Stock purchase opportunity

FTR, Frontier Communications, reported earnings above expectations today after market close. This stock has been under significant pressure from shorts and belief the company could not get it's act together.  Indeed earlier reports this year showed what is know as a legacy telecom having issues consolidating some new assets purchased from Verizon last year and enough debt issues that the company cut their dividend almost in half. 

We have followed this company for some time and believed that it had shown good consolidation of other purchased assets and to our eyes was getting it's debt under control. The dividend cut was a big winner as well as it would make debt much less of an issue moving forward.  To that end we took out 20000 options on FTR earlier this year in a bet we were right and obviously are quite pleased today with the earnings reports and our profits. 

The earnings call today, which we listened to, made solid bullish on this stock. 

Legacy telecom's are communications companies that own old wire line business mostly in rural areas.  These areas have been abandoned by the big boys like AT&T and Verizon since the forward growth profile is weak and there is continuing loss of wire line business. However the one thing that investors seem to forget is that these areas where the legacy telecoms operate have few other competitors, have weak wireless service, and have US Government financial support to add internet access to areas not served currently. They piggyback the web service with television service and cheap telecom service.  Yes, they continue to lose RESIDENTIAL access lines, but most of the business customers continue to use them. 

FTR has a large business service business especially in the northeast United States which is going nowhere. They are adding internet access and just took a big check from the US government this week to expand that access even further.  FTR is a solid company with a 10% dividend that is taking up 37% of cash flow, which is the lowest ratio in the legacy telecom area.  Like all telecoms the debt, and the continuing depreciation cover much of the profit.  But the cash flow and EBITDA are solid and looking better after today's report. 

No this company might be the same company it is now in 20 years, it might even be consolidated with a bigger telecom, but for sure it will be here in some form as the big telecoms will not service rural areas like they do urban areas so someone has to provide this service. 

With that said FTR,  is up 8% today on good earnings to after hours at $4.18.  You could have bought it at $3.06 earlier this year in May which is a 37% gain in about three months.  This stock still looks good for a nice 10% dividend and some more capital gains as well. 

WIN, a similar but larger cousin of FTR, reports earnings on August 9 could also be a good candidate here. WIN pays out a 10% or so dividend as well. Note that both FTR and to even a larger extent WIN have had significant insider buying the last quarter, which is a good signal that people who work there see a both as a good buy now. 

CTL, the largest of these telecoms, has already moved up in price to around $42 from last September's lows of $32.  CTL makes for a good almost blue chip hold here for a 7% dividend. 

All these stocks offer higher dividend opportunities for those seeking yield and FTR and WIN offer some capital gain opportunities as well. 

We currently own 20000 options on FTR at $4 per share as reported earlier  in our postings.  We also hold several thousand options on CTL and long several thousand shares of WIN.  We eat what we cook.

                 

July Report.

Starting the second half of 2012 we had an excellent cash flow month in July.   We were blessed to hit the jackpot in timing as the European troubles popped up again on the exact day we starting trading and with the nice downward movement in stock prices we caught some excellent option premiums.  All but one trade was made on one day this month, quite unusual. 

Only 8 positions were sold in July, but as noted the above higher than normal premiums allowed us to make larger than normal cash flow trades. ERF and LO were traded with some of the best options premiums ever.  Add in another four digit trade premium for O as well.  The best part of these trades is the lower price points for the trades mean they have a very good chance of expiring with no assignments. 

We ended the 7 month period with a 6.44% annualized gain to date. Far below our normal gain expectations, but it is nice to be back above water after a horrible second quarter. We have now exited all losing positions and are totally net positive for the year. Maybe we should be happy since the above gain is still significantly above anything one could get in CD's or US Treasuries.  Of course as we have noted before we are playing with the house's money so any gain is a gain for us. 

Looking towards August we have 10 or maybe 11 positions that will be open.  The difference there is we have left one position open in case there is movement in the market we can take advantage of prior to August expirations.  August trades will also likely be more on the put side which always offer better premiums than calls. Fear always trumps greed when people are deciding with emotions. 

