Tuesday, February 1, 2011

Sold 300 WIW at $12.61/HFBC/Bought 1 Selective Insurance Bond in Regular IRA/

This is a link to an article written by Geoff Considine that I view as important for dividend investors. This is a link to the entire article in the pdf format. 

Basically, investors need to consider volatility of the stock when selecting and managing their portfolio of dividend paying companies.  On his list at page 5, I own Con Ed (ED), my largest position in the core electric utility strategy, Wal-Mart and JNJ.  I have bought and sold PG, XOM, and KMB.  

That article is discussed in a recent article published in Seeking Alpha, where the author has screened equity income stocks for their volatility and other important factors impacting the selection of securities in a dividend growth strategy. (see item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds

Of the stocks that made the cut in that screen, I own General Mills, Wal-Mart and JNJ, all small positions. I am of course a believer in the use of volatility as one component in my asset allocations. Vix Asset Allocation Model Explained Simply

Marc Faber may have started to channel some of our favorite Tea Party intellectuals, like Sharron Angle and Congresswoman Michele Bachmann, who represents the 6th Congressional District in Minnesota.  


In Michele's response to Obama's State of the Union speech, she expressed concern about the government's intrusion into our right to choose which light bulb to buy (PolitiFact), proof positive in Michele's view that the U.S. is now on a The Road to Serfdom. Of course being accurate with her facts is not one of Michele's strong points. 

Marc Faber is equally dubious of our future from an over-reaching government gone wild, wanting investors  to rent a safety deposit box from a Hong Kong bank to their store gold, where it would be safe from the clutches of our destitute of Uncle Sam who may want to seize it, pay you the "going rate", and then  overnight  revalue the "gold to $10,000 an ounce." Now, that may sound goofy but au contraire mon frere. I just read about it as an earnest forecast by one of the Barron's investment gurus.   

So, our gold is apparently safer in China than in the U.S according to Mr. Faber.  Really? Faber refers to the expropriation of gold bullion in the U.S. in 1933 to support his thesis that gold is safer in China or Dubai than in the U.S.  I am sure that Sharron and Michele would agree with him. 

Echoing this theme, Hickey wants to hold his gold outside the U.S. where he believes it will be safer too.   

FDR did sign an  Executive Order 6102 in 1933 that required individuals to turn over their gold to the U.S. treasury for $20.67, except an individual was allowed to own up to $100 in gold coins "and gold coins having a recognized special value to collectors of rare and unusual coins" (section 2 (b), order.pdf

Violations were punishable by fine and/or imprisonment. The Order was widely ignored by the population.  

There was only one criminal prosecution of the Order and it was not successful. The government did not search safety deposit boxes except in one instance as part of a tax evasion prosecution. This order would make it much harder to sell gold bullion.

As I remember, investors who were interested in buying and selling gold while this prohibition was in effect had no trouble trading numismatic gold, i.e., gold coins that were issued by the U.S. mint.


A large number of circulated U.S. gold coins, with common dates, were priced then, and now, at only a small premium to the spot price of gold. I bought my first gold coin coin in the early 1960s, with money earned from mowing lawns at $2 per lawn (weed clipping included), and it was a common date  United States $5 Gold Piece from the 1880s. Those coins were legal tender of the U.S. government.  


Mario Gabelli recommends United States Cellular (UZV), a relatively small cellular phone company that is majority owed by Telephone and Data Systems (TDS). For as long as I can remember, Mario has been recommending these stocks in the Barron's Roundtable.  


In the latest segment, he asserts that TDS "should" acquire UZV.  Maybe they should.  But one reason to keep UZV as a separately traded company is to be able incentivize the UZV employees with that stock, rather than to use the less desirable parent's stock whose operating business includes the contracting land line phone operations.  

I do not own the common stocks of either UZV or TDS, but I own senior Exchange Traded Bonds issued by them.  The yields on those senior bonds are around 7.5% at their current prices.  I recently received a partial call on TDA and lost part of my position in that bond from Telephone and Data Systems to that call.  I do not expect much, if any, capital appreciation on those bonds, both of which were bought solely for their income generation.  Bought 100 TDA at 25.22 Bought 50 TDA at 25.5 Bought: 50 TDA @ 25.14 Bought 100 UZV at $24.42 Added to UZV at 25.16 Added to UZV at 25.01 Rounded UZV to 200 shares


