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Big Picture Synopsis
Big Picture Synopsis
Stocks:
Stable Vix Pattern (bullish)
Short Term: Hoping for a 10%+ Correction
Intermediate and Long Term: Bullish
Among Byron Wien's ten surprises for 2014 is a prediction that the S & P 500 will approach a 20% total return for the year after first correcting by more than 10%.
The stock market is in need of a 10% correction. The S & P 500 is up over 80% since August 2011 without one. Several stock sectors are either overvalued or at the top end of my fair valuation range.
A recent study, referenced in a Barrons.com column, concluded that emerging market stocks are currently the cheapest asset class. I would agree when making a 5 to 10 year forecast. The picture for the next 12 to 18 months is less positive.
The herd momentum is to the downside, as investors yank money out of emerging market stock funds, causing the worst outflow streak in 11 years. MarketWatch A number of emerging markets are facing political problems (Turkey & Thailand), while companies in other countries have to overcome regressive, frequently hostile and counter-productive government policies (e.g. notably in South America). China is slowing down and has some serious debt issues. Emerging market currencies have been losing value to the USD. Still, notwithstanding those problems, valuations are compelling for a long term purchase in my opinion. It is anyone's guess when the worm will turn.
Bonds:
Short Term: Neutral to Slightly Bearish
Intermediate and Long Term: Slightly Bearish
Forecast Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
Bob Doll, Nuveen's chief equity strategist, expects the ten year treasury to "move toward" 3.5% this year. Since the yield is so low, a rise of that magnitude would likely result in a negative total return for that bond.
The Difficult Path to Interest Rate Normalization
Bob Doll, Nuveen's chief equity strategist, expects the ten year treasury to "move toward" 3.5% this year. Since the yield is so low, a rise of that magnitude would likely result in a negative total return for that bond.
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Recent Developments:
The government reported the November 2013 trade deficit at $34.3B, considerably smaller than the consensus estimate of $40B. Adjusted for inflation, the November trade deficit was $8B lower than a year ago. Over the past year, imports were down 1.1%, driven by a 15.1% decline in petroleum imports. Exports of petroleum increased by 23.4% over an annual period. It is anticipated that the U.S. will become a net petroleum exporter by 2016.
ADP reported that the U.S. private sector added 238,000 jobs in December, the most since November 2012. The services sector added 170,000 jobs. Goods producing industries added 69,000 jobs. In that category, construction added 48,000 jobs, the most since 2006. adpemploymentreport.com/ December2013. pdf
The Labor Department's December jobs report showed only a 74,000 gain in jobs, far below expectations of +200,000. Employment Situation Summary November was revised up to 241,000 from 203,000. The unemployment rate fell to 6.7% from 7%. The decline in the unemployment rate was largely due to a decline in the labor participation rate. The civilian working age population was 246.7 million but the labor force was at 154.9 million. The labor participation rate declined by .2 points to 62.8, the lowest rate in 35 years. (in December 2012, the participation rate was at 63.5%, so about 2 million workers have gave missing from the labor pool over the past year) The average workweek edged down by .1 to 34.4 hours. Average hourly earnings increased by 2 cents to $24.17. The U-6 number remained unchanged at 13.1. Table A-15. Alternative measures of labor underutilization This latest report is just out of whack with the ADP report and other recent economic data. Either the other data is wrong or this last jobs number will be revised substantially higher next month.
The poor jobs report did result in a bond and equity REIT rally last Friday:
TLT: $104.41 +1.23 (+1.19%)
LQD: $115.13 +0.62 (+0.54%)
VNQ: $66.11 +0.88 (+1.34%) : Vanguard REIT ETF
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Redemptions of the Trust Certificates JZV and JBI:
JZV was redeemed by the owner of the call warrant. Notice of CONDITIONAL FULL Redemption Corporate Backed Trust Certificates, CNA Financial Debenture-Backed Series 2003-10 Trust 1,160,000 $25 Par ($29,000,000 Certificate Principal Amount) Class A-1 Certificates Due November 15, 2023 CUSIP No. 21988G122* (NYSE: JZV)
Fidelity is incorrectly showing the accrued interest payment as a dividend. JZV had a 7% coupon on a $25 par value. The underlying security was a senior unsecured bond issued by CNA maturing in 2023.
Realized Gain From Redemption:
Most of that gain originated from a 50 share purchase made in March 2009: Buy of 50 JZV at $9.93 March 2009 I had several more profitable trades with earlier bought shares before deciding to hang onto that 50 share lot using FIFO accounting. SOLD JZV WITH GTC LIMIT ORDER AT $16.25 January 2009 (bought at $12.78); SOLD 1/2 JZV at $14.07 April 2009; Sold 120 of the TC JZV at $25.5 April 2011; SOLD 50 JZV at $25.62 May 2011
Total JZV Realized Gains: $1,526.08
Another recent redemption by the call warrant owner was the TC JBI: Notice of CONDITIONAL FULL Redemption Corporate Backed Trust Certificates, Duke Capital Note-Backed Series 2003-3 Trust 1,489,200 $25 Par ($37,230,000 Certificate Principal Amount) Class A-1 Certificates Due February 15, 2032 CUSIP No. 21988G312* (NYSE: JBI)
I have sold my position in that TC: Stocks, Bonds & Politics: SOLD 100 JBI AT PAR VALUE (January 2009); Sold 50 of the TC JBI at $26.47; Sold 50 of 100 JBI at $26.25 Sold 100 JBI at $26.5 January 2011 JBI was one of the first trust certificates discussed in this blog: TRUST CERTIFICATES JBI (October 2008)
Stocks, Bonds & Politics: Trust Certificates: New Gateway Post (realized gains now at $26,708.72)
Redemptions of the Trust Certificates JZV and JBI:
JZV was redeemed by the owner of the call warrant. Notice of CONDITIONAL FULL Redemption Corporate Backed Trust Certificates, CNA Financial Debenture-Backed Series 2003-10 Trust 1,160,000 $25 Par ($29,000,000 Certificate Principal Amount) Class A-1 Certificates Due November 15, 2023 CUSIP No. 21988G122* (NYSE: JZV)
 |
| Redemption of JZV by Owner of Call Warrant |
Realized Gain From Redemption:
 |
| 2014 JZV 150 Shares +$870.6 |
Total JZV Realized Gains: $1,526.08
Another recent redemption by the call warrant owner was the TC JBI: Notice of CONDITIONAL FULL Redemption Corporate Backed Trust Certificates, Duke Capital Note-Backed Series 2003-3 Trust 1,489,200 $25 Par ($37,230,000 Certificate Principal Amount) Class A-1 Certificates Due February 15, 2032 CUSIP No. 21988G312* (NYSE: JBI)
I have sold my position in that TC: Stocks, Bonds & Politics: SOLD 100 JBI AT PAR VALUE (January 2009); Sold 50 of the TC JBI at $26.47; Sold 50 of 100 JBI at $26.25 Sold 100 JBI at $26.5 January 2011 JBI was one of the first trust certificates discussed in this blog: TRUST CERTIFICATES JBI (October 2008)
Stocks, Bonds & Politics: Trust Certificates: New Gateway Post (realized gains now at $26,708.72)
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AllianceBernstein Income Fund (ACG)
AllianceBernstein Income Fund announced receipt of shareholder requests to submit an open ending proposal to ACG's shareholders.
