TIDBITS: Peter Schiff referred to the 50% rise in the market averages as a "correction" in a bear market:
David Rosenberg is no longer predicting a fall in the S & P 500 to 600 by October, and now has a prediction for a correction back to 840 to 850: Video at 13:58 CNBC.com. Continuing to predict 600 by October in the S & P 500 would look ridiculous now to anyone other than Abelson. It is best to keep predicting and just ignore your past predictions in order to cement your status as market guru, eventually one of the predictions will come true, then you can remind everyone about that one. But I am keeping track of David's predictions, having just pointed out this weekend his prediction in early March that the market will continue to slide from the March 6th lows since the S & P 500 had not yet priced in the bad news at 660.
How is it possible for Moody's to rate the odds that the EC will request a deferral without evaluating the arguments relating to mandatory payment events for firms like Aegon and ING?
I heard a comment this morning on CNBC that the spread between the new orders and inventory numbers in the ISM index from yesterday is the widest since 1975. This would suggest a need to replenish inventories.
1. Pending Home Sales: The National Association of Realtors reported yesterday that pending home sales rose 3.2% in July, a two year high. CNBC.com
2. Great Atlantic & Pacific Tea Co: Sometimes, due to old age issues, I forget that Great Atlantic is still around. The company acquired the Pathmark grocery chain in 2007. BMO started coverage yesterday with an underperform rating and a $6 price target. I mention these tidbits simply in passing, since I have considered from time to time an exchange traded senior bond issued by Great Atlantic (GAJ), rated as junk with a capital "CCC", but have never bought it due to a combination of considerations. The coupon is 9.375% with a maturity date in 2039: http://www.sec.gov For me the price would have to be below $15 to be even slightly tempting, and it is currently just north of $20. It did hit close to $10 on four occasions between October and March, though I was unaware of its existence during those meltdowns. NYSE Now, I have it on a bond monitor list.
3. Reason for Release of the Convicted Mass Murderer of Civilians, al-Megrhi, by Scotland allegedly on Compassionate grounds: Some written documents were released yesterday by Great Britain. In one of them, the British government informed Scotland that the early release of the only person convicted of murdering 270 civilians in the Lockerbie bombing would advance "the overwhelming interests of the United Kingdom". NYTimes
4. SOLD 100 FBFPRN AT $17.38 (SEE DISCLAIMER): I sold this TP with the intention of buying another one with a higher yield in my IRA. FBFPRN was bought in a taxable account on 7/21/09 at $16.58 so this transaction resulted in a small gain plus one dividend. Bought 100 FBFPRN/ Sold CXW/
5. KEYPRA vs. KEYPRB: I talked some about KEYPRA yesterday. I view that security as functionally equivalent to KEYPRB. Both mature in 2033 and are cumulative. The only difference is the coupon with the " B" having a slightly higher coupon at 6.125% compared to 5.875% for the "A". That is not important. What is important for functionally equivalent securities is the yield at my purchase price. The lower coupon could have the higher yield at any given moment. At $16.95 KEYPRA yields 8.67% and the KEYPRB yields 8.51% at $17..99. That relationship will change constantly, but the lower coupon was a slightly better value at yesterday's closing price. I do not view the other Key bank TPs as being functionally equivalent given the vast disparity in maturity dates. The others mature over 30 years after KEYPRA and KEYPRB, eliminating the possibility of holding to maturity for someone my age. (KEPPRF-2068; KEYPRD-2066; KEYPRE-2066) Before venturing back into either of these securities, however, I would want to be compensated with more of a yield, more like 10% rather than 9%.
6. Productivity: The Labor department reported that worker productivity rose to an annualized rate of 6.6% in the second quarter, the fastest pace in almost 6 years. Labor costs fell an annualized rate of 5.9%. Productivity and Costs, Second Quarter 2009, Revised
7. Bought 50 ZBPRB at $19.9 in Roth (see disclaimer): Prior to buying the 50 shares of ZBPRB this morning, I wanted to know where my ZBPRA, a non-cumulative floating rate preferred stock, stood in relation to the government's preferred stock purchased with TARP funds. The following statement was lifted from the annual report:
"The Series D Fixed-Rate Cumulative Perpetual Preferred Stock was issued on November 14, 2008 to the U.S. Department of the Treasury for $1.4 billion in a private placement exempt from registration. The EESA authorized the U.S. Treasury to appropriate funds to eligible financial institutions participating in the TARP Capital Purchase Program. The capital investment includes the issuance of preferred shares of the Company and a warrant to purchase common shares pursuant to a Letter Agreement and a Securities Purchase agreement (collectively “the Agreement”). The preferred shares are ranked pari passu with the Series A and C preferred shares." (Page 15: Form 10-K)
That last sentence tells me what I need to know. I stand at the same level of priority as the U.S. government with my Series A shares. The Trust Preferred shares, Series B, ZBPRB, would be debt, standing higher in the chain of priority than all equity securities, including my Series A preferred stock and the government's Series D. I bought the ZBPRA at a good price, $7.8 for a $25 par value security, and intend to keep it. Both ZBPRA and ZBPRB just went ex dividend.