Headknocker kicked off the staff morning meeting by noting that he had been looking at his brokerage statements, always a dangerous undertaking LB muttered silently, and HK wanted to know what had happened to his Exxon stock. Exxon Mobil reported an E.P.S. of $1.85 for the 4th quarter, up 53%, and its stock rose to over $80 per share.  The RB replied, ask the Mr. Tunnel Vision, also known by many staff members as the Lame Brain. RB wanted to buy a 1000 shares of XOM at $67.81


The Old Geezer could not remember what had happened to those shares, then he requested that some Fritos be crunched up and placed into his IV, and further reminded the HK that the OG had been limited to buying or selling no more than $1000 of any security, due to old age infirmities, and the XOM shares were far beyond that limit. LB said that it was proud of the trading profit made in the Exxon shares over the years, and, if HK did not like, he could stick it where the sun don't shine.   


It goes without saying that the HK is tolerant of the LB, recognizing in the Nerd a younger, less experienced, and immature version of himself.  But, HK's tolerance is wearing thin, how will HQ ever acquire Canada, all of it, let alone Switzerland, with LB leaving all of this money on the table.  "Amen to that", the RB howled.  

Another republican Federal District Court judge, Roger Vinson from Pensacola, who was appointed by Reagan,  held that the Democrats' "health reform" law was unconstitutional.  Judge Vinson's Ruling   


The part of the law, which is the most questionable under the Constitution, is whether Congress can in effect compel individual's to purchase private health insurance under its enumerated power in the Commerce Clause of the U.S. Constitution. (Compel is far too strong of a word but it is the one being used by those who question the constitutionality of this provision.)   

So far, the answer to that question depends on the judge's political party affiliation. The end result is likely to be another political decision by the Supreme Court. It is an interesting Constitutional question.  This is a quote from his decision explaining the ideological basis of his opinion:

 "It would be a radical departure from existing case law to hold that Congress can regulate inactivity under the Commerce Clause. If it has the power to compel an otherwise passive individual into a commercial transaction with a third party merely by asserting --- as was done in the Act --- that compelling the actual transaction is itself “commercial and economic in nature, and substantially affects interstate commerce” [see Act § 1501(a)(1)], it is not hyperbolizing to suggest that Congress could do almost anything it wanted. It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place. If Congress can penalize a passive individual for failing to engage in commerce, the enumeration of powers in the Constitution would have been in vain for it would be “difficult to perceive any limitation on federal power”[Lopez, supra, 514 U.S. at 564], and we would have a Constitution in name only.Surely this is not what the Founding Fathers could have intended. See id. at 592 "  Page 42



As you would expect, the GOP politicians rejoiced at this decision, even though the idea of requiring individuals to buy insurance as part of a national plan originated from the GOP, as part of their alternative to ClintonCare in the early 1990s. WP Consistency is not one of the virtues advanced by the modern GOP, and I would add for good measure, neither is True Conservatism.


The requirement struck down by the Court is intended to prevent people from refusing to buy health insurance until they become sick, since insurance could not be denied for pre-existing conditions under the new law.   


Once healthy people buy insurance, this will bring down the premiums for everyone. Vinson's decision to strike down the entire law based on his view of one provision indicates to me that his opinion was largely based on his ideology (see Ezra Klein column).


Ultimately, what will be more important over the coming decades will be how the Supreme Court, when making another political decision (like Bush v. Gore), will be able to distinguish programs set up by the federal government that basically require individuals to do something and/or punishes them for inaction or for failing to do something.  Is the power to fine inaction unconstitutional, whereas the power to tax in order to support Social Security and Medicare constitutional?  In the later case, I have been forced by the federal government to participate in Social Security since I was a teenager, many moons ago.  I could refuse to participate in ObamaCare and just pay a small fine.   


Possibly, the inclination of some GOP jurists will be able to make a distinction in form, while ignoring the substance and direction of what they are trying to do. ( see legal analyse of Bush v. Gore at Equal Protection?)


The general approach, and ultimate goal, of many GOP jurists have been to dismantle virtually every piece of progressive legislation enacted since the early days of FDR's administration, in favor of their view of state's rights. Item # 3 Conservative or Delusional Reactionaries? (March 2010);   GOP and the Lochner Era (Jan 2009)  The key part of that strategy is to gut federal power under the Commerce Clause.  The modern GOP jurist will justify his decisions with flowery language about "Liberty" but ultimately it is a return to the reactionary doctrines of state's rights.


1.  Sold 300 WIW at $12.614 on Monday (see Disclaimer):  As noted when I purchased these shares a few days ago at $12.17, I am in a trading mode on this particular bond CEF. Item # 5 Bought Back 300 of the CEF WIW at $12.17 (1/20/2011 Post).  As of last Friday, the discount to net asset value had contracted to -5.29 from over 8% at the time of my last purchase.


