For some reason, possibly a subconscious fear of a black swan type event where all my best laid investment plans go awry, I have been rolling over my remaining 3 month treasury bills in my Treasury Direct account, after redeeming some of them last quarter to buy some bank certificates of deposit which were then yielding over 4%.
I looked today to see what I was paid for one just auctioned and realized that I could not fill up my tank with gas with what Uncle Sam was paying me in interest. Someone told me that the postal office was about to raise the cost of stamps again. I was thinking of putting a note on the outside of an envelope when that happens, saying I will gladly pay you more for postage as soon as the government starts paying me some interest on its debt. The 3 month bill is currently quoted at around .13%. That will get you about $130 in a year for $100,000 before taxes and inflation. Money market funds are not much better. The Vanguard Prime money market, with one of the cheapest expense ratios, had a seven day compounded yield of .58% as of last Friday according to Barron's.Barron's Online The Vanguard tax free money fund was yielding .61% which is where I have kept all of Tyler's trust fund money for college, completely missing the stock meltdown with those funds.
One of the floaters fell a lot toward the close yesterday, so I placed an order to buy at the market which was filled at $10.95. This floater was only recently discovered, and it originated from UBS. The symbol is GYB. Par value is $25. Since I have 100 shares at about a $11 cost, there will be a $1400 profit at maturity on early redemption assuming as usual that Goldman Sachs survives to pay me.
The underlying security in the TC GYB is a fixed rate, Goldman Sachs' junior bond maturing in 2034, with a coupon of 6.345% but that is not the rate for GYB unless the swap agreement creating the float is terminated for some reason. The FINRA data on the underlying bond can be found at FINRA - Investor Information - Market Data - Bonds - Bond Detail.
The prospectus can be found at:
These synthetic floaters do have some unique tax issues to them that are discussed starting at pp. S-51 of the prospectus, which might be overwhelming to many individuals and they certainly give me a headache. I will deal with that issue next March however. For now, I will buy any new ones in my retirement account, and will also buy in those accounts the same or functionally equivalent ones currently held in the taxable account, as funds become available, simply to avoid having to spend too much time after this tax year trying to figure out the tax issues discussed in the prospectus. It may take the remainder of this year to buy the floaters in the retirement accounts to replace those that are currently in the taxable accounts, which can be done with cash flow in the retirement accounts, so that my exposure ends up being the same as now, but the account location of the security will change over time as interest and dividends are received in the retirement accounts. The Roth retirement account contains GYP, GJK and PYT. I will substitute GJK, currently owned in the Roth, for PYV currently in the taxable account so PYV will be sold soon. I have sufficient funds in the retirement accounts now to buy GJT and GJS which I will do as the opportunity arises, and those securities would likewise be sold, though only at a profit, in the taxable account. Sometimes, while all of this is plain to me, it can sound convoluted but this is an unavoidable result from a change in my opinion on which account needs to hold all of the synthetic floaters rather than just some of them. The ones in the taxable account now include GJT, GJS, GJN, GJR, PYT (both accounts), and PYV. GJP has already been sold in furtherance of this plan.
My taxable accounts are substantially larger than the retirement accounts which gives me more leeway to add positions in taxable accounts when money is scarce in the retirement accounts as now. I am going to start adding more bonds to the retirement accounts until I have a 70% weighting in bonds with 30% in stocks (more stocks will eventually be held in taxable accounts). This would be a reversal from existing allocation a few days ago of 70% in stocks and 30% in bonds. The bond allocation in the retirement accounts will include individual bonds, both fixed coupon and floaters, the TIP ETF (may add LQD at some point) , a few equity preferred issues currently owned like AEB, INZ, METPRA, AEH, ISF, SLGPRC, CUZPRB, GRTPRG & FRPRK classified as bonds by me for purposes of the allocation, and a closed end fund for emerging market securities which is currently owned, ESD. The holdings in closed end bond funds also now include FAX and ERF, both of which may be sold during this re-allocation process. I expect to be finished with the re-allocation by the end of 2010. The fixed coupon individual bonds now held in the retirement accounts are all TCs bought at prices over the past seven months to yield over 10% annually: DKK, KTN, PJS, PIS, JZH, KSA, and DKF. I will add to the fixed coupon component as opportunities arise. I just sold one, JZJ which raised some funds to buy a floater possibly today. The floaters are being added primarily as inflation hedges and I am going to emphasize those with minimum guarantees. So when I replace GJS which has no minimum, I may not buy GJS but may add to the functionally equivalent security GYB which has a guarantee.
