CPI-Cash Inflation Is Accelerating Rapidly/Dean Foods (DF)/Sold JNJ @ 66.88/Harland Clarke/First Data/SOLD 50 KRBPRE @ 25.96/SOLD 2 Alon Refining Krotz Springs Bonds @ 107/Bought 1 Dillards 7.75% Senior Bond Maturing 5/15/2027

Why am I not surprised that the head of the IMF, Dominique Strauss-Kahn, a French Socialist, thrice married, whose knickname is "the great seducer", was arrested yesterday for "allegedly" emerging naked from the bathroom of a luxury 3 thousand dollar a night hotel room in NYC to chase a maid, before sexually assaulting her, and whose recent affair with a subordinate probably aided his chances to become the next French President? NYT

Treasury bonds experienced a robust rally Friday after the Labor Department reported another robust CPI number.  The government reported that CPI rose .4% in April on a seasonally adjusted basis. The core index rose .2%. Consumer Price Index Summary Cash inflation, which excludes the phony owner's equivalent rent, was up .5% in April and has accelerated at a 7.8% annual pace over the past 3 months: First Trust Economics Blog

I read an article in the WSJ that referred to this release as a good inflation report. CPI increased 3.2% year over year. The ten year note ended the week with a yield of around 3.15%, giving it a negative real rate of return before taxes based on the prior year's inflation rate.  Some hypothesize that inflation will cool in the months ahead, or that the current treasury yield is supported by a slowing economy.

In a NYT  article published over the weekend, it was reported that all of the major credit card companies reported increases in card spending for the 2011 first quarter.

Apparently, there is a considerable amount of circumstantial evidence that the Chicago Cubs lost the 1918 World Series due to one or more of their players being bribed by gamblers. NYT One CUB player was picked off twice in the same game and a reliever later barred from baseball fielded a sacrifice bunt and threw the ball wildly into the stands.  This allowed the winning run to score.

As a result of technical problems with Google's Blooger, ZDNet, one of my posts describing trades from last week was destroyed and I do not intend to write the post again.  The post had been written and saved during the period of instability, which led access being denied to bloggers for over a day.  I am not going to write that post again.  I will simply mention a few of the trades in passing:

I sold my shares of Johnson and Johnson at $66.88, with the intent of buying them back at a lower price. Common Stock Dividend Growth Strategy.  I bought 30 shares of SUSQ as a Lottery Ticket at $8.75.  I had previously bought and sold the common shares as part of the Regional Bank Stocks' basket strategy.  I also still own some shares of its TP, SUSPRA, in the Roth IRA.

I bought one senior 7.75% Dillards' bond maturing in 2027 at a total cost, including commission, of 98.625, giving me a current yield of 7.834%. Junk Bond Ladder Strategy This is the link to the FINRA information on that bond. FINRA This is a link to the prospectus: www.sec.gov

Dillards' stock has been on a tear since hitting a low of $3.35 in October 2008, closing at $56 last Friday, DDS Interactive Chart up $7.41 for the day after reporting better than expected earnings. Dillard's, Inc. Reports I previously traded for a profit an exchange trader TP from Dillard's Capital Trust I  (DDT). The senior bond that I bought has a better yield, shorter maturity, and a higher priority than DDT, plus the TP does permit a deferral of interest payments which is not a possibility for a senior bond. I did buy shares of DDT $5.82, generating at that price an annualized yield of around 32%. (March 2009 Post).

I do not intend to discuss further any of those trades or any of the other trades where my saved discussions were lost by Blogger's mishap.  I may mention them when an if I sell the securities.

1. Dean Foods (DF)(own senior bonds only: Junk Bond Ladder Strategy): Dean Foods reported net income of 25 million for the first quarter, a decrease from the 43 million earned in the first quarter of 2010. SEC Filed Press Release The company raised its guidance for 2011 to a range between $.67 and $.75 per share. Dean continues to be adversely impacted by commodity prices and pricing pressures in its private label milk business, as the company is being squeezed by grocery stores who use milk as a loss leader to drive store traffic.  I have never been in a grocery store where the milk was anywhere near the front of the store.

