Thursday, May 13, 2010

Sold 50 of the 150 GJD at 18.59/SOLD 200 of 300 WIW at $12.5 & Bought 300 HSF at 5.76/Macy's/ Spain & Europe GDP/ING & Aegon/Bought 50 GSPRA at 18.8

1. Aegon and ING (own hybrids-IND, INZ, AEH, AEB, AEF): Both Aegon and ING reported earnings for the 1st quarter yesterday, which are summarized in this story from MarketWatch. As an owner of the hybrids, I am satisfied with both reports. I would characterize the earnings from ING to be more than satisfactory. Aegon Hybrids: Gateway Post ING Hybrids: Links in one Post

ING posted 1Q underlying net profit of EUR 1,018 million compared to a loss of €236 million in the year ago quarter. The return on equity increased to 11.3%. The net profit was higher at €1,326 billion given profits realized on divestments.

AEGON reported underlying earnings before a tax increase of €488 million. Net income was €372 million.

The Aegon and ING hybrids responded favorably to these reports.

2. Europe 1st Quarter GDP-Spain Moves Toward Austerity: GDP growth in the euro-zone remains anemic. GDP rose just .2% in the first quarter for the 16 nations that use the Euro. epp.eurostat.ec.europa.eu/ .PDF Given the impact of recently announced austerity measures, it would not be surprising to see Europe continuing to struggle in the months to come. The .2% increase from the previous quarter was also the percentage increase for both Germany and the Netherlands.

Spain's federal government announced some austerity measures yesterday, including a 5% cut to public sector wages this year and a freeze on them for 2011. And this is a new one for me. Spain gives €2500 for each new baby. This "baby check" will be eliminated and public investments will be cut.

3. Macy's (own senior bond in TC form only-Bought 50 of the TC DKQ at $15.95): I discussed this TC, originally an issue from May Department stores, in several prior posts going back to October 2008 when it was being priced at around $10: TRUST CERTIFICATE MACY'S BOND DKQ.

I would not view the 1st quarter report of a retailer to be that important, unless the company was showing an acceleration of losses for that normally weak quarter on significantly declining same store sales. Macy's reported a profit of 5 cents a share for its fiscal 1st quarter compared to a loss of 21 cents in the 1st quarter of 2009.

4. Sold 200 of the 300 shares of WIW at 12.5 and Bought 300 HSF at $5.76 (see Disclaimer): WIW is a closed end bond fund that invests mostly in treasury inflation protected securities. It was ex dividend yesterday for its monthly distribution. I bought 300 shares at $11.94 on 3/10/10. Recently, I bought 300 shares of a similar CEF, IMF, that was selling at a larger discount to its net asset value. Both of these funds are part of Legg Mason's Western Asset group, and their respective Net Asset Values and discount to NAVs is updated each day at the WSJ. As of 5/11/2010, which is the information that I had when placing the trade yesterday, IMF was selling at a 8.14% discount to its NAV, whereas WIW closed at a 5.87% discount. This information is also available at the fund sponsor's web site. Western Asset | Product List It can also be found at the Closed-End Fund Association.

I bought as a temporary holding 300 shares of the CEF HSF at $5.76. I noticed that it has fallen in price more than enough to pay for the cost of the commission. This CEF is called the Hartford Income Shares, and this is a link to the Morningstar page. It invests mostly in intermediate term investment grade bonds. The dividend is paid monthly, and is currently over 6% based on my cost. I did review the latest SEC filed report for the period ending on 1/31/2010. Hartford Income Shares U.S. treasuries constituted then 11.3% of the portfolio. I would characterize the remainder as mostly lower tier investment grade corporate bonds with some junk and A rated bonds. The net expense ratio is shown at page 18 as .84%. It varies but has remained under 1% for the years shown on that page. Like WIW and IMR, HSF is listed in the "Investment Grade Bond" funds section of the Closed-End Funds by Category - Markets Data Center - WSJ.com. The discount as of 5/11/2010 was 5.43%, down from 10.05% as of last Friday when the share price closed at $5.64.

HSF closed yesterday at $5.92. The NAV was $6.26 per share as of 5/12. The closing discount to NAV was 5.43%. The discount at my price of $5.76 was 7.99%. HSF link at Closed-End Fund Association. This is the link to the sponsor's web page The Hartford Income Shares Fund, Inc.


If the ten year treasury note rises to yield 4.25%, I will sell this fund. For now, it is just an alternative to cash earning nothing in a money market fund. The current 10 year treasury note data can be found at MDC - Java Chart - WSJ.com. The Federal Reserve publishes data daily on the 10 year CMT, going back to 1962: federalreserve.gov

5. Taleb Interview On CNBC: I happened to turn on CNBC when Taleb, author of the "Black Swan" and "Fooled by Randomness" was being interviewed. CNBC

He appeared to most concerned about the possibility of a failed U.S. treasury auction at some point, which would qualify as a black swan type of event. If and when that occurs, gold and other precious metals will most likely have a smoking day, while everything else hits the crapper big time.

