1. Indexed Linked CDs: I do not own any certificates of deposit that link interest payments to the performance of an index. In some respects, there are similar to the Citigroup funding principal protected notes that I have purchased recently on the stock exchange with some important differences. The key difference is that the principal protected notes are unsecured obligations of Citigroup and are not covered by FDIC insurance. Certificate of deposits which are linked to an index are covered by FDIC insurance with the usual limitations regarding amounts. I am starting to pay more attention now to the linked certificates of deposit due to the FDIC protection. I found this web site that lists some recent offerings. Structured Investments - Broker-Dealer Offerings It appears that the banks offering these kind of CDs include J.P. Morgan, Wells Fargo and Union Bank. These offerings will need to be studied in more detail.
The first one that I will study in more detail is an offering from Wells Fargo tied to S & P 500. reports.incapnet.com .pdf The minimum deposit is $1000 with integral multiples of 1 thousand. The maturity is 4/30/2015. No payments are made prior to maturity. At maturity, a purchaser will receive the original deposit amount plus an amount based on the performance of the S & P 500 from its starting value. The pricing date will be 4/23/2010. There are some complicated tax issues as I would expect which would cause me to hold this type of security only in a retirement account.
This product is only distributed through brokers who receive a placement fee which is probably a kill provision for me. Another provision that I do not like is the knockout provision, which is similar to the reversion provision in the Citigroup Funding principal protected notes except the reversion is activated if the "Threshold Amount" is exceeded as of the maturity date, which in this case may be somewhere between a 55% to 65% increase (to be set on the Pricing Date) from the starting value. This is another unappealing feature. If you bought one of these and had a 68% gain in the S & P from the starting date to the closing date five years later, you do not receive any of that increase. Instead you receive what is called a "rebate" amount which is 10% of the Deposit Amount (call it a 2% per year guarantee)
I just glanced at this prospectus, long enough to decide that it is not for me. There could easily be more relevant and material details, replete with important ifs, ands and buts.
This product is only distributed through brokers who receive a placement fee which is probably a kill provision for me. Another provision that I do not like is the knockout provision, which is similar to the reversion provision in the Citigroup Funding principal protected notes except the reversion is activated if the "Threshold Amount" is exceeded as of the maturity date, which in this case may be somewhere between a 55% to 65% increase (to be set on the Pricing Date) from the starting value. This is another unappealing feature. If you bought one of these and had a 68% gain in the S & P from the starting date to the closing date five years later, you do not receive any of that increase. Instead you receive what is called a "rebate" amount which is 10% of the Deposit Amount (call it a 2% per year guarantee)
I just glanced at this prospectus, long enough to decide that it is not for me. There could easily be more relevant and material details, replete with important ifs, ands and buts.
The reason for looking into these instruments was a SmartMoney article mentioned them as a safe alternative for retirees (page 52 May 2010 issue received yesterday here at HQ). An older article from this magazine can be found at Boost Your Returns: CDs at SmartMoney.com Some other articles on this subject matter are from Investopedia and this recent segment on the Nightly Business Report | PBS.
2. Annuities: Eventually, when interest rates move back up, I will buy some fixed income annuities. The current issue of SmartMoney.com has rankings for the providers. Christine Benz also wrote an article recently for Morningstar which highlights the problem that the current low interest rate environment has on the future income stream from fixed payment annuities purchased now. I was aware of that issue already and am in no hurry to to buy one for that reason along with my current age. /Life Annuities/ (see also Exploring Types Of Fixed Annuities) And, it goes without saying that 16 year old Stock Studs have no need for such an OG investment anyhow.
3. CPI: The Labor department reported another tame inflation number. CPI rose .1% on a seasonally adjusted basis in March: Consumer Price Index But, the index has now risen 2.3% over a twelve month period prior to the seasonal adjustment.
I will generally calculate how this new number will impact the monthly interest rate for the CPI floaters that I own-OSM and PFK.
I can now calculate the monthly interest payment for July 2010:
March 2010 Non-Seasonal 217.631 (source: http://research.stlouisfed.org/fred2/data/CPIAUCNS.txt)
March 2009 Non-Seasonal 212.709
Difference=4.922
Divided by 212.709=.02314
Add the Spread of .02 for OSM=.04314
Multiply .04314 x. $25=$1.0785
Divided by 30/365=$.0886
Previously I had been doing the last calculation by using the twelve month divisor which was an incorrect and easier way to do the calculation. Sallie Mae will use the actual number of days in the monthly payment period divided by the constant 365 day year. OG just said that he was waiting on pins and needles for the LB to figure out the correct divisor.
By performing the same calculation for June with the correct divisor, this would change my previous estimation of the June OSM payment from $.0863 (CPI) to $.088 ($.087967), since that payment period has 31 days in it rather than 30. The May 2010 OSM payment, which will have 30 days in the payment period, will be $.095.
The PFK calculation is the same except the spread is .024%.