We have one of the long held off balance sheet options in FTR expiring in August as well. Today after market close that company reports earnings and that will likely significantly effect the movement of that security.  Thus that report could make our trade in FTR either positive or negative.  After the report we could consider additional option trades in FTR.  WIN reports August 9th and will likely trade along with FTR and a option position could open up there a

Reorganized Trading Portfolio.

Due to the run up in dividend stock values we have been forced to exit some positions and add some on in order to keep within the parameters of our trading rules.  Thus below is our current third quarter trading portfolio. Again let us mention this is a TRADING portfolio, not an investing portfolio. The purpose is simply to find stocks that provide us with option income and some degree of safety. During the next few months safety has become the most important variable in trading until the political situation becomes clearer. Our trading portfolio is completely in a margin and thus the hedging technique to make profits is applied, this a hedge fund. 

AGNC... still a solid performer since late last year. Continues to produce moderate income with good safety due to the stable interest rate market.  This one will remain here until Bernanke says he is raising rates which he had said will be no earlier than 2014.  Big time dividend too. 

ARCC..this stock has stabilized here around $16 and we have waded back in after dropping it last year. We figure if it can hold up in this economic environment then it should be good for awhile especially considering we will be trading it with a larger than normal margin of error. Good 9% dividend.  Business development company. 

BCE...continues to impress with unusual stability at a price we believe to be moderately overvalued.  It might drop below $40, but quickly rebounds making it an excellent trading vehicle. Canadian telecom paying over 6%. 

CTL... approaching a fair value price at around $41 now. Could move up some more, but has enough volitilty that we can sell puts at $38 and make good money and have a nice degree of safety.  Has continued to invest in areas where growth in telecom looks good.  Nice 7% payout. 

ERF... yes we took a huge loss in this stock earlier this year, but believe it would be foolish not to trade it now since much if not all of the loss is baked in at the current price of around $13.  We look for stock with floors and this one surely has hit it now down over 50%. Nice dividend still even with the recent cut and continue to be paid monthly with suits our trading style just fine. The oil in the Dakotas which ERF is a big part of is starting to pay profits now as well. 

FTR...we continue to keep this position on a seperate balance sheet due to the long term nature of the holding and the size of the option.  Note the significant insider buying of late and we believe we might have hit the sweet spot here. 10% divy. 

JNK...junk bond ETF continues to be a part of our ongoing portfolio. It will not make one rich, but it pays a monthly dividend which is above 7% and provides continuing option income. 

LO...ok there is some risk here above $130, but we have baked in the risk and taken the chance Obama will not make menthol illegal until after the election if then. Great option income makes this risk sweet. 

NNN...we are still holding these positions until Sept. when they expire, but likely will drop it then due to the high price of the stock where the value has been bought out. For long term investors you can hardly go wrong with money here being safe and the dividend almost guaranteed. 

O...we are wading back into Realty Income at a price that makes us worry. Like NNN it's triple net cousin the price now has got almost perfect profit performance priced in, one little mistake and this stock drops $5 so we are taking so significant risk with options, but have few stocks left from which to choose at this price point. The only salvation is the monthly dividend. 

PM...despite begin a tobacco stock we feel reasonably safe in this Swiss national company. Safe from trial lawyers and priced right we have taken a position with lots of wiggle room just in case. 

WIN...we hold this in another account, but wanted to note the holding here for full disclosure.  Good dividend at 10% and most impressive insider buying last quarter makes us think positive about this long term long holding. 

                 

Municipal Bonds in today's rate environment.

It is not easy being a bond investor today especially is you are buying individual municipals.  The prices are moving up and income going down, but they still might be the best income buy out there. 

