $2.73; Cash 13.65B as of 6/30/12
IBM Key Statistics: Cash per share $9.83; Cash 11.23B as of 6/30/12
TXN Key Statistics: Cash per share $2.05; Cash 2.33B as of 6/3012

Unfortunately, a lot of the cash is held by overseas subsidiaries of these companies, and is consequently not available for dividends unless the corporation wants to pay a large tax to bring funds back to the U.S.

If Romney is elected, I would expect a reduction in corporate tax rates and possibly a tax holiday for repatriation of those funds.

Previously, U.S. multinationals promised to create U.S. jobs in return for a 5.25% tax on repatriation as part of the 2004 American Jobs Creation Act, but of course failed to deliver on that promise. Instead, corporations used the repatriated funds to increase dividends, which is fine with their shareholders, and to line the pockets of their executives with increased pay and benefits. (Press Release with link to Senate report on this issue)

The windfall for the corporations was approximately $265B. New York Times The Congressional Research Service noted that there is no empirical evidence that there was any increase in investment or employment by those firms utilizing this one time tax break. repatriationholiday.pdf

I am not making a policy argument here. If the GOP wins, I suspect that large tech firms will be able to bring money back to the U.S. that can be used to accelerate their dividend increases. The plan will be sold to the public as a measure to create jobs, and many gullible people will accept that line of B.S. without questioning it.

TDIV: 19.91 -0.08 (-0.40%)

2. Hudson City (own: Regional Bank Basket Strategy): HCBK is one of the three "underperforming" stocks in my regional bank basket. Yesterday, Hudson City Bancorp announced that it was being acquired by M & T Bank (MTB). This seems to be a good long term deal for the MTB shareholders, as shown by yesterday's price gain.  MTB Stock Quote

Under the deal, HCBK shareholders will receive consideration valued at .08403 M& T shares in the form of M & T stock or in cash. I have a generally favorable opinion about M & T. I  The offer is subject to proration, so that no more than 60% of the aggregate consideration can be paid in M & T stock. Since I only own 111+ shares, I may end up selling this lot just to avoid the proration.

HCBK Stock Quote

I have few unfavorable comments to make about MTB. The company participated in TARP, always viewed unfavorably here at HQ. In addition, MTB has not redeemed the government's cumulative preferred shares. It is allowing the government to sell those shares to the public. Treasury Department Announces Public Offering of M&T Bank Corporation Preferred StockUnderwriting Agreement, dated August 17, 2012 As previously noted, the government's preferred stock pays 5% over the first five years and then the coupon increases to 9%. Second quarter earnings fell to $1.82 per share from $2.16 in the 2011 second quarter. The capital ratios are at best okay:


10-Q/A

There are also many positives for M & T. It navigated the Near Depression period better than most banks and has significantly expanded its geographic footprint by acquiring other institutions that faltered, including Wilmington Trust. As of 6/30/2012, the efficiency ratio was good at 56.86%; nonaccrual loans were acceptable at 1.54% of total loans; and the average return on tangible assets for the last quarter was 1.3%. SEC Filed Press Release Under the circumstances, the net interest margin was okay at 3.74%, basically unchanged from a year ago.

Before HCBK became fell victim of the Fed's Jihad Against the Saving Class, the stock was trading over $16 per share back in October 2008. HCBK Interactive Chart This bank was highly dependent on outside funding sources and home mortgages. With the decline in rates, Hudson's net interest margin was negatively impacted far more than other regional banks that I own for those two reasons.

While it is just my personal opinion, I believe HCBK shareholders would be better off long term rejecting the MTB offer and simply wait for a more opportune interest rate environment before selling out. By selling out now, they in effect value the bank at 2003 prices. (see long term chart of HCBK; and WSJ) For that reason, I will vote against the merger.

HCBK: 7.45 +1.01 (+15.68%)
MTB: 89.81 +3.94 (+4.59%) 

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.  

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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).  
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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.

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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. CNN.com 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.

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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: cadc.uscourts.gov.pdf

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:

2013

2016

2017

2027

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.