Monday, May 9, 2011

MTY/Pared ED and FE: Sold 25 ED @ 52.5 & 50 FE @ 41.33/Sold 1 Albertsons' Bond Maturing 2029 at 84.125/Added 100 GGN at 18.78-Regular IRA and 50 in a Taxable Account @ 18.18/Sold 200 JPC at 8.87

MTY is one of the exchange traded "principal protected" senior unsecured notes that I own.  The note was issued by Citigroup Funding and guaranteed by Citigroup as provided in the prospectus.  I own several Citigroup funding senior "principal protected" notes, whose coupon payments are linked to the performance of an index.  The coupon payments of MTY and MOL, both owned, are not linked to an index but to the price of gold.  All of the Citigroup "principal protected" notes, which I own, are traded just like stocks on the stock exchange, have $10 par values and mature in 2014, except for IFO.

MTY is close to what I call a "maximum level" violation.   For those familiar with this note, it will make an annual interest payment at the greater of 3% or up to 35% based on the percentage increase in the price of gold from its starting value.  But there is a catch. There can be no close above a 35% increase at anytime during the annual coupon period. Final Pricing Supplement If there is one close above that maximum permissible level, then the owner of MTY will receive a 3% coupon payment on the $10 par value note, irrespective of how much gold increases during the annual coupon period.   The maximum level violation causes a reversion to 3% irrespective of what happens thereafter to the price of gold.

MTY had a big payday for its first annual period. The starting value of gold for its second annual coupon period was $1168 per ounce, based on the P.M. London fix on 7/27/2010.   Kitco Inc. - Past Historical London Fix So, the maximum level in the second period is $1576.8 (Multiply 1.35 x Starting Value of $1,168=$1576.8). The period ends on 7/27/2011. The closing P.M. London fix for 5/4/2011 was $1541, Past Historical London Fix, so that London P.M. fix was getting too close for comfort. There has not been a maximum level violation-yet, and the price of gold has retreated to below $1500 after hitting that high last Monday. The London P.M. Fix for May 6th was at $1,486.5.

If gold closed at $1,486 on 7/27/2011, the closing date for the second annual period, and there was no close during that period higher than $1576.8, then this note's coupon for the second annual period would be about 27.2%, based on those hypothetical assumptions.

I have had a few discussions with readers about what I intend to do when and if there is a maximum level violation. I do not intend to do anything. This is the way that I look at it.  As long as I am comfortable with the credit risk, I am willing to accept the minimum coupon payment as long as I have a chance at a higher interest rate, and these notes give me that chance. If I end up receiving a 3% coupon for MTY in the second annual period due to a maximum level violation, then maybe I will receive more in 2012, 2013 or 2014.

I received two big paydays on MKN, tied to the commodity index (24.56% for the second annual period and 18% for the first). MKN Closes with a 25.56% Gain I also recently received one good payday from MOU which is linked to the Russell 2000 (27.9%:  see snapshot at MBC & MOU).

This is a link to snapshots of my total cost for 100 shares of MKN and the two annual interest payments received to date:




So that is +435.59 in interest since my purchase of 100 shares on 1/22/2010 or 43.86% on my total cost of $993.  So, if Citigroup survives to pay off the note in 2014, the worst that can happen is that I receive the minimum 3% payment for the annual periods ending in 2012, 2013, and 2014.  I bought this note in a Fidelity account before that firm prohibited it customers from making any additional purchases.  I am now buying these kind of securities at Vanguard.

It is also interesting to me that institutional investors are buying fixed coupon Citigroup senior notes maturing in 2014 with YTM's less than the minimum payments provided by several of the index linked senior notes that I own, most of which were purchased below or near their $10 par values.  I at least have some upside potential in the coupon payment with the "principal protected" notes.

And why do I put a parenthesis around "principal protected" Some individuals, whose lost money on these kind of notes issued by Lehman, hired lawyers and sued everybody, claiming that they thought the senior unsecured notes were principal protected in the event of a Lehman bankruptcy filing, just like an FDIC insured CD.

