Before discussing another topic today, I will simply note that the CBOE Volatility Index for the S & P 500 index (^VIX at yahoo finance) crossed 50 on Monday, an unprecedented level of fear in the market. Those familiar with my posts prior to this blog know about my extensive discussions connected with the VIX and how to trade it.
I had anticipated a stock rally after the bailout bill by the House last week, which did occur but only intraday. The last opportunity to sell mutual funds, which are priced at the closing prices, was the huge rally after Paulson made first made the announcement or the day before when Senator Schumer hinted that it was coming from the administration.
The Federal Reserve said it would provide as much as 900 billion in cash loans to banks in an ongoing urgent effort to prevent a further credit collapse. I view the Feds actions positively, and it shows that Bernanke did learn from his extensive study of how the Federal Reserve contributed to the Great Depression by restricting credit. If this crisis subsides, and it might, I do wonder, however, about the long term inflationary impact of all the actions taken by the Fed over the past several months, since money seems to be flowing off the printing presses with abandon now. That is a worry for another day. The problem now is clearly a potentially devastating deflation.
In preparation for the debate tomorrow, I wanted to illustrate how to use the fact check services and other information to verify a factual claim made by the candidates, using McCain's claim that Obama would increase taxes on the middle class and Obama's claim that McCain voted to privatize Social Security, with both being false in my opinion. McCain's claim is often based on Obama's vote on a non-binding budget resolution that assumed the Bush tax cuts would not continue past their 2010 expiration date. This is done since the tax code has not yet been amended to provide for their continuation. Obama's vote on that non-binding resolution is not a vote for or against a tax increase.
Sometime, before 2011, the Congress will have to vote on a bill amending the tax code to continue or to change the Bush tax cuts. Obama has made clear that the favors keeping the Bush tax cuts for couples earning less than 250,000 and a single individual earning less than 200,000. Someone earning above those limits will suffer an increase in tax rates by rolling back the Bush tax cuts as well as lose the favaroble tax treatment of dividends and capital gains. When McCain and Palin claim that Obama would increase taxes on families earning $42,000, this is a false statement and is based on the non-binding vote on a budget resolution described above. This information is taken from a variety of fact checking services but I will just site this one for brevity. PolitiFact | Obama's tax plan hits $200,000 and up Another helpful guide to the debate tonight would be the "partial tally" in fact check.org describing how both candidates have misled the voters. FactCheck.org: The Whoppers of 2008
I view politicians efforts to cloud people's minds as very regrettable and it only makes our jobs harder as voters.
I would also view review the summary of both candidates tax plans available at taxpolicycenter.org which shows the Obama plan does more for the middle class than McCain's plan. I would prefer McCain to admit that the Democrat plan does more for the middle class and then justify how giving more tax breaks to the wealthy would benefit the country. Voters could then decide what is best for themselves and the country under each plan without having one candidate purposefully distort the other candidate's proposal. This is just a link to the non-partisan's taxpolicycenter's executive summary of their report. An Updated Analysis of the 2008 Presidential Candidates' Tax Plans: Executive Summary - Revised September 15, 2008
For an Obama claim against McCain, I would highlight the claim that McCain was in favor of risking Social Security in the stock market, hardly a popular option today. This may sometimes be phrased to suggest that McCain was in favor of privatizing Social Security.
Obama had a claim in a stump speech that the plan favored by McCain a few years back, early in Bush's second term, would have had Social Security recipients money tied up in the stock market. Both charges were meant to scare seniors who are receiving benefits now. One of the Obama ads asked -rhetorically- what would happen to your benefits if they had been invested in AIG or Lehman Brothers. (always beware of a politicians' rhetorical question) Wow, that would be really bad.
These claims- at best- create a false impression and are more accurately described with the word false. The plan that McCain voted for would not effect existing retirees. It instead gave an option to younger people, born after 1950, to invest part of the Social Security taxes paid by them in private accounts managed by the government, which would not be invested in a few stocks but in broadly based indexes of stocks.FactCheck.org: More Social Security Spin
1. JZJ: This afternoon's stock topic is a Trust Certificate containing an AT & T bond.
For several years between 2000 and 2005, several brokerage firms created trust certificates containing corporate bonds. Normally, a bond in the institutional bond market will trade in units of 1,000 so that a buy of 5 at a par of 100 would cost $5,000. Many individuals will not trade in this market and the creation of trust certificates was done to attract individual investors to the bond market. For trust certificates, the brokerage firm would create a trust, appoint a national bank as the trustee, and then bonds of a particular corporate issuer would be delivered to the Trustee. Each Trust Certificate represents an undivided, proportionate interest in the bonds contained in, and owned by the Trust. These Trust Certificates are then listed on the stock exchange and trade like stocks, but they are in fact bonds.
When the trust is created, it may have a coupon that is larger or smaller than the coupon of the underlying bond and any difference in coupon is taken into account by adjusting the amount of bonds delivered to the Trustee. The market for these stock certificates is dominated by individual investors which creates opportunities to buy investment grade bonds at much cheaper prices when they are embodied in a Trust Certificate than when the underlying bonds contained in the Trust Certificate are traded in the institutional bond market.
The one that I am going to discuss today is a Trust Certificate containing an AT & T bond (common stock symbol is T) The stock symbol of the Trust Certificate (TC) is JZJ. It was a trust originally created by Lehman.
The TC JZJ represents an interest in a senior unsecured AT & T bond currently held in trust by U.S. Bank Trust. The credit rating of AT & T has gone up several notches since the bond was originally issued, and the underlying bond is an investment grade bond yielding 8%, more than the TC coupon, and could go higher in the event of a downgrade by the rating agencies.
The maturity of the underlying bond is 11/15/2031. The coupon on the TC is 7.125% per annum which can be decreased by .25% for each upgrade in rating of the bonