Sold Some IRR/ VZ/Another SeekingAlpha Comment

1. Verizon (owned): Excluding items, Verizon earned 63 cents per share in the 2nd quarter, one cent better than the consensus estimate. On that basis, the earnings declined from 67 cents in the year ago quarter. GAAP earning were 52 cents. Sales rose 1.9% excluding the Alltel acquisition. VZ added 1.1 million customers to its wireless operations, as mentioned in a post last week, and 300,000 customers for its television service (FIOS). VZ now has 2.5 million FIOS TV customers.

2. Posted Comment to SeekingAlpha Article: I felt the need to post another comment to an article by Neal George at Seeking Alpha. Just based on the comment made prior to mine, the typical individual investor may easily be confused by Neal's use of the word "preferred", understanding it to mean "equity" or traditional preferred rather than Trust Preferred.

3. Sold Some IRR Shares (see disclaimer): One of my readers is interested in closed end funds. I own 30 of them. This morning I sold all of my shares of IRR in my retirement account (109+), a closed end fund investing in energy stocks. The bid/ask spread was narrow so I entered at market order which was filled at $16.65. The quarterly dividend was just paid. Those shares were included in a ROTH conversion at a lower price. I am keeping the 200 shares owned in the taxable account. I also own shares in two other natural resource closed end funds, BCF and GCS, and BCF is owned in both retirement and taxable accounts. I recently discussed these closed end funds: Closed End Funds: Energy and Natural Resources Funds

The sale of IRR today is also part of ongoing re-allocation in the retirement accounts to emphasize bonds.

I also recently bought at an ETF, IGE, containing North American natural resource stocks in a taxable account:

BOUGHT 100 IGE/Forbes Makes Case for Bonds Over Stocks/PFK Retrospective/S & P Economist: No Inflation Threat for Five Years at Least

As of Friday's close, IRR was selling at a slight premium to its asset value. ING Risk Managed Natural Resources Fund - Overview And it was rallying about 3% early this morning. Generally I would prefer buying an Exchange Traded Fund (ETF) at or very close to NAV rather than a CEF (closed end fund) selling at a premium to NAV. Also, as a couple of general points, the ETF is lower cost than a CEF, and will outperform over time a comparable CEF. So, I would generally expect XLE to outperform a CEF like PEO which is a low cost CEF investing in energy stocks (the expense ratio of PEO is still higher than XLE).

My general approach for CEFs is to buy them at a large discount to Net Asset Value, and then sell them when that discount narrows substantially or when the price moves to a NAV premium. The shares of IRR in the taxable account are being kept for now, but they are on my trading chopping block.

I view my decision to hold CEFs in 2008 to be easily the biggest mistake that I have made in a very long time:

Buy High & Sell Low /Retrospective on the Good & Bad

CLOSED END INVESTMENT COMPANIES: Hopefully Lessons Learned and To be Applied

How to Find Stocks Masquerading as Lottery Tickets/Bary's Columns In this Week's Barrons

1. How Do I Find Lottery Tickets: The lottery ticket strategy is explained in a previous Gateway Post. LOTTERY TICKET PURCHASES: LINKS IN ONE POST This post is simply intended to explain the processes used to find and to evaluate potential purchases in this immaterial part of my investment portfolio.

The best way for me to find potential selections is to conduct screens with just a few key criteria. The most important search terms are price to sales and price to book of less than 1. A firm like National Dentex (NADX) was found just based on those two criteria. I then might add one or more of the following to the screen: stock price of less than $5 or $10, cash greater than $2 per share, and/or no debt. I then review the results and pick a few that may interest me after a brief amount of research. I then conduct more research on the few remaining selections to learn more about the business, why the share price has been smashed to smithereens (sort of a requirement for a lottery ticket), whether the fall in the stock's price was more likely due to general macro factors as opposed to the something specific to the firm, and whether the firm is likely to survive long enough to turn itself around. Too much debt will eliminate some companies from further consideration.

Some firms are found using the stock screen at Morningstar. I am a subscriber and this service is not available to non-subscribers. Morningstar: Premium Stock Screener One of the criteria added to that screen is a large discount from Morningstar's fair value estimate, using at least a 50% discount of current price to estimated fair value (use under "Valuation Measures", "Price/Fair Value). This morning I used that screen with 2 criteria, price less than .6 of Fair Value and Price to Sales of less than 1, and 70 stocks met both of those criteria. That is how I found Digirad (DRAD) when it was selling at $1.24. I then added another criteria of price to book of less than 1 and that narrowed it down further to just 35 companies. That is a manageable number for me to examine. On that list I currently own only one as a LT, RF, and I sold another Solta. But having done this exercise for purposes of writing this post, I am going to look at the list closer today. I am familiar with most of these companies to varying degrees except I have never heard of Goldsmith International (already excluded just on its existing debt levels). The vast majority of these companies, on further inspection, will not even make the cut to placement on the YF monitor list, eliminated for one reason or another.

Occasionally I might find a company suitable for more than just a LT purchase. If I wanted to limit the screen to only potential LT purchases, I would add the criteria of last price below $10 (found under "risk and return data", then "price and market data", then scroll to under 2. "last close", then in 3. use the less than symbol, then in 4 use enter number value, then I use less than 10). This knocked it down to LT size orders with just 24 companies to examine. One of those was prior to today being considered for an LT purchase. Which one?

The stock screener at Yahoo! Finance allows me to add criteria such as cash per share coupled with no debt.

Some of the bank stocks bought as lottery tickets were identified using the Morningstar screen criteria of discount to fair value, as potential candidates for purchase in the LT category, but I was already familiar with those firms, such as Wilmington Trust and EWBC. I had never heard of Digirad before its name pop up on a screen. For the bank stocks, their addition has more to do with my memories of what happened after the last near death experience for banks back in 1990 and 1991 and the ensuing bull market in financial stocks.

The firms that pass the initial evaluation are placed in a separate portfolio at Yahoo Finance. This enables me to review the prices and news with ease. Prior to purchase, I will at a minimum read the latest 10-Q filing and important news for the past six months or so. If there is an analyst report on the company, I will read it. Sometimes, there is nothing of consequence available from brokerage firms about the company, and that will not deter me. I also mentally frame a range of potential buy targets, and an idea of where I might sell the stock, before doing any actual buying.

