Facebook IPO/Bought Back R.R. Donnelley 8.875% Senior Bond Maturing in 2021 at $96.95/Bought 50 RRD at $10-ROTH IRA/Bought 80 TINY at $3.3-LT Category

SandRidge Energy, a LT selection, completed its $1.2 billion acquisition of Dynamic Offshore Resources. The consideration consisted of $680 million in cash plus 73,961,554 SD shares. Form 8-K The stock has dived, along with most energy stocks, since I purchased 40 shares at $7.68. Bought 40 SD at $7.68-LT Category (3/9/12 Post)

There was a media and investor frenzy before the Facebook IPO. That phenomenon, reminiscent of the Nasdaq 1999 bubble, is primarily relevant to those interested in behavioral finance and to those who unfortunately bought into the story being peddled to them. After the IPO, the media has started to examine in more detail problems with the Facebook business model and other issues that may have impacted the decisions made by individual investors, if disclosed by the mass media before the IPO, to buy into Wall Street's hype machine.

Some of those articles have focused on the lack of an adequate strategy for mobile advertising and other issues relating to mobile apps. WSJ Yesterday, Reuters disclosed that analysts for the main underwriters, Goldman Sachs and Morgan Stanley, had lowered financial projections for Facebook shortly before the IPO and only made their respective downgrades available to a select number of institutional investors. (see also similar articles at the WSJ and Barrons) When reading those stories, I can not help but think of the statement made by Leona Helmsley about the "little people".

For those individuals participating in the Facebook IPO at $38 per share, I suspect many of them did not question the valuation of a 100+ billion market capitalization company at close to a 100 P/E, when the company just disclosed a sequential slowdown in revenue growth (Forbes; Reuters), acknowledged issues with its mobile strategy, and suffered a loss of a major advertising client due to a lack of results shortly before the IPO. 

1. Bought 50 RRD at $10.00 Last Thursday--Roth IRA (see Disclaimer): Just prior to making a decision to buy back RRD, I read the Fitch report which reaffirmed its rating on RRD debt. TEXT-Fitch This report gave me some comfort that RRD would be able to maintain its generous dividend while reducing gradually its leverage. As noted in this report, there is no "tolerance" for a dividend increase.

I recently flipped RRD common after holding the stock just long enough to collect one quarterly dividend. Sold 100 RRD at $12.24-Bought 100 RRD at $11.6.

After buying and selling RRD bonds, I own only 2 RRD senior bond at the present time. One of those bonds was bought last August. Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89 (August 2011). The other was bought last Friday and is discussed in Item # 2 below.

RRD "anticipates" keeping the annual dividend rate at $1.04 per share. RR Donnelley - Dividends That remains an open question for the future of course. At that annual rate, the yield at a total cost of $10 would be slightly over 10%, a higher current yield than than the RRD bonds maturing prior to 2022. In the ROTH IRA, that dividend yield becomes tax free.

The current consensus estimate is for an E.P.S. of $1.81 in 2012 and $1.84 in 2013. At a $10 price, the forward P/E on the 2012 estimate is about 5.52 with a 10% dividend yield. To justify those numbers, the sellers of RRD stock must believe, with a high level of certainty, that the earnings will collapse and take the dividend with it. While I would view that outcome as a possible scenario, it is not a rational one based on currently available information.

A more optimistic spin on RRD appeared in a Barrons' article published last February.  

Since I do not share others optimism about RRD's long term prospects, I will keep my overall exposure, both bonds and the stock, relatively low. I doubt that I would buy more than 100 shares of the stock or own more than 3 thousand in face amount of the senior unsecured bonds. And, I will likely continue trading those positions regularly, moving my overall allocation from zero to a maximum limit of $4,000.

A long term chart looks awful after 1998: RRD Interactive Chart The stock was doing fine from around 1985 to 1998, topping out at over $43 per share in June 1998. A double top was formed in 2007, with the shares trading over $43 per share again before collapsing to below $8 by February 2009. Since 2/2009, the stock has been on a roller coaster ride to over $20 in what appears to be the latest double top, at less than 1/2 of the price of the former double top, before falling to the current level. In other words, no encouragement for a long term investor, just looking at the chart since 1998. RRD stock would have been a good long term investment from 1985 to 1999.

SEC Form 10-Q for the Q/E 3/2012: Form 10-Q

2011 Annual Report: Form 10-K

Profile Page at Reuters

I would be satisfied to receive a 10% annualized return on this stock purchase. Assuming the dividend is kept at the current level, that goal could be reached simply by selling the stock at break-even. My stock commission rate is $7 per trade at Vanguard. (the bond commission rate for Voyager customers is $2 per bond)

On the day of my purchase, the stock hit a new 52 week low, breaking $10 per share shortly after my day limit order at $10 was filled.

RRD has some issues. As noted earlier, the RRD pension plan is underfunded by about $700 million. The company operates in a industry that is in secular decline. And, the leverage is high, with $3.4085 billion in long term debt as of 3/31/12. Form 10-Q Most of the debt will come due before July 2020, see page 21. In March 2012, the company issued  $450 million of 8.25% senior notes maturing in 2020.

Yesterday, RR Donnelley announced an agreement to acquire Edgar Online (EDGR) in a deal valued at approximately $70.5 million. (Profile of EDGR)

R.R. Donnelley & Sons Co (RRD) fell 12 cents in trading yesterday to close at $10.32. 

2. Bought Back 1 R.R. Donnelley 8.875% Senior Unsecured Bond Maturing in 2021 at $96.95 Last Friday (Junk Bond Ladder Strategy)(see Disclaimer): I have previously bought and sold this bond: Bought 1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 at 92.69 (2/13/12 Post)-Sold 1 RRD Senior 8.875% Bond Maturing 2021 at 100 (4/11/12 Post). This purchase brings me up to two RRD bonds ($3,000 in principal amount is my maximum permissible allotment)

According to FINRA, this bond is currently rated Ba1 by Moody's and BB+ by S & P.

My confirmation shows the same ratings.

My confirmation states that the current yield at my cost is 9.079% and the YTM is 9.248%.