Within the next few months, and I simply want to complete this task during the tax year 2009, all of the synthetic floaters will be in the retirement accounts due to the complexity of the tax issues which caused my eyes to roll back into my head, and for two other good reasons. (I see no reason to discuss the transactions as they occur, since I would simply be selling a floater held in the taxable account only at a profit, no matter how small, and then buying the same or similar one in a retirement account.) Another reason for me to put them in a retirement account has to do with the floaters like the ones tied to GS and JPM bonds, which are basically trust preferred securities with liberal deferral of interest provisions. Deferred interest can create a taxable event according to every trust preferred prospectus that I have ever read, similar to what happens with a zero coupon bond or a TIP. The other more important reason is that the income from the floaters is interest- taxable at the highest marginal rate. I would, therefore, prefer to have them in a tax deferred retirement account, and to place dividend paying common stocks in a taxable account, assuming cash is available.
Bank of New York is the trustee for the TC GYB.
GYB is the best GS synthetic floater in my opinion based on the current pricing as of yesterday's close, and I know of five. The minimum rate is 3.25% and the maximum is 8.25%. The float provision is .85% plus 3 month LIBOR which is also good. Interest is paid quarterly. Since the minimum rate is the applicable rate now, the yield at my $11 cost is 7.38% and that would be the minimum yield for me for the life of this security which is 25 years. The maximum yield based on the float provision would be 18.75% (.0825% x $25 par value=$2.0625 per certificate in interest per year divided by $11 cost=18.75%). The maximum yield to me would be hit when the 3 month LIBOR rate rises to 7.15%. At a 3.5% average 3 month LIBOR rate over the next 25 years, the yield would be 9.88% (.035 3 month Libor + .85%= .0435% x 25 par value= $1.0875 in annual interest divided by $11 cost=9.88%). Amortizing the spread between cost and par value to arrive at an annualized yield assuming payment of par value in 25 yields results in another 5.1% ($1400 profit for 100 shares at maturity divided by 25 years=$56 per year divided by cost of $1,100=5.1%) So if 3 month LIBOR would average 3.5% over the next 25 years, the total return for this security, assuming payment of all interest and principal at maturity, would be about 15% annually. I am just looking at the past to come up with a number for the average over the next twenty five years which is not unreasonable based on prior experience:
This is a link to a chart of 3 month LIBOR rates since 1999. 3 Month LIBOR - Rate, Definition & Historical Graph
This chart goes back to 1986: ECB Statistical Data Warehouse
This is another link: LIBOR Rates History (Historical)
The underlying bond is a trust preferred type security so there are liberal deferral rights (see pp. S-13 & 14).
The same GS bond is also the underlying security in PYT, which I also own and JBK which I do not own. At some point I will trade the GS floaters to generate some profit, while hopefully lowering my cost basis which is my custom. The first to go will most likely be the equity preferred floater GSPRA, but I am in no hurry.
I do not have a high opinion of Jack Murtha, the Democrat who chairs a powerful defense committee, and some of the reasons are discussed in the report from CBS News last night. CBS News
While the FBI is investigating whether there is a quid pro quo between defense contractors receiving earmarks from Murtha and giving him campaign contributions, there can be little doubt that giving the campaign contribution is one of the prerequisites to the receipt of the earmark. I am not singling out Murtha since I view politicians of both parties to be guilty of this practice and it is condoned by the people that send them to Washington. It could be stopped by either prohibiting earmarks, which would be fine with me, or preventing any company from receiving an earmark who donated money to a candidate, which is also fine with me.