Some companies which have been bought in this category are companies that I have owned in the past and generally follow virtually all of the time. Some event caused me to sell the position. And, then, I notice the price has fallen to a level where I am comfortable buying it back, but not in a significant way due to significant concerns about its prospects. CB Richard Ellis fell into that category. I had sold the stock at much higher levels, trading it on two prior occasions, first selling it at around 38 and then selling at around 23 in 2007. Both trades were profitable, but then I decided to stay away. CB Richard Ellis My next entry point was as a lottery ticket purchase at $3.77 in December 2008 (see last link) and at $2.39 in March 2009 ( SOLD NADX IN IRA/ Bought Lottery Ticket in CBG at 2.39). Those last shares were sold last Friday at $9.73. SOLD 1/2 CBG

Since I am familiar with a large number of companies, including many small cap names, with a monitor list of about 200 small cap names, I am aware of some companies, successfully traded for a profit in better times, that have had something go wrong since my last sale. The stock was not originally a purchase in the lottery ticket category but as one of my small cap purchases. Readers of this post know that I will range everywhere in making security selections. An example of this kind of stock would be Sunopta (STKL) where I had around a $800 profit in an earlier transaction and then the company ran into some serious problems. As a result of those issues, I would no longer devote much capital to it, so STKL was put in the lottery ticket category where my maximum investment is currently $300 per stock. I bought a 100 shares at $1.65 in December 2008, after selling more shares at around $15 in 11/2007. Buy of Sunopta: Highly Speculative This is a constant source of lottery tickets. In my mind's eye, I am already playing with the house's money and do not want to bet more than my previous gain on a second try. For STKL, I was not willing to commit more than 25% of my earlier winnings.

Some stocks are found at Joel Greenblatt's site (registration required, free site): www.magicformulainvesting.com, and his book is a worthwhile read-"The Little Book That Beats the Market". I found an interesting one there this afternoon with the 50 million market cap, 50 company screen.

Some selections are traded frequently to lower my cost basis, using FIFO accounting. My total exposure to all of the lottery tickets is never material to me. That allows me to have some fun with this activity since I do not have to be responsible, but I do not want to be stupid either which means RB is still controlled with the LB's iron fist in a velvet glove. If I think that I made a mistake, then I will sell for a loss, which will generally be small. The gains have recently been worthwhile. An example was the purchase of just 50 NADX in a Roth IRA at $1.27, which was quickly sold at $4, and on the same day 50 of CBG was bought at $2.39 and sold Friday at $9.73. So, that was a successful turn of only $60 or dollars into more than $500. I am not good at mental math, need to count numbers using my fingers, a slight exaggeration. In fact, I decided to attend Tulane in 1969, because that institution allowed me to substitute philosophy for calculus. Maybe New Orleans was tempting to a 17 year old too.

2. Andrew Bary: Andrew has yet to convince me of the merits of buying Citigroup, and his last effort in this week's Barrons failed to move me from my disdain. I was recently somewhat critical of his effort to convince small investors to buy Citigroup equity preferred as an arbitrage play to buy the common at less of a price.

Bary's column about stocks having more upside this year, based on the current consensus forecast of 2010 earning for the S & P 500 at $75, did relieve at least for now the queasy feeling that I was developing last week. Risk Reduction Mode this Week-That Queasy Feeling I am still wondering where Jim Bianco got his $52 number for 2010 as being from "most analysts". (See item # 1: Goldman Sachs Upgrades Forecast for S & P 500 Earnings)

3. Roubini and Schwartz Columns in NYT on Whether or Not Obama Should Appoint Bernanke for Another Term: If I am able to be coherent at 92, I will thank the Lord for my good fortune. Anna Jacobson Schwartz (born November 11, 1915) gave in an opinion column in the Sunday NYTimes her reasons why Bernanke should not be reappointed as Fed Chairmen. I would agree with her that Bernanke did not see the credit meltdown coming, and he may be underestimating now the potential inflationary impact of Fed money creation. I also agree with Roubini that, once the Fed Chairman woke up to the Great Depression II on the near horizon, Bernanke did take a number of steps that averted the implosion of the financial system. You will never receive much, if any, credit for preventing something from happening. (A politician being fiscally responsible will not be given much credit now for saying no to every new expenditure that the Democratic Party wishes to make and for starting to take now the necessary steps to fund the 100 trillion or so of unfunded liabilities from existing programs).

What is a Birther?/CIT Bonds/More on SIMG & DRAD/Using the Military to Arrest and Imprison U.S. Citizens Without A Trial-Viewed as Conservative?

1. SIMG and DRAD: I recently discussed the earnings reports from these two lottery ticket purchases, and just wanted to add a few comments. The SIMG results for the second quarter did miss the consensus revenue forecast, and the guidance given by the company was below the consensus for the 3rd and 4th quarters. (item # 3: Earnings Reports: SIMG) It would be my opinion that its current market cap of the company at a $2.4 price, close to the net cash on its balance sheet, already reflects the Street's poor opinion of SIMG, its prospects, and a lot of bad news. As shown at YF, the analysts consensus revenue was 49.33 million and 50.28 million for the 3rd & 4th quarters, respectively. The company has guided to 44 to 46 million for both quarters.

The news on DRAD was far more positive. (see discussion at # 2 Digirad/). I would just add that the profit for the second quarter was driven by cost reductions. Revenues for the quarter did decline to 18.6 million from 19.9 million in the 2008 2nd quarter. The firm also posted a positive operating margin of 3.4, from a negative 7.1%. Over the past two trading days the stock has far exceeded it average trading volume of 66 thousand, hitting 494,257 on Friday. The percentage gain for those days was over 50%, moving from $1.22 close on Wednesday to a $1.89 price at the Friday close. This rise means the market cap has expanded to about 36 million which is more than the cash on the balance sheet. When I bought the stock as a Lottery Ticket in early June, the price was less than DRAD's cash on hand, and the firm's stocks was selling at a fraction of its book value and at a very low price to sales. Bought Lottery Ticket 100 DRAD I mentioned in that post that I would be happy for a double in five years. Maybe I will be rewarded with a double sooner. Though, I may allow my magic coin to make the hold or sell decision when and if it crosses $2. I certainly did better with this lottery ticket purchase than the $20 scratch off ticket that I bought today.