Of course, to maintain that claim, the investors could not have read the prospectus, just being lazy of course. The prospectuses will make it clear that these "principal protected" notes are unsecured senior obligations of the issuer, and the buyer is subject to the same credit risk as any other owner of the issuer's debt.  If the firm goes bankrupt, you are screwed.  If the firm survives until the note comes due, then you will receive par value just like any other bond or note. These securities pay interest just like any other bond. That is not hard to understand, and there is no excuse for laziness when investing your own money.  But as LB just noted, the really lethal combination is laziness, stupidity and ignorance, all in an unholy matrimony, with the investor also operating under the delusion that they are smart and informed while recognizing their laziness.  When that investor makes mistakes, by the boatload, it will always be someone else's fault.

My only exposure to Citigroup is $8,000 principal amount in these senior notes issued by Citigroup Funding, and my total investment is close to that $8,000 par value:

Bought 100 MKN at 9.85
Bought 100 MOU at $10.12
Bought 100 MBC at 9.78
Bought 100 MBC at 9.84
Bought 100 MTY at 10.49
Bought 100 MKZ at 9.96  (sold another 100 bought in the ROTH)
Bought: 200 MOL at 9.95 Sold 100 MOL @ 10.3 (now own 100)
Bought 100 IFO at $9.35-Regular IRA

I may add one more, but the 8 thousand has been my maximum limit for exposure to unsecured C debt.

Travelport announced that it had close the sale of its GTA business to Kuoni.  The gross cash consideration was 720 million, subject to certain closing adjustments.  Travelport repaid 655 million of indebtedness outstanding under its senior secured credit agreement. SEC Filing This company remains highly leveraged, as shown in the note 12 of its 2010 Annual Report even adjusting for the payment (p. F-28 Form 10-k).  I added up the senior secured credit facility amounts, as of 12/31/2010, and the total came to 2.298 billion.  So even after the 655 million dollar reduction in that secured debt, there is still a lot of debt with a higher priority than my 3 unsecured bonds.  I view my three bonds as extreme risks. The 11 7/8% senior subordinated note due in 2016 is the riskiest one in this highly leveraged capital structure.   Bought 1 Travelport Bond Maturing in 2014 at 99.5  1 Travelport Senior Bond Maturing in 2016 Bought 1 Travelport 11.875% Senior Sub Maturing 9/1/2016 at 92  I am a tad under water on all of those bonds.

FINRA Information on the 11.875% 2016 Senior Subordinated
FINRA Information on the 9% 2016 Senior
FINRA Information on the 9.875% 2014 Senior

1. Pared Core Electric Utility Positions to Book Profits and To Lower Average Cost of Remaining Shares: Sold 50 FE at $41.33 and 25 of ED at $52.5 Last Tuesday (core electric utility strategy) (see Disclaimer): Both of these transaction were GTC limit orders.  I actually received a better price on the FE shares than my limit order since FE opened on Tuesday with a strong pop, gaining $1.5, after the company increased forward guidance.   

FirstEnergy reported Non-GAAP earnings of 69 cents, which was 4 or 5 cents lower than the consensus estimate depending on the service providing the consensus estimate. Revenue rose 9% compared to a year ago quarter and industrial demand is increasing.  This is relevant to other merchant power producers who have been hurt by lackluster demand since 2007.   The company just completed its acquisition of another electric utility company, Allegheny Energy, and provided updated forward guidance in its earnings release. The company estimated Non-GAAP earnings of $3.2 to $3.5 in 2012 and $3.2 to $3.5 in 2013.

This last sale lowered my average cost per FE share to $36.67.  The stock just went ex dividend and I am reinvesting the dividends.

The pare of 25 ED shares reduced my long term cost basis per share to $42.5.  

