Michael Lewis' New Book-Boomerang/ Added 50 NBB at $19.55 in the ROTH IRA/Bought 50 GSPRD at $18.6/Sold 2 Edison Mission 2017 Bonds at 64

The government's third estimate of 2nd quarter GDP was released yesterday. According to the last estimate, real GDP grew 1.3% in the last quarter.  www.esa.doc.gov.pdf

I downloaded Michael Lewis' new book Boomerang: Travels in the New Third World into my Kindle and started to read it Wednesday night. The opening section must have given the Old Geezer nightmares since he was up and down all night. In his prior book, The Big Short: Inside the Doomsday Machine, Lewis focused on the motley group of hedge fund managers who made fortunes betting against subprime mortgages. One of those managers, Kyle Bass from Dallas, was left out of the "The Big Short" book. Maybe Lewis thought he was crazy after interviewing him. What can you say about an investor who buys 20 million nickels? And, after all, he was buying gold and credit default swaps on Greek government debt in 2008 too.  The doomsday scenario presented by Bass is a plausible one, which is what gave the OG bad dreams last Thursday night.

I found this recent interview of Bass by David Faber:  CNBC He thinks the European banks need a trillion dollars.

The latest Lewis book is reviewed in this NYT article.

The deleveraging process by governments is fraught with peril and is nowhere near over.  The possibility still exists for a catastrophic outcome.

The treasury auctioned $29 billion in 7 year treasury notes yesterday to yield 1.496%. The coupon for that note is 1.375% and the original issue discount (OID) provides the remainder of that yield. www.treasurydirect.gov.pdf

I would just point out that the government reported earlier this month that CPI had increased 3.8% over the past year before "seasonal adjustments". Consumer Price Index Summary

Jeffrey Gundlach says the U.S. is already in a recession and there will be big losses coming out of Europe.

On Wednesday night, I turned off the Red Sox-Oriole game during a rain delay, thinking that Boston would win and salvage a playoff birth, notwithstanding a late season decline that left them tied with the Tampa Bay Rays going into the last game of the season. Earlier in September, one estimate gave the Red Sox a 99.6% chance of making the playoff. Red Sox Beat Math in Impossible Collapse - ABC News As a corollary, the odds of Tampa making the playoffs hovered close to zero in early September, no chance at all really.  A graph of the odds can be found at the NYT.

And the Tampa Bay Rays were sure to lose too on Wednesday night too. David Price, a former Vanderbilt ace who I started to watch in his freshman year, was pounded in the Rays' game with the Yankees who were leading 7-0 when I turned off the TV to start reading "Boomerang".  Well, what can I say, I sure missed something, as the Rays beat the Yankees 8 to 7 in miraculous fashion and the Red Sox managed to revive some kind of ancient curse, losing to the Orioles, in what some are calling the most epic collapse in sports' history. SI.com

I wonder whether the Yankees deliberately lost that game.

RB just said the OG needs to stick with watching sporting events rather than reading scary books.

1. Bought 50 GSPRD at $18.6 Last Tuesday (see Disclaimer): Most of the positive and negative comments recently made about a similar security issued by Morgan Stanley are applicable to GSPRD, a floating rate preferred stock issued by Goldman Sachs.  Bought 50 MSPRA at $16.6  Those issues are also summarized generally in Advantages and Disadvantages of Equity Preferred Floating Rate Securities.

GSPRD pays non-cumulative qualified dividends at the greater of 4% or .67% above the 3 month LIBOR rate on a $25 par value. Prospectus As with other equity preferred stocks, GSPRD has no maturity and is senior only to common stock. An equity preferred stock will be junior to all debt issued by the company.  In the event of a GS bankruptcy, GSPRD would be a worthless piece of paper.

Since the FED is likely to keep short term rates low for at least two more years, I would anticipate that the applicable coupon for this security will be the 4% minimum for more than two years. The 3 month LIBOR rate would have to rise above 3.33% to trigger a better coupon than the 4% minimum.

As previously discussed, this kind of security is volatile and particularly vulnerable to downside movement in times of market stress, particularly during periods like the Near Depression when the viability and solvency of financial institutions were matters of legitimate concern.

More recently, with the escalation of concerns about Europe and the economy, this security has fallen from a close at $23 on May 11, 2011 to a close of $18.45 last Tuesday, when I made my purchase.  GS.PD Stock Charts There is also some headline risk associated with GS bonds and preferred stocks.

This security pays quarterly dividends. The last ex dividend date was on 7/22/11.