2. CIT Bonds: Most likely, I am going to take a hit on my 2 CIT bonds, the only question is how much. I discovered over the weekend that none of the 3 billion loan recently made to CIT at 13% or so interest could be used for the tender of the 1 billion in bonds maturing in August, unless 90% of the bonds are tendered in response to that offer. If that does not happen, then the odds of a bankruptcy filing in August would be the likely result, unless CIT could round up the money to pay off that maturing bond from other sources.

3. Using the Military to Arrest U.S. Citizens on U.S. Soil: Some may remember the Lackawanna Six, a group of six American citizens who were arrested by the FBI in Buffalo and later convicted after a jury trial of providing support to al-Qaeda. Cheney and W were not fans of jury trials, and all of that Anglo-Saxon non-sense which started with the Magna Carta, better just lock them up and throw away the key. The NYTimes.com has a story in its Saturday edition that Cheney, and the really scary Cheney acolyte in training, David Addington, wanted to use the U.S. military to arrest these U.S. citizens on U.S. soil, to incarcerate them indefinitely without a trial, in the same manner as they did with Jose Padilla. Bush and Cheney were relying on the legal opinion of John Yoo, who was willing to provide Cheney a legal opinion supporting the expansion of Presidential powers to enable such actions. I have maintained previously that Yoo's opinion would allow the President to line up citizens and fill them full of lead. There are always people who will be willing to give someone in power that kind of opinion. The only question is whether the President wants to enable that person, place them in a position in the Justice Department to render the desired opinion, and then rely on that opinion to justify virtually any action desired by the President. Yoo is what Bush and Cheney, and many in the GOP Tribe, call a conservative legal scholar. True conservatives, rather than those masquerading as such, particularly those with strong totalitarian tendencies and little if any regard for the Bill of Rights, would find the mere discussion of what Cheney wanted to do to be appalling. Torture and the Imperial Presidency: Why are those Conservative Values? NYT: Torture approved at the highest level/ Bush and Cheney did implement in other instances Yoo's tortured version of a constitutional Imperial Presidency by sanctioning the use of torture and other actions later struck down as unconstitutional by the Supreme Court. My point is simple, a John Yoo can always be found to provide cover to unrestrained exercises of executive power over the lives of citizens, in a manner inconsistent with the clear spirit and meaning of the Constitution. So, this will happen again, and next time they may not be anyone like the FBI Director Mueller to put the brakes on someone like a Cheney, Bush or Addington.

4. "Birthers": Birthers are the names given to those who are convinced that Obama is not a U.S. citizen. Egged on by their ringmaster, Clown-In-Chief, Rush Limbaugh and CNN's Rush imitator, Lou Dobbs, these individuals do not care that numerous independent third parties have examined Obama's birth certificate from Hawaii, embossed seal and all, and found it to be authentic, as discussed in this linked article in the NYT. I previously mentioned that representatives from the non-partican FactCheck.org were among those who authenticated the birth certificate.More Foolishness from the GOP in the Volunteer State/Buy FRPRK/ GLEN CASADA & OBAMA/ Ideologues Rarely See What is in Front of Them/ True Believers could care less about facts. Once a belief is formed without regard to any accurate information, any fact inconsistent with that belief is false, just that simple, and is being spread to the populace by the left wing conspiracy implemented by the mainstream media to deceive the public. This is a YouTube Video showing a congregation of the TBs confronting Rep. Mike Castle from Delaware who had the audacity to claim Obama was a U.S. citizen, rather than a citizen of Kenya. This is worth a view: YouTube - Mike Castle confronted over Obama's birth certificate

This is a link to Jon Stewart's take on the Berthers: Jon Stewart (this is a link to the Huffington Post that has the Stewart video, just need to click the arrow to start it)

Having said all of that, I wonder what worries me most. The TBs taking power again with someone like Sarah as Commander in Chief. Or, is it better to have an intelligent leader from the Democratic party who is intent on passing a trillion dollar new social program (probably twice that amount over just the next 10 years) at a time when nothing has been done to shore up the medicare and social security system for the baby boomers now starting to retire, and at a time when the nation will be running yearly budget deficits greater than the total U.S. debt from 1776 to 1980? It is just madness. And the Democrat health plan is being sold as a "cost saver" which is a hoot.

Almost 45 million Americans are now receiving Medicare benefits. This is about to accelerate big time. The trustees for Medicare currently estimate that the fund will be exhausted by 2017. http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2009.pdf

(see the chart a p. 213). This forecast of when the Medicare fund will be depleted keeps moving closer when a new forecast is made. It is estimated that Social Security will run out of money in 2037: Medicare Depleted By 2017 : NPR

SLM-POSSIBLE DOWNGRADE IN DEBT/Bought 50 KRH in IRA/Sold Google/Sold 50 FRPRJ in IRA/ Risk Reduction Mode this Week-That Queasy Feeling

1. Possible S&P Downgrade of SLM debt: I currently own 200 shares of OSM, a debt issue from SLM, and those shares slid today on news that S & P may cut its ratings on Sallie Mae's debt, based on what S & P views as the increasing likelihood that SLM will soon not be able to generate federally guaranteed student loans. I view that prospect as close to a certainty. A House Committee recently passed a bill that would eliminate the federal guarantee of student loans originated by private lenders by June 2010. Sallie is currently rated investment grade by S & P at BBB-, so I would anticipate a possible downgrade to junk which Moody's has already done. Market While I do not want to downplay my concerns about SLM's prospects, and I am certainly concerned about being paid par value at maturity, there are some positive aspects to the Sallie story including the run-off of existing federally guarantee loans, and revenues from servicing the government's loans. Another issue involves a contract which may be awarded relating to the origination of government student loans. I discussed these issues in prior posts: SLM News Sallie Mae Upgrade Cramer & Sallie Mae:/ OBAMA SALLIE MAE & MY HOLDING OSM

2. Bought 50 KRH in ROTH (SEE DISCLAIMER): I decided to skip the auction for the 20 year TIP on Monday, and will instead focus on nibbling on some bonds. I raised some capital this morning by selling CBG after a huge run up and another non-dividend paying stock, Tejon Ranch (TRC). I bought 50 KRH at $18.62. This Trust Certificate contains the same underlying bond as my earlier buy of PKM in a taxable account. Bought 150 TC PKM The only material difference is that PKM has a 8% coupon and KRH has a 7.75%. This does not matter. For functionally equivalent securities, with an identical maturity date and originating from the same firm, the only relevant consideration is the yield to maturity at the prices those securities can be purchased at the moment a decision is made to buy one of them. KRH provided a slightly higher yield and more capital gains potential this afternoon, and it had a narrow 2 cent bid/ask spread. PKM closed at $20.13 to yield 9.94%.