I have occasionally had a CEF transform itself into a mutual fund or ETF that would trade at or near net asset value respectively. On the last such occasion, it was the sponsor who took the initiative. The First Trust Value Line® Dividend Index Fund (FVD) was transformed from a CEF into an ETF that resulted in a quick gain ($746.43) for the OG in 2006 {see snapshot at Item # 1 Bought 50 FVL at $12.95; 2006 article WSJ.com article}
In the case of ACG, I suspect the sponsor will oppose transforming ACG into an open end investment company. To accomplish that result, two thirds of the shareholders will have to approve and that approval rate is not certain.
After trading the shares at higher levels, I recently bought only 150 shares in an IRA. Item # 2 Bought 150 ACG-$6.975-Regular IRA (October 2013 Post)
ACG Page at CEFConnect
With a further narrowing of the discount, I may elect to exit this position.
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1. Bought 50 COP at $68.87 (see Disclaimer): I was waiting for COP to fall below $70. I have also started to add more companies whose earnings are cyclical based on the recent positive economic numbers.
Snapshot of Trade:
After the close of trading on 1/7/13, ConocoPhillips cut its forecast for 2013 4th quarter production based on significant weather downtime, but did not change its 2014 forecast. The stock has declined since that announcement which makes no sense to me. The cold weather is temporary.
Closing Price Day of Trade: COP: $68.87 -0.59 (-0.85%)
Company Description: ConocoPhillips (COP) is an E & P company "focused on exploring for, developing and producing crude oil and natural gas globally".
PDF Map of Operations: WorldwideOps Map.pdf
SEC Filings
In April 2012, Conoco completed separating its downstream business, now known as Phillips 66. In connection with that separation, Phillips 66 distributed approximately $7.8B to COP. That cash distribution was to be used solely to pay dividends, buy back stock and repay debt, or some combination of those three options. (page 5, 10-Q)
ConocoPhillips Profile Page at Reuters
ConocoPhillips Key Developments Page at Reuters
Website: ConocoPhillips
ConocoPhillips (COP) Stock Dividend History - ConocoPhillips
Last December, COP announced that its 2014 capital expenditures budget was $16.7B: ConocoPhillips Announces 2014 Capital Budget of $16.7 Billion and Affirms Production Growth Target
A number of recent articles summarize the recent discoveries made by COP and its partners. "ConocoPhillips: 2013 Was A Very Good Year, 2014 Should See 20% Total Returns" and "ConocoPhillips: In Search Of More Hydrocarbons And Cash Flow"
List of COP articles at Seeking Alpha
About 35% of COP's 2014 planned capital expenditures will be spent on projects that will start production in 2015 or later. Those projects are described in this Motley Fool article.
ConocoPhillips Announces Fourth Oil Discovery in Deepwater Gulf of Mexico
Raymond James recently raised COP to market perform from underperform: Barrons.com
Prior Trades: A long term chart reveals a buying opportunity in March 2009 that was seized upon by the RB shortly after its coup d'etat dethroning Mama's Boy as HQ's Head Trader: COP Interactive Chart Unfortunately, the myopic Nerd Machine LB restrained the amount of the purchase and subsequently sold too soon after regaining control of the trading desk.
As to timing, I would give myself an "A" on the following purchase and a "F" on the sell:
Buy of COP at $38.69 (March 2009 Post)- Item # 2 Pared Stock Positions Including the Sell of COP at $46.45 (October 2009)
In two separate satellite taxable accounts, I flipped two fifty share lots after brief holding periods:
Item # 5 Bought 50 COP at 51.35 (March 2010)- Sold COP at $54.71 (June 2010); ITEM # 3 Bought 50 COP at $48.75 (July 2010 Post)-Item # 5 Sold COP at $57.44 (August 2010)
RB notes that this last trade manifest how the LB thinks, focusing on the short term quick profit rather than the much larger profit derived from buying and holding a blue chip bought at a favorable price. "Not a word of gratitude for a good, low risk trade", the LB snorted in retort. The $420.45 profit on 50 shares was realized in 30 days.
I could find one other trade made in the main taxable account, a 50 share flip in 2010:
Item # 1 Added 50 COP at $51.22 (March 2010)- Item # 7 Sold 50 COP at $56.63 (April 2010)
The last three sells would have been productive provided I had re-entered the position in June 2012, when the price slid back into the low 50s. COP Interactive Chart
Net Realized Gains Since 2006: $1,038.66
Last Earnings Report: For the 2013 third quarter, COP reported adjusted earnings of $1.8B or $1.47 per share, up from $1.37 in the 2012 third quarter. Special items, excluded from the 2013 third quarter adjusted E.P.S. number, primarily relate to gains from asset sales. SEC Filed Earnings Press Release The company achieved its production guidance during the third quarter at 1,514 MBOED, of which 1,470 MBOED originated from continuing operations. Eagle Ford, Bakken and Permian production increased by 40% compared to the 2012 third quarter.
SEC Form 10-Q for the Q/E 9/30/13
Rationale: (1) Decent Dividend Yield and Some Dividend Growth Plus Potential for Capital Appreciation: The current quarterly dividend is $.69 per share, which was raised from $.66 in the 2013 third quarter. The dividend has more than doubled from the $.31 quarterly in effect during 2006. ConocoPhillips (COP) Dividend Date & History - NASDAQ.com
At a total cost of $68.87 per share, the current dividend yield is about 4.02%. I would view another dividend raise later this year as likely.
A rise to a 12 P/E based on the current forecasted 2014 earnings would result in a $76.2 share price. A 15 multiple on the 2014 forecasted earnings would be regarded as high for COP and would equal a $95.25 share price. I would be pleased with a $75 share price sometime during 2014.
Conoco has enjoyed success in its recent exploration activities and has a number of projects under development for future production as noted above.
(2) Reasonable Valuation: The current consensus E.P.S. estimate for 2014 is $6.35. Analysts-Reuters.com At a total cost of $68.87, the P/E would be about 10.84 based on that estimate.
Risks: The company discusses risks relating to its operations starting at page 23 of its 2012 Annual Report: Form 10-K
The increased production in the U.S. and elsewhere could put downward pressure on prices.
Environmental disasters are always a concern (e.g. Deepwater Horizon oil spill, Exxon Valdez)
The share price can be volatile and has recently been correcting after closing at $74.02 (11/22/13).
The share price is not likely to enjoy much multiple expansion, a major source of the stock market's recent move.
Future Buys and Sells: I may add another 50 shares when and if the price falls below $65, assuming no material adverse development. I do not have a target price but would hope for a greater than 10% annualized total return with the dividend providing 40% to 45% of that hoped for annualized total return.
AllianceBernstein Income Fund (ACG)
AllianceBernstein Income Fund announced receipt of shareholder requests to submit an open ending proposal to ACG's shareholders.
I have occasionally had a CEF transform itself into a mutual fund or ETF that would trade at or near net asset value respectively. On the last such occasion, it was the sponsor who took the initiative. The First Trust Value Line® Dividend Index Fund (FVD) was transformed from a CEF into an ETF that resulted in a quick gain ($746.43) for the OG in 2006 {see snapshot at Item # 1 Bought 50 FVL at $12.95; 2006 article WSJ.com article}
In the case of ACG, I suspect the sponsor will oppose transforming ACG into an open end investment company. To accomplish that result, two thirds of the shareholders will have to approve and that approval rate is not certain.
After trading the shares at higher levels, I recently bought only 150 shares in an IRA. Item # 2 Bought 150 ACG-$6.975-Regular IRA (October 2013 Post)
ACG Page at CEFConnect
With a further narrowing of the discount, I may elect to exit this position.