This earnings report is discussed at  Reuters and Motley Fool. The market responded favorably to this news on the day of its release, driving both the common stock and bonds up in value.  The common stock increased 11.48% in value on 5/10 to close at $12.24. The guidance for the year makes me more comfortable holding the senior unsecured bonds.

I currently own 3 Dean Foods' senior bonds:

Bought 1 Senior 6.9%  Dean Foods Bond Maturing 10/15/2017 @ 89.48 (December 2010 Post)

BOUGHT 1 Senior 7% Dean Foods Bond Maturing on 6/1/2016 at 93.8 (12/1/2010 Post)

Added 1 Senior 6.9% Dean Foods Bond Maturing 10/15/2017 at 93.5 (4//21/2011 Post)(Averaged UP)

FINRA Information on 2016 Bond

FINRA Information on 2017 Bond

2. Harland Clarke (own senior bond only: Junk Bond Ladder Strategy): At least Harland reported a net profit for the first quarter.  SEC Filed News Release  The problem is that both earnings and revenues are declining by significant sums. For the 1st quarter of 2011, the company reported net income of $23.4 million on revenues of $403.9 million. Compared to the first quarter of 2010, net income declined 27.3% while revenues slipped 6.1%. I did notice a small price decline in the 2015 senior bond after this release.  Harland also filed a  Form 10-Q for the 2011 1st quarter.  The balance sheet shows $107 million in cash and long term debt at $2.192.1 billion or way too much leverage in my judgment.  This debt is discussed at pages 11-13 of the 10-Q.  There is a senior secured debt facility, and $1.729 billion was drawn by the company as of 3/31/2011. That facility matures in 2014.   I own just one senior unsecured bond maturing in 2015 and may add 1 more at some point.  Bought 1 Harland Clarke Senior Bond Maturing 2015

3. Sold 50 of 150 KRBPRE at 25.96 Last Wednesday (see Disclaimer):  This sale was part of my ongoing bond allocation pare.  I am keeping for now the 100 shares of KRBPRE bought in the ROTH IRA. Bought 50 KRBPRE at 24.62 in Roth IRA (6/23/2010 Post)  Added 50 of the TP KRBPRE at 25.19 in Roth IRA (2/17/2011 Post) I sold the shares held in a taxable account which also contains the related security KRBPRD.   Bought 50 KRBPRD @ 25.14 Both of these securities are trust preferred stocks, originally issued by a Delaware Trust controlled by MBNA that was later acquired by BAC. I bought those TPs rather than others issued by BAC since they had a higher yield at the time of purchase.  They do have different ex interest interest dates.  KRBPRE went ex interest on 5/11, the day after my sale. As a Tennessee resident, I do not pay state income tax on a gain from a stock sale, but I would have to pay a 6% tax after exhaustion of a standard deduction on the interest payment made by KRPPRE.  The state tax is applied to most of my interest and dividend payments and is  material to me.  

These TPs were not bought during the Near Depression period, when their prices sunk to below $10. MBNA Corporation Tr originated Pfd Secs Ser E % TOPRS MBNA Corporation 8.125% Trust Preferred Securities Series D (look at 5 year charts). Instead, all of the purchases were made near par value. Under those circumstances, I will manage the position for small profits on the shares after collecting one or more interest payments. I view the upside potential as limited at purchases near par value, and the downside risk is more pronounced-caused  either by new concerns about BAC's credit risk or by interest rate risk.  I would add a third risk: irrational actions by the herd.  My best buy of a BAC TP during the Near Depression was just 50 shares of MJH (a TP wrapped inside a TC) at $7.51, later sold near its $25 par value.  

