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Yola Edwards

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Get out of the kitchen

Yola Edwards

TORONTO (GlobeinvestorGOLD) — There was a time when Corning meant cookware and many people still think of the company in those terms. Well, that's ancient history. Today's Corning is a high-tech giant that is an industry leader in such fields as fiber optics, emissions control systems, liquid crystal display terminals, microwave connectors, and more.

In recent years derivative products have become all the rage. In 2001, Salomon Smith Barney formed a Delaware company, Structured Products Corp., incorporated as an indirect, wholly-owned limited-purpose finance subsidiary of Salomon Smith Barney Holdings Inc., and issued an asset-backed derivative security. This security was based on the 8.3 per cent Medium-Term Notes due April 4, 2025 issued by Corning Incorporated.

Investors with U.S. cash in hand, looking for high U.S. interest rate investment vehicles might wish to consider the Corning 8 per cent Corporate-Backed Trust Securities (CorTS) Class A Certificates, which have a principal amount of $25 (U.S.) each. They pay semi-annual interest of $1 on each payment day of June 1 and Dec. 1 and began trading on Aug. 13, 2001. These certificates should be considered as derivatives but they trade like a stock. Separate Call Warrants have been issued and the Class A Certificates are redeemable by the warrant holder on or after April 4, 2005 at $25, plus any accrued and unpaid interest. Also, the Underlying Issuer, Corning Inc., has the right to redeem the underlying Medium-Term Notes on or after April 4, 2005, at a price on that date equal to 104.15 per cent of the principal amount plus accrued interest to the redemption date. The redemption price will reduce by 0.415 per cent annually until the redemption price is 100 per cent of the principal amount of the underlying Medium-Term Notes to be redeemed. The Trustee will give fifteen days notice of any intention to redeem the underlying Notes, but no assurances can be given that the Trust will repurchase your Class A Certificates prior to April 4, 2025. There are only 1.546 million certificates outstanding, so risk investors should take into consideration that the market is thin.

The trust security also depends on Corning Inc.'s well-being and the direction of U.S. interest rates. Currently, the company appears to be on a firm footing as company officials affirm analyst expectations of its third-quarter 2005 earnings of 20 cents to 22 cents a share, excluding special items, on sales of $1.14-billion to $1.19-billion. The company estimates that sales, for the first three quarters, will amount to at least $3.33-billion. Thomas Weisel Partners estimate 2006 sales to be $4.97-billion, with earnings of 95 cents for the year. That's in sharp contrast to 2001 when Corning posted annual sales in excess of $3-billion, but recorded a huge loss of $1.78-billion ($1.85 a share) in 2002, mainly due to restructuring and impairment charges of $1.5-billion. The financial problems drove down the common share price from over $16 in October 2001 to a low of $1.10 a year later. However, the company having since reversed its misfortune has seen its common share price rally back from its 2001 lows and recently in September it traded as high as $21.95.

The CorTS share technical chart reveals that the derivative traced out a "V" reversal pattern since it was first issued at $25 in 2001. Six months after the issue began trading, the economy and financial markets turned down and investors became increasingly alarmed at the issuer's financial condition. As a result, they sent the certificates to a trading low of $7.80 in July 2002. Then, without warning, the certificates made an abrupt about-face and have since rallied back to the issue price of $25, thus forming a pattern that looks like the letter "V". The stock currently trades at around $25.75. However, since June 2003 the CorTS shares have traded virtually sideways between $24.35-26.30 and although they are expected to continue to be range bound a symmetrical triangle has appeared. Although future U.S. interest rates could decline, a capital appreciation in share price should not be expected due to the callable nature of the underlying security, the bullish technical pattern suggests there may be some appreciation ahead. With the pattern, which is usually a pause in the prior trend, near completion the share price should break out to the upside and rally to its technical target of about $28 over the next sixteen months.

Interest rate direction will be a key factor in the share price movement. The 30-year Treasury bond weekly chart indicates that the interest yield has traced out descending triangles. The recent rally from the August lows of 4.253 per cent has taken the yield back up toward significant overhead resistance defined by the August "tweezers top" candlesticks formation and the upper overbought Bollinger band found at 4.612 per cent. If the yield is able to rise above the heavy overhead resistance point then a continued rally to next resistance at 4.757 per cent is possible, however it seems as though that will be unlikely. The most likely scenario would be for a renewed decline, over the next three months, to support found at the 10-and 20-week MA's at about 4.45 per cent with major support at about 4.2 per cent. Longer-term, a break and close below the 4.18 per cent level would suggests that the long bond yield could fall to about 3-3.6 per cent over the next sixteen months.

If this security is suitable to your portfolio, I recommend that you place a limit order, which is an order with a stated price, rather than a market order, which can be filled at the next available price. This is advisable due to the small capitalization of this security. The small number of shares available means that it is thinly traded, so a market order could unintentionally inflate the price and you could end up paying more than you wanted to.

This high-yielding U.S. dollar income security could be an interesting play. American interest rates are likely to stay low over the next year, continuing to make the security very attractive.

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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