*************
1. Bought 50 COP at $68.87 (see Disclaimer): I was waiting for COP to fall below $70. I have also started to add more companies whose earnings are cyclical based on the recent positive economic numbers.
Snapshot of Trade:
 |
| 2014 Bought 50 COP at $68.87 |
Closing Price Day of Trade: COP: $68.87 -0.59 (-0.85%)
Company Description: ConocoPhillips (COP) is an E & P company "focused on exploring for, developing and producing crude oil and natural gas globally".
PDF Map of Operations: WorldwideOps Map.pdf
SEC Filings
In April 2012, Conoco completed separating its downstream business, now known as Phillips 66. In connection with that separation, Phillips 66 distributed approximately $7.8B to COP. That cash distribution was to be used solely to pay dividends, buy back stock and repay debt, or some combination of those three options. (page 5, 10-Q)
ConocoPhillips Profile Page at Reuters
ConocoPhillips Key Developments Page at Reuters
Website: ConocoPhillips
ConocoPhillips (COP) Stock Dividend History - ConocoPhillips
Last December, COP announced that its 2014 capital expenditures budget was $16.7B: ConocoPhillips Announces 2014 Capital Budget of $16.7 Billion and Affirms Production Growth Target
A number of recent articles summarize the recent discoveries made by COP and its partners. "ConocoPhillips: 2013 Was A Very Good Year, 2014 Should See 20% Total Returns" and "ConocoPhillips: In Search Of More Hydrocarbons And Cash Flow"
List of COP articles at Seeking Alpha
About 35% of COP's 2014 planned capital expenditures will be spent on projects that will start production in 2015 or later. Those projects are described in this Motley Fool article.
ConocoPhillips Announces Fourth Oil Discovery in Deepwater Gulf of Mexico
Raymond James recently raised COP to market perform from underperform: Barrons.com
Prior Trades: A long term chart reveals a buying opportunity in March 2009 that was seized upon by the RB shortly after its coup d'etat dethroning Mama's Boy as HQ's Head Trader: COP Interactive Chart Unfortunately, the myopic Nerd Machine LB restrained the amount of the purchase and subsequently sold too soon after regaining control of the trading desk.
As to timing, I would give myself an "A" on the following purchase and a "F" on the sell:
 |
| 2009 COP 30 Shares +$215.56 |
In two separate satellite taxable accounts, I flipped two fifty share lots after brief holding periods:
 |
| 2010 COP 50 Shares +$250.6 |
 |
| 2010 COP 50 Shares +$420.45 |
Item # 5 Bought 50 COP at 51.35 (March 2010)- Sold COP at $54.71 (June 2010); ITEM # 3 Bought 50 COP at $48.75 (July 2010 Post)-Item # 5 Sold COP at $57.44 (August 2010)
RB notes that this last trade manifest how the LB thinks, focusing on the short term quick profit rather than the much larger profit derived from buying and holding a blue chip bought at a favorable price. "Not a word of gratitude for a good, low risk trade", the LB snorted in retort. The $420.45 profit on 50 shares was realized in 30 days.
I could find one other trade made in the main taxable account, a 50 share flip in 2010:
 |
| 2010 COP 50 Shares +$152.05 |
The last three sells would have been productive provided I had re-entered the position in June 2012, when the price slid back into the low 50s. COP Interactive Chart
Net Realized Gains Since 2006: $1,038.66
Last Earnings Report: For the 2013 third quarter, COP reported adjusted earnings of $1.8B or $1.47 per share, up from $1.37 in the 2012 third quarter. Special items, excluded from the 2013 third quarter adjusted E.P.S. number, primarily relate to gains from asset sales. SEC Filed Earnings Press Release The company achieved its production guidance during the third quarter at 1,514 MBOED, of which 1,470 MBOED originated from continuing operations. Eagle Ford, Bakken and Permian production increased by 40% compared to the 2012 third quarter.
SEC Form 10-Q for the Q/E 9/30/13
Rationale: (1) Decent Dividend Yield and Some Dividend Growth Plus Potential for Capital Appreciation: The current quarterly dividend is $.69 per share, which was raised from $.66 in the 2013 third quarter. The dividend has more than doubled from the $.31 quarterly in effect during 2006. ConocoPhillips (COP) Dividend Date & History - NASDAQ.com
At a total cost of $68.87 per share, the current dividend yield is about 4.02%. I would view another dividend raise later this year as likely.
A rise to a 12 P/E based on the current forecasted 2014 earnings would result in a $76.2 share price. A 15 multiple on the 2014 forecasted earnings would be regarded as high for COP and would equal a $95.25 share price. I would be pleased with a $75 share price sometime during 2014.
Conoco has enjoyed success in its recent exploration activities and has a number of projects under development for future production as noted above.
(2) Reasonable Valuation: The current consensus E.P.S. estimate for 2014 is $6.35. Analysts-Reuters.com At a total cost of $68.87, the P/E would be about 10.84 based on that estimate.
Risks: The company discusses risks relating to its operations starting at page 23 of its 2012 Annual Report: Form 10-K
The increased production in the U.S. and elsewhere could put downward pressure on prices.
Environmental disasters are always a concern (e.g. Deepwater Horizon oil spill, Exxon Valdez)
The share price can be volatile and has recently been correcting after closing at $74.02 (11/22/13).
The share price is not likely to enjoy much multiple expansion, a major source of the stock market's recent move.
Future Buys and Sells: I may add another 50 shares when and if the price falls below $65, assuming no material adverse development. I do not have a target price but would hope for a greater than 10% annualized total return with the dividend providing 40% to 45% of that hoped for annualized total return.
2. Bought 100 ORKLA ASA at $7.61 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): I classified this stock in my Flyer's risk category, one rung above the Lottery Ticket category.
Snapshot of Quote Before Trade:
Snapshot of Trade:
Security and Company Description: Orkla ASA is a conglomerate based in Norway.
Its most important core business is branded consumer products which "consists of a portfolio of well-known brands . . . that hold mainly No. 1 and No. 2 positions in their categories". About Orkla The primary geographic area for those positions would be in Orkla's home markets of Norway, Sweden, Denmark, Finland and the Baltics, but the company claims to have "several strong positions in Russia, Poland, India and Austria."
Another important core operation is Jotun, a manufacturer of paints, coatings and powder coatings. Orkla has a 42.5% interest in that business
The company also owns the Sarpsfoss hybroelectric power plant and has a 85% stake in the hydroelectric facility AS Saudefaldene. The company also owns real estate and various investments.
Orkla formed a 50/50 joint venture known as Sapa that is the "world's leading aluminum solutions provider" with 2011 revenues of NOK47 billion and underlying EBITDA of NOK 1.9 billion. "Orkla and Hydro to form the world’s leading aluminium solutions provider"- Orkla.com; 9/2/2013 Press Release: Hydro's and Orkla's Sapa aluminium joint venture established - Norsk Hydro The asset contributions made by Orkla to this JV were greater than Norsk Hydro, and "Orkla has received just under NOK 2 billion in compensation for this difference" (2013 3rd quarter report at page 7)
Its most important core business is branded consumer products which "consists of a portfolio of well-known brands . . . that hold mainly No. 1 and No. 2 positions in their categories". About Orkla The primary geographic area for those positions would be in Orkla's home markets of Norway, Sweden, Denmark, Finland and the Baltics, but the company claims to have "several strong positions in Russia, Poland, India and Austria."