3. Bought 80 Harris & Harris (TINY) at $3.3 Last Friday (Lottery Ticket Basket Strategy)(see Disclaimer): I probably lost money on this stock a few years ago. With the price scraping near a five year low, I decided to try again. TINY Interactive Chart TINY is a BDC.

The author of an article at Seeking Alpha argues that Harris & Harris is undervalued, and it is selling below its net asset value per share. As of 3/31/12, the net asset value per share was $4.89, up from $4.7 on 12/31/11 (page 2 Form 10-Q). I would add that a number of those firms are private, so there could be valuation issues. A list of TINY's investments can be found starting at page 9 of the 10-Q and at TINY's website.

However, this company invests largely in the high risk area of nanotechnology startups which is reason for caution. The firm has had a few of those companies go public. In 2011, two of those companies, Solazyme (SZYM) and NeoPhotonics (NPTN), completed IPOs. TINY had investments in three other companies that were acquired last year (Biovex, Crystal IS, and Innovalight).

NeoPhotonics highlights a problem. The company did have an IPO. Yet, in the 10-Q at page 9, TINY notes that the cost of its investment is $7,299,590 while the value was $2,132,790 as of 3/31/12.

Solazyme is the polar opposite, where the shares are valued at $33.8+ million, as of 3/31/12, with a cost at $5.44+ million. Since the shares are publicly traded the value will change. The Solazyme share price has declined from the $14.63 close on 3/31/12 to $9.71 yesterday. SZYM Historical Prices TINY owned 2,304,149 shares at the end of the first quarter, page 9 Form 10-Q.

SZYM is interesting, though not yet profitable. Quarterly Report on Form 10-Q The company is discussed in this Seeking Alpha article. SZYM did trade briefly over $26 last July, SZYM Interactive Chart, and then started to slide, closing as low as $8.29 by October 2011. (TINY was trading near $5.5 per share last July before sliding to $3.3 by October 2011, TINY Interactive Chart). The IPO was at $18. Prospectus

The NeoPhotonics' shares are close to unchanged since 3/31/12. NPTN Historical Prices

Harris & Harris issued a press release on May 17th noting that it had generated approximately $910,000 from selling call options on Solazyme and NeoPhotonics this year. In that press release, the company also discussed recent developments at three of its portfolio companies (Bridgelux, Laser Light Engines, and Metabolon)

TINY did realize a profit on the three companies acquired during 2011, but not enough to impress me given the risk and the fees paid to TINY's employees. In 2011, the company received $13,992,952 in upfront payments. The total cost of those investments was $11,383,299 in those three companies. I would not call that result a success, particularly when the investor factors into the equation operating costs. 

Another $953,480 was received for the BioVex investment in March 2012, after that sum was released from escrow. BioVex was acquired by Amgen, and TINY may receive some milestone payments from Amgen. TINY could receive up to $9,526,393 million in future payments. The value now placed on that possibility is $3,352.886 (page 60).

TINY has not paid a dividend in over a decade. The last dividend was $.02 a share paid in 2010. Harris & Harris Dividends It may be the only BDC that has that ignominious distinction. As noted previously, a BDC has to pay out at least 90% of its net income to maintain its tax status. The lack of dividends paid by BDC, therefore, is a clear manifestation of a lack of past success. That is another reason to classify the purchase of shares in this BDC as a Lottery Ticket.

Website: Harris and Harris Group

Harris & Harris Group fell 7.29%, or 24 cents, yesterday to close at $3.05, a new 52 week low.

Some of yesterday's weakness in the shares may be due to the potential blowback in the IPO market from the Facebook fiasco. TINY will monetize some of its investments through the IPO process.  

EK/Sold LT HUN at $14.65/ Bought Back 50 KRBPRE at $25.06-ROTH IRA/Bought 50 NOK at $2.88-LT Category

There was a vigorous bounce yesterday off 1295 in the S & P 500, which I noted as an important level in the previous post.

For the 2012 first quarter, RRsat, a LT selection, reported GAAP net income of $2.3 million, or 13 cents per share, up from 5 cents in the 2011 first quarter. Cash increased by $1.2 million to $34.4 million. Bought 50 RRST at $3.95-LT Category

KeyCorp, a LT selection, increased its quarterly dividend to 5 cents per share from 3 cents.

An article at Forbes compares the valuations of Facebook and Google at the time of their respective IPOs. A similar article was published in the WSJ yesterday, where the author noted that Facebook's P/E was four times greater than the 14 P/E for Google.

I did not participate in the FB IPO. I viewed the stock as over-valued at $38 per share. Apparently, Nasdaq screwed up the Friday trading in a big way according to news reports. I noticed this warning on Fidelity's website yesterday morning:

I do not recall ever seeing a similar message. Facebook Inc. Cl A (FB) fell $4.2 in trading yesterday to close at $34.03.

Until I read a NYT article, I did not realize that the founder of T.D. Ameritrade, Joe Ricketts, is a True Believer of the right wing variety.

RadioShack is paying too much in dividends to its common shareholders. The RadioShack Board recently declared a quarterly dividend of 12.5 cents per share. Based on the current price, the dividend yield would be about 10.75%. I own two senior RSH bonds. Bought 2 RadioShack 6.75% Senior Bonds Maturing 2019 at 80

JPM suspended its stock purchase plans yesterday. The stock closed at $40.74 on 5/10/12, and is now hovering just above $32. I would not make an assumption that the Masters of Disaster know what they are doing. It is also evident that they lack common sense. Possibly, more of them need to undergo Nerd Therapy and ReEducation. Paul Wilmott & The Need for Nerd Therapy (June 2009). I have no position in JPM but will consider a nibble near $30. JPMorgan Chase & Co declined 97 cents yesterday to close at $32.52 per share.

Eastman Kodak lost its ITC patent infringement case against Apple and RIMM at the ALJ level. usitc.gov/.pdf  The ALJ found infringement but held that the EK patent was invalid. The ALJ found that the EK patent did not pass the test of being "non-obvious". An invention must be more than an obvious variation of prior art in order to merit patent protection.