US Treasuries are a joke and frankly worthless as long term income in our opinion. Ten year bonds paying 1.48% would be a misprint in earlier times now it is a reflection of broad ignorance of the perils of bond pricing and the sheer fear that an Obama economy makes of savers.  Of course European savers are helping push Treasury rates down since fear is rampant over there due to being a few years ahead of the US on the out of control social spending curve.  The sad fact is that when all this fear finally breaks either due to a better economy under a different US administration rates are likely to move up making any bond purchased now lose significant capital value and the very low interest rate worth much less.  Owning a US 10 year US Treasury paying 1.5% and having interest rates move up just .5% the holder could lose 33% of the value in their bond. A $1000 bond could be valued at $667 with an annual payout of $15.  This kind of risk is more than owning a 4% blue chip stock.

Municipal bonds which have been a staple of our portfolio for many years are also starting to bite in a different way due to the lower rateenvironment.  For many years it was fairly easy to find good AA revenue municipals paying 5%. Our portfolio has many of these and some even 6% or better. However with the lower rates many borrowers are taking advantage of rates by calling bonds when allowed and reissuing them at the lower rate. As a bond investor that hurts since one has to take the capital and reinvest it in new bonds paying lower rates.  We had two 5.5% A rated hospital bonds called this month and the best alternative we could find were AA rated 4.0% bonds as a replacement.  Ouch 

This is being repeated with regularity now in our portfolio, which if it continues for the entire bond portfolio would push down income generated with the same capital by likely 20%. Such are the perils of owning bonds which have call features.  The good news is that even with the redemptions we are finding good AA bonds paying in the 4% range.  Even better news is that the new bonds are priced right, either at par or sometimes just below.  As has been our pattern for many years we will not buy bonds that are generally priced at 102 or above.  The belief is that bonds priced higher than par guarantee a loss when redeemed and you end up giving back much of your capital just to gain the higher rate.  Bonds bought below par not only make for capital gains, but also push up the coupon rate nicely.  Of course YOU gain capital when and if the bonds are called. 

Buying individual municipals means one must do research on your purchases and keep up with news on the issuers bond ratings. Fortunately in North Carolina that is easy via several web sites.   North Carolina also has many issuers who are strong financially and there are a good number of state laws that keep bonds issuers in line.  For instance the certificate of need that almost all hospitals must gain prior to being built make sure that if the hospital authority issues bonds there is shown to be a need for the beds being added to the area.  That frankly keeps competition down and prices up, but significantly improves the ability of the authority to issue bonds at a higher rating and lower rate.   Taxpayers gain, but hospital customers lose since that is a manipulation of a free market. 

Hospital bonds known as revenue bonds offer compelling rates in NC as well as good value and sometimes gain AA ratings. The bond mentioned earlier that we bought for 4% was a AA bond for a hospital authority in NC that has very strong financial's and a vibrant market in which to operate. Bottom line is that municipals issued in states where finances are solid even at today's rates offer compelling values as compared to US Government Treasuries.   

Of course 4% municipals are totally state and federal income tax free and would compare to 5% or higher rates on other income opportunities when including the tax free advantage.  One thing that many people fail to consider when earning tax free income is that the lack of inclusion of the that income in your overall income when considering taxes owed actually reduces the tax rate on your other income by keeping it in lower tax brackets.  In all municipals continue to be a great sources of income and we continue to recommend them for investors as a way to salt away your money. 

               

Oil and where prices might be going.

Today's oil market is intriguing to us with so many moving parts and only a few players who can really call the shots.  Let's see why prices are what they are and what the US can and will do about them. 

Gas at the pump has backed off the last month from nearly $4 per gallon to now approaching $3 per gallon.  Let's point out that just less than four years ago gas at the pump was selling for $1.80 or so. So even with the decrease in the last month we are still almost double 2008.  Since oil per barrel was much higher then, $80 vs. $125 then, there must be some issues that are not pushing prices down even further.  Simply put most are political, and not supply based. 