Provided that GS survives, I would anticipate being able to sell this security at a decent profit at some point.  That point may be a few weeks or several years. In the meantime, I would expect volatile movement up and down. This security closed at $10.37 on 3/5/2009.

Once GS credit concerns are no longer an issue, and the FED ends its Jihad against savers with the 3 month LIBOR rising to a range between 3% to 5%, I would expect this security to be selling between $22 to $25. In 2007, there were trades above $26.  I would not anticipate, however, that the 3 month LIBOR will exceed 3% for at least two more years.

Goldman Sachs Group Inc. Dep. Shs Pfd. Series D closed at $18.57 in trading yesterday.

I previously bought and sold this security at higher prices. Bought 50 GSPRD at 21.58 in January 2011  Sold 50 GSPRD @ 22.72 April 2011  So I view the repurchase of this security at close to $3 per share less than my last purchase as a win.

{It is possible for the LIBOR rates to be unanchored from the treasury bill rates, which happened in the Fall of 2008 for a brief period. This can be caused by the banks no longer trusting each other to pay back short term loans. If that happens again, the Libor float provision could become the applicable rate, even with treasury bills near zero, but the credit concerns would be acute in that scenario and the price for non-cumulative equity preferred stocks issued by large financial institutions would likely be in a world of hurt).

Floaters: Links in One Post
GOLDMAN SACHS FLOATERS (October 2009)
Goldman Sachs Synthetic Floaters and Floating Rate Non-Cumulative Preferred (April 2009)

Analysis of Prior Question about Goldman Sach's Floaters (October 2009)

2. Added 50 of NBB at $19.55 in the ROTH IRA Last Tuesday (see Disclaimer): NBB is a bond closed end fund that invests in taxable municipal bonds issued under the Build America Bond program.  This program expired at the end of last year.  This CEF is set to liquidate on or about 6/30/2020, unless there are new issuances of BABs, or similar U.S. Treasury subsidized  municipal bonds, within a twenty month period ending on or before 2014. NBB - Nuveen Build America Bond Fund Since the program was not extended, it is possible that this term provision may come into play which would turn this CEF into a term bond fund.  I recently discussed this fund at Build America Bond CEFs (September 22, 2011 Post). The fund does use leverage. Dividends are paid monthly at the current rate of $.117 per share.  NBB Distributions The credit quality is weighted in bonds rated "A" or better:  NBB Holdings (11.2% AAA; 50.4% AA; 32.8% A as of 8/31/11).

CEFA Page for NBB.

The last SEC filed shareholder report is the Annual Report for the period ending in March 2011: SEC  Information relating to the fund's borrowing can be found in note 8 at page 40 of that report.

A later filed Form N-Q shows the holdings as of 6/30/11: SEC

Nuveen Build America Bond Fund closed at $19.67 yesterday. 

3. Sold 2 Edison Mission 7% Senior Bonds Maturing in 2017 Last Wednesday (Junk Bond Ladder Strategy)(see Disclaimer):  I also manage money for family members. My personal accounts are at the same brokerage firms.  A few weeks ago, while attempting to buy 2 Edison Mission 2016 bonds in my mother's account, I did not realize that I was actually in my ROTH account and instead bought those two bonds in my ROTH rather than my mother's taxable account. I said then that the Lord had intervened to punish the Old Geezer. Added 2 Edison Mission 7.75% Bonds Maturing 6/15/2016 @ 86.12 in Roth That mistake left me with 5 Edison Mission bonds, at least two more than my comfort level. I elected on Wednesday to sell at a loss the 2 bonds maturing in 2017 and to keep the 3 bonds maturing in 2016. Bought 1 Edison Mission 7% Senior Bond Maturing 5/15/2017 at 80.361 in IRA Bought 1 Edison Mission 7% Senior Bond Maturing on 5/15/2017

I have increased my risk rating for EM bonds to 8 from a prior rating of 6+. Personal Risk Ratings For Junk Bonds Since I started to purchase these bonds, the earnings reports have been unfavorable, the EPA went ahead and adopted more stringent pollution regulations impacting EM's coal fired plants, and Moody's lowered the rating on the EM senior bonds with a negative outlook.  Moody's; Item # 3 Edison Mission Bonds on EPA regulations

Fitch rates the EM bonds at CCC which is probably closer to my opinion now.

The total loss realized on these two bonds was $381.11 excluding interest payments received. I expect defaults and losses in this strategy. For it to be successful, most issuers will need to survive long enough to pay par value.

Item # 5 Realized Gains Junk Bond Ladder Strategy