Also, it is important to keep in mind that BAC TPs will have to be phased out as Tier 1 equity capital.  This may result in the redemption of several of them, particularly the ones with higher yields.  KRBPRE has a 8.1% coupon on a $25 par value. www.sec.gov

Trust Preferred Securities: Links in One Post

4. Sold 2 Alon Refining Krotz Springs Bonds at 107 Last Wednesday (see Disclaimer): I was surprised about how well this junk bond has done since my purchase a few months ago. This sale is simply profit taking and gives me a little more of a green cushion in my junk bond ladder strategy. Given the risks inherent in this strategy, I expect to lose money on some of the bonds and hopefully will offset those losses with some realized gains, achieved by some profitable trades and by capturing the discounts to par value through early redemptions or principal payments at maturity. For these two Alon bonds, I just harvested the gains.

I was not aware of potential flooding until the evening after I sold this bond.  The swollen Mississippi is the culprit. If the Corps of Engineers opens the Morganza Spillway to prevent flooding in New Orleans, the water will then spread to the Atchafalaya River Basin. The opening of this spillway is the subject of this CBS News' story. The Krotz Refinery is located in this basin.  Alon is building a levee to help protect the refinery from flooding. The spillway was opened over the weekend.

I compute the total return from these 2 Alon Refining Krotz Springs bonds as follows:

+151.77 Realized Gain on Bonds
+135 Interest Paid on 4/15
+23.25 Accrued Interest to be Paid by Buyer on Settlement Date
-18 Interest Paid by Me at Settlement to Seller on 11/9/2010 Settlement Date
 Total + $292.02

I discussed earlier the accounting for the accrued interest that I paid to the seller when I purchased these bonds.  Item # 1  Tax Accounting For Bonds Purchased in the Secondary Market-Too Complicated  

5. First Data (own 1 bond: Junk Bond Ladder Strategy):  First Data was taken private in a leveraged buyout and consequently has a horrendous amount of debt. SEC Filed Press Release  Most likely, I will sell my 1 senior subordinated bond before its maturity on 3/31/2016, as I lessen exposure to the riskiest credits in my junk bond ladder strategy.  Generally, there are five bonds issued by First Data available for purchase in the bond market, and the one that I own is junior to all of them.  But it has a 11.25% coupon and I was able to purchase it below par value.  

The market did bump up the prices for those bonds after First Data released its first quarter earnings, and the reasoning is not apparent to me.  The company did report a 6% increase in revenues to $2.5 billion.  The net loss was reported at 217 million, which is not surprising given the interest expense that has to be paid on the debt. The company did generate 108 million in operating cash flow after paying $353 million in interest during the quarter. The company claims to have $1.9 billion in unrestricted liquidity which includes $150 million in cash.  The long term debt is shown at $22.5792 billion as of 3/31/2011.  Bought 1 First Data Senior Sub at 98.75  I am not exactly living dangerously with 1 First Data bond.   

Index Linked CDs/Annuities/CPI/CHINA/EMO/Added 50 VLY at 16.6 and Sold 50 PBIB at 14.7/Added 50 GJD at 17.95 and Sold 50 DDT at 22

1. Indexed Linked CDs: I do not own any certificates of deposit that link interest payments to the performance of an index. In some respects, there are similar to the Citigroup funding principal protected notes that I have purchased recently on the stock exchange with some important differences. The key difference is that the principal protected notes are unsecured obligations of Citigroup and are not covered by FDIC insurance. Certificate of deposits which are linked to an index are covered by FDIC insurance with the usual limitations regarding amounts. I am starting to pay more attention now to the linked certificates of deposit due to the FDIC protection. I found this web site that lists some recent offerings. Structured Investments - Broker-Dealer Offerings It appears that the banks offering these kind of CDs include J.P. Morgan, Wells Fargo and Union Bank. These offerings will need to be studied in more detail.

The first one that I will study in more detail is an offering from Wells Fargo tied to S & P 500. reports.incapnet.com .pdf The minimum deposit is $1000 with integral multiples of 1 thousand. The maturity is 4/30/2015. No payments are made prior to maturity. At maturity, a purchaser will receive the original deposit amount plus an amount based on the performance of the S & P 500 from its starting value. The pricing date will be 4/23/2010. There are some complicated tax issues as I would expect which would cause me to hold this type of security only in a retirement account.