The current drop in oil prices per barrel is being manipulated by the one player right now who can and will do something about it and that is Saudi Arabia.  Contrary to anyone who writes or says otherwise they have a huge supply that can last for almost eternity.  They also can produce oil out of the ground dirt cheap for best guess around $10 or $15 per barrel, maybe less. Best guess here is because the royal kingdom keeps their oil pool info and cost to produce held closely so as to be able to not be manipulated themselves.  So even with oil at $80 per barrel Saudi Arabia can pump and dump and still makes lots of cash to keep it's citizens happy. 

The Saudis started this extra pumping around a month ago in anticipation of the world oil embargo on Iranian crude taking hold July 1.  No one knows if countries will actually adhere to the embargo, but the oil market concerned with the lower supply had already began pushing up barrel prices. Saudi production quickly put an end to that with added supply that showed up in storage in the US  with a huge glut of oil. The Saudis are not friendly with Iran and want that regime gone and would like to see the embargo work. Therefore the added supply makes countries who would be getting oil from Iran less jumpy. The added supply also has the effect of keeping prices lower and hopefully keeping the world from going into a complete new recession.  A recession could push barrel prices towards $60 or even $50 and even that is too low for the Saudis. 

The other added incentive for the Saudis is to keep the US and Canada from expanding it's own  production and with prices around $80 that keeps oil field developers here so close to cost to produce they do not go out a look for new supply.  It also puts the hurt on Russia who has a higher cost to produce and has issues with prices being below $90 per barrel. Nothing like sticking it to the Russians who have aided Iran.   Other OPEC producers such as Venezuela also have a higher cost to produce and are not real happy with the Saudis pushing down prices. But like I said Saudi Arabia is the big kid on the block and can do about darn well what it pleases. 

The US and Canada continue to sit on large pools of oil. Canada has been developing theirs over the past decade and wants to sell it to the US via pipelines.  Hence the political issues over building the Keystone XL pipeline which would provide over time enough oil to make the US totally independent for oil supply from US and Canadian sources.  Here you got some strange bedfellows as environmental groups and big oil companies prefer less production to keep prices high which works for both interests. Big oil companies give generously to large environmental groups to not only buy goodwill, but also in hopes that regulations and caps will be put on oil resources. Talk about an unholy alliance but this surely is one. 

Canadian oil production is increasing quickly and in three years will be 50% more than it is today.  That oil is very heavy oil, which is nothing more than oil where the molecules are more numerous than what is known as light oil.  Refineries on the Gulf Coast have been working on retrofitting to be prepared for heavier oil processing due to the expectation of lots of Canadian oil. Those refineries currently are using heavy Venezuelan oil.  These refineries would like to switch to Canadian oil which is cheaper to transport over land via pipelines and frankly more reliable a provider than Venezuela or anybody else for that matter. 

The only thing keeping oil prices high is government restriction of supply in the US. If the government would allow pipelines to be built and wells to be drilled we would find enough oil within 5 years to drop the price in half at the pump.  The world is awash in oil and natural gas, enough to last almost forever contrary to anything you hear or read, but like any commodity supply, or restriction of supply, is either caused by political reasons or companies manipulating supply to raise prices.  Add the restriction in supply, the fact that the huge refinery base now retrofitted in the US Gulf region is forced to buy high priced foreign oil,  the worry about Iran and the result is double gas prices at the pump. 

As we move forward it will be interesting to see if Saudi Arabia keeps up it's heavy pumping of oil past the embargo ending or more importantly past the US election when Obama will no longer show even the pretense of caring about Iran and it getting a bomb.  If not, you can expect a significant increase in oil prices and gas at the pump next spring as the Saudis begin to use cash as an incentive to keep their people at bay from Iranian religious zealots.  You can also expect that once Obama is freed of the concerns of re-election that the current pipeline projects will come to an end and oil supply restricted further putting even more pressure on gas prices as he would prefer to make green energy more attractive. 

Longer term the most interesting point is that with all this natural gas and oil why are we wasting so much time and money even considering other energy sources.  Contrary to all you read oil is not more polluting or messier than any other source of energy, it is just that some believe it to be almost evil in nature.   