Another important core operation is Jotun, a manufacturer of paints, coatings and powder coatings. Orkla has a 42.5% interest in that business
The company also owns the Sarpsfoss hybroelectric power plant and has a 85% stake in the hydroelectric facility AS Saudefaldene. The company also owns real estate and various investments.
Orkla formed a 50/50 joint venture known as Sapa that is the "world's leading aluminum solutions provider" with 2011 revenues of NOK47 billion and underlying EBITDA of NOK 1.9 billion. "Orkla and Hydro to form the world’s leading aluminium solutions provider"- Orkla.com; 9/2/2013 Press Release: Hydro's and Orkla's Sapa aluminium joint venture established - Norsk Hydro The asset contributions made by Orkla to this JV were greater than Norsk Hydro, and "Orkla has received just under NOK 2 billion in compensation for this difference" (2013 3rd quarter report at page 7)
1 ADS Shares=1 Ordinary Share
The ordinary shares trade on the Oslo Stock exchange in Norway. Orkla ASA (ORK:OSL) Those shares are priced in Krone and were price around KR46.53, down KR.11 or .24%, when I bought the ADS shares. At that time, KR46.53 converted into USD$7.57. Currency Converter
Norway's Krone=NOK or KR
Norway's Krone=NOK or KR
Recently, the USD has been gaining in value against the Norwegian Krone, buying about 6.15 Krones compared to 5.5 back in January 2013. USD/NOK Currency Conversion Chart However, the KR was trending up against the dollar, with occasional minor setbacks between January 2009 and August 2011.
Company Website: Orkla - Orkla Com
The ADS shares are traded on the U.S. pink sheet exchange. ORKLY Orkla ASA
The ADS shares have been range bound between $7 and $10 since January 2010: ORKLY Interactive Chart The shares closed at $9.94 on 5/28/13 and then slid 27% to close at $7.25 on 8/26/13.
There are SeekingAlpha articles discussing this company. One was published last November and another, more comprehensive one, in June 2013.
Dividend History
In the October 2013 Art of Successful Investing conference, hosted by Barrons.com, Orkla was mentioned as a value stock by Oscar Schafer who believes that the shares "could be worth NOK75 to NOK 80. At the time of my purchase, the ordinary shares were trading at NOK46.53. Schafer references the ongoing efforts to improve profit margins and to the Chairman's 20% stake in the company.
Dividend History
In the October 2013 Art of Successful Investing conference, hosted by Barrons.com, Orkla was mentioned as a value stock by Oscar Schafer who believes that the shares "could be worth NOK75 to NOK 80. At the time of my purchase, the ordinary shares were trading at NOK46.53. Schafer references the ongoing efforts to improve profit margins and to the Chairman's 20% stake in the company.
Prior Trades: None
Recent Earnings Report: For the 2013 third quarter, the company reported operating revenues of NOK 8,443 million and EBITA of NOK 909 million. Operating profit in branded consumer rose 11% to NOK868 million, with revenues rising to NOK7,116 million from NOK5,929 million in the year ago quarter.
The second quarter report, which included a goodwill charge for its Russian operations, caused almost a 10% drop in the share price back in July. Reuters The ADS share fell from a closing price of $8.79 (7/17/13) to $8.05 the next day.
The second quarter report, which included a goodwill charge for its Russian operations, caused almost a 10% drop in the share price back in July. Reuters The ADS share fell from a closing price of $8.79 (7/17/13) to $8.05 the next day.
Rationale: The dividend will provide some support to the share price at current levels. There is some potential here for a turnaround based on the ongoing restructuring, downsizing and refocusing efforts.
The dividend is paid in Krone which will be converted into USDs for the ADS shares. The value of that dividend to an owner of the ADS shares will be impacted by the conversion rate on that applicable date. The dividend is paid annually.
MarketWatch shows the dividend yield at 5.7% for the ordinary shares, based on the KR46.53 price. OTCMarkets was showing a 4.45% yield on the ADS at $7.63. The 2013 dividend was NOK2.5 per share which would be worth about $.4056 per ADS share. That would give me a 5.32% yield at a $7.63 total cost per share. However, that would be before Norway's dividend withholding tax which I believe will be 15% by treaty: www.irs.gov/pub/irs-trty/norway.pdf The dividend yield after a 15% withholding tax would be about 4.522%
The dividend is paid in Krone which will be converted into USDs for the ADS shares. The value of that dividend to an owner of the ADS shares will be impacted by the conversion rate on that applicable date. The dividend is paid annually.
MarketWatch shows the dividend yield at 5.7% for the ordinary shares, based on the KR46.53 price. OTCMarkets was showing a 4.45% yield on the ADS at $7.63. The 2013 dividend was NOK2.5 per share which would be worth about $.4056 per ADS share. That would give me a 5.32% yield at a $7.63 total cost per share. However, that would be before Norway's dividend withholding tax which I believe will be 15% by treaty: www.irs.gov/pub/irs-trty/norway.pdf The dividend yield after a 15% withholding tax would be about 4.522%
Risks: With any foreign stock, currency risk is important. If the Krone fell in value against the USD after my purchase, that decline will flow through to the ADS price.
Orkla's operations in Russia appear to be a problem for the company.
The restructuring, downsizing and refocusing efforts may not produce the hoped for results.
I am not expressing much confidence in Orkla's future by classifying the investment as part of the Flyer's basket strategy which limits my total exposure to $500 to $1,000.
Orkla's operations in Russia appear to be a problem for the company.
The restructuring, downsizing and refocusing efforts may not produce the hoped for results.
I am not expressing much confidence in Orkla's future by classifying the investment as part of the Flyer's basket strategy which limits my total exposure to $500 to $1,000.
Future Buys and Sells: I am not likely to buy more. I do not have a price target for selling the shares. As noted above, the stock appears to be undervalued but is undergoing a restructuring process that creates valuation problems. Recent earnings reports have also been disappointing. I am basically nibbling at the shares before it becomes apparent whether or not the company can grow its remaining businesses at a higher than currently anticipated rate.
Closing Price Last Friday: ORKLY: $7.61 +0.13 (+1.74%)
ORK:OSL: Kr 46.33 +.32Kr or .7%
3. Bought 50 LARK at $19.7 (REGIONAL BANK BASKET STRATEGY GATEWAY POST)(see Disclaimer):
Snapshot of Trade:
Closing Price on Day of Trade: LARK: $19.85 -0.16 (-0.80%)
Company Description: The Landmark Bancorp Inc. (LARK) is a bank holding company that owns Landmark National Bank which currently has 30 community bank locations in 23 communities across Kansas. Landmark National Bank Locations
The bank raised its dividend during the recent Near Depression. Dividend raises have occurred every year since 2002 when the quarterly rate was raised from $.0795 to $.0835 per share. Landmark National Bank-Dividends The bank has also paid a 5% stock dividend every year since 2001. Landmark National Bank-Stock Dividends The quarterly dividend paid in 2013 was $.19 per share, which would be adjusted to $.181 for the 5% share dividend paid in mid-December.
At a total cost of $19.7 per share, the dividend yield at the adjusted 2013 quarterly rate ($.724 per share annually) would be about 3.675%.
In November 2013, Landmark completed the acquisition of Citizens Bank which had 8 branches, including 2 in Fort Scott, Iola, Kincaid, Lenexa, Mound City, Overland Park and Pittsburg, all in Kansas. SEC Filed Press Release
Prior to that merger, the bank had 20 banking offices. As of 12/31/12, it owns its main office in Manhattan, Kansas and 17 of the 19 branch offices, page 35 of the 2012 Annual Report.