This is what the prospectus for ZBPRA says about ranking with other equity preferred (EP) stock issues:
"Shares of the Series A Preferred Stock will rank senior to our common stock and at least equally with each other series of our preferred stock we may issue (except for any senior series that may be issued with the requisite consent of the holders of the Series A Preferred Stock and any other class or series whose vote is required) with respect to the payment of dividends and distributions upon liquidation, dissolution or winding up. We will generally be able to pay dividends and distributions upon liquidation, dissolution or winding up only out of lawfully available assets for such payment (i.e., after taking account of all indebtedness and other non-equity claims)." (page S-4) www.sec.gov The difference with the government's shares is the non-cumulative dividend for my shares in ZBPRA. So, I could have my dividend eliminated when the government has their dividend deferred, but Zion's could not eliminate my dividend and pay the government as I understand it currently. I believe that is the case, and it is an important point.
Zions also has a 9.5% equity preferred (EP), non-cumulative security, ZBPRC. Prospectus Supplement
The TP, ZBPRB, bought this morning is a bond and ranks senior to all of these equity issues. And for that one, the government's dividend would also have to be deferred to defer the payments on ZBPRB, so in a way it is no better off in that regard than the equity preferred issues. Why? It would be hard to anticipate the situation where Zions would defer the coupon payment for the government and not defer all other securities where deferral is an option. The only difference then would be the dividend for the TP would continue to accumulate with interest during the deferral period: "Any deferred interest on the junior subordinated debentures will accrue additional interest at an annual rate of 8.00%, and, as a result, any deferred distributions will accumulate additional amounts at an annual rate of 8.00%, compounded quarterly." (P. S-5) The dividends for ZBPRA and ZBPRC would just be lost forever, just like the common stock dividend, which would also have to be eliminated before eliminating payment to the equity preferred shareholders.
So, after working through this scenario, what do I buy if I wanted to add one to my current 100 shares of ZBPRA at yesterday's closing prices. My two choices are:
ZBPRB (a TP): $20.02 yield 9.99% taxed as interest: ZB P.RB Stock Quote - Zions Cap Tr B CAP SECS
ZBPRC (EP non-cum): $21.50 yield 11.29% qualified dividend ZB P.RC Stock Quote
I am going to make some non-factual assumptions about a hypothetical purchaser now. That person is in a 32% U.S. federal income tax bracket. The after tax yield for the two securities for that person is 6.79 % for the TP ZBPRB and 9.6% for the EP ZBPRC, so that person would now be giving up 2.81% in yield to buy the cumulative "insurance" type protection of a junior bond plus the value of a maturity date. But, then the Democrats are going to take away the qualified dividend rate from that well off person at some point, most likely, before 2011. One last firm fact is that the TP has a maturity and consequently comes with a promise to pay the principal back in 2032. On the other hand, when conditions improve, Zions may want to call for redemption a preferred stock with a 9.5% coupon, and refinance it at a lower rate. It can not be called prior to 9/15/2013 at its $25 par value. After that time, it can be called if Zions wants to do it. Otherwise, it is a perpetual security. I would rate a call as possible. With improving earnings and assuming low rates after 9/15/2013, the odds of a redemption would increase. This issue originated in 2008 when the banks were already under stress.
Now, there needs to be a few mushy type of considerations. If a bank fails, all the junior security holders will most likely be in the same boat, holding worthless pieces of paper, so there is no advantage in that scenario for even the TP. If the bank survives, and eliminates the non-cumulative dividends, the common shareholders will at some point expect a resumption in the common dividend, which would cause a restart of the non-cumulative equity preferred dividends. Where the bank has to eliminate those dividends and defer payments to both the government and on the TP, and survives, the worse case time period would be three years of non-payment in my opinion, and that scenario has a low probability for this bank. Zions is currently paying a 1 cent per quarter common share dividend. I would currently rate it as more probable than not that it will continue to pay that dividend. Conditions would have to worsen for Zions to take the momentous step of deferring the government's dividend. So, at least for that hypothetical person in the 32% bracket, it is difficult for me to justify the price of the "cumulative" insurance policy as being worth 2.81% per annum. For someone in the 15% tax bracket, the cost of the insurance is reduced to slightly more than 1%, and that may be worth it given the added features of a maturity date, interest on the deferral amount and the cumulative nature of the dividend with a five year limit on deferral with the TP compared with the EP. And a change in the qualified dividend law for the well off individual could impact this decision too.
What I decided to do is divide an order for 100 shares in two parts, one 50 share purchase of ZBPRC in a taxable account and 50 shares of ZBPRB in a retirement account. I will wait to see if I can pick up ZBPRC at a lower price, closer to $20.
The yield at my cost is around 10%. The coupon is 8% on a $25 par value. Maturity for ZBPRB is in 2032. One reason for putting that one in an IRA has to with the tax consequences of deferral of a cumulative interest payment. The other has to do with the taxation of interest as distinguished from qualified dividends. The retirement accounts are now geared to throw off a lot of income, somewhere around 12% a year as long as all of the securities continue to pay. Some of that is due to the opportunistic buying of fixed income instruments from last Fall and in early March of this year, including a few REIT cumulative preferred issues.
Added: Sometimes it helps to just list the order of priority to see what has to be eliminated or deferred before ZBPRB can be deferred:
Common Dividend: Eliminated
ZBPRA & ZBPRC: Eliminated
ZBPRD -Deferred (Government Preferred not traded)
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