Saxbe Chambliss, who reminds me of a more suave version of Lester Maddox Lester Maddox - Wikipedia, the free encyclopedia, though Lester was a Democrat and Saxbe is a Republican, both products of Georgia, expressed his disapproval over Obama releasing the torture memos, saying Obama had really overstepped his bounds.TheHill.com Saxbe further claimed that torture worked, and the American people supported the GOP position. I single out Saxbe rather than Mitch only because Saxbe had one of my top ten most repulsive political ads that I have seen, and I will discuss it at the drop of a hat. It was from his 2002 campaign to unseat the then incumbent Democrat Senator from Georgia, Max Cleland, who had lost both legs and and an arm in combat during the Vietnam War. Saxbe dodged military service claiming he had a bad knee. Although Cleland had a strong record on national defense issues, Saxbe ran a commercial that started with pictures of Bin Laden and Saddam with a voice over asking whether Cleland had the courage to lead-enough said.
A good source that exposes false political advertising by both parties is Politifact who just won a Pulitzer for it coverage of the 2008 election . PolitiFact | Sorting out the truth in politics
Boston.comWhile a member of one of the two tribes will only make an effort to hear information from approved outlets that confirms pre-existing opinions, thereby forever existing in a closed loop system, the rest of us do not have to follow their lead by listening to Sean, Ann and Rush, or reading the self-proclaimed "conservative" pundits at Newsbusters, and can therefore make an effort to ascertain the falsehoods told to us by politicians in both parties. Politifact is a good start in that endeavor for those of us who remain open to discovering the truth. The Annenberg foundations FactCheck is another good source for fact checking. FactCheck.org
R. Allan Sanford is making media appearances claiming his innocence and basically blaiming the government for destroying what he believed to be a viable business. NYTimes.com Bloomberg.com
Sometimes facts and common sense do not matter. Sanford hired Dick DeGuerin as his lawyer. I watched Dick's "performance" on Court TV as the defense lawyer in the murder case involving Robert Durst. Robert Durst - Wikipedia, the free encyclopedia
He won an acquittal for Durst so I would not be surprised with the same result for Stanford. Durst admittedly killed his friend and neighbor, Morris Black in 2001, and explained on the stand how he carved up the body with various tools, placed it in a drum, and dumped it into Galveston bay. The drum later turned up and Durst was charged with murder. (His wife had disappeared in 1973 and a long time friend was found brutally murdered in her home in 2000. His wife has never turned up-wonder what happened to her?) The defense for the murder of his friend Morris was not insanity but self defense. Say what you say? It worked so I am very impressed with the selection of Dick DeGuerin to be Stanford's counsel, almost like drawing a get of jail free card.
I heard from a defense attorney one time that they try to select the dumbest people that they can find to sit on a jury, at least when the evidence overwhelming points to their client's guilt. Basically, as I understood what he was saying, you are looking for jurors with an IQ just above plant life.
IBM beat expectations on the earnings per share number but came up short on revenues. IBM's revenue fell 11% year over year (4% adjusted for currency). IBM did reiterate 2009 guidance at $9.2 per share.
DuPont suffered a 59% drop in earnings from a year ago and reduced its 2009 forecast to a range of $1.7 to $2.1, down from an earlier range of $2 to $2.5. The consensus estimate is currently $1.93.
United Technologies, another Dow component, reported a fall in earnings to 87 cents excluding items on a 12% decline in revenues. The company reaffirmed its 2009 outlook at $4 to $4.5. Assuming the worst is past, this major American industrial company is selling for 10-11 times recessionary earnings. I do not own UTX but I am constantly monitoring it now.
Excluding items Coca Cola earned 65 cents compared to 67 cents in the year earlier periods excluding items. The first quarter of 2009 was helped by 5 extra selling days. Revenues declined 3%. KO claims that currency neutral operating income increased 17%. Yahoo! Finance
Here are links to two other GS synthetic floaters that I have not yet discussed and do not presently own.
GJJ:
I am interested in GJJ at a lower price.
JBK:
This one is a Lehman ABS origination and is tied to the same GS bond maturing in 2034 as PYT and GYB. It has a floor of 3.5% and a float of .75% above 3 month Libor, not to exceed 7.5%. It closed yesterday at $14.4 whereas I bough GYB at $10.95. I would just point out that while the minimum is 1/4 point higher than GYB, the float is worse and the maximum cap which could be important down the road is .75% point higher for GYB than JBK. So, if I was going to choose one, it would not be JBK.
I have already discussed GJS and PYT.
DISCLAIMER:
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments NOT A RESEARCH SERVICE/Add of PWE Last Week These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.
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