Larry Summers is trying to prepare the market for an unexpected and unfavorable number for February unemployment. He is basically asking everyone to look past the February number as an aberration impacted by the snowstorms. Reuters The February data is scheduled to be released this Friday. Current Population Survey (CPS) Unfortunately, there are other indicators pointing to at least some slowing in economic activity since the end of last year. The latest example would be the ISM report released yesterday which is discussed below, and the home sales number released last week.
Jim Bunning, a republican senator from Kentucky, successfully blocked the passage of routine legislation over the weekend. He managed to block legislation that would have extended unemployment insurance to about 400,000 Americans. Bunning claimed that he was sacrificing too, in that he had to miss a Kentucky basketball game. Bunning's stunt also required on Monday the furlough of workers as 41 infrastructure projects had to come to a halt. And, the legislation also provided funds to keep medicare payments to doctors from being slashed 21%. CBS News
1. Bought 50 shares of the Trust Certificate DHM at $21.35 in the Roth IRA Yesterday (see Disclaimer): This is what happens when I see the dividend paid on my money market cash balance at the end of each month now. Even the LB can become temporarily unhinged for a second, sometimes two. The TC DHM has as its underlying security a senior bond from Sprint Capital, wholly owned by Sprint Nextel (S). I am not a fan of this company, which is why I have never owned any of the TCs containing a Sprint bond prior to yesterday. The yield on this TC at my cost is close to 9.5%. The underlying bond in DHM matures on 11/15/2028. Par value of the TC is $25. The coupon on the TC is 8.125%. Interest payments are made semi-annually in May and November. The coupon of the TC is higher than the underlying security which has a 6.875% coupon. U.S. Bank is the trustee. The underlying bond is firmly in junk territory.
This is a link to the prospectus: Prospectus Supplement
Information about the underlying bond can be found at FINRA. That page currently shows a S & P rating of BB. The current yield based on a 76 price for the underlying bond would be around 9% ($6.875 divided by 76). The yield to maturity would be higher due to this bond selling at a discount to par value.
There are three other TCs containing this same bond, so I compared the yield at their current prices before entering an order:
When comparing these four TCs with the same underlying bond, the coupon rate of the TC is not relevant. The issue is the yield at the investor's possible purchase price at the time an order is desired to be placed. This would include for many investors the yield to maturity, which would assume Sprint survives to pay off the note in 2028.
The 1998 prospectus for the underlying security contained in DHM can be found at www.sec.gov.
2. SOLD Entire Position in Canadian Energy Trust Penn West Energy at 21.88 CAD Yesterday (PWT-UN.TO) (PWE in U.S.)(See Disclaimer) I talked briefly about buying some shares in PWE in a post form December 2008 Add of PWE Last Week I read the Morningstar report on it yesterday morning and that service was not recommending the shares with a one star rating. Since the price had almost doubled since December 2008, and given the unfavorable change in the Canadian tax law in 2011 for these energy trusts, I decided to eliminate my position in PWE yesterday.
3. SOLD 70 PYT in Regular IRA at 18.66 and Added 70 GYB at 18.49 Yesterday (See Disclaimer): This exchange only made sense to the LB. The RB thought it was just asinine. PYT and GYB are two synthetic floaters tied to the same Goldman Sachs junior bond in a TP form. Synthetic Floaters For those unfamiliar with these securities, a brief summary may be helpful. The GS junior bond is in a trust. The trustee collects the interest payments from GS and swaps that amount with a brokerage company in exchange for the amount owed to the owners of the Trust Certificates. If that swap agreement is terminated then the owner of the TC is entitled to receive the fixed coupon payment of the underlying GS bond. The swap agreements for both PYT and GYB are in effect. For the owner of GYB, this means that the owner will receive quarterly payments at the greater of 3.25% or .85% over three month LIBOR with a maximum rate set at 8.25%. For PYT, the rate is the greater of 3% or .85% above the 3 month LIBOR rate with a maximum of 8%. So the LIBOR floats are identical but GYB has a .25% greater guarantee and maximum rate. Both of these TC securities have a $25 par value.
So, in a perfect world, the price of GYB should always be greater than PYT. This says nothing about what is the right price for either of these securities, but is merely making a relational point. PYT cost more yesterday. But there are other securities that need to be considered other than just the synthetic floaters with a GS bond. What is the float worth when the investor starts out, as now, with a lower yield for the synthetic floater than with a fixed coupon TC with the same GS TP as the underlying security?