At a $19.85 price, the market capitalization is slightly over $61M.
Prior Trade: I previously bought and sold a 50 share odd lot, acquiring 2 shares from a 5% share dividend. SOLD 52 LARK at $18.75 (January 2012)-Item # 5 Bought 50 LARK @ $16.6 (May 2011)
Recent Earnings Report: For the 2013 third quarter, Landmark reported net income of $1.2M or $.43 per diluted share, up from $.41 in the 2012 third quarter. SEC Filed News Release
2013 Third Quarter/2012 Third Quarter
E.P.S.: $.43 / $.41
Net Interest Margin: 3.4% / 3.35%
NPL Ratio 2.01% / 1.46% (But down from 2.84% as of 12/31/12)
ROA: .8% / .74%
ROE: 8.19% / 7.69%
ROTE: 10.98% / 10.25%
Book Value P.S.= $21.53 / $21.43
The capital ratios are good:
Page 29: 10-Q for the Q/E 9/30/13
Rationale and Risks: Landmark appears to me to be a sound community bank with a history of dividend raises. I view it as important that this small bank raised its dividend during the Near Depression period and did not participate in the TARP program (page 9, 2009 Annual Report 10-K) The current payout ratio is below 50%, and there is room for small dividend increases based on reasonably anticipated earnings growth.
In my opinion, the valuation is reasonable at the $19.7 price. I am not aware of any analyst estimates. I suspect that price will be between 10 to 12 times the 2013 E.P.S. number adjusted for the December 2013 5% stock dividend and less than 10 times a reasonable forecast for 2014 assuming normal loan losses.
The company discusses risk factors incident to its operations starting at page 25 of its 2012 Annual Report.
The bank did suffer a significant earnings decline and a meaningful increase in NPLs during the recent recession. Diluted E.P.S. declined from $1.55 in 2008 to $.7 in 2010 before rebounding to $1.54 in 2011 and $2.16 in 2012. The NPL ratio was at 3.45% as of 12/31/2010. That ratio subsequently declined to .45% in 2011 before accelerating again in 2012. (page 37 of 2012 Annual Report)
A few bad loans of $1M+ can cause large swings for small banks like Landmark. Total net loans at the end of 2012 were almost $316M. If $5M in loans went into NPL status, that would be 1.58% of total loans. One of the negatives is the upswing in bad loans during 2012-2013.
Future Buys/Sells: This repurchase was a marginal buy. I am not likely to buy more. I do not have a target price but would consider selling at over $22.
Closing Price Last Friday: LARK: $19.67 +0.02 (+0.10%)
4. Bought Back 50 STIPRA at $18.99 (see Disclaimer):
Snapshot of Trade:
The price sank after my purchase, falling to $18.75 before closing at $18.91.
Closing Price 1/6/2004: STI-PA: $18.91 +0.06 (+0.34%)
Company and Security Description: The SunTrust Banks Inc. Preferred Series A (STI.PA) is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .53% above the 3 month Libor rate on a $25 par value. Dividends are paid quarterly with the last ex dividend date on 11/26/13. The shares may be redeemed at anytime now by the issuer at par plus accrued dividends.
There is a typical dividend stopper clause at page S-17:
This clause implements the preferred share's preference right to dividends over the common shares. STI is currently paying a cash common share dividend (Dividends) and would have to eliminate that dividend before eliminating the non-cumulative preferred dividends.
Final Prospectus Supplement
The issuer is Suntrust Banks, a large regional bank based in the Southeast.
Information about Suntrust:
November 2013 Analyst Presentation Filed with the SEC
STI 2012 Annual Report SEC Form 10-K
STI 3rd Q 2013 SEC Form 10-Q
SunTrust Banks Profile Page at Reuters
SunTrust Banks Key Developments Page at Reuters
Given the current low LIBOR rate, it is anticipated that the minimum 4% coupon will be the applicable rate for at least two more years and probably for another three. The 3 month Libor rate would have to rise above 3.47% during the applicable computation period to trigger any coupon increase.
At a total cost of $18.99 and at the 4% minimum coupon, the dividend yield is acceptable to me at about 5.27%; and the dividend is classified as qualified.
At a total cost of $18.99 and a 5% three month Libor during the relevant quarterly coupon period, the current yield would become 7.28% (.05% 3 month Libor + .53% spread=applicable coupon rate of .0553 x. $25 par value=$1.3824 per share annual dividend divided by total cost of $18.99 per share=7.28%). The coupon rate would become 10.53% at a 8% 3 month Libor rate.
3-Month London Interbank Offered Rate (LIBOR - St. Louis Fed
Daily Data for 3 Month Libor since 1/02/1986: research.stlouisfed.org
Prior Trades: I sold two 50 share lots in 2010 realizing a total gain of $227.61.
Item # 5 Bought 50 STIPRA at $17.2 (September 2009); Item # 1 Sold 50 STIPRA at $20.90 (March 2010); Item # 4 Bought 50 STIPRA @ $19.75 (October 2010); Item # 3 Sold 50 STIPRA @ $21.24 (December 2010)
I have had one other trade: Item # 2 BOUGHT 50 STIPRA at $19.85 (December 2010)-Item # 1 Sold 50 STIPRA at $20.9 (February 2011)(profit $36.57)
Total Realized Gains to Date STIPRA=$264.18
Last Earnings Report: For the 2013 third quarter, Suntrust reported net income available to common shareholders of $179M or $.33 per share. Excluding certain items, E.P.S. was $.66 per share. SEC Filed News Release STI has a number of legacy problems that it is resolving as noted in that release.
The current consensus E.P.S. estimates are $2.36 in 2013 and $2.95 in 2014.
Full Service Branches: 1,508
Net Interest Margin: 3.38%
NPL Ratio: .83%
Coverage Ratio: 201%
Annualized Charge-Offs to Total Loans: .47%
Tangible Assets to Tangible Equity: 8.98
Tier 1 Capital Ratio: 10.57%
Book Value Per Share: $37.85
Tangible Book Value Per Share: $26.27
It is imperative that an investor become familiar with a company when buying any of its securities. There is no excuse for laziness as an investor.
Rationale: This security combines some protection for both inflation and deflation/low inflation scenarios. The low inflation/deflation scenario is addressed by the minimum 4% coupon while some inflation protection is afforded by the Libor float. Another positive is the qualified nature of the dividend as well as the current yield and discount to par value.
There is some room for capital appreciation when buying this security at a 24% discount to its par value. Prices for equity preferred floaters have generally been volatile during my trading experience with them. That volatility is reflected in a one year chart of STIPRA. STI.PA Interactive Stock Chart As recently as June 2013, this security was trading near its par value. Back in February and March 2009, this security was trading in the single digits. Suntrust did not miss a dividend payment.
While the market does not anticipate an increase in the coupon for several years, the market has been known to be wrong. I use the floaters to balance, in part, the interest rate risks inherent in long term fixed coupon bonds that would be adversely impacted by a rise in rates caused by inflation.
The recent rise in intermediate and long term rates was caused by interest rate normalization rather than by an increase in inflation.
There are risks associated with this type of security that are generally discussed in this Gateway Post: Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Risks: The non-cumulative nature of the dividend and the low status in the capital structure contribute to both volatility and the downside risk. The equity preferred stock is senior only to common stock and is junior in priority to all debt. The issuer is a leveraged financial institution with plenty of debt.