David Leonhardt has a column in the NYT drawing parallels and highlighting some difference between the U.S. and Greece. He points out that the U.S. debt is projected to be 140% of GDP within two decades, far higher than Greece now. While there are obvious dissimilarities when comparing Greece and the U.S., the key similarity is the important one, a population that wants to spend ever increasing sums of borrowed money. I really do not want to sound pessimistic, but I would seriously doubt that any significant belt tightening will occur until disaster strikes and our lenders demand it.

6. Sold 50 GJD at 18.59 (see disclaimer): This is one of the junk rated securities that I have allowed into a retirement account. This Trust Certificate was ex interest yesterday for its semi-annual interest payment and the price popped almost 3% adjusted for the interest payment. Those shares were bought in the Roth IRA on March 24 at 17.8. I still own 100 GJD in the taxable account and 50 shares of DHM in both the Roth and the taxable account. So, this transaction yesterday is a trim of what I would view as an over exposure for an Old Geezer to this junk bond. Bought 50 GJD at 17.49 Added 50 GJD at 17.95 Bought 50 of the TC DHM at 21.35

7. Bought Back 50 of the 100 of GSPRA at $18.8 (see Disclaimer): This was a close call given the headline news about Goldman Sachs.

This is a link to the GS website that summarizes the key terms of its 3 floating rate, non-cumulative equity preferred stocks. Goldman Sachs | Investors - Preferred Stock Given the prices yesterday, I preferred GSPRA given its lower price which will juice my return when and if the LIBOR float is activated. The GSPRA and GSPRC have a float of .75% over 3 month LIBOR, but GSPRC was priced almost $2 a share higher than the "A" preferred shares. Both securities have the same credit risk of course. Both are perpetual, non-cumulative equity preferred stocks with a $25 par value. And dividends are paid quarterly.

The difference between the 2 securities is that the "C" shares have a 1/4% greater guarantee. That guarantee translates into a 4.82% yield at a $20.75 price for GS.PRC . The 3.75% guarantee for the "A" preferred shares results in a 4.98% yield at the $18.8 price for the GS.PRA. So, there is no reason to go with the "C" shares due to the price differential. The yield differential would increase at a 5% 3 month LIBOR rate during the relevant computation period. At that point, both the "A" and "C" shares would have a 5.75% coupon but the yield differential would be around .7% in favor of the "A" shares due to their lower initial cost. (7.64% for the "A" at $18.80 cost and 6.937% for the "C" at $20.75).

I sold 100 GSPRA at $21.9 last October. I am just buying back 50 of those 100 shares for now.

One benefit of GSPRA is that the payments are qualified dividends. I discuss generally the pros and cons of this type of security in more detail in Advantages and Disadvantages of Equity Preferred Floating Rate Securities. Some of the main disadvantages include the low priority and the non-cumulative nature of the dividends, along with the lack of a maturity date. I frequently compare the GS floaters with synthetic floaters tied to either a GS junior bond in TP form or a GS senior bond. (See, e.g.: Synthetic Floaters Bought GYB/DD/Will Hold Synthetic Floaters In Retirement Account Analysis of Prior Question about Goldman Sach's Floaters /GJS VS. PYT As of 10/8/09 Bought 100 GJS/ Bought 50 PYT/)

The quantum site has links to the GS floating rate equity preferred stocks listed under Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.com.

This is the link to the GSPRA prospectus: 424(B)(2)

The dividends on the GS equity preferred stocks are non-cumulative. If GS had the need to eliminate its common and preferred stock dividends, I would expect that it would be in dire financial straights and ready to do a Lehman, which went from paying on all of its securities to paying on none of them at the same time including its senior notes. I would not expect to recover anything for GSPRA in the event of a GS bankruptcy. It would be worth zero under those circumstances. But, I also own a GS senior bond in TC form, and I would not expect to recover more than 20 cents on the dollar in the event of a bankruptcy for the senior security. In other words, if GS wants to stay in business, it will need to pay this non-cumulative dividend in my opinion. What would its clients think if it had to quit paying the dividends on preferred stock to preserve capital?

I will hold the synthetic floaters tied to GS bonds in the retirement account due to tax issues, and buy the GS equity preferred stock in a taxable account due to its currently favorable tax treatment. I would not count on this tax treatment for much longer however.

8. New Evidence on the Oil Spill: New evidence is spilling out now about serious and known problems before the oil spill: WSJ.com msnbc.com CBS News At least for a few months, the apologists for the oil companies will have some difficulty maintaining in a credible fashion that they can be trusted to basically regulate themselves. DISGUSTING is the only appropriate word. This is a link to the video of the oil gushing out of a large broken pipe on the ocean's floor: BP Releases Video of Oil Leak - ABC News

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