{Link to latest Supreme Court decision on patent obviousness: KSR Intern. Co. v. Teleflex Inc., 127 S. Ct. 1727 - Supreme Court 2007; and to the Court's decision in  Microsoft Corp. v. i4i Ltd. Partnership, 131 S. Ct. 2238 - Supreme Court 2011 which made it clear that patent invalidity must be shown by clear and convincing evidence. That is a higher standard of proof than mere preponderance of the evidence}

Kodak will appeal the ALJ's decision on the validity of EK's patent. If the ALJ's decision is upheld on appeal, this will be a major blow to EK's recovery potential after its reorganization in bankruptcy and would consequently have an adverse impact on the unsecured senior bond owners. It might also pose a problem in the ongoing sale process  (NYT) of 1,100 EK digital patents.

In addition, the 2012 first quarter report was embarrassingly pathetic, another bright red emblem of management's ineptitude, and their unquestionable failures to transition this American icon into successful new businesses after more than a decade of effort. {ekq12012_10q net loss was $366 million for the quarter}.

Hopefully, at some point in my lifetime, corporate America will quit rewarding those who engineer colossal failures. Perhaps, under the circumstances, this may be too much change   from the past to even contemplate as a remote possibility.

I had predicted a recovery of 20-30 cents on the dollar for the unsecured senior bond owners provided EK was successful in this litigation and generated a settlement north of $2 billion. Eastman Kodak Bankruptcy The price of the 2013 bond declined yesterday in response to this development, closing at 15.

1. Sold 30 of HUN at $14.65 Last Monday (Lottery Ticket Basket Strategy)(see Disclaimer): I do not spend much time analyzing whether it would be better to hold or to sell a LT selection. Either way, it really does not matter given the size of the position. The thought process behind this sell was relatively simple. Huntsman is a cyclical company, and the evidence suggest an economic slowdown worldwide.   

2012 HUN 30 Shares +$126.29

The shares were bought @ 9.91 last January.

Huntsman closed at $13.1 yesterday.

2. Bought Back 50 KRBPRE at $25.06 Last Monday-ROTH IRA (see Disclaimer): MBNA Capital E is a Trust Preferred security originally issued by MBNA Capital, a Delaware Trust, that owned a junior bond issued by the credit card company MBNA which was later acquired by Bank of America. The underlying security in this TP is currently an obligation of BAC and has the same credit rating as TPs originally issued by Bank of America.

See list of BAC TPs at Bank of America | Investor Relations | Capital Issuances.

All of BAC's TPs are rated in junk territory: BB by Fitch; Ba1 by Moody's; BB + by S & P. Bank of America | Investor Relations | Credit Ratings

The TP has a 8.1% coupon on a $25 par value. It matures on 2/15/2033. Prospectus As noted previously, this TP is a typical trust preferred security. BAC could defer interest payments for up to 5 years, provided no distribution is made on a junior security. So, for as long as BAC pays a common dividend, it has to pay the interest on this TP in full. If a interest payment is lawfully deferred, the deferred payment will accrue interest at the coupon rate. (see page S-4)

Interest is payable quarterly on 2/15, 5/15, 8/15 and 12/15. This security trades flat.

This security may be redeemed now at par value plus accrued interest. BAC will have to phase out the use of TPs at TIER 1 equity capital. Trust Preferred Securities & Financial Reform There is a good chance that this security will be redeemed by BAC, so I would not want to pay much more than par value for it.

I have bought and sold this TP for small gains after harvesting more two or more quarterly interest payments. Bought 50 KRBPRE at 24.62 in Roth IRA (June 2010); Bought 50 KRBPRD @ 25.14 (October 2010); Bought 50 KRBPRE  @25.07 (November 2010); Added 50 of the TP KRBPRE at 25.19 (February 2011); SOLD 50 KRBPRE @ 25.96 (May 2011); Sold 100 KRBPRE at $25.13-ROTH IRA (November 2011) (later shares sold shortly after 11/9/11 ex-interest date)

Trust Preferred Securities: Links in One Post

I also own one MBNA TP bought in the bond market: Bought 1 MBNA Capital Series A 8.278% TP at 94.5 Maturing 12/1/2026; FINRA. That bond has a $1,000 par value, whereas the exchange traded TP's originating from MBNA Capital have $25 par values. Moreover, unlike the exchange traded TP's KRBPRD and KRBPRE, that bond pays semi-annually, and I had to pay the seller accrued interest.  (BAC assumed MBNA obligations for that 2026 bond in Third Supplemental Indenture dated as of December 21, 2005). Most indentures that I have seen contain a provision requiring an acquiring company to expressly assume the obligations. If one is inclined to search long enough, it is possible to find a filing whereby that assumption is set forth.

I view this kind of purchase to be merely a "placeholder" kind of holding, where I am just trying to capture the coupon yield without suffering a loss of principal over a holding period likely to be in the six month to one year range, absent a call by the issuer.

MBNA Capital E 8.10% TOPrS Series E (KRB.PE) rose 19 cents yesterday to close at $25.35.

3. Bought 50 NOK at $2.88 Last Wednesday (Lottery Ticket Basket Strategy)(see Disclaimer): Many investors have declared NOK to be dead. Good as gone- all is lost-road kill-Apple and Google have won the smartphone war. Maybe so. But, as Mark Twain once said, the "report of my death was an exaggeration".

I am not confident in NOK's ability to resurrect itself. With a 50 share purchase, I am not expressing any noticeable level of confidence. I can, however, sit on those shares until either NOK is buried or I am. 

The long term chart is ugly, and highlights the importance of never falling behind the curve in a fast changing industry. NOK Interactive Chart 

I have a dumb phone. No teenager would be caught dead using it. I did look at NOK's latest smartphone releases, the Lumia line, and those phones appear competitive on both price and function. Cell Phones and Smartphones - Nokia - USA A note from a Raymond James analyst claims that AT & T, which recently lost exclusivity on the IPhone, has been pushing the Lumia 900. That report is summarized in the Tech Daily blog at Barrons.com. In other words, it is not clear that all is lost, at least not yet.  