 This product is only distributed through brokers who receive a placement fee which is probably a kill provision for me. Another provision that I do not like is the knockout provision, which is similar to the reversion provision in the Citigroup Funding principal protected notes except the reversion is activated if the "Threshold Amount" is exceeded as of the maturity date, which in this case may be somewhere between a 55% to 65% increase (to be set on the Pricing Date) from the starting value. This is another unappealing feature. If you bought one of these and had a 68% gain in the S & P from the starting date to the closing date five years later, you do not receive any of that increase. Instead you receive what is called a "rebate" amount which is 10% of the Deposit Amount (call it a 2% per year guarantee)

I just glanced at this prospectus, long enough to decide that it is not for me. There could easily be more relevant and material details, replete with important ifs, ands and buts.

The reason for looking into these instruments was a SmartMoney article mentioned them as a safe alternative for retirees (page 52 May 2010 issue received yesterday here at HQ). An older article from this magazine can be found at Boost Your Returns: CDs at SmartMoney.com Some other articles on this subject matter are from Investopedia and this recent segment on the Nightly Business Report | PBS.

2. Annuities: Eventually, when interest rates move back up, I will buy some fixed income annuities. The current issue of SmartMoney.com has rankings for the providers. Christine Benz also wrote an article recently for Morningstar which highlights the problem that the current low interest rate environment has on the future income stream from fixed payment annuities purchased now. I was aware of that issue already and am in no hurry to to buy one for that reason along with my current age. /Life Annuities/ (see also Exploring Types Of Fixed Annuities) And, it goes without saying that 16 year old Stock Studs have no need for such an OG investment anyhow.

3. CPI: The Labor department reported another tame inflation number. CPI rose .1% on a seasonally adjusted basis in March: Consumer Price Index But, the index has now risen 2.3% over a twelve month period prior to the seasonal adjustment.

I will generally calculate how this new number will impact the monthly interest rate for the CPI floaters that I own-OSM and PFK.

I can now calculate the monthly interest payment for July 2010:

March 2010 Non-Seasonal 217.631 (source: http://research.stlouisfed.org/fred2/data/CPIAUCNS.txt)

March 2009 Non-Seasonal 212.709

Difference=4.922

Divided by 212.709=.02314

Add the Spread of .02 for OSM=.04314

Multiply .04314 x. $25=$1.0785

Divided by 30/365=$.0886

Previously I had been doing the last calculation by using the twelve month divisor which was an incorrect and easier way to do the calculation. Sallie Mae will use the actual number of days in the monthly payment period divided by the constant 365 day year. OG just said that he was waiting on pins and needles for the LB to figure out the correct divisor.

By performing the same calculation for June with the correct divisor, this would change my previous estimation of the June OSM payment from $.0863 (CPI) to $.088 ($.087967), since that payment period has 31 days in it rather than 30. The May 2010 OSM payment, which will have 30 days in the payment period, will be $.095.

The PFK calculation is the same except the spread is .024%.

4. China: China reported that its GDP grew by 11.9% in the first quarter of 2010. Property prices are in a parabolic rise, increasing 11.7% in March, year over year, in China's seventy largest cities, according to a release by China's National Bureau of Statistics. Further Expanding Momentum of China's Economic Recovery in the First Quarter of 2010 China property (Article in the Sydney Morning Herald)

5. EMO-Entergy Mississippi First Mortgage Bond (no longer owned): After Entergy Louisiana called its 7.6% coupon first mortgage bond ( EHL Redemption), I sold my position in EMO, a 7.2% coupon first mortgage bond from Entergy Mississippi. I suspected that it would only be a question of time before EMO was called too. SOLD EMO AT 25.8/ This has now happened. I checked yesterday the SEC filings, and Energy Mississippi just registered a longer term first mortgage bond with a lower coupon than EMO. The new bond matures in 2040 and has a 6.2% coupon. Preliminary Prospectus Supplement I will start to track the prices of this bond, waiting for an opportunity to buy it at a much lower than its $25 par value. A long term bond maturing in 30 years with a less than generous coupon will not fare well when interest rates start to accelerate. I did well with my investments in EMO an EHL, and will be happy to buy their new mortgage bonds when it makes sense which would require a significant decline in price before I would give it any consideration. I believe EHL is scheduled for redemption on 4/19/2010. The new first mortgage bond which replaced EHL (a 7.6% coupon & a 2032 maturity) is ELB with a 6% coupon and a 2040 maturity. www.sec.gov

The Fed's long Jihad against savers is providing ample opportunities for companies to refinance by issuing new debt at a lower yield and a longer maturity.