The underlying bond in both KRH and PKM is a Trust Preferred issue from AFC Capital that is guaranteed by Hanover Insurance Company. The bond matures on 2/3/2027. At my price, the current yield is around 10.25% plus 6.3 dollars per share at maturity assuming as usual survival of the firm. (see above linked post for more information about Hanover). If purchased at a total cost of $18.62, the current yield calculated at MarketWatch.com is 10.41%.

The underlying bond is rated junk. It is the only junk rated bond currently in an IRA (other than 50 OSM rated junk currently only by Moody's), several are found in the main taxable account, where I will take more risk. The underlying bond is a 8.207% junior deferrable interest bond, with the usual right to defer for up to five years provided no distributions are made on a junior security (see p. S-12) . The interest payments are cumulative and interest is payable on any deferred payment at the coupon rate (see p. S-14).

This is a link to the prospectus: www.sec.gov

3. Sold Google at $447: (see disclaimer) I just bought some shares at $395 Bought Google/Pricing American General Finance bonds/OSM & Sallie Mae/Pared BWX, and decided late in the day to take my small profit. This is not due to any concern about Google's last earnings report. Instead, I just developed more concern over the past week about the long term moat for Google's business. Sure, it is top dog now, but it just seems to me that Yahoo and Microsoft might just gradually eat into Google's bread and butter business. I have tried "Bing" several times during the past week on my last remaining Windows computer. While I still prefer the Google search, I understand how BING may gain some traction. Also, not being a tech guy, it just seems to me that Google is a one trick pony as far as revenue generation goes.

4. Sold FRPRJ in IRA (see disclaimer) I have been in the risk reduction mode all week, just a queasy feeling. I own two cumulative preferred issues from First Industrial (FR) in a regular IRA account. This REIT has eliminated its common dividend so the preferred shareholders are in a state of enhanced danger of a deferral with the removal of the security blanket. So I sold the 50 shares of FRPRJ at around $11.5 for a small profit with a dividend and will keep the lower cost FRPRK bought at $8.40 in that same retirement account.

If this queasy feeling does not go away early next week, I would not rule out buying a small hedge for my stock positions, using either TWM or SDS, or some combination of those two double short ETFs. I have a barrel full of short term gains in the taxable account so far in 2009, which gives me my "mental" leeway to buy a double short ETF, and then place a stop loss maybe 10% or 15% below what I paid for it, or some version of a trailing stop loss. If I suffer a loss then it will just offset some of the short term gains already realized this year.

SOLD 1/2 CBG/Earnings Reports: Timberwest, WL, SIMG/VZ 1.1 Million Net Adds for Wireless/OBAMA Says Police Acted Stupidly in Arrest of Gates

1. Timberwest (TMWEF) (owned): This is a lottery ticket purchase that is slightly in the red. LB Goes Nuts: Buys 50 TMWEF at $3.24/Sold BMLPRG It was originally bought with the realization that business for this timber company was weak, and likely to remain so for several months, and that patience was the operative word. Just based on a review of information at the firm's web site, Timberwest appeared to be a value play, owning 796,000 acres of land on Vancouver Island, and its timber operations would ultimately turn around with an economic recovery. TimberWest reported its results for the second quarter this morning, and I was not surprised by the loss of $.07 per stapled unit. Due to economic conditions, Timberwest has cut back on production, and its log sales volume was down 56%. On the bright side, real estate sales were 6.7 million.

2. Verizon (owned): Verizon Wireless had 1.1 million net customer additions in the second quarter. I am starting to wonder where all of these new customers are coming from, since many analysts have said for years that the market is saturated with no room for growth. Based on what Scot Moritz, the senior tech reporter from TheStreet.com said in this video, anything over a million would be solid.

3. Silicon Image (owned-lottery ticket): SIMG was a recently added lottery ticket purchase. Bought 50 SIMG as Lottery Ticket I started to read the earnings call transcript this morning, and the CEO sounded upbeat about the firm's prospects for the second half of 2009. The book to bill was greater than 1 now, and the mix of legacy and new products was shifting too more normalized levels. The firm expects growth in the second half based on recent design wins, and sees growth across all segments of its business. For now I just checked the cash on the balance sheet as of 6/30/2009 from its earnings release this morning, with short term investments listed at 144.37 million and cash at 18.583 million, or about 163 million. This was down from 169 million as of 3/31/09. The non-GAAP loss was 6 cents on 37.3 million in revenue. The GAAP loss included pre-tax restructuring expenses of 7.1 million. SIMG expects revenue for the next two quarters to range between 44 to 46 million (see pp. 4-5 of transcript from seekingalpha). The company said it was "positioned for profitability" in the second half of 2009 and for 2010 (see p. 5). I am all for positioning for profitability.

4. Wilmington Trust (owned as Lottery Ticket): A few days ago, WL preannounced weaker than expected earnings, and the stock fell back close to where I initiated my lottery ticket position. WL=Lottery Ticket The 2nd quarter results were released this morning, and I can say that Wilmington Trust is doing better than another lottery ticket purchase Regions Financial. On an operating basis the bank did record 8.8 million in net income. A loss was suffered however due the write-down of securities, primarily a 23.4 million loss on pooled trust preferred securities.

5. Obama Comments on the Arrest of the Henry Gates, a Harvard Professor: Obama, while professing not to know all the facts, sided with the black Harvard professor arrested for disorderly conduct, saying the police "acted stupidly" As I understand it, a neighbor saw two black men breaking into the professor's home, and this was not disputed. The professor had to pry open his front door, and was being helped in his effort by a cab driver who had brought him from the airport. For those of us who do not live our lives with massive and heavy chips on our shoulders, we would hope that one of our neighbors would report such an incident to police, and then would be pleased that the police showed up to investigate. This is not how Mr. Gates reacted to the police doing their job. The police report said Gates refused to come out of the house or to provide identification, and became verbally abusive, made threats, and yelled at the officer. I found Obama's comments at the press conference to be offensive, and it reveals a great deal about what is actually going on in his head. For that reason, the most important matter to learn about the incident has nothing to do with Mr. Gates but with how Obama reacted to it.

Obama's comments elevated this incident to a prominent feature story on page 1 of today's USATODAY.