The latest downdraft was probably linked to a poor earnings report for the 2012 first quarter. sec.gov

Recently, SocGen threw fuel on the selling conflagration by reducing Nokia to a sell. So, overall, investor sentiment is extremely negative. Institutional investors, for the most part, want to avoid looking foolish by reporting a stake in NOK. 

Besides the new products, Nokia is still sitting on a sizable chunk of cash, which will give it breathing room to implement a turnaround. As of 3/31/12, Nokia had €9.8 billion in gross cash and €4.9 billion of net cash after subtracting its debt. I would, however, anticipate a fairly rapid burn rate through that cash. Nokia's bonds, trade in the U.S., have also taken a big hit in value. 

As with many LT selections, both price to sales and price to book are below 1. NOK Key Statistics 

Another positive is that Nokia has a very strong patent portfolio. (see discussion at  Zacks.com,  Reuters and  Seeking Alpha)

Long term and patience are the operative words for this LT.

The Lumia has had initial success after its launch in China, but skeptics believe that pop will be short lived. The author of an article at Seeking Alpha is more upbeat about sales in China.

Nokia Corp. ADS  (NOK) shares rose 5.79% or 17 cents per share to close at $3.02 yesterday. 

Trust Certificate PJR Called/Bought 50 GOV at $22.9-ROTH IRA/Appleton Papers/Added 30 AMAT at $10.99/Earnings: PSEC, Momentive Specialty Chemical

The VIX rose 2.49% last Friday to close at 25.1. The VIX crossed 20, an important demarcation line, on May 9th. The S & P 500 Index closed on May 8th at 1,363.72 and has declined 5% since that time to the May 19th close.

The VIX closed at 14.26 on March 26th with the S & P 500 Index closing at 1416.51 that day. With the VIX moving from 14.26 to 25.1 since 3/26/12, the S & P 500 Index has lost 8.56%. Last week, this index lost 58 points or 4.3%.

The 52 week high in the S & P 500 was 1422.38, hit intra-day on 4/2/12. Historical Prices - S&P 500. When the market started to decline in October 2007, a temporary bottom was put into place around 1295, which was followed by a brief rally to 1425 into mid-May 2008. S&P 500 Index Chart The collapse followed, as the S & P experienced a waterfall decline before bottoming in March 2009.

This suggests the possibility only that resistance to the upside is significant at 1425, possibly a long term double top, and the market's high has already been made this year.

The S&P 500 Index closed at 1295.22 last Friday which suggests that this is a fairly important support level, so I would like to see a strong bounce off that level today. The S & P 500 index has already fallen below its 50 and 100 day SMA. S&P 500 Index Chart The 200 day is currently around 1278.

PJR has been called by the owner of the call warrants. Notice Of Exercise Of Warrants To The Certificate Holders Of PREFERREDPLUS Trust The warrant owner will purchase all PJR trust certificates at $25 plus accrued interest up to, but excluding, the exercise date which is 6/15/12. According to Marketwatch, the next ex interest date is June 12th. If that is correct, I will receive one more semi-annual interest payment and then two days of accrued interest. I still own 50 shares bought at $16.72. (July 2009).

The author of an article, published at the Motley Fool, makes an investment case for Meritor (MTOR) based on valuation. I own 100 shares of MTOR. Although the shares were bought recently, I am already in the hole.

Appleton Papers, a private company, has agreed to a business combination with the Hicks Acquisition company II. If that transaction is consummated, the combined entity will become a publicly traded company. SEC Filed Press Release That announcement had a positive impact on a 2015 Appleton second lien bond. FINRA

1. Prospect Capital (own 417+ shares): Prospect Capital, a Business Development Corporation, reported net income of $50.2 million (44 cents per share) for its third fiscal quarter, up from 38 cents in the year earlier quarter. PSEC's net investment income was $58.1 million or 51 cents per share for the March 2012 quarter.

Form 10-Q for the Q/E 3/31/2012 At page 3 of that form, the net asset value per share is shown as $10.82. The investments are described starting at page 7.

Prospect Capital decline 14 cents in trading last Friday to close at $10.58.

2. Momentive Specialty Chemicals (own 1 2016 Senior Unsecured Bond: Junk Bond Ladder Strategy): MSC reported a net loss of $16 million on revenues of $1.24 billion for the 2012 first quarter. In the year earlier period, the company reported net income of $63 million. As of 3/31/2012, MSC had unrestricted cash of $397 billion and long term debt of $3.444 billion. In addition, there was $224 million in long term pension and post employment benefits.  SEC Filed Press Release

Bought 1 Borden Chemical 8.375% Bond Maturing 4/15/2016

I am not likely to buy more than 1 Borden Chemical/Momentive Specialty Chemicals due to the credit risk.

3. Bought 50 of Government Properties Trust (GOV) at $22.9-ROTH IRA (see Disclaimer): Government Properties Trust is a REIT that owns commercial real estate leased to governments. As of 3/31/12, this REIT owned 71 properties, located in 29 states and the District of Columbia. The U.S. government is GOV's largest tenant accounting for 68.4% of the annualized rental income as of 3/31/12.  Form 10-Q for Q/E 3/31/12 at page 5

The total debt stood at $444.826 million, of which $350 million was an unsecured term loan. The weighted average interest rate under that term loan was 2.02% for the 2012 first quarter (page 5)  The corporate credit ratings are Baa3 by Moody's and BBB- by S & P, GOV Credit Ratings

For the 2012 first quarter, normalized FFO was 54 cents per share, up from 48 cents in the year ago quarter. SEC Filed Press Release

Profile at Reuters

GOV Website: Government Properties Income Trust

Link to Map of Properties: Government Properties Income Trust

The current quarterly dividend is $.42 per share. At that rate, the dividend yield at a total cost of $22.9 is about 7.34%. In the ROTH IRA, this is in effect a tax free yield, both when the distribution is paid and when it is drawn out.

This is one of several REITs originating from Commonwealth REIT (CWH) who still owns 9.95 million GOV shares, or 21.1%, as of 3/31/12.  CWH 10-Q page 7 I also own CWH shares.