6. Philadelphia Region Manufacturing Survey: The Philly Fed reported its business outlook survey for manufacturing improved to 20.2 in April from 18.9 in March (Zero is the demarcation line in this index). April 2010 Business Outlook Survey - Philadelphia Fed The new order index increased by 5 points.

7. Interactive Map of Bank Failures 2008-2010: This article has an interactive map showing the bank failures by state: TheStreet.com Tennessee has none as does Montana. As you would expect, Georgia, Nevada, Florida and California lead the pack in failures. In California, the FDIC has incurred 19.3 billion dollars cleaning up the messes in that state alone.

8. Marathon Oil (MRO)(owned): Credit Suisse initiated coverage on MRO with an outperform rating and a $41 price target.

9. Sold 50 Porter Bancorp (PBIB) at $14.7 and Bought 50 Valley National Bancorp (VLY) at $16.6 (Regional Bank Stocks strategy-Category 2)(See Disclaimer): I am just more comfortable with VLY than PBIB after the late Friday warning Porter gave last February, Item # 6 PBIB. I bought PBIB at 14.1, This brings the realized gains in the regional bank strategy to $291 in 2010, mostly from the disposition of Wilmington Trust. The unrealized gains in this basket are close to 7 grand. I will update the table in my next post. I intend to add a new name tomorrow or next week, a small bank expanding in the Carolina region.

The add on VLY was an average up from my last 50 share purchase at $15.06. I have nothing to add to that post form mid-March, except to note VLY just declared a 5% stock dividend, which will give me 105 shares when I receive the stock dividend on 5/21. Five Percent Stock Dividend

10. Sold 50 DDT at $22 and Added 50 GJD at $17.95 (see Disclaimer): I thought that the Dillard's Trust Preferred was mispriced in relation to the Sprint Capital senior bond contained in the TC GJD. This is what I would call a minor capital allocation adjustment.

DDT is a Trust Preferred, which means that it is in effect a junior bond, with a maturity on 8/1/2038. The coupon is 7.5% with a $25 par value. It just went ex interest for its quarterly interest payment, and was yielding at the $22 price about 8.5%. I had just bought DDT at 18.42 last February. The interest payable by a junior bond can be deferred under certain circumstances.

GJD is a Trust Certificate containing a senior bond from Sprint Capital that matures in 2028, about 10 years sooner than the junior bond in the DDT Trust Preferred. The current yield on GJD at the $17.95 price is about 9% or 1/2% higher in current yield. This is an average up from my last purchase at 17.49. GJD has a 6.5% coupon, a $25 par value, and matures on 11/15/2028: www.sec.gov

Since GJD matures sooner and is selling at a deeper discount to DDT, its yield to maturity would be better also. The yield to maturity calculations, which includes both the current yield and yield generated by receiving a profit at maturity on the shares, can be done with a calculator at Morningstar.

DDT Matures 8/1/2038 Coupon 7.5% Price $22= YTM of 8.81%

GJD Matures 11/15/2028 Coupon 6.5% Price $17.95=YTM of 10.26%

Both of these bonds are rated junk. According to QuantumOnline.com, the Sprint TC is rated Ba2 by Moody's and BB by S & P. I will only do nibbles in junk bonds due to their enhanced risk profile. Quantum has the DDT rated lower at Caa1 by Moody's and CCC- by S & P. So when I am doing my nibbling, I will go with the higher rated senior bond versus the deferrable junior bond, particularly when the senior obligation pays more currently, matures sooner, and has an even higher YTM.