This is a link to the police report: cnn/2009/07/23/0498.001.pdf

6. Buffet on Inflation: If someone told you many years ago that the U.S. would be running a 1.8 trillion dollar budget deficit in FY 2009, and the FED was creating money like crazy and holding short interest rates at near zero, would you be concerned about the potential inflationary impact of running huge deficits and flooding the world with dollars? The government is scheduled to borrow over 200 billion next week. Bernanke is not worried, but he was not worried about the developing subprime crisis until it was too late. In May 2007, he said the problem was contained and will not cripple the economy. I generally have a favorable view of the Fed Chairman, and I do believe that he has done a great deal to avert a Second Great Depression. But, for me, Bernanke has already proved that he is not omniscient. Warren Buffett is concerned about inflation, while acknowledging that deflation is the short term concern.

7. SOLD 50 CBG AT $9.73 (see disclaimer): The shares sold this morning were the 50 shares bought in the Roth a few months ago at $2.39. Bought Lottery Ticket in CBG at 2.39/ I am going to keep the 50 shares purchased a slightly higher price in the taxable account, and will wait at a minimum one year after their purchase before deciding what to do with them. The IRA shares were selected for sell this morning solely due to the lack of tax consequences for harvesting a short term gain, which exceeded 280% in about 4 months. I know that I previously said that CBG would be held for more of a gain, and that may still happen for the other 50 shares. I thought that it would be irresponsible not to harvest this kind of gain in the IRA. Besides, the IRA accounts are geared toward producing income, either with bonds or high yielding commons stocks, as exemplified by the recent purchases of T (at around $23) and DD (at less than $17) in that account. I am shifting the retirement accounts to 70% bonds or bond like investments such as preferred stocks, bought on an opportunistic basis. By opportunistic, I mean such buys so far in 2009 of AEB at $4.8 (Buy of 50 AEB at 4.8), ISF at $4.6 (BUY OF ISF), GYB at $11 (Added another 100 GYB in Regular IRA) LXPPRD at $7 (Buy 50 LXPPRD), INZ at $7.82 (Buy of 50 INZ at 7.82), SLGPRC at $10.5 & $11.39 (Bought SLGPRC: Buys ... SLGPRC ) , AEH at $4.63 (Buy of AEH in IRA), DKF at $20 (Buys of DKF), GJN at 12 (BUY 50 GJN), PYT at $11.2 (Bought 50 PYT) and several more including several sold after pops such as DKK, GRTPRG (sold yesterday), 1/2 of GJT, and GJR. Similar type purchases were made in the 4th quarter of 2008. That is my main focus in these accounts, opportunistic buying of bonds and bond like investments, along with buying some high yielding blue chip stocks. The opportunistic buying of these income securities has not only generated both realized and unrealized capital gains, many of them will deliver substantial yields in interest for years to come, provided, of course, the firms remain solvent and out of bankruptcy.

The lottery ticket purchases in those accounts have to be traded more aggressively. For me, as a general rule, I prefer being more cautious with a retirement accounts, even if I believe now that I will never need those funds. And, while this point should not be important to anyone but me, I am up about 20% in the retirement accounts since this bear market started with this kind of mind set (adjusted for subsequent contributions), while I am still down a tad in my taxable accounts.

Bought 100 GJS/Sold shares of GRTPRG in IRA/Microsoft/More on DRAD/

1. Sold Remaining Shares of GRTPRG-Lottery Ticket (see disclaimer): I sold the remaining shares of the Glimcher Preferred G shares in my IRA, with a cost basis of $2.59, at $11.25 today. It is these kinds of trades that have my retirement accounts up around 20% over their October 2007 values, after adjusting those values for two subsequent contributions. I have not sold any of the GRTPRF or the common shares, and I still have a few shares of GRTPRG left, with all of those positions in a taxable account. I still view these lottery tickets to be high risk, and it is better to be safe than sorry by harvesting some gains. LOTTERY TICKET PURCHASES: LINKS IN ONE POST Now, I need to decide what to do with the 50 CBG bought in the same account at $2.39.

2. Bought 100 GJS at $12.25 (see disclaimer): This Trust Certificate is a synthetic floater tied to a senior bond issued by Goldman Sachs maturing in 2033. I have previously bought and sold it earlier in the year. Par value is $25. There is no guarantee which is why I sold it earlier. I thought that buying 200 of GYB at around $11 was a better buy back in April. Bought GYB Added another 100 GYB in Regular IRA/ I was right about that point, but I should have nonetheless kept the GJS, bought previously at $10.50 in April, Bought 100 GJS, since that was a good price for a long term hold. This TC is explained in detail in the preceding linked post. It pays monthly interest at .9% over the 3 month treasury bill rate. While there is no minimum yield, there is in effect a minimum guarantee of .9% even if the T Bill yield is zero. If GJS was bought at a total cost of $12.5, and T Bills were at zero, the effective minimum would be 1.8%. So, when I look at it that way, it has a guarantee even at a zero T Bill yield. If the 3 month T Bill rose to say 4.1%, then the yield at par value would be 5% or an effective yield of 10% based on a total cost of $12.5. That is the appeal of this security when bought at a large discount to par value. It provides me with a good spread over the T Bill rate for the next 24 years plus another 100% at maturity provided GS survives to pay me. This is a link to the FED data on the 3 month T Bill rate since 1980: www.federalreserve.gov/ It is abnormally low now, and may stay that way for several more months.

The underlying security is a 6.125% GS senior bond. One thing about being tied to a senior bond, as distinguished from the floaters tied to a GS junior bond, is that GS can not defer interest payments. A failure to pay interest under the senior bond is a default. GYB, on the other hand, is tied to a junior bond: Goldman Sachs 6.345% Junior Debenture Maturing on 2/15/2034 I also own currently JBK and PYT, both linked to this same junior bond. Interest on the underlying junior bond may be deferred for up to five years for any reason, with the usual limitation that no cash dividends can be paid on a junior security while a deferral is in effect.

One factor that convinced me to add it back, in addition to what I discussed above, is the pricing of GJS compared to another synthetic floater, which I also sold after about a 5 dollar pop, GJR. That synthetic floater is tied to a Proctor & Gamble bond, also has no minimum rate but floats at .7% above the 3 month T Bill rate, compared to the .9% for GJS. GJR closed at $16.01 and GJS at $12.25. I would not buy either of these securities at $16 now, but I changed my opinion about holding GJS provided my purchase price was less than 1/2 of par value which gives me the permanent juice in the spread over the T Bill rate plus the long term capital gains potential.