At yesterday's close, the NAV per share for WIW was $13.23, down one cent from Friday's close. WSJ.com At the price that I sold my shares, the discount to NAV had contracted to 4.66%.


2. HopFed Bancorp (HFBC)(own:Regional Bank Stocks' basket strategy):  I own 102 shares of HFBC, a marginal buy in the regional bank basket and a continuing marginal hold.  I picked up the two shares from a recent stock dividend.   I am not impressed with this small bank's earnings.   


I own it primarily for HSBC's dividend, capital ratios, relatively low loan losses comparatively speaking and most importantly the low valuation judged by its tangible book value. As reported in yesterday's 4th quarter earnings release, the tangible book value per share is $12.57. The stock price is hovering in the $9 to $9.5 range, usually on light volume.  


As of 12/31/2010, the total risk based capital ratio was at 16.22% for the bank; the Tier 1 capital ratio for the bank was at 9.37%; NPLs to total loans was .82%; and the allowance for loan losses was 195.35% of NPLs.  The bank expects loan demand to remain weak.  


However, it anticipates economic activity will pick up when 14,000 soldiers return to Ft. Campbell in Kentucky from combat duty overseas. Welcome to Fort Campbell, Kentucky. Home of the 101st Airborne Division Screaming Eagles


The one analyst following the company had predicted earnings of 16 cents, and the bank reported 8 cents for the 4th quarter.  This result was explained by the CEO as follows: "The Company has obtained legal possession of a significant portion of our problem assets.  As a result, the Company's balance in other real estate owned increased from $2.6 million at September 30, 2010, to $9.8 million at December 31, 2010. . . . The Company's profitability declined in the current quarter primarily due to additional provision expenses resulting from a reclassification of four credit relationships."  



HFBC closed at $9.4 per share, down 15 cents, on very heavy volume for this stock.  The daily average volume for the past 3 months was slightly over 13,000 and almost 69,000 shares traded yesterday.  This one has not done anything since I purchased my position in two fifty share lots: Bought 50 HFBC at 9.1  Added 50 HFBC at 9.26  I am a tad in the black with the stock and cash dividends. 


3. Bought 1 Select Insurance 6.7% Senior Bond Maturing on 11/1/2035 at $89.5 (with concession 90.3)(see Disclaimer): At Fidelity, I would have paid a little less in the concession fee by ordering two bonds.   I did not want more than 1 at the current yield given the maturity.  According to FINRA, this senior bond from Selective Insurance (SIGI) is rated investment grade, Baa2 by Moody's and BBB by S & P. The current consensus estimate is for an E.P.S. of $1.25 in 2010.  The 4th quarter earnings report is scheduled for release on 2/3, with the consensus at 38 cents.

Selective is one of the smaller property and casualty insurance companies, selling insurance primarily in 22 Eastern and Midwestern states. Profile | Reuters.com


I was not planning to buy this bond yesterday.  I was searching for available bonds with the name "Select" and this one popped up.  I was familiar with the company and a few bonds were being offered by a seller, most likely by an individual investor.


I have passed so far on an exchange traded bond issued by Selective, SGZ, which is a junior subordinated 7.5% note maturing in 2066. That bond was selling at over its par value yesterday.  The senior bond matures much sooner in 2035 and had about the same current yield at my price yesterday. (SGZ prospectus) And, I would have a profit by holding the bond to maturity, assuming, as usual, that Selective survives to pay me.


The prospectus for the senior bond that I bought can be found at  www.sec.gov.  Interest is payable semi-annually on 5/1 and 11/1. At page 9, it is stated that these notes are "unsecured senior obligations". My confirmation states the my current yield is 7.419% and the YTM is 7.571%.


I stuck this 1 bond in the regular IRA where it can stay until I become rationally very concerned about the credit risk.  I had just raised enough funds to make this purchase after selling 50 PKM last Friday.  In a few years, when the price may drop due to rise in rates, I will either transfer this security to a ROTH IRA or simply transfer it to a taxable account.  I will eliminate my regular IRA in about 10 years, almost entirely with ROTH conversions which have already depleted most of the regular IRA already.  


I had another trade from Monday which I will discuss in the next post. 

1 comment:

  1. I bought 2 Edison 2017s @ 83.00(continuously callable) and MO today at 23.50 is yielding close to 6.5%. thanks for the blog.

    ReplyDelete