One last point needs to be made. Individuals dominate the trading in these type of securities. Judging from my view of their trading habits, few of them appear to take into consideration the yield at their purchase price when comparing functionally equivalent securities. Instead, they focus on the coupon. There are four Trust Certificates which contain the same senior Sprint Capital bond. The TCs have different coupons, but are otherwise equivalent.

PYG Stock Quote - Pplus Tr SPR-1 TR CTF28

JZK Stock Quote - Corporate Backed Tr Ctfs 03-17SPRINT

GJD Stock Quote - Strats Tr For Sprint Secs STRATS A1 6.5%

Cobalts Tr For Sprint Cap Nt COBALS 8.125%, DHM Stock Quote

DHM-8.125% coupon -At a $22.45 Price= Current Yield of 9.09%

GJD-6.5% coupon-At a $17.95 Price= Current Yield of 9.05%

PYG-7% coupon-At a $19.71 Price = Current Yield of 8.88%

JZK- 7% coupon-At a $20.30 Price= Current Yield of 8.62%

So, when comparing these TCs, I can eliminate PYG and JZK as possibilities right away.

This leaves DHM and GJD. DHM fell 60 cents today. If I had to explain it, it became mispriced in relation to GJD. Even after falling 60 cents, I would view GJD still to be the better buy than DHM today due to the higher YTM and greater capital gains potential to its par value of $25. The GJD YTM is 10.26% whereas DHM has a YTM of 9.72%. While DHM has a slight current yield advantage, this does not offset the much larger advantage of GJD due to its larger discount to par value. For a junk rated security, I will give more weight to current yield than YTM, but I see no reason to go with the much lower YTM when the current yields are close.

Bought 50 DDT at 18.42/New Long-Short Strategy: Bought 50 SDS at 34.75 and 50 PIE at 14.04

Brian Westbury, Chief Economist at FirstTrust, keeps track of cash inflation, which is based on actual transactions, and excludes the make believe number of what the government estimates a homeowner would charge himself for rent. The cash inflation number is now up 3.4% over the past year. ftportfolios.com 2010/2/19/_cpi

1. Bought 50 DDT at $18.42 Friday (See Disclaimer): At a $18.42 price, this is a very marginal buy. DDT is a trust preferred issued by Dillard's Capital Trust I and guaranteed as provided in the prospectus by Dillard's (DDS), a department store chain. This is a typical TP. The underlying security in the Delaware Trust is a deferrable junior bond from Dillard's. Dillard's Capital Trust sells preferred trust shares to the public and uses the proceeds to buy the junior bond. The bond matures on 8/1/2038, so there is a lot of interest rate risk with such a long term bond. Rising Rates and Your Investments There is also significant credit risk. The security is rated CCC- by S & P according to the QuantumOnline.com site. So that is deep into junk which explains my timid purchase of just 50 shares. The TP's coupon is 7.5% with a a $25 par value. The yield at a total cost of $18.42 would be 10.18% paid quarterly. This is a link to the prospectus: www.sec.gov. Interest is deferrable for up to 5 years, which is typical for a junior bond, and any deferred payment accumulates with interest. There is a stopper provision activated by payment on a junior security. Dillards is currently paying a small dividend on its common stock. DDS Stock Quote - Dillard Department Stores Inc

Dillard's was profitable during the Q/E 10/09, earning 11 cents per share. www.sec.gov The current consensus is for 80 cents per share for its fiscal year ending in January 2010 and 74 cents for F/Y 2011. DDS: Analyst Estimates for Dillard's Inc.

I bought this security for the first time at $5.82 in March 2009. buy 50 of ddt I was not exactly comfortable buying it at that time, and maybe a tad more comfortable now. I do have a tendency to look down before gazing skyward.

2. Long-Double Short Strategy-Bought 50 PIE at $14.04 and 30 of SDS at 34.75 (see Disclaimer): After the big run up in stocks since March, and what I perceive to be a dicey future, I have decided to initiate new positions only with some kind of hedge bought at the same time. This will be an imperfect process at best. I am running multiple strategies at the same time, and this will just be one layered on top of everything else.