This is a link to the prospectus: www.sec.gov/

This is a link to FINRA information about the underlying bond: FINRA - Investor Information - Market Data - Bonds - Bond Detail

If the swap agreement creating the float provision is terminated, then the owner of GJS would receive that fixed rate, with the annual penny rate calculated by multiplying .06125% by the $25 par value. The swap counterparty is Wachovia. If Wachovia had failed like Lehman, this TC would be a fixed rate coupon bond. Instead, a marriage was arranged by the government, and Wachovia is now part of Wells Fargo. I would not count on receiving the fixed rate coupon anytime in the foreseeable future, and this security has to evaluated now based on the floating rate and its current discount to par value.

3. Microsoft (owned)(bought at $17.79/ADD 50 MSFT) I try to keep a Windows computer around HQ to remind myself why I transitioned to IMACs. The results from Microsoft have been characterized by others as disappointing. I would just say ugly, and there is no reason to describe the results in detail here. Revenues declined 17%. Hopefully, the release of Windows 7 in October will rejuvenate this elephant for a quarter or two. I do not see any reason to sell based on this news however.

4. More on Digirad (owned as Lottery Ticket): DRAD rose 57.38% today after releasing its earnings, and you would think that would have engendered a moment of joy and contentment here at HQ, or at least a moment of peace and quiet between RB and LB. No, just the opposite, and I am not kidding, it just got RB lathered up, saying that LB cost Headknocker 600 grand today by not allowing RB to buy what it wanted to buy of DRAD, limiting RB to just 100 shares rather than 1 million. Readers know how this debate goes. LB says how many shares should we buy, and RB says lets buy a 1000 or 10,000 or a million, whatever figure just pops into its side of the brain, without any regard to available funds, risk/reward, or anything at all recognizable as a thought to LB. LB then conducts a vote, decides how many votes to give to RB to cast, for this is a democracy here at HQ, then counts the votes and RB loses 5 to 4, 7 to 5 or 3 to 1. It is all fair and above board. Notwithstanding the fairness of the process on DRAD, which RB lost in the vote count 123 to 1, LB had to listen to a constant refrain, incessant, over and over again, is $60 better or worse than $600,000. Proof, once again that it is RB who is the star of this operation, and LB is nothing but an old goat, no a decrepit, blind in terms of real vision, ornery old goat.

5. Added 10 p.m -Citigroup Preferred: I have never own any Citigroup equity or trust preferred issues. I just thought that I would add a link to this last post today from Barron's, which argues that no one should be buying Citi equity preferred now. The deadline for buying those equity preferred shares and being able to exchange them for common stock has expired. Citigroup will not be paying dividends on its equity preferred shares and Barron's claims those shares will be delisted from the NYSE. I do not understand why Barrons was touting these preferred shares to begin with for small investors, its bread and butter readers, but to each his own. I do not want to own Citigroup common so it never crossed my mind to buy the preferred just to exchange them for the common, and then clip a few bucks by selling the common hopefully at a profit.

Bought 50 OPXT as Lottery Ticket/ Digirad/EMC earnings/

1. Bought 50 Opnext at as a Lottery Ticket At $1.91 (see disclaimer): After discussing SIMG, I thought, what the heck, buy some meaningless amount of shares in another company that makes thingamajigs that Headknocker does not really understand. One thing about my professional career is that you become sort of a jack of many trades and master of none.

Opnext's cash on hand as of 3/31/09 is just about equal to its current market cap OPXT: Balance Sheet for Opnext, Inc. That money comes from its IPO in 2007, and there is apparently some litigation on representations made with that IPO. In January, Opnext used 30 million of its cash and 26.5 million shares to buy Stratalight Communications.

So whatever it makes, I am not paying anything for it, unless the company starts burning up a lot of its cash. Reuters has a good profile of the company. Suffice it to say OPXT makes "subsystems, optical modules, and components that enable high-speed telecommunications and data communications". e10vk Sound impressive, but the company is losing money. Morningstar has a report on it, rating it just 3 stars, and overall it is not favorably disposed to buying shares at the current price. So that is one reason less than $100 of capital is being deployed to buy shares. Another reason is that Headkocker wants dividends and consistent profits, and OPXT fails on both of those counts.

One long term problem is that two companies account for close to 50% of sales, Cisco and Alcatel. Whenever that happens, the customers have the pricing power, and have considerable power to dictate other unfavorable terms to the supplier. The second long term problem is the pace of innovation, which generally means new products have a short shelve life and better products have to be constantly rolled out. However, the current price is just around .51% of price to sales and price to book value according to the information at Ya Fin.

The Lottery Ticket category keeps RB busy without causing any real damage, and it has been on a roll lately with a hiccup here and there: LOTTERY TICKET PURCHASES: LINKS IN ONE POST

It would be a better use of my time to research companies where I am comfortable devoting capital with more zeros than $90. Sure, admittedly, that would be the rational way to approach it, and it would be the action recommended by LB. Another way would then have to be found to silence the RB. The RB wants to have some fun, rational is not exactly an appropriate description for it, and LB feels a need to spend some time researching these lottery ticket finds of RB before allowing the use of immaterial amounts of Headknockers cash which is treated by LB as a scarce resource, no matter the amount available to invest at any given point in time.

I would add this caveat. I would call whatever Opnext makes thingamajigs which establishes the extent of my expertise on the subject, which is nil of course, or as some would say, in a less diplomatic way, worse than nil since I probably think that I know something which in reality is wrong so that is actually less than nil (this phenomenon is called "negative information" here at HQ).

2. Digirad (owned): DRAD is another one of RB's lottery tickets, purchased a few weeks ago at $1.24 Bought Lottery Ticket 100 DRAD/ and LB allowed RB to go wild with a 100 share purchase. I guess that one could say that a profit of 784 thousand for the 2nd quarter is okay for this small company, better than the loss suffered in the 2nd quarter of 2008. Digirad also reported positive cash flow of 3 million. I did check the cash on the balance sheet. Cash and cash equivalents were listed at 15.735 million and securities available for sale were valued at 15.767 million. That is a total of 31.502 million. The market cap of the company as show at YF is just 26.53 million. Yah Fin Revenue for the last quarter was 18.6 million. For the last six months, revenue was 36.269 million. So the price to sales ratio is extremely low, well below 1.