Consequently, if the FDIC seized STI's operating banks, its major asset, STIPRA would most likely become worthless as the senior debt owners strive to recover cents on the dollar. The fear of an equity preferred stock going to zero is a powerful one and influenced pricing during the recent Near Depression, driving most equity preferred stocks issued by financial institutions into the single digits.
The owners of STIPRA can have their dividend payments eliminated altogether legally when and if STI first eliminates cash dividend payments to the common shareholders (the requirement contained in the Dividend Stopper Clause of the preferred stock prospectus).
As long as STI is paying a cash common share dividend, as it is doing now, the owners of STIPRA have to be paid their dividend in full.
The problem now is that investors have come to accept two beliefs: First, they believe the Fed's Jihad Against the Saving Class, manifested by ZIRP, will likely continue two more years. Second, even when the FED starts to tighten, possibly in 2015, the FED will be slow in raising the federal funds rate, so it will be another few years after the FED abandons ZIRP for the 3 month Libor to rise above 3.47%.
The primary wild card is inflation and inflation expectations. If inflation starts to rise outside of the FED's comfort zone, then it may not have the luxury of waiting and may have to tighten more quickly than investors currently anticipate.
Anyway, the decline in STIPRA since June 2013 is based on the following beliefs in my opinion and has nothing to do with the credit quality of the security. All equity preferred floaters had a bad second half in 2013.
Future Buys/Sells: I may buy another 50 shares at or below $17.99.
Closing Price Last Friday: STI-PA: $19.48 +0.54 (+2.85%)
5. Sold 100 of the Bond CEF NBB at $18.8 (see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
Item # 6 Added 50 of the Bond CEF NBB at $17.76 (11/23/13 Post); Item # 2 Bought 50 NBB at $18.55 (6/29/13 Post)
Security Description: The Nuveen Build America Bond Fund (NBB) is a closed end leveraged bond fund that owns taxable municipal bonds issued under the Build America Bond program.
Data Day of Trade 1/8/2014:
Closing Net Asset Value= $20.55
Closing Market Price= $18.84
Discount: -8.32%
Average 3 Year Discount: -5.86%
NBB Page at Morningstar
CEFConnect Page for NBB
Rationale: The better than expected economic reports, which were released prior to this sell, caused me to lighten up a tad on longer duration bond CEFs. The Labor Department's job report for December was released after this sell.
As of 11/29/13, the sponsors claims that the leveraged effective duration was 12.51 years with an average effective maturity of 26.78 years. NBB - Nuveen Build America Bond Fund
I still own 154+ shares of NBB in two retirement accounts where the taxable dividends become tax free.
6. Added 50 LXP at $9.95-ROTH IRA (see Disclaimer):
Snapshot of Trade:
I recently discussed this REIT: Bought: 100 LXP at $10.33 (12/3/13 Post)
Since that purchase, the stock has gone ex dividend for its quarterly distribution of $.17 per share. LXP Stock Quote At a total cost of $9.95 per share, the dividend yield is about 6.83%.
LXP was favorably discussed by Brad Thomas in a recent article published by Seeking Alpha after my prior purchase. Another favorable article on LXP was published by Seeking Alpha after my last discussion.
Lexington Realty issued a press release on 1/7/14 discussing its 4th quarter activities, including its acquisitions, dispositions, new leases, lease extensions, and completed build to suit projects.
Closing Price Last Friday: LXP: $10.15 +0.12 (+1.20%)
Politics and Etc:
1. The System Rewards and Encourages Rampant Disability Fraud: Billions are stolen each year by those who falsely claim a disability. The fraudulent claims may be made in a worker's compensation case or in connection with social security disability claims.
The basic underlying problem, besides rampant dishonesty, is that large sums of money are available by claiming an "injury" that can not be verified with any scientific test such as an X-ray, MRI, or simple observation (e.g. a lost limb). The fraudulent claims will general fall into two broad categories. The claimant will falsely claim to have psychological problems, whose purported symptoms can easily be faked with a little coaching from a lawyer or other facilitator. The second area can be broadly described as purported soft tissue injuries that will not show up on an MRI, the most infamous being lower back pain.
Many years ago, I wrote a number of appellate briefs on workman's compensation cases. I would not be involved in the trial where the worker was invariably awarded compensation, with the deposition of some physician or chiropractor accepted as gospel, even though the purported "expert" made a good living in this kind of racket and there was zero physical evidence supporting the claim. Defense lawyers in any locality could quickly rattle off the names of those compliant experts.
It was generally hopeless to challenge on appeal a disability award based on a lack of evidentiary support unless there was significant evidence of a fraudulent claim. Instead, the focus on appeal would be some unusual legal and factual issue. The system was geared toward compensation awards for non-verifiable injuries and consequently encouraged and rewarded fraudulent claims. I do not regard that point as debatable.
A recent story highlights this pervasive problem. NYT; NYC disability insurance fraud may total $400 million - CBS News This is just a drop in a very large ocean.
A similar type of fraud was documented by the NYT in a series of stories involving disability claims made by virtually all employees of a NY railroad. NYT; Fraud Complaint; Item # 1 Unfunded Pension & Disability at State & Local Governments (May 2010 Post).
A recent 60 Minutes story highlighted how bogus SS disability claims were depleting the disability fund. Disability, USA - CBS News
In 2010, 1 in 21 Americans between 25-64 were receiving social security disability benefits totaling $115B. NYT By 2012, that number had risen to $137 billion. Today, 1 in 14 workers receive SS disability benefits. Wage Woes Why work when it is so easy to convince the government to pay you not to work?
Without changes in the disability laws, the SS disability trust fund will go broke in 2016, requiring a 20% cut in all disability benefits or another taxpayer bailout. "Grand Theft Disability" - WSJ.com
One reason for the decline in the labor participation rate is the dramatic increase in workers leaving the workforce after receiving disability benefits. The Heritage Foundation (see also provocative analysis by Charles Murray in Coming Apart: The State of White America, 1960-2010: Charles Murray: 9780307453433: Amazon.com: Books, reviewed by the NYT and the WSJ.com; and Senate report: www.coburn.senate.gov)
Even when the scammers are prosecuted and convicted, the punishment meted out by the judiciary is barely a slap on the wrist. The culprit would lose future benefits, at least until another fraudulent disability claim was concocted and supported by a different "expert" witness. Possibly, a fine would be levied, requiring the return of some or all of the ill gotten gains, but collecting those funds may end up being dropped by the state as being too time consuming and costly.
While this may seem harsh, disability payments for alleged mental problems, which cover about one third of SS disability awards, and soft tissue injuries just need to be stopped altogether, except in limited cases where the claimant can prove disability by clear and convincing evidence, an evidentiary standard greater than the mere preponderance of evidence, with any finding of disability reviewable de novo by an appellate court. Legal burden of proof - Wikipedia This will never happen in any entitlement society where a large percentage of the population believe that they are entitled to receive benefits because they want them.