This purchase was made Friday, 5/11/12.  

Government Properties Income Trust declined 34 cents in trading last Friday to close at $21.66.

4. Added 30 AMAT at $10.99 (see Disclaimer): The dividend yield at a total cost of $10.99 for this large cap technology company is about 3.22%. After making this last purchase, I decided to change my dividend option to reinvestment.

This purchase was made Friday, 5/11/12. I am over a week behind discussing my trades due to discussing earnings reports.

Although I have never lost money investing in AMAT, I have never made much either. I have nibbled at shares only after the price was crushed in the wake of the Nasdaq bubble and subsequent crash. During the Crazy Period, this stock traded over $50 per share.  AMAT Interactive Chart

At the time of my 30 share purchase, the consensus estimate was for an E.P.S. of 98 in the F/Y ending 10/2012 and $1.12 for fiscal 2013. AMAT Analyst Estimates If the consensus proves accurate, then my purchase was at less than 10 times forward earnings.

This purchase was an average down from a 50 share buy at $12.45 (June 2011).

Most likely I will average down again with a 30-40 share buy when and if the price declines below $10 per share.

At the time of my purchase, Morningstar had a five star rating on AMAT shares, with a consider to buy price at $13.3 or lower.

Subsequent to this last purchase, Needham cut AMAT to hold from buy. The report is discussed in the Tech Trader Daily column at Barron's.

For its second fiscal quarter ending 4/29/12, Applied Materials reported adjusted earnings per share of 27 cents on $2.54 billion in revenues. SEC Filed Press Release The expectations was for 24 cents on $2.4 billion in revenues.

Applied Materials fell 12 cents in trading last Friday to close at $10.36.

I will likely add another small lot below $10. 

Causes for Labor Participation Decline/BYD/ Earnings: Cascades, Travelport, CenturyLink/Bought 1 Forest City Enterprises 7.65% Senior Bond Maturing 6/1/2015 at 100/Sold 50 UBCP at $10.05

I have been raising cash, as noted by the preponderance of sell transactions discussed in this blog, and have returned to my most cautious stock buying strategy. That cautious strategy allows for new stock purchases, other than REITs and BDCs, only with cash flow or the proceeds of a stock sell. Cash flow refers to dividend and interest payments received into one of brokerage accounts.

Alexis Tsipras, the head of Greece's "Coalition of the Radical Left", told the WSJ that Greece will repudiate its debts in the event the EU cuts off funding. Tsipras wants Greece to renege on the recently approved austerity agreement that was a condition precedent to receiving more EU funds. So, from his viewpoint, once Greece reneges on austerity, the EU will need to keep the billions flowing into Greece or that country will simply repudiate all of its debt. Tsipras, who is a "former" Communist, is also in favor of nationalizing Greece's banks and scrapping plans to lay off public employees. The public sector in Greece is bloated to the extreme.  

According to a recent poll discussed at Reuters, Greek voters would give the two parties that approved austerity measures enough votes to form a new government.

Barclays upgraded Cisco to buy while maintaining a $21 price target. The report is summarized in the Tech Trader Daily blog at Barron's. I would be a seller at $20.

The Philadelphia Fed released its manufacturing survey which showed contraction. The index for general business activity fell to -5.8 from +8.5 in April. Survey Shows Pace of Growth Fell Back (May 17, 2012) - Philadelphia Fed The expectation was for a slight increase to +9.3. As soon as that number was release yesterday, the market sold off.

Caterpillar noted in a SEC filing yesterday a decrease in sales growth in the Asia/Pacific region during April compared to March. The downtrend in Latin America sales accelerated in April SEC Form 8-K The common shares, CAT, declined 4.42% in trading yesterday to close at $87.8. I have no position.

The Treasury auctioned 10 year TIPs yesterday at a -.391% yield. treasurydirect.gov.pdf

The Federal Reserve members disagree about the underlying causes for the decline in the U.S. labor participation rate. FRB: FOMC Minutes, April 24-25, 2012 I noted in a prior post that the participation rate appeared to be in a long term secular decline that would be occurring independent of the recent recession, which just accelerated the decline. Secular Decline Labor Participation Rate

Some research papers estimate that almost 1/2 of the decline can be explained by patterns likely to continue. chicagofed.org..pdf; kc.frb.org.pdf While those papers discuss some reasons for the decline, which are undoubtedly contributing factors, more problematic explanations may be providing the impetus for the decline.

Those trends include the loss of U.S. jobs as companies move factories overseas in search of cheaper labor or hire cheaper foreign labor to perform jobs formerly held by U.S. citizens. Those job losses originate mostly from corporations who are sitting on record cash piles. Another long term factor is the unwinding of leverage, both at the consumer and government levels, that was a major driving force for aggregate demand during the Age of Leverage. What Will Produce Growth after the Age of Leverage? (September 2009)

When large sums of borrowed money are being spent, there will be more jobs created to serve the demand for products and services created by the surge in leverage. As that process is unwound,  jobs just disappear, causing segments of the workforce to give up, a decision that may be made easier by extending unemployment benefits for unprecedented periods of time.

Neither political party has a plan to address the underlying causes for this secular decline in labor participation rates.

An article published in the WSJ discusses an aggressive and profitable trade made by JPM's London Whale, Bruno Iksil, last year. It is not possible to even argue with a straight face that this kind of trade represents a hedge. It was clearly an aggressive wager aimed solely at generating profits for the bank.

Boyd Gaming is buying Peninsula Gaming for total consideration of $1.45 billion. Part of that amount involves the assumption of Peninsula's debt by Boyd. The seller will throw in a note in the approximate amount of $144 million. The deal will add five casinos, located in the south and midwest, to BYD's operations. BYD anticipates that the deal, expected to close by year end, will immediately add to earnings. WSJ I own the common as a LT and 1 senior bond. Bought 1 Boyd Gaming 9.125% Senior Bond Maturing on 12/1/2018 at 89 (October 2011); FINRA. S & P placed the senior debt under review with negative implications. TEXT-S&P The common shares, BYD, rose 3.72% in trading yesterday to close at $7.24.