3. EMC (owned): EMC reported 2nd quarter GAAP EPS at 10 cents and Non-GAAP at 18 cents, beating expectations by a penny. Revenue increased 3% sequentially. EMC issued upside guidance of 82 cents versus consensus of 78 cents. I do not recall when I initiated this position except that it was probably in the 2nd half of 2008, bought with cash flow.

4. Glimcher (owned GRT, GRTPRF, GRTPRG) I currently own both the common and the preferred shares of Glimcher, all bought as lottery tickets. LOTTERY TICKET PURCHASES: LINKS IN ONE POST (e.g. /Buys: GRT & GIVN GRTPRF: A WALK ON THE WILD SIDE/ KTN add) Glimcher reported its second quarter results this morning. It had a net loss of 3 cents per share and FFO of 44 cents down from 50 cents per share for the 2nd quarter of 2008. GRT expects FFO for the year to be in the range of $1.85 to $1.95. It also said it was in compliance as of 6/30 with all financial covenants.

5. Regions Financial (RF): RF was another lottery ticket purchase made at around the current price. I did not want to review its recent quarterly release, knowing in advance it would be depressing for RB. I was expecting more proof of rampant incompetence, and I was not disappointed when I gave it a cursory review this morning. I did not disagree with Cramer's placement of RF's CEO on his Wall of Shame, just in the numerical order of its placement. AFTERNOON COMMENTS: 6/23/09/ SOLD NESTLE & BOUGHT BRKB The loss for the quarter was 244 million or 28 cents. The bank set aside triple the amount for credit losses than it did in the year earlier quarter. For those who believe a broker is protecting their interests, this story about an SEC complaint against Morgan Keegan is worth a read. WSJ.com Morgan Keegan is owned by RF. This is a link to a story about a couple of Morgan Keegan's bond funds that crashed due to big bets on exotic securities: Kiplinger.com So why did I buy 50 at around $3.5. Well, it is a lottery ticket and eventually I figured the Board of Directors would actually try to do their job and clean house. Cramer may however be right in stating that there must not be a Board of Directors at Regions. (see video: CNBC.com) Anyway, when the Board decides to do what needs to be done with the top layer of management, then the bank at least has a chance to recover, and possibly even prosper some during the next economic recovery in my opinion. But, patience will have to be on the extreme side with RF. Maybe I will show my confidence in C. Dowd Ritter by buying 30 shares at less than $3.5, down from $43.6 in 1998. Or maybe not. Even one of Ritter's acolytes on the Board would have to admit this is one ugly chart: Chart

6. CIT Bonds: These bonds are swinging wildly in price. The 1 bond that I own maturing in December 2009 fell over 10% in value to around 50 assuming the third party price is anywhere near correct. I would be surprised to receive par value at maturity for that bond or the 1 bond maturing in March 2010. The last price is close to where the bond is currently trading. The fluctuation in price intra-day is just wild. Maybe, when I have that queasy feeling about a company, like I did when I bought those CIT bonds in 2007, a better alternative might be to buy none, rather than just reducing my buy to a nominal amount.

The buy earlier this morning of VIS represented a course correction in what I planned to do with the proceeds from the BRK/B transaction. Even though I do not own MMM now, I read its earnings report this morning, and had a favorable view of it. Who knows whether it will turn out to be right or wrong, but it appeared to be the reasonable to replace BRK/B with a stock ETF rather than more bonds which is what I intended to do.

The magic coin said that I can not sell EBAY today. Bought 100 PMK/EBAY and Eric Savitz

Bought 100 VIS at $42.46/ Earnings from T, MMM, KMB & BMY/ Medtronic

1. Bristol Myers (owned): Bristol-Myers released a solid earnings report for the second quarter. Excluding items, the firm earned 56 cents per share, beating expectations by 9 cents. In the 2nd quarter of 2008, earnings were 43 cents non-GAAP. GAAP earnings were reported at 49 cents compared to 36 cents in the year earlier quarter, an increase of 36%. Revenues increased 3.5%. Plavix sales increased 11%, and Ablify saw a 22% spurt in sales. Sustiva increased 11% to 312 million during the quarter. Orencia saw a 40% increase to 148 million. BMY raised its EPS guidance for its fiscal 2009 year to $1.95 to $2.05, excluding items, and the consensus forecast was at $1.92.

Last night, BMY announced an agreement to acquire Medarex (MEDX) for 2.4 billion in cash, a 90% premium to Medarex's closing price on Wednesday of $8.4. Medarex has about 300 million in cash so some news services were adjusting the price to 2.1 billion. This acquisition is anticipated by BMY to decrease its earnings by about 2 to 3 cents in 2009 and 7 to 9 cents in 2010. That dilution is included in BMY's guidance issued this morning.

Medarex has a technology to produce human protein for the production of monoclonal antibodies. The firm has not successfully launched one of its own drugs. It has licensed its technology, referred to as its UltiMAb(R) technology platform, to Johnson & Johnson and Novartis, and will receive royalties from those firms. I believe three products from those two companies have been approved using this technology, including JNJ's psoriasis drug STELARA which was just launched. The Novartis drug is called Ilaris which was recently approved by the FDA for the treatment of a rare autoimmune disorder called cryoprin-associated periodic syndrome. JNJ has another compound called Simponi. Merck has also recently sign a license agreement. Medarex and BMY were already collaborating on a cancer compound called ipilimumab. There was a recent report that two men receiving this drug in a prostrate cancer trial had their tumors shrink dramatically and experienced a reduction in PSA. Medarex has several other compounds in development which are described by Reuters in its "key developments" section. {I find that section from Reuters very helpful to obtain quickly a firm's major new events. It is just organized better than Yahoo Finance's Headlines section, and usually provides good summaries of the major events. After entering the symbol at the main Reuters page, there is a column to the left which contains several options to acquire more information about the company including one titled "key developments".}

While it is too early to tell how successful MEDX's technology will be, this acquisition looks to me like a worthwhile gamble for BMY which is facing a major patent expiration problem with Plavix.

2. Earnings Reports This Morning Were Encouraging: Kimberly-Clark(KMB) issued upside guidance and beat the consensus estimate by 22 cents. 3M beat the consensus by 26 cents and raised the lower end of its guidance range for 2009 to $4.10 from $3.9. KMB's revenues fell 5.6% and MMM had a 15.1% decline, and the bears will focus on that one point. MMM's sales did increase 12.4% on a sequential basis. Currency translation reduced MMM's sales by 5.5%. I would expect a revenue decline during the worst recession since the Great Depression. Considering what has happened, and that conditions are starting to improve, I would call those results good under the circumstances and then concentrate more on the future rather than the immediate past.