Closing Price Last Friday: ORKLY: $7.61 +0.13 (+1.74%)
ORK:OSL: Kr 46.33 +.32Kr or .7%
3. Bought 50 LARK at $19.7 (REGIONAL BANK BASKET STRATEGY GATEWAY POST)(see Disclaimer):
Snapshot of Trade:
Closing Price on Day of Trade: LARK: $19.85 -0.16 (-0.80%)
Company Description: The Landmark Bancorp Inc. (LARK) is a bank holding company that owns Landmark National Bank which currently has 30 community bank locations in 23 communities across Kansas. Landmark National Bank Locations
The bank raised its dividend during the recent Near Depression. Dividend raises have occurred every year since 2002 when the quarterly rate was raised from $.0795 to $.0835 per share. Landmark National Bank-Dividends The bank has also paid a 5% stock dividend every year since 2001. Landmark National Bank-Stock Dividends The quarterly dividend paid in 2013 was $.19 per share, which would be adjusted to $.181 for the 5% share dividend paid in mid-December.
At a total cost of $19.7 per share, the dividend yield at the adjusted 2013 quarterly rate ($.724 per share annually) would be about 3.675%.
In November 2013, Landmark completed the acquisition of Citizens Bank which had 8 branches, including 2 in Fort Scott, Iola, Kincaid, Lenexa, Mound City, Overland Park and Pittsburg, all in Kansas. SEC Filed Press Release
Prior to that merger, the bank had 20 banking offices. As of 12/31/12, it owns its main office in Manhattan, Kansas and 17 of the 19 branch offices, page 35 of the 2012 Annual Report.
At a $19.85 price, the market capitalization is slightly over $61M.
Prior Trade: I previously bought and sold a 50 share odd lot, acquiring 2 shares from a 5% share dividend. SOLD 52 LARK at $18.75 (January 2012)-Item # 5 Bought 50 LARK @ $16.6 (May 2011)
 |
| 2012 LARK 50 Shares +$129.08 |
2013 Third Quarter/2012 Third Quarter
E.P.S.: $.43 / $.41
Net Interest Margin: 3.4% / 3.35%
NPL Ratio 2.01% / 1.46% (But down from 2.84% as of 12/31/12)
ROA: .8% / .74%
ROE: 8.19% / 7.69%
ROTE: 10.98% / 10.25%
Book Value P.S.= $21.53 / $21.43
The capital ratios are good:
 |
| Capital Ratios Holding Company and Landmark National Bank |
Rationale and Risks: Landmark appears to me to be a sound community bank with a history of dividend raises. I view it as important that this small bank raised its dividend during the Near Depression period and did not participate in the TARP program (page 9, 2009 Annual Report 10-K) The current payout ratio is below 50%, and there is room for small dividend increases based on reasonably anticipated earnings growth.
In my opinion, the valuation is reasonable at the $19.7 price. I am not aware of any analyst estimates. I suspect that price will be between 10 to 12 times the 2013 E.P.S. number adjusted for the December 2013 5% stock dividend and less than 10 times a reasonable forecast for 2014 assuming normal loan losses.
The company discusses risk factors incident to its operations starting at page 25 of its 2012 Annual Report.
A few bad loans of $1M+ can cause large swings for small banks like Landmark. Total net loans at the end of 2012 were almost $316M. If $5M in loans went into NPL status, that would be 1.58% of total loans. One of the negatives is the upswing in bad loans during 2012-2013.
Future Buys/Sells: This repurchase was a marginal buy. I am not likely to buy more. I do not have a target price but would consider selling at over $22.
Closing Price Last Friday: LARK: $19.67 +0.02 (+0.10%)
4. Bought Back 50 STIPRA at $18.99 (see Disclaimer):
Snapshot of Trade:
 |
| 2014 Bought Back 50 STIPRA at $18.99 |
Closing Price 1/6/2004: STI-PA: $18.91 +0.06 (+0.34%)
Company and Security Description: The SunTrust Banks Inc. Preferred Series A (STI.PA) is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .53% above the 3 month Libor rate on a $25 par value. Dividends are paid quarterly with the last ex dividend date on 11/26/13. The shares may be redeemed at anytime now by the issuer at par plus accrued dividends.
There is a typical dividend stopper clause at page S-17:
This clause implements the preferred share's preference right to dividends over the common shares. STI is currently paying a cash common share dividend (Dividends) and would have to eliminate that dividend before eliminating the non-cumulative preferred dividends.
Final Prospectus Supplement
The issuer is Suntrust Banks, a large regional bank based in the Southeast.
Information about Suntrust:
November 2013 Analyst Presentation Filed with the SEC
STI 2012 Annual Report SEC Form 10-K
STI 3rd Q 2013 SEC Form 10-Q
SunTrust Banks Profile Page at Reuters
SunTrust Banks Key Developments Page at Reuters
Given the current low LIBOR rate, it is anticipated that the minimum 4% coupon will be the applicable rate for at least two more years and probably for another three. The 3 month Libor rate would have to rise above 3.47% during the applicable computation period to trigger any coupon increase.
At a total cost of $18.99 and at the 4% minimum coupon, the dividend yield is acceptable to me at about 5.27%; and the dividend is classified as qualified.
At a total cost of $18.99 and a 5% three month Libor during the relevant quarterly coupon period, the current yield would become 7.28% (.05% 3 month Libor + .53% spread=applicable coupon rate of .0553 x. $25 par value=$1.3824 per share annual dividend divided by total cost of $18.99 per share=7.28%). The coupon rate would become 10.53% at a 8% 3 month Libor rate.
3-Month London Interbank Offered Rate (LIBOR - St. Louis Fed
Daily Data for 3 Month Libor since 1/02/1986: research.stlouisfed.org
Prior Trades: I sold two 50 share lots in 2010 realizing a total gain of $227.61.
Item # 5 Bought 50 STIPRA at $17.2 (September 2009); Item # 1 Sold 50 STIPRA at $20.90 (March 2010); Item # 4 Bought 50 STIPRA @ $19.75 (October 2010); Item # 3 Sold 50 STIPRA @ $21.24 (December 2010)
I have had one other trade: Item # 2 BOUGHT 50 STIPRA at $19.85 (December 2010)-Item # 1 Sold 50 STIPRA at $20.9 (February 2011)(profit $36.57)
Total Realized Gains to Date STIPRA=$264.18
Last Earnings Report: For the 2013 third quarter, Suntrust reported net income available to common shareholders of $179M or $.33 per share. Excluding certain items, E.P.S. was $.66 per share. SEC Filed News Release STI has a number of legacy problems that it is resolving as noted in that release.
The current consensus E.P.S. estimates are $2.36 in 2013 and $2.95 in 2014.
Full Service Branches: 1,508
Net Interest Margin: 3.38%
NPL Ratio: .83%
Coverage Ratio: 201%
Annualized Charge-Offs to Total Loans: .47%
Tangible Assets to Tangible Equity: 8.98
Tier 1 Capital Ratio: 10.57%
Book Value Per Share: $37.85
Tangible Book Value Per Share: $26.27
It is imperative that an investor become familiar with a company when buying any of its securities. There is no excuse for laziness as an investor.
Rationale: This security combines some protection for both inflation and deflation/low inflation scenarios. The low inflation/deflation scenario is addressed by the minimum 4% coupon while some inflation protection is afforded by the Libor float. Another positive is the qualified nature of the dividend as well as the current yield and discount to par value.
There is some room for capital appreciation when buying this security at a 24% discount to its par value. Prices for equity preferred floaters have generally been volatile during my trading experience with them. That volatility is reflected in a one year chart of STIPRA. STI.PA Interactive Stock Chart As recently as June 2013, this security was trading near its par value. Back in February and March 2009, this security was trading in the single digits. Suntrust did not miss a dividend payment.