1. Cascades (own 1 2017 senior unsecured bond: Junk Bond Ladder Strategy): Cascades reported a first quarter profit of 6 million CADs or 6 Canadian cents per share, up from a loss of 8 cents per share in the 2011 first quarter. Revenues rose 15% to C$891 million. 

Website:  Cascades and Cascades - Debt investors

Bought 1 Cascades 7.75% Senior Bond Maturing on 12/15/2017 at 96.5

The common shares, CAS, trade on the Toronto exchange but three of Cascades' bonds can be bought in the U.S:

2013 Note
2017 Note
2020 Note

All of those bonds are currently rated Ba3 by Moody's and B+ by S & P according to FINRA.

2. Travelport (own 3 bonds: Junk Bond Ladder Strategy): Travelport reported a first quarter loss of 11 million on $550 million in revenues, compared to a 23 million loss on $531 million in sales for the first quarter of 2011. SEC Filed Press Release

The company claims that it is making progress in expanding its Asian operations:

Operating income fell to 66 million for the quarter, down from 79 million in the year ago quarter. Travelport generated $29 million in net cash from continuing operations, a $32 million dollar decrease "due to a $20 million payment under the 2011 employee plan in March 2012 and fluctuations in our collection and payment cycles".

As of 3/31/12, the company had $109 in debt and $3.376 billion in long term debt.

Due to adverse developments since I purchased the bonds, I have raised the risk ratings on Travelport's senior and senior debt to 10- and 10+ respectively. Personal Risk Ratings For Junk Bonds Those events are described in earlier posts: Item # 2 Travelport; Item # 1   Travelport; and Item # 3 Update on Travelport.

I am in a hole on the 2014 and 2016 senior bonds (1 each) and in a really deep hole on the one 2016 senior subordinated bond. The bond prices have improved over the past few weeks, narrowing my losses some.

3. CenturyLink (own bonds originally issued by Qwest): CTL reported adjusted diluted E.P.S. o f68 cents per share on revenues of $4.61 billion. Excluding special items, the company generated free cash flow of $1.04 billion.  SEC Filed Press Release

Discussion of Earnings Report at Zacks.com

As of 3/31/12, CTL reported having $1.53 billion in cash and cash equivalents and long term debt of $20.667 billion. Current maturities of long term debt totaled $2.2 billion.

Last March CTL sold $1.4 billion in 5.8% senior notes maturing in 2022 and $650 million of senior notes maturing in 2042. Prospectus

CenturyLink Profile Page at Reuters
CenturyLink Key Developments Page at Reuters

Fitch affirmed the debt ratings in April: TEXT-Fitch The senior unsecured debt is hovering above junk at the investment grade rating of BBB-.

The current consensus estimate is for an E.P.S. of $2.38 in 2012 and $2.35 in 2013.  CTL Analyst Estimates I do not own the common.

My largest position consists of 150 shares of the Trust Certificate PJA (Prospectus):

Trust Certificates: New Gateway Post; Bought 50 PJA at 19.45 December 2009; Bought 50 PJA at 24.65 December 2010; Bought 50 of the TC PJA at 25.06 April 2011; Sold 50 PJA at $25.4-ROTH IRA

PJA contains a senior Qwest Capital bond maturing in 2031 so there is a lot of interest rate risk. The TC has a 8% coupon on a $25 par value. The next ex interest date for the semi-annual payment is 6/12/12. TCs trade flat. Merrill Lynch Depositor Inc. PreferredPLUS Cl A 8% TRUCs QWS-2 for Qwest Capital Funding Inc. (PJA) rose 18 cents yesterday to close at $25.55.

I also own 2 U.S. West Communications bonds. FINRA Information; Bought 1 U.S. West Communications 7.5% Senior Bond Maturing 6/15/2023 at 100; Bought 1 U S West Communications 7.5% Senior 2023 Bond @100.13 -ROTH IRA

I have also traded another TC which contains a senior Embarq bond, another company acquired by CTL. That TC, FJA, has a 7.1% coupon on a $25 maturity, with a maturity in 2036. BOUGHT 100 of the TC FJA at $15.35 May 2009; Bought another 50 FJA at $14.2 May 2009; Sold 50 of 100 FJA at 24.75 December 2010; Sold 50 of the TC FJA at $24.84 June 2011 I have no interest in that long term bond anywhere near its par value.

4. Sold 50 UBCP at $10.05 Last Thursday (Regional Bank Basket Strategy)(see Disclaimer): I sold my highest cost shares bought at $8.49 (May 2010). When I discussed this bank's earnings report for the 2012 first quarter, I mentioned then that I might pare the position at a price greater than $9.75. Item # 4 UBCP FCBC XRX (April 2012). While this small Ohio based bank pays a good dividend, the payout ratio is near 100% and net income grew only 3.1% last quarter compared to the 2011 first quarter.

I still own 111+ shares. I am reinvesting the dividend. Bought 50 UBCP @ 8.13 Bought 50 UBCP at 7.99 The shares went ex dividend on May 17th. United Bancorp, Inc. Declares a Regular Cash Dividend Payment of $0.14

United Bancorp closed at $9.42 yesterday.

5. Bought 1 Forest City Enterprises 7.625% Senior Bond Maturing 6/1/2015 at 100 Last Thursday-ROTH IRA (Junk Bond Ladder Strategy)(see Disclaimer): By buying this junk rated bond in the ROTH IRA, I in effect turn it into a tax free bond. One reason for buying this bond is its maturity in slightly more than 3 years. Given the likely continuation of the FED's Jihad against the Saving Class into 2014, a 7.625% tax free yield has some appeal. It is probably a too risky security, however, for the ROTH IRA, which is one reason for limiting my exposure to just one bond.

This bond is currently rated B3 by Moody's and B- by S & P.

This is a snapshot of the bond information taken shortly before I entered the purchase order:

As a Vanguard Voyager customer, my commission was just $2.

FINRA Information on this Bond.