3. A T & T (owned): AT&T reported earnings of 54 cents, above the 51 cent forecast, but below the 63 cents earned in the year earlier period. Revenue fell .45%. The firm added a greater than expected 1.37 million wireless customers during the quarter and activated 2.4 million IPhones. The expectation was for 1.08 new wireless customers.

4. Medtronic (owned): An FDA panel unanimously approved Medtronic's heart valve which can be implanted without open heart surgery.

5. Bought 100 VIS at $42.46 (see disclaimer): Prior to today, I intended to buy about 6 grand of preferred securities this morning with the proceeds received from the Baby Berkshire sell yesterday. Instead, I was encouraged enough with the earnings reports this morning to increase my exposure to ETFs which contain U.S. industrial companies. Previously, I had bought XLI, which contains the industrial companies in the S & P 500. Sold out of IR and Bought XLI This morning I bought 100 shares of the Vanguard Industrial ETF, VIS at $42.46 to gain more exposure to this sector and to a larger variety of companies. The Vanguard ETF has a large selection of small and mid cap companies that are not included in XLI which includes only the large cap names. The Vanguard Industrials ETF has an expense ratio of .25% so it is an inexpensive way in my opinion to gain exposure quickly to this sector without having too focus attention on individual names which is time consuming. This ETF has 374 holdings. Vanguard - Fund Holdings This link contains the list as of 3/31/2009:Vanguard - All fund holdings I do have positions in a few of the individual names including GE, which is heavily weighted in VIS at 12% as of 3/31/09Quarter-End Holdings, and Emerson Electric.

J P Morgan predicted earlier this month an industrial intensive recovery, expecting the manufacturing sector to lead the recovery.

Bought 100 PMK/EBAY and Eric Savitz

1. Bought 100 PMK at $8.35 (see disclaimer): I thought that I had reached the bottom of the exchange traded bond barrel with the purchase Monday of 100 shares of the Trust Preferred from FleetBoston, FBFPRN. Bought 100 FBFPRN/ Now, with today's purchase of 100 PMK, I know that I am at the bottom. This exchange traded bond is a senior unsecured issue from PMA Capital with a par value of $10, an 8.5% coupon, and a maturity on 6/15/2018. Interest is paid monthly. So, that is $85 per year which translates to a 10.17% yield, plus another 16% or so at maturity provided PMA Capital survives to pay me. Interest is paid monthly. I wish that I could buy investment grade securities with the same features.

This is a link to the prospectus: PMA Capital Corporation Form 424 (B)(5)

PMA Capital (PMACA) is a small property and casualty company serving just a few states, offering workmen's compensation and disability insurance, as well as a range of commercial and general liability insurance. PMA Capital's last earnings report was a profit of 26 cents a share, above analyst expectations. Market cap at the closing price today of $5.5 is around 177 million. Price to sales is around .32 and price to book is .47. PMACA: Key Statistics

The quantum online site says Moody's has this debt rated Ba3. That is junk. If you scroll further down the list of exchange traded bonds at this site, you see another Ba3 rated debt security, an issue from Pulte Homes. Exchange-Traded Debt Securities Table While I do not totally ignore junk bonds, I am cautious with my exposure to them (see item # 5: Junk Bonds/ )

This is a link to a PDF that contains a PowerPoint presentation made by PMA on its First Quarter 2009 highlights. pmacapital.com/pdf This presentation also contains the firm's debt maturity schedules. This is an important consideration for this company. Total debt is listed as 129.4 million as of 3/31/2009 in the last 10-Q, at p. 26: pma10q.htm

A.M. Best recently placed the ratings of PMA Capital and its subsidiaries under review with negative implications. This includes its "bb" rating on the 54.9 million senior note due in 2018.

The agreement to sell its PMA Capital Insurance Company, a discontinued operation, has not been completed, and is pending approval by a state insurance commission. The parties to that agreement agreed to extend the deadline for such approval to 10/31/2009. pma8k.htm A description of that discontinued business can be found at p.7 of the recently filed 10-Q. pma10q.htm The negative rating outlook from A.M. Best is connected with this discontinued operation, its shortfall in "overall capitalization, concern over the sale of the run-off operations and potential exposure to PMA Capital upon the sale closing". For me, it is impossible to assess what may happen with this discontinued operation, yet another reason to limit my exposure to 100 shares.

Given my large diversity of holdings, an individual security like this one, with just 100 shares owned, throwing off $85 a year in interest, will not have any material impact on my portfolio, no matter what happens. But that is not how I look at it. I have a large number of securities that throw off income, individually most of them do not matter much when viewed in isolation. Together, the bond and other income producing holdings provide a significant amount of cash flowing in the brokerage accounts, virtually every week, that can be reinvested into purchasing other securities.

2. Ebay (owned): Barron's tech writer, Eric Savitz, wrote a negative article when EBAY was at $11.93 and I mentioned that I was going to bet against Eric. /Savitz on Ebay/ Maybe LB thinks too much, but it was hard to accept Eric's reasoning that EBAY was a "value trap" at 9 times estimated 2009 earnings with almost 4 billion in cash and short term investments as of 12/31/08. EBAY: Balance Sheet Arguments stand or fall based on their merits and whether they are reasonably based on facts, or simply whether they make sense, and not based on the identity of the person making them. Well, eBay reported after the close, and the stock was rising after hours to over $20, a double from ERIC's warning to stay away. I am not a big fan of EBAY so I may allow my magic coin decide its fate tomorrow. The numbers do not look so good, with earnings at 25 cents a share down from 35 cents a year ago. Excluding one time items, the Non-GAAP earnings were 37 cents a share, a penny better than the consensus estimate. Revenues declined 4%. But there were some signs of stabilization, if you are willing to call a slower decline stabilization. PayPal had a 11% revenue increase and registered users grew 20%. FREE CASH FLOW for the quarter was 602 million. As of 6/30/09, cash and short term investments were about 3 billion. EBAY bought Korea’s Gmarket for 1.2 billion in cash during the quarter. For the next quarter, EBAY expects adjusted earnings of 34 to 36 cents, with the street at 35 cents.