While the market does not anticipate an increase in the coupon for several years, the market has been known to be wrong. I use the floaters to balance, in part, the interest rate risks inherent in long term fixed coupon bonds that would be adversely impacted by a rise in rates caused by inflation.
The recent rise in intermediate and long term rates was caused by interest rate normalization rather than by an increase in inflation.
There are risks associated with this type of security that are generally discussed in this Gateway Post: Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Risks: The non-cumulative nature of the dividend and the low status in the capital structure contribute to both volatility and the downside risk. The equity preferred stock is senior only to common stock and is junior in priority to all debt. The issuer is a leveraged financial institution with plenty of debt.
Consequently, if the FDIC seized STI's operating banks, its major asset, STIPRA would most likely become worthless as the senior debt owners strive to recover cents on the dollar. The fear of an equity preferred stock going to zero is a powerful one and influenced pricing during the recent Near Depression, driving most equity preferred stocks issued by financial institutions into the single digits.
The owners of STIPRA can have their dividend payments eliminated altogether legally when and if STI first eliminates cash dividend payments to the common shareholders (the requirement contained in the Dividend Stopper Clause of the preferred stock prospectus).
As long as STI is paying a cash common share dividend, as it is doing now, the owners of STIPRA have to be paid their dividend in full.
The problem now is that investors have come to accept two beliefs: First, they believe the Fed's Jihad Against the Saving Class, manifested by ZIRP, will likely continue two more years. Second, even when the FED starts to tighten, possibly in 2015, the FED will be slow in raising the federal funds rate, so it will be another few years after the FED abandons ZIRP for the 3 month Libor to rise above 3.47%.
The primary wild card is inflation and inflation expectations. If inflation starts to rise outside of the FED's comfort zone, then it may not have the luxury of waiting and may have to tighten more quickly than investors currently anticipate.
Anyway, the decline in STIPRA since June 2013 is based on the following beliefs in my opinion and has nothing to do with the credit quality of the security. All equity preferred floaters had a bad second half in 2013.
Future Buys/Sells: I may buy another 50 shares at or below $17.99.
Closing Price Last Friday: STI-PA: $19.48 +0.54 (+2.85%)
5. Sold 100 of the Bond CEF NBB at $18.8 (see Disclaimer):
Snapshot of Trade:
 |
| 2014 Sold 100 NBB at $18.8 |
 |
| 2014 NBB 100 Shares +$40.62 |
Security Description: The Nuveen Build America Bond Fund (NBB) is a closed end leveraged bond fund that owns taxable municipal bonds issued under the Build America Bond program.
Data Day of Trade 1/8/2014:
Closing Net Asset Value= $20.55
Closing Market Price= $18.84
Discount: -8.32%
Average 3 Year Discount: -5.86%
NBB Page at Morningstar
CEFConnect Page for NBB
Rationale: The better than expected economic reports, which were released prior to this sell, caused me to lighten up a tad on longer duration bond CEFs. The Labor Department's job report for December was released after this sell.
As of 11/29/13, the sponsors claims that the leveraged effective duration was 12.51 years with an average effective maturity of 26.78 years. NBB - Nuveen Build America Bond Fund
I still own 154+ shares of NBB in two retirement accounts where the taxable dividends become tax free.
6. Added 50 LXP at $9.95-ROTH IRA (see Disclaimer):
Snapshot of Trade:
 |
| 2014 Roth IRA Bought 50 LXP at $9.95 |
Since that purchase, the stock has gone ex dividend for its quarterly distribution of $.17 per share. LXP Stock Quote At a total cost of $9.95 per share, the dividend yield is about 6.83%.
LXP was favorably discussed by Brad Thomas in a recent article published by Seeking Alpha after my prior purchase. Another favorable article on LXP was published by Seeking Alpha after my last discussion.
Lexington Realty issued a press release on 1/7/14 discussing its 4th quarter activities, including its acquisitions, dispositions, new leases, lease extensions, and completed build to suit projects.
Closing Price Last Friday: LXP: $10.15 +0.12 (+1.20%)
Politics and Etc:
1. The System Rewards and Encourages Rampant Disability Fraud: Billions are stolen each year by those who falsely claim a disability. The fraudulent claims may be made in a worker's compensation case or in connection with social security disability claims.
The basic underlying problem, besides rampant dishonesty, is that large sums of money are available by claiming an "injury" that can not be verified with any scientific test such as an X-ray, MRI, or simple observation (e.g. a lost limb). The fraudulent claims will general fall into two broad categories. The claimant will falsely claim to have psychological problems, whose purported symptoms can easily be faked with a little coaching from a lawyer or other facilitator. The second area can be broadly described as purported soft tissue injuries that will not show up on an MRI, the most infamous being lower back pain.
Many years ago, I wrote a number of appellate briefs on workman's compensation cases. I would not be involved in the trial where the worker was invariably awarded compensation, with the deposition of some physician or chiropractor accepted as gospel, even though the purported "expert" made a good living in this kind of racket and there was zero physical evidence supporting the claim. Defense lawyers in any locality could quickly rattle off the names of those compliant experts.
It was generally hopeless to challenge on appeal a disability award based on a lack of evidentiary support unless there was significant evidence of a fraudulent claim. Instead, the focus on appeal would be some unusual legal and factual issue. The system was geared toward compensation awards for non-verifiable injuries and consequently encouraged and rewarded fraudulent claims. I do not regard that point as debatable.
A recent story highlights this pervasive problem. NYT; NYC disability insurance fraud may total $400 million - CBS News This is just a drop in a very large ocean.
A similar type of fraud was documented by the NYT in a series of stories involving disability claims made by virtually all employees of a NY railroad. NYT; Fraud Complaint; Item # 1 Unfunded Pension & Disability at State & Local Governments (May 2010 Post).
A recent 60 Minutes story highlighted how bogus SS disability claims were depleting the disability fund. Disability, USA - CBS News
In 2010, 1 in 21 Americans between 25-64 were receiving social security disability benefits totaling $115B. NYT By 2012, that number had risen to $137 billion. Today, 1 in 14 workers receive SS disability benefits. Wage Woes Why work when it is so easy to convince the government to pay you not to work?
Without changes in the disability laws, the SS disability trust fund will go broke in 2016, requiring a 20% cut in all disability benefits or another taxpayer bailout. "Grand Theft Disability" - WSJ.com
One reason for the decline in the labor participation rate is the dramatic increase in workers leaving the workforce after receiving disability benefits. The Heritage Foundation (see also provocative analysis by Charles Murray in Coming Apart: The State of White America, 1960-2010: Charles Murray: 9780307453433: Amazon.com: Books, reviewed by the NYT and the WSJ.com; and Senate report: www.coburn.senate.gov)
Even when the scammers are prosecuted and convicted, the punishment meted out by the judiciary is barely a slap on the wrist. The culprit would lose future benefits, at least until another fraudulent disability claim was concocted and supported by a different "expert" witness. Possibly, a fine would be levied, requiring the return of some or all of the ill gotten gains, but collecting those funds may end up being dropped by the state as being too time consuming and costly.
While this may seem harsh, disability payments for alleged mental problems, which cover about one third of SS disability awards, and soft tissue injuries just need to be stopped altogether, except in limited cases where the claimant can prove disability by clear and convincing evidence, an evidentiary standard greater than the mere preponderance of evidence, with any finding of disability reviewable de novo by an appellate court. Legal burden of proof - Wikipedia This will never happen in any entitlement society where a large percentage of the population believe that they are entitled to receive benefits because they want them.
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