Bond Prospectus: sec.gov

2011 Annual Report: FORM 10-K

Profile page at Reuters

I have done well investing in the Forest City common as LT purchases. BOUGHT 50 SHARES OF FCEA AT 6.3-FOREST CITY COMMON (May 2009); Sold FCE at $13.23 (September 2009).

2009 FCE/A 50 Shares +$327.48

I recently bought 30 shares as a LT and still own them. Bought 30 FCE/A at 11.58 (January 2012)

I have also realized profits in its senior exchange traded senior bond maturing in 2034. Forest City Enterprises Inc. 7.375% Sr. Notes 2034  (FCY) When I bought the 2015 bond, FCY was trading at $24.87. Par value for that security is $25. www.sec.gov Given its interest rate risk directly linked to its much longer maturity, and its lower current yield than the 2015 bond, I preferred buying the 2015 bond.

During the Near Depression, I bought FCY for less than $10 and sold those shares at $14.6.  SOLD FCY (May 2009). FCY closed at $24.46 yesterday. I made one other round trip in the ROTH IRA in 2010.

2009 FCY 50 Shares +$213.98

2010 FCY 50 Shares ROTH IRA +$71.48

Needless to say, I would have been better off keeping all of those shares. If I had, I would sell them now since the OG is concerned about interest rate risk associated with long term bonds and the credit risk just aggravates those concerns.

Exchange Traded Bonds

AGY Holding, Edgen Group/Sold 1 Dillard's 7.75% Maturing in 2027 at 99.25/Earnings: CVO, Macy's, BAM, WIN

According to Randall Forsyth, Richard Russell, who has been writing the Dow Theory Newsletter for more than 50 years, told his subscribers to get "OUT" of stocks on Monday. Barrons (quote and large caps originate from Russell)

Sources have told the NYT that J.P. Morgan's trading losses have increased by "at least $1 billion" since the bank estimated the loss at $2 billion last week.

The VIX rose 1.37% yesterday to close at 22.27. This is consistent with the Phase 1 Unstable VIX Pattern in force since August 2007.

I have noted an interesting correlation from last year between the rise in the VIX and gold prices. When there was a spike in the VIX last summer, that is when gold hit its high. The VIX rose from 23.38 to 31.66 on 8/4/11 and then spurted to a 48 close on 8/8/11. Throughout September 2011, there were several elevated VIX readings, meaning anything over 35 and particularly readings over 40. VIX Historical Prices

On 8/4/11, GLD closed at 160.64 and hit 184.24 by 9/2/11. As the VIX started to stabilize in the high 20s and 30s, GLD started to decline back to trading mostly in the 155 to 165 range. GLD Historical Prices; GLD Fund Chart GLD closed yesterday at $149.46. If the VIX spikes again, similar to last summer, it will be interesting to see whether gold will reverse its recent downward spiral. I suspect that the VIX will need to spike to over 30 for the correlation to return. The small spike in the VIX so far has probably just sent more people into U.S. treasuries, so far at least.

I sold gold and junk silver coins last September. Those were my first sales ever. Recent Gold and Silver Sales (9/15/11 Post-with snapshot); Sold Some Junk Silver Coins Yesterday (9/13/11 Post). I sold more in January of this year, realizing proceeds of $5,322.25, which will be reported on a separate IRS Form 8949 for the 2012 tax year (i.e. for sales where there is no 1099 and the cost basis is not reported to the IRS.

This is my 8949 Form for 2011 covering just the coin sales made in September 2011.

2011 Form 8969 Coin Sales

The junk silver coins were mostly taken out of circulation at face value back in the 1960s. The exception was a roll of 1964 Kennedy Half dollars purchased for $59 in 1986. I do not own this stuff to make a profit, but as a possible hedge against other assets collapsing in value, particularly those priced in USDs. I incur storage costs to hold these gold and silver coins, which are stored in bank lock boxes. And, I had to pay taxes on the profits after holding those assets for a long time.

GE Capital Capital has resumed paying dividends to its parent General Electric. A quarterly dividend of $475 million was declared for the 2012 second quarter, as well as a $4.5 billion special dividend. I own 506+ shares of GE, and I am reinvesting the dividend. General Electric's share price bucked the downtrend yesterday, rising 61 cents to close at $19.01.

The ECB cut off liquidity to certain Greek bank due to inadequate capitalization. I do not see any rational reason to believe that the June election in Greece will solve anything. The ECB already owns about €52 of Greek government fixed coupon bonds. The ECB has also lent Greek banks billions to keep them afloat.

Merkel seemed to suggest yesterday that Germany was open to discussing stimulus measures for Greece, but Greece must honor its commitments. CNBC Interview While the tone of that interview showed a somewhat softer side to the German steel, the discussion about stimulus was so ambiguous that it lacked substance.

AGY Holding reported 2012 first quarter results on 5/15/12. agy.com.pdf The company also filed the SEC Form 10-Q for the 2012 first quarter. AGY reported a net loss of $8.4 million on revenues of $47.1 million, compared to a loss of $6.9 million on $44.9 million in revenues for the 2011 first quarter. Adjusted EBITDA reportedly rose to $6.9 million from $4.6 million in the year ago quarter. The company seemed more upbeat in this earnings release than in the prior ones. I am just grateful to receive an interest payment from AGY. I own just 1 second lien bond maturing in 2014, currently rated at 10+ in my Personal Risk Ratings For Junk Bonds. That bond is referenced at page 10 of the Form 10-Q. I received the semi-annual interest payment on 5/15/2012:

Another potentially troublesome bond, Colt Defense, also paid its semi-annual interest on 5/15. The GMAC bonds shown in this snapshot make monthly interest payments, as does the Prudential bond. The PRU bond was bought in 2007 and matures 7/15/12.

Pacific Continental, a LT selection, increased its quarterly dividend to 6 cents per share from 5 cents.

Edgen Group (EDG) filed its quarterly report for the Q/E 3/2012 (actually, for its predecessor company: 10q-03/31/12) The senior secured note, issued by Edgen Murray Corporation, is referenced in note 8 at page 8. Bought 1 Edgen Murray 12.25% Senior Secured Bond Maturing 2015 at 97.5; FINRA. That junk bond is currently rated Caa3 by Moody's and B- by S & P according to FINRA. The same ratings were in effect when I purchased this bond back in March 2011.