Believing that governments will continue to restrict supply and with stock prices down currently there are still good investments in oil.   CVE and ERF in Canada are down in price and the former provides some income and nice capital gains potential, while the later is more focused on current income.  XOM is a bellwether and it almost impossible to go wrong long term with the company that is maybe the smartest and most skilled operator out there.  BP continues to be an interesting play with some nice current income and rebound in stock price possibilities.  For those willing to consider higher risk higher reward scenarios OGZPY and LUKOY, both Russian producers offer intriguing opportunities with the consideration that Russian overlords sometimes do not consider shareholder interests like other countries.   COSWF a Canadian producer which has had it's issues with getting production up full scale also is a interesting contrarian buy.  Lastly for those who want to buy at the bottom, HGT, a US trust, has been beaten down badly and once natural gas prices begin to improve could make for some serious capital gains. The only question is when natural gas prices will rebound.  Consider tax implications in Canadian stocks and US Trusts before you buy. 

We currently hold ERF as a long and an option. 

             

Duke Energy merger is a mess.

Right off we will admit we have never liked Duke Energy as a company and as a stock. Never have we owned Duke as a long in the past due to our concern over what we considered wacky management.  CEO Jim Rogers has been like the energizer bunny with a lack of direction.   He has led Duke through what seems to be his many phases of trying to figure out where he wanted the company to go in future years. This mismanagement led them into areas like the unregulated energy trading business where the famous Enron went for a few years.  Duke got hit hard in losses and could barely make enough cash flow to pay it's dividend for a time. 

Duke has also dived headlong into green energy projects many of which have been money losers and negative cash flow to the bottom line.  In the past year CEO Rogers gave 10 million dollars to the Democrats for their convention in Charlotte NC which frankly is not a good use of a regulated utility's funds since ratepayers are the ones who will be actually paying that expense.  Even with the entry in green energy projects and the convention gift Duke Energy and Jim Rogers have few friends on the environmental and liberal side of the isle. Frankly all the expense has been wasted money. 

 Now this will not be the last major regulated utility merger in this country as the new EPA rules are forcing these companies to merge to cut costs and get bigger to spread all the new environmental mandate costs over a greater number of customers.  Unfortunately this will lead to more situations like the ones this past month where storm crews are taking not days, but weeks to get power restored to areas hit by storms.  Less local management and less connection locally means less response to outages and the like.  More costly EPA mandates and state renewable energy mandates mean more costs and less cash flow so rates are going up and there will be even less crews available to take care of power lines and maintenance.  Note however the EPA actually likes the larger utility structure because it is much easier to force these companies to do as told. 

This new regulated utility world needs management that has an especially talented leader to negotiate and keep customers, employees, and investors happy.  Simply put the people assigned to approve the merger of Duke and Progress knew Jim Rogers was not up to the task.   Progress CEO Bill Johnson has been on a learning curve with Progress Energy having made mistakes too, but showed he was a quick study by not making the same mistakes two times. Progress had issues back several years ago with cash flow and stopped annually raising their dividend which they had done for about 25 years in order to conserve cash flow. But never did Progress get into the energy trading business and never did they have to be concerned about having enough cash flow to pay their dividend. Progress has been on a nice up trend of late and lots of that is due to CEO Bill Johnson's direction.   The regulatory board in NC knowing that allowing the two companies to merge would basically mean one utility in the whole state of NC were most skeptical of Jim Rogers running the entire company and were heartened when the Duke board told them the merged company would be run by Bill Johnson.  

States where Duke also does business like Indiana and Florida approved the merger with the understanding Jim Rogers would step down as well since they had concerns about his leadership.  But all this went array shortly after the merger was consummated when out of the blue Jim Rogers and the Duke board announced that Bill Johnson would be leaving the company and with a $40 million dollar plus hush money account.  Duke, now an even larger company has the same poor leader Jim Rogers and NC regulators voiced their displeasure. They have said they are going to take another look at the merger and maybe even consider rescinding the approval.  Once again Jim Rogers has shown his loony side and run afowl of the very people who he must depend on to approve rate increases and who can mandate many things about how his company is run.  Now that is a level of stupid I do not understand.  Normally regulated utility CEO's get in trouble caught trying to curry favor with regulatory boards with nice trips and fine dining expenditures, but not Mr. Rogers. 

