Since I have been focusing on floaters recently, due to their depressed valuations in the current low inflation environment, trying to think ahead, I have located more. Yesterday, I found one in TC form, PYT, a synthetic floater tied to a fixed rate Goldman Sachs bond maturing in 2034. I found another new synthetic floater tied to the same bond originated by another broker that I did not know previously to even be a source of TCs. I now have 5 synthetic GS floaters to monitor, and I have already noted some pricing discrepancies in these functionally equivalent securities. This will provide opportunities to trade positions in an effort to manage risk, similar to what I did last year for the several AON TCs which contained the same underlying security. Given the recent investment history of investment banks, I will keep the total position relatively small even though I have always had more confidence in GS than any of the others.
The synthetic floaters are tied to junior bonds. Goldman has also issued several floating rate preferred issues which it describes at its web site: Goldman Sachs | Investors - Preferred Stock
Of those I own GSPRA which is non-cumulative, always a bad thing, and pays the greater of 3.75% or .75% above 3 month LIBOR. The C series has better terms than the A series with a floor of 4%. It is just my personal opinion that the synthetic floaters are a better deal than the preferred issues, provided the investor is comfortable with the TC form of ownership and the synthetic quality of the float. I am comfortable with TCs and synthetic securities but others may have a different opinion. I can only act on my own opinions which should be the case for every investor.
I am not in the market for any of the floating rate non-cumulative preferred issues, though possibly I might add 50 shares of GSPRC and then sell the 100 of GSPRA that I own now when I can obtain a better price. There are three negative features to them. They are all non-cumulative, with no maturity date and are junior in priority to all GS bonds and senior only to the common. Nonetheless, there would be no good reason for GSPRC to be priced the same or lower than GSPRA. GSPRC should be priced higher with the better guarantee and the same float provision, and the amount would just depend on how much an investor is willing to pay for that extra 1/4% in the guarantee that is magnified some by the current deep discount to par value.
There is one positive factor that supports owing an equity preferred rather than a debt issue. Interest paid on debt will be taxed at the highest marginal rate. Dividends paid on equity preferred issues is currently taxed at the maximum rate of 15%. Obama plans to change this cap for rich folks, but that may not happen until 2011. His last proposal was to increase the cap to 20% for those making over $250,000. Center on Budget and Policy Priorities If and when the cap is removed for certain investors, then that would of course eliminate or modify this one advantage of the equity preferred over debt. The after tax yield would be higher for an equity preferred now, for some one in the top bracket, than an owner of a debt issue where the before tax yield was the same. I did confirm by looking at my 1099 for 2008 that the dividends paid by GSPRA were treated as Qualified Dividends.
Personally, I would favor a maximum dividend tax of no more than 15%. Some of my reasons are expressed in this article. Seeking Alpha
Corporations receive a deduction for interest payments but not for common stock dividends. Those dividends are paid from after tax money. So when I pay an income tax on the dividends received by me, the same funds are then taxed twice. More importantly at least to me, I believe the common stock holders need to be treated more like owners of the business under the tax code. When looked at that way, there should be a zero tax on dividends, at least to the extent the corporation has paid income tax on that money already. To treat the shareholder more like an owner under the tax code would require the elimination of double taxation. However, being a realist on such matters, and recognizing the government's need for money, I am okay with a 15% cap rate.
I would agree with the WSJ article that $250,000 a year in income is not "wealthy", particularly when you have 3 kids to raise. WSJ.com
Regions Financial announced that it will report a profit for the 1st quarter and the stock rose 30% or so this morning. MarketWatch Stocks To Watch TodayRF was one of Right Brain's lottery ticket purchases. Buys of DKF, AA and a Lottery Ticket in 50 shares of RF/Heinz & its Boston Market Line/ Duality of Long Term Risks/Stocks Under $5: Per Se Lottery Tickets/ Left Brain is considering the possibility that RB's ruminations may be worthy of more consideration in the future. It was RB that initiated the flagrant violation of all trading rules starting on 3/3.
I intended to buy 50 shares of EWBC, a California bank, at the same time that I purchased UCBH. FASB Gives Leeway/Buy of 50 UCBH: Lottery Ticket/Winstream/Low Dividend Yields=Low Earnings Growth/Dividends=Most of Stocks Historical Returns I viewed both banks as lottery tickets on a recovery in California real estate. I forgot to do it, old age memory issues. It was around 5 bucks at the time of my memory lapse so I remembered my intent from a few weeks ago this morning and bought 50 at $5.7 in my lottery ticket category. I have to admit that I have not even been to California since 1993, and there is nothing in my past experience which would assist me in evaluating any bank or California real estate. I did note in a prior post that were some indications of a bottoming process occurring in California.
VIX Below 40/Housing Recovery?/Budget Deficits & the Value of Treasuries/ABC & CBS Programs on Gun Show Loophole I first became acquainted with East West after reading a favorable Barron's article about a year ago.Barrons.com I did not buy it then because I was very negative on all banks. It was trading around 12 at that time. Like virtually all banks, it had a tough 2008 and has fallen a great deal from its June 2007 high of 42. Like UCBH, it has strong ties to the Chinese community in the U.S. and in China. Morningstar has it rated 5 stars with a consider to buy at below 10. S & P is more negative with a 3 star rating and a $8 target. For the shares of this bank to get a lift, there probably needs to be evidence of a real estate recovery in this bank's primary market, the Inland Empire region of California. The bank has 71 branches in California and a branch in Hong Kong with representative offices in Beijing and Shanghai, China.Yahoo! Finance
The bank has branches in grocery stores operated by Ranch Market, a large chain catering to the Asian community.Branch Locations - EWB Southern California Offices Branch Locations
Since I am very near dipping into my static cash allocation which does not include cash flow from dividends and interest payments, I am considering investing the accumulated cash flow now that has been mentally sequestered due to my 815 trading rule.
ADDENDUM ADDED AT 1:52 P.M.: When the ask price for PYT slid to $11, I placed a market order to buy 50 in my Roth at $11.
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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