SDS is the double short ETF for the S & P 500. I will add shares in stages based on the movement in the VIX. The VIX crossed below 20 on Friday, and that was my signal to start the SDS hedge. More SDS will be added when and if the the VIX closes below 19, and more on a close below 18. This is a modification of the SDS swing trade previously used successfully after the commencement of the Unstable Vix Pattern in August 2007. Trading and Asset Allocation in Stable and Unstable VIX Pattern If the VIX shoots back over 25 again, then the first position taken will be sold and the remainder on a close above 28. And, if the VIX meanders below 20 for 30 consecutive trading days, I will sell the entire SDS position, which is being used as a hedge and not as a bet. Most likely, under those later circumstances, the transaction would be at a loss. And SDS and other double short ETFs will be entirely a partial hedge just for positions added so far in 2010 or to be added, and will not be anywhere near sufficient to hedge the large number of stock positions held at the start of 2010. If I do not implement this kind of hedging strategy now, I will not be able to increase my stock positions in the coming weeks.

I added 50 shares of PIE to my existing position. DWA Emerging Markets Technical Leaders is an ETF from Powershares. This is a link to its existing holdings: InvescoPowerShares.com - PIE - DWA Emerging Markets Technical Leaders Portfolio Holdings This ETF includes generally around 100 companies from emerging markets whose stocks are demonstrating relative strength and are not listed for trading on a U.S. stock exchange. And that last point means that larger well known companies are not included in this ETF. The NAV at Friday's close on 2/18/2010 was $14.17.

I bought 50 shares of PIE in October 2008 at $10.01: Emerging Markets

A way to play large cap names in the emerging market space is via another Powershares product called BLDRS Emerging Markets 50 ADR Index Fund - ADRE. That ETF has an expense ratio of .3% and contains 50 companies from emerging markets, owning their ADRs. This would cover the companies known by many individual investors: Holdings

A more comprehensive and low cost ETF is VWO from Vanguard: Vanguard - Vanguard Emerging Markets ETF Overview VWO has a .27% expense ratio and has 810 holdings currently: Vanguard - Fund Holdings

Lastly, I will also consider buying an ETF from WisdomTree: WisdomTree Emerging Markets Equity Income Fund (DEM) and from iShares MSCI Emerging Markets Index Fund (EEM):

The emerging markets have in recent years been highly positively correlated with U.S. stocks with a much higher beta. Seeking Alpha This paper written by William Corker has some historical correlation data: spwfe.fpanet.org:10005/.pdf ( and see instability & volatility in asset correlations & Emerging Market Currencies and Bonds as Non-Correlated Asset Classes).

FED Buying up to 300 Billion in Treasuries/Buy 50 of DDT/Nibbled at ST JOE/Sold a Couple of International Lease Bonds/Oracle

1. Fed Buying 300 Billion in Treasury Paper: In its statement released today, the Federal Reserve removed a sentence from its prior statement that it expected a recovery to start later this year. 

The Fed also said that it would buy up to 300 billion in  treasury paper which caused a major rally in the treasury market This statement caused a major spike down in my hedge positions in TBT and PST, which is okay since I am looking for opportunities to add to them as I expand my corporate bond positions.   

The Fed's action also knocked the dollar for a loop,  which put some upward momentum for a change in two of my foreign bond ETFs, BWX and WIP and my only foreign currency holding FXA.

2.  Oracle: I own Oracle, as a recent purchase, and was shocked that it declared a dividend.

Under the circumstances, and relatively speaking, I thought Oracle's earnings report was okay. 

3. International Lease Bonds: I reduced my exposure to International Lease Finance bonds by selling two bonds.  

4. Dillards Junior Note DDT: I also added a very speculative long bond position in Dillards (DDS) department store by buying 50 shares of DDT at 5.82. This is a junior note with a 7.5% coupon and a maturity in 2038. Interest is paid quarterly.  Par value is $25. 

The current yield at my cost is around 32%.