Let's add in that this morning the SEC has decided to do a investigation into this matter and there is news that the former Progress shareholders will begin a lawsuit  as well.  NC Attorney General Roy Cooper has also decided to do his own study of what happened.  All this will lead to millions of dollars of added costs and likely some significant payouts to former Progress Energy shareholders who approved the deal with the understanding Jim Rogers was gone.  One can also expect requests for resignations from the Duke Energy board notably the head Ann Gray to step down due to not looking after shareholder interest. All these added costs and distractions just when the new company needs good leadership.  Frankly some of these lawsuits could end up quite costly since the Duke board could have actually led regulators astray with promises of new CEO leadership when they had no intention of such changes. 

Now no one knows where all this is going.  But what we do know is unless the NC regulatory commission puts it's foot down hard Jim Rogers is running Duke going forward.  We want none of that personally.  Currently we own over 4000 shares of this company as a option, but that option expires in 2 weeks and we will not renew it since this kind of silliness makes us nervous. 

If you own Duke and have a low cost in it we would hold it going forward just to keep the taxes from eating into capital.  But do not expect a steady ride and be prepared for some setbacks in stock price with all the bad news that is going to come over the next few months.   If you have a higher cost basis best to get out now as you might get a chance to buy it lower again sometime down the road. One further points on capital gains,  if  Obama is re-elected we would highly suggest that ANY capital gain you are sitting on being sold since it is almost guaranteed that future capital gains taxes will be confiscatory.  Duke despite now being the largest utility in the country has too many issues to make for a smart purchase right now and if you do not believe me check out what the market has done to Duke stock since the merger.   For those interested in regulated utility purchases may we suggest Southern Company and SCANA Corp. as better choices.  Both are better run and operate in better regulatory environments.

First Half 2012 Trading Results.

"Of course it's hard.  It's supposed to be hard. It it were easy everyone would do it. Hard is what makes it great."  Tom Hanks in A league of their own.  

Two statements that sum up the first half of the year.... The first quarter was our best ever net profit wise. The second quarter was our worst ever net profit wise. That sums it up that basically it was a break even six months and maybe we should be happy considering the horrible political environment in the US.  

Trading on leverage is hard, very hard, and always has been.  Lots of practice and study is necessary if one is to win at this work.  If it was not hard more people would do it and frankly then some of the enjoyment of trading a winning hand would be gone.  As noted in our opening sentence "hard is what makes it great".  If we wanted to we could just settle for the 5% plus that most people are making on their invested assets and call it a day.  Not us, not never, at least until the mind gets where it can not do it or November brings election results where we decide to call it quits and go to the beach permanently. This is mental work not physical work and we suppose there are positives in exercising the brain and warding off dementia a little longer.  So with said let the final half of this 2012 begin. 

June was a lackluster month of trading and again reminded us of the long hard won knowledge that most times the first price is the best price. We started the June trading week with decent option premium pricing, but held out for a little more, which quickly became a good bit less. Our initial trades in BCE and LO produced above average profits and from there trades tailed off into almost boring trades as we waited too long. We did pick up another nice premium from our big loser this year ERF.  With our loss in this security baked in we can now just use the remaining corpse as trade bait and did so this month. 

Cash flow was weaker than normal as noted above, but we still had a profitable month of trading.  Again trading fees were lower than last year and margin costs were controlled despite some puts assigned us last month.  The timing of the puts as planned produced excellent dividend income as well this month more than offsetting any margin costs.  

Again the driver this month were the net losses and pending losses in the fund all now in one security ERF, which will draw down almost all gains for the first six months.  Our annualized yield for the first six months was 4.6%, in our universe hardly worth the trouble to trade.