4. China: China reported that its GDP grew by 11.9% in the first quarter of 2010. Property prices are in a parabolic rise, increasing 11.7% in March, year over year, in China's seventy largest cities, according to a release by China's National Bureau of Statistics. Further Expanding Momentum of China's Economic Recovery in the First Quarter of 2010 China property (Article in the Sydney Morning Herald)
5. EMO-Entergy Mississippi First Mortgage Bond (no longer owned): After Entergy Louisiana called its 7.6% coupon first mortgage bond ( EHL Redemption), I sold my position in EMO, a 7.2% coupon first mortgage bond from Entergy Mississippi. I suspected that it would only be a question of time before EMO was called too. SOLD EMO AT 25.8/ This has now happened. I checked yesterday the SEC filings, and Energy Mississippi just registered a longer term first mortgage bond with a lower coupon than EMO. The new bond matures in 2040 and has a 6.2% coupon. Preliminary Prospectus Supplement I will start to track the prices of this bond, waiting for an opportunity to buy it at a much lower than its $25 par value. A long term bond maturing in 30 years with a less than generous coupon will not fare well when interest rates start to accelerate. I did well with my investments in EMO an EHL, and will be happy to buy their new mortgage bonds when it makes sense which would require a significant decline in price before I would give it any consideration. I believe EHL is scheduled for redemption on 4/19/2010. The new first mortgage bond which replaced EHL (a 7.6% coupon & a 2032 maturity) is ELB with a 6% coupon and a 2040 maturity. www.sec.gov
The Fed's long Jihad against savers is providing ample opportunities for companies to refinance by issuing new debt at a lower yield and a longer maturity.
6. Philadelphia Region Manufacturing Survey: The Philly Fed reported its business outlook survey for manufacturing improved to 20.2 in April from 18.9 in March (Zero is the demarcation line in this index). April 2010 Business Outlook Survey - Philadelphia Fed The new order index increased by 5 points.
7. Interactive Map of Bank Failures 2008-2010: This article has an interactive map showing the bank failures by state: TheStreet.com Tennessee has none as does Montana. As you would expect, Georgia, Nevada, Florida and California lead the pack in failures. In California, the FDIC has incurred 19.3 billion dollars cleaning up the messes in that state alone.
8. Marathon Oil (MRO)(owned): Credit Suisse initiated coverage on MRO with an outperform rating and a $41 price target.
9. Sold 50 Porter Bancorp (PBIB) at $14.7 and Bought 50 Valley National Bancorp (VLY) at $16.6 (Regional Bank Stocks strategy-Category 2)(See Disclaimer): I am just more comfortable with VLY than PBIB after the late Friday warning Porter gave last February, Item # 6 PBIB. I bought PBIB at 14.1, This brings the realized gains in the regional bank strategy to $291 in 2010, mostly from the disposition of Wilmington Trust. The unrealized gains in this basket are close to 7 grand. I will update the table in my next post. I intend to add a new name tomorrow or next week, a small bank expanding in the Carolina region.
The add on VLY was an average up from my last 50 share purchase at $15.06. I have nothing to add to that post form mid-March, except to note VLY just declared a 5% stock dividend, which will give me 105 shares when I receive the stock dividend on 5/21. Five Percent Stock Dividend
10. Sold 50 DDT at $22 and Added 50 GJD at $17.95 (see Disclaimer): I thought that the Dillard's Trust Preferred was mispriced in relation to the Sprint Capital senior bond contained in the TC GJD. This is what I would call a minor capital allocation adjustment.
DDT is a Trust Preferred, which means that it is in effect a junior bond, with a maturity on 8/1/2038. The coupon is 7.5% with a $25 par value. It just went ex interest for its quarterly interest payment, and was yielding at the $22 price about 8.5%. I had just bought DDT at 18.42 last February. The interest payable by a junior bond can be deferred under certain circumstances.
GJD is a Trust Certificate containing a senior bond from Sprint Capital that matures in 2028, about 10 years sooner than the junior bond in the DDT Trust Preferred. The current yield on GJD at the $17.95 price is about 9% or 1/2% higher in current yield. This is an average up from my last purchase at 17.49. GJD has a 6.5% coupon, a $25 par value, and matures on 11/15/2028: www.sec.gov
Since GJD matures sooner and is selling at a deeper discount to DDT, its yield to maturity would be better also. The yield to maturity calculations, which includes both the current yield and yield generated by receiving a profit at maturity on the shares, can be done with a calculator at Morningstar.
DDT Matures 8/1/2038 Coupon 7.5% Price $22= YTM of 8.81%
GJD Matures 11/15/2028 Coupon 6.5% Price $17.95=YTM of 10.26%
Both of these bonds are rated junk. According to QuantumOnline.com, the Sprint TC is rated Ba2 by Moody's and BB by S & P. I will only do nibbles in junk bonds due to their enhanced risk profile. Quantum has the DDT rated lower at Caa1 by Moody's and CCC- by S & P. So when I am doing my nibbling, I will go with the higher rated senior bond versus the deferrable junior bond, particularly when the senior obligation pays more currently, matures sooner, and has an even higher YTM.
One last point needs to be made. Individuals dominate the trading in these type of securities. Judging from my view of their trading habits, few of them appear to take into consideration the yield at their purchase price when comparing functionally equivalent securities. Instead, they focus on the coupon. There are four Trust Certificates which contain the same senior Sprint Capital bond. The TCs have different coupons, but are otherwise equivalent.
DHM-8.125% coupon -At a $22.45 Price= Current Yield of 9.09%
GJD-6.5% coupon-At a $17.95 Price= Current Yield of 9.05%
PYG-7% coupon-At a $19.71 Price = Current Yield of 8.88%
JZK- 7% coupon-At a $20.30 Price= Current Yield of 8.62%
So, when comparing these TCs, I can eliminate PYG and JZK as possibilities right away.
This leaves DHM and GJD. DHM fell 60 cents today. If I had to explain it, it became mispriced in relation to GJD. Even after falling 60 cents, I would view GJD still to be the better buy than DHM today due to the higher YTM and greater capital gains potential to its par value of $25. The GJD YTM is 10.26% whereas DHM has a YTM of 9.72%. While DHM has a slight current yield advantage, this does not offset the much larger advantage of GJD due to its larger discount to par value. For a junk rated security, I will give more weight to current yield than YTM, but I see no reason to go with the much lower YTM when the current yields are close.
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