Technically, it is similar to a typical bank Trust Preferred. The issuer is Dillard's Capital and Dillards guarantees the note.  Interest can be deferred for up to five years but payments are cumulative. Dillards is still paying a cash common stock dividend. 

I will not buy more of DDT.  

This purchase is a play on a potential recovery in the economy before something very negative happens to this retailer.  

If a retailer bankrupts, I would not expect much recovery as a holder of a junior debt instrument but at a cost of $5.82 anything would be okay. This security was originally issued back in 1998. Fitch rates it as junk with a B- rating. 

The prospectus can be found at this link: Prospectus 

Before buying this bond, I read the latest quarterly earnings report filed by Dillards and a few analyst reports. Dillard's, Inc. Reports Fourth Quarter and Fiscal Year Results: Financial News - Yahoo! Finance Dillard's posts $149M 4Q loss: Financial News - Yahoo! Finance UPDATE 1-Dillard's posts surprise loss, to close 5 stores | Markets | Markets News | ReutersS & P has it rated 3 stars.  Comparable retail store figures were down double digits in recent monthly reports. 

5. Bond Buying & Frank Sinatra Music:  As I have mentioned, when I was a young man, say three years ago, I believed that bonds were for old geezers, not a young stud like myself.  But, at about the time 

I started listening to Frank Sinatra for the first time in my life a couple of years ago,  I underwent a change in attitude  and started to add bonds to my portfolio.   

So, at best, I am a novice bond investor, at the beginning of my learning curve.   

I am not saying that everyone who starts to listen to Frank will become a bond buyer, but I can only speak for myself.

6.  Buy of ST Joe at $15.69: I also did a nibble by buying St. Joe (JOE) at 15.69.  This one is purely an asset play and has to be characterized at the start as a long term hold.  For this one, I am talking 5 years as a minimum holding period.   

My last sale was about this time last year in the mid 40s somewhere.  Since then the stock has caved in a big way.  

St Joe owns about 600,000 acres of land in Florida and claims that around 426,000 acres are within 15 miles of the coast in the northwest Florida Panhandle. 

It is the largest land holder in Florida.  Their land near the coast would be worth 4.3 billion if one assigned a value of 10 grand an acre. The inland land of 182,000 acres might be valued at 2 grand an acre. This would bring the land value to about $50 to $55 a share. 

The company owns about 75000 acres around Panama City, in what it calls its West Bay sector. A new airport is being built in Panama City and I believe that St Joe donated the land for it.   

I also like the balance sheet. JOE: Balance Sheet for ST JOE CO (THE) - Yahoo! Finance

Due to the shutdown in Florida real estate over the past year or so, JOE has struggled to sell much of anything.  The unlocked land value will have to be realized over time and will be dependent on a recovery in real estate.  

These estimates on land values are not mine but gleamed from several analyst reports.  Ten grand might look dirt cheap for parcels near the coast in ten to fifteen years, or maybe not. 

7. Land Rich Companies-Tejon, St Joe, Texas Pacific Land and Alexander & Baldwin:  I have been familiar with land rich companies like Tejon Ranch, St. Joe, Alexander & Baldwin, Texas Pacific Land Trust and some others for a very long time.  I did review early today, before making my purchase, reports from Morningstar, S & P and Value Line, and looked at the recent earnings release again.The St. Joe Company Reports Fourth Quarter and Full Year 2008 Financial Results: Financial News - Yahoo! Finance  The St. Joe Company., Q4 2008 Earnings Call Transcript -- Seeking Alpha So, I have now inched my way back into Tejon Ranch and St. Joe. 

8. Liddy and AIG: I understand why Liddy does not want to make the names of those receiving bonuses public. MarketWatch  

I doubt that the real reason is the one expressed by him in his testimony.  

I strongly believe that the public's right to know far outweighs the extremely remote possibility of some physical harm coming to one of them.  

A few people may have vented their anger in an inappropriate way.    

Personally, I believe in shining a light on all of the Master of Disaster at AIG's Financial Product Unit. For all practical purposes now, AIG is a public company and  should be subject to the same disclosure rules on compensation as any public enterprise.  

DISCLAIMER:

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.