I received an email notice yesterday that S & P raised its rating on the Edgen bond to B from B-.

1. Macy's (own one  2030 Senior Unsecured Bond:  Junk Bond Ladder Strategy): The 2030 bond is the one bought pursuant to the Junk Bond Ladder Strategy that has been upgraded to investment grade by the rating agencies. Bought 1 Macy's Bond Maturing in 2030 @ 99.5 (January 2011).

For Macy's first quarter ending 4/28/12, Macy’s reported net income of $181 million or $.43 cents per diluted share, up from 30 cents in the 2011 1st quarter, on a 4.3% increase i revenues to $6.143 billion. The consensus estimate was for 40 cents per share on $6.14 billion in revenues. Net cash provided by operating activities was $265 million, up from $67 million. Online sales rose 34%.

The company maintained full year guidance at $3.25 to $3.3 per share. The market consensus was at $3.39 per share. 

As of 4/28/12, the company reported $1.891 billion in cash and cash equivalents. Long term debt stood at $6.644 billion.

2. Cenveo (own 1 2018 2nd Lien Senior Bond: Junk Bond Ladder Strategy): Cenveo reported adjusted income (non-GAAP) from continuing operations of $3.3 million or 4 cents per share on revenues of $455.6, hardly a stellar performance. Adjusted EBITDA for the first quarter was $47 million. The GAAP number was a $27.2M loss which included impairment charges on plant closures and a loss on the early extinguishment of debt previously discussed in prior posts.

The consensus estimate, originating from 2 analysts, was for earnings of 3 cents per share on revenues of $475.07 million. The common stock slid badly after this report, falling from a close of $2.58 on 5/9/12 to $2 the next day. CVO Historical Prices The common could only be bought as a lottery ticket given the risk. I have never owned the common shares.

The company has too much debt in my opinion. A list can be found at page 12 of the recently filed CVO-2012.3.31-10Q.  As of 3/31/12, the company had long term debt of $1.229636 billion. Of that amount, $65.8 million would be first lien debt. I own only a second lien note with $397+million outstanding. The remaining long term debt is unsecured senior and senior subordinated debt. The 2013 senior subordinated bond has been reduced to $152.621 million from $284.878 million on 12/31/11. I have sold out of my position in that senior subordinated bond. Sold 2 Cenveo 7.875% Senior Sub Bonds Maturing in 2013 at 95 (March 2012 Post).

The recently issued 11.5% senior unsecured notes would "rank effectively junior to any of our and our guarantors' secured indebtedness, including indebtedness outstanding under our 2010 Credit Facilities and second lien notes, to the extent of the value of the collateral securing such indebtedness",  Prospectus at page 11 (underlining added). I recently bought the second lien note. Bought 1 Cenveo 2nd Lien at 92.499 (May 10, 2012 Post).

The common shares (CVO) closed at $1.79 yesterday, hardly reassuring given the sliver of equity underlying a mountain of debt. The common is nonetheless under consideration for a possible Lottery Ticket purchase. Lottery Ticket Basket Strategy I will not stay up nights worrying about a 50 share buy of CVO at $1.5.

3. Sold 1 Senior 7.75% Dillard's Bond Maturing 5/15/2027 at 99.25 Last Wednesday (Junk Bond Ladder Strategy)(see Disclaimer): This bond was sold near break-even. Bought 1 Dillards 7.75% Senior Bond Maturing 5/15/2027 at 98.625 including brokerage commission (May 2011). So basically I received a year of interest and nothing more.

By selling some of my longer maturities, I reduce my interest rate risk inherent in all long bond purchases. And, I improve a tad my overall composite yield for junk bonds by selling a 7.75% coupon bond near par value. On the other hand, this bond is one of my better junk bond credit risks.

I will receive $38.53 in accrued interest from the seller.

4. Brookfield Asset Management (own 100 shares-Toronto Listed): Brookfield Asset Management reported FFO available to shareholders of $283 million or 40 cents per share, up $52 million from the 2011 first quarter.

The company claims that the "intrinsic value" of its common equity was $42.35 per share as of 3/31/12.

The Toronto listed shares, BAM.A (TOR), closed at 31.80 CADs. The NYSE listed shares closed at $31.69. Brookfield Asset Management Inc. Cl A, BAM

5. Windstream (own 100 shares): Windstream reported first quarter earnings of 11 cents per share on $1.4884 billion in revenues. Adjusted earnings were 13 cents per share. The consensus estimate was for 14 cents or 16 cents, depending on the service providing that information. Business service revenue increased 3.2% to $897 million on a pro forma basis from the first quarter of 2011. Broadband revenue increased 5.9% to $113. Wholesale revenue fell 6% to $225M. Windstream generated $352 million in adjusted free cash flow. Adjusted for acquisitions, total revenue declined by .5%. Net leverage declined to 3.6 times EBITDA.  SEC Filed Press Release

The company also cut its outlook for 2012 to the bottom halve of its previously given target range.

The stock declined significantly when the CEO predicted a 12% decline in WIN's wholesale business in the current quarter. That decline is apparently due to dropping certain wholesale business lines that had previously been offered by PAETEC, a company acquired by Windstream, in response to a FCC statement about business practices. For institutional investors, I suspect that this development has caused them to question the PAETEC acquisition which was completed last December for $2.3 billion. Windstream News Center

In response to this release, Citigroup downgraded the stock to neutral and reduced the price target from $15 to $11, as discussed at Benzinga.

Yesterday, Stifel upgraded WIN to buy with a price target of $11.

Windstream closed at $9.54 in trading yesterday.

Last summer, I did manage to liquidate my holdings for a decent profit considering the rich dividend.  Sold 300 WIN at 12.31 It seemed reasonable at the time to buy back 100 shares  at $11.2 (April 2012). After selling out of the senior unsecured bonds, I am at liberty to average down on the common shares which yield more than the bonds. Sold All Winstream Bonds: Two 2019s at 101 and One 2020 at 103.5