2. Sold 1 Albertsons Senior Bond Maturing 2029 at 84.125 Limit Last Tuesday(83.325 with concession)(Junk Bond Ladder Strategy)(see disclaimer):  I mentioned in prior posts that I would hold the two shorter term SuperValu bonds until maturity and trade the 3 longer term Albertson bonds. (e.g.  SVU-March 22, 2011 Post) I sold one of the 3 Albertsons bonds at a small profit last Tuesday.  That bond was purchased at 77 last December.  I hope to manage my positions in this particular strategy so as to avoid a net loss on the bonds.  The interest rate spread between junk and BBB investment grade bonds is sufficiently wide to entice me to buy some junk rated bonds, mostly at discounts to par value.

I am keeping track on any realized gains and losses in an earlier post. Item # 5 Realized Gains Junk Bond Ladder Strategy As long as the net number remains in the green, I will consider this particular strategy to be a success, simply by capturing the interest payments made by these junk rated securities without suffering a net capital loss from owning the bonds.   I would be shocked to conclude this strategy without suffering at least two defaults, given the number of issuers and the heightened credit risk endemic to these securities.

My broker shows a $50.36 gain on that 1 bond. 

3. Added 100 GGN at 18.78 on Tuesday in Regular IRA Last Tuesday and 50 in a Taxable Account at 18.18 Last Friday  (see Disclaimer): The IRA accounts recently lost some investment grade bonds due to redemptions. While the OG is starting to lose track of what the Headknocker owns, I now own 400 shares of GGN.   This CEF owns gold and natural resource stocks and uses a buy-write strategy to generate income and to hedge risks.  I have discussed it in several recent posts: Sold 100 GGN at 19.36  Bought Back 100 GGN at $18.65  Added 100 of the CEF GGN at 18.84 in the Roth IRA  Added 50 GGN at 18.31 in the Roth IRA

I did go back and examine my trading history  for this CEF.  While the OG had no memory of making any trades in GGN before 2010, and I mean not a even a faint memory, the records reveal that trading in this CEF started in 2006 with $466.92 in gains that year, $162.3 in 2008 (no memory of that either), $56.47 in 2010 and +$134.96 so far in 2011 (some recollection of the 2011 trade):

GGN Realized 2006 Gains =+$466.82

GGN Realized 2008  Gains= $+162.3

GGN 2010 Realized Gain=$56.47

2011 Realized Gains to May==$134.96

Total=$820.55, excluding dividends. For this kind of security which pays a good dividend, I would be okay with just breaking even on the stock.  The dividend yield is close to 9%, payable monthly, GGN Fund Quote. After GGN slid after my purchase last Monday, I decided to add another 50 shares in a taxable account at $18.18. 

4. Sold 200 JPC at $8.87 Last Tuesday in Satellite Taxable Account (see Disclaimer): If the OG remembers correctly, this sale eliminates HK's JPC position.  Instead, I have elected to stick with a similar, virtually identical, balanced CEF from the same sponsor, JQC, where my position is approaching 1000 shares.  I clipped 2 quarterly dividends and made a few bucks on the shares:  Bought: 200 JPC @ 8.61 (11/10/2010 Post)

I do not have any long term investments in my two satellite brokerage accounts. When and if interest rates return to normal levels, possibly a year or two after the Federal Reserve ends its Jihad against savers, I will start to buy certificates of deposit, treasury bills, and similar investments in those two satellite accounts and keep more funds in a savings account. I will then liquidate most, if not all of the stock investments which are viewed as placeholders for cash in those two accounts. The stocks being purchased are higher yielding securities, mostly utility and regional bank stocks as well as a few higher yield CEFs like the JPC shares sold last Tuesday. The alternative to those type of purchases would be to buy the "safe" investments which have virtually no yield and a negative real rate of return adjusted for inflation. Once a further adjustment is made for federal taxes, it would become even more negative to buy CDs or to keep excess funds in a savings account.  

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