The same GS TP is the underlying security in several fixed coupon TCs that would provide the investor with more current yield than either GYB or PYT. This would include GYA, PYC, PYY, PYK, HJJ, HJL and HJN. And, there is one TC, JBK, which started out as a floater and became a fixed coupon TC upon the termination of the swap agreement. The closing yield on GYA yesterday, for example, was 6.84% at $22.06, whereas HJN has a 7.23% yield at its closing price of $21.18. And there are several fixed coupon TCs tied to a senior GS bond maturing in 2033, including JZS, PYB, PJI, DKP, DKW, and HJG. JZS at a $21.06 price has about the same yield as GYA, the TC with a junior bond, as does PYB. Another TC with the senior bond was priced to yield 6.97% at yesterday's close. So, none of that is what the LB would call entirely rational. I only own JBK, as giving me the most bang for the buck at the time of my purchases: new information about jbk bought 100 jbk at $16.15 more on jbk /JBK Interest Payment bought 50 of the tc jbk Trust Certificates Links in One Post
{the current yield on JBK shown at Marketwatch and everywhere else is wrong. Since 2/2009 JBK has been paying the fixed coupon rate of the underlying GS TP semi-annually which is .7931 or $1.5862 annually. This translates into a 8.24% yield at yesterday's closing price of $19.25. Marketwatch shows 16.48%, which is erroneous, and is due to the failure to treat the .7931 as a semi-annual payment which is the correct schedule after the termination of the swap agreement with Lehman. When the swap agreement was active, the security paid quarterly at the greater of a guarantee or a percentage over Libor. So if you erroneously assume 4 payments of $.7931, you arrive an erroneous conclusion of a 16.48% yield).
This trade, basically exchanging PYT for GYB yesterday in my regular IRA (PYT is still owned in the Roth with an unrealized profit of close to $700 on 100 shares), really would make sense only with a lot more shares and then only in my retirement account where the tax issue is not in play. I bought the 70 PYT held in the regular IRA at $15.75 last November: Added 50 of the TC DKK/Bought 70 PYT at $15.75/Sold All Shares TIP That would have been a short term gain if those shares had been held in a taxable account. The 70 shares of GYB added yesterday in the regular IRA will bring the total in that account to 170 shares. The previous 100 shares were bought at a favorable price of just $11 last April. Added another 100 GYB in Regular IRA/ SOLD LQD again/ That brought the total in April 2009 up to 150 GYB but I later sold 50 of the first shares bought at $15 to lock in a good percentage profit ( Bought GYB Sold 50 GYB at $15).
This is a link to the prospectus of GYB: /www.sec.gov The swap counterparty is the UBS London branch.
This is a link to the prospectus of PYT: www.sec.gov The swap counterparty identified in the prospectus is Merrill Lynch, now part of Bank of America.
My analysis of the Goldman synthetic floaters, and how I compare them to the GS equity floating rate preferred stocks, can be found at Analysis of Prior Question about Goldman Sach's Floaters
The underlying security is a Goldman Sachs Trust Preferred issue. The issuer is Goldman Sachs Capital I: www.sec.gov That entity purchased a 6.345% junior bond from Goldman Sachs maturing in February 2034. The purchase is financed by selling preferred securities in Goldman Sachs Capital I, a Delaware Trust, that represent a beneficial interest in the bonds contained in the trust. In other words, the underlying security in both PYT and GYB is the same GS Trust Preferred which in turn contains this junior bond issue from GS. That bond pays semi-annually, whereas the owners of PYT and GYB receive quarterly distributions. More information about the underlying bond can be found at FINRA. The coupon interest rate and the payment schedule of the underlying bond becomes applicable only when the swap agreement is terminated for some reason like the bankruptcy of the swap counterparty, which is what happened to the swap agreement for the TC JBK. If that was to happen, the yield at a total cost of 18.5 would be 8.57% which is more than I would receive now with the swap agreement in effect. So, I really don't care if it is terminated at some point.
The LIBOR rate is abnormally low now, so the applicable rate for GYB is the 3.25% guarantee. This works out just fine for the swap counterparty who receives the 6.345% paid by Goldman, and then pays out to the owners of GYB 3.25%. At a 5% 3 month Libor rate during the applicable computation period provided in the prospectus, the amount payable to the owner of GYB would still be less than the swap counterparty collects from the GS bond, but it would be an improvement nonetheless for the TC owner who would then have a coupon of 5.875% in that hypothetical. But on my initial purchase at $11, that 5.875% is worth 13.35%. At a total cost of 18.5 the yield falls to 7.94% at that 5% 3 month Libor rate. The Libor rate now is .25% due to the abnormally low short rates maintained by the central banks. ( WSJ.com: right hand column under Consumer money rates). The Federal Funds rate is 0 to .25%. The yield at 3.25% and a total cost of $18.5 is just 4.39%. I place the synthetic floaters in a retirement account due to the tax issues. I like them when I was able to purchase them at steep discounts to par value. When LIBOR starts to increase due to inflation, and the central banks tighten by raising their benchmark rates, the LIBOR float will come into play and provide a measure of inflation protection. But, I do not expect this to happen at least until the Federal Reserve is well into its tightening cycle and raising the federal funds rate in response to a rise in inflation.
Historical Libor rates can be found at LIBOR Rates History (Historical).
4. Bought 100 Kimberly Clark (KMB) at 60.58 Yesterday (see Disclaimer): This purchase would fit into the Dividend Growth strategy had I bought shares in the mid to high 40s. The main reason for buying KMB is for the relative safety of its dividend, which will give me around a 4.3% yield at the current payout rate, and KMB's long history of raising its dividend. The last dividend raise was from 60 cents to 66 cents, a 10% increase, and that increase represented the 38th consecutive year of KMB enhancing its dividend. Kimberly-Clark Announces 10 Percent Dividend Increase The consumer brands made by KMB are well known and include Kleenex, Huggies, Cottonelle and Scot in the U.S. KMB has operations in 80 other countries.
The company earned $4.52 per diluted share in 2009, up from $4.03 in 2008 (see page 36 Form 10-K) That number, however, includes 22 cents in restructuring charges. The current consensus estimate is for $4.94 in 2010 and $5.35 in 2011. So if that 5.35 proves accurate, at a total cost of $60.58, the the forward P/E based on the 2011 estimate would be 11.33. The five year P.E.G. is currently estimated at less than 1. KMB: Summary for Kimberly-Clark Corporation
Kimberly-Clark's last earnings report for the 4th quarter of 2009 missed expectations of $1.25 by nine cents according to MarketWatch. Barclays thought that this was a significant earnings miss and has an underweight weighting on the stock with a $59 price target. Morningstar viewed the report more favorably, and has the stock rated 4 stars.
Goldman Sachs cut KMB to sell from neutral this morning and lowered its price target by $3 to $60 based on its view of a competitive environment for KMB and an increase in pulp prices.MarketWatch Reuters
The current dividend of 66 cents per share will be $2.64 annually. The rate in 2002 was $1.2, so the current dividend has more than doubled in less than 10 years.
I did pass on KMB in favor of a purchase of 100 Proctor and Gamble at $52.85/ in 9/09. Those PG shares were then sold at $59.45. Item # 6 Sold MSFT PG IXC I do not regret selling those shares. I do regret selling the PG shares bought in March 2009 at $47.49, since that purchase was consistent with contours of the my dividend growth strategy. Those shares were sold at $56.89 in July 2009 by the LB in its trading mode.
KMB is ex dividend tomorrow, 3/3/2010: Dividends - Markets Data Center - WSJ.com I do not plan to reinvest the dividends.
5. ISM: ISM index for manufacturing still showed expansion in February 2010 with a reading of 56.5. But there are some important caveats to that statement. The index fell in February from the January reading of 58.4. Importantly, the new order component declined to 59.5 from 65.9. On the positive side, the employment index component increased to 56.1 from 53.3.
6. CVR Energy (owned): CVR Energy was expected to lose 1 cent per share and reported earnings for the 4th quarter of 9.5 million or 11 cents per share excluding items. Revenues rose 32% to 921.9 million, better than expectations. The revenue expectation was 897.3 million.
7. Dillard's (own TP DDT only): After posting some comments about Dillard's common stock (DDS) yesterday morning, the common stock (DDS) continued to rise, closing at $20.03 for a 18.73% gain yesterday. The common has had a huge run since 3/6/2009 when it closed at $3.19. Dillard's, Inc. I do not own the common and certainly would not buy it at current levels. I agree with the comments made in a Barrons article, published yesterday afternoon and written by Alexander Rule, that the common stock has become rich compared to other department store stocks like Macy's. He emphasizes that Dillard's has not a positive same store sales number since July 2008.
My holding is in a Trust Preferred issue, DDT, which is in effect a junior bond. Bought 50 DDT at 18.42 buy 50 of ddt DDT rose yesterday by 4.72% to close at $19.72. DDT: Summary for Dillard's Capital Trust I I would describe myself as a weak holder of that security. I own senior bonds in TC form from retailers Limited and Macy's that also have long term maturities. I am more comfortable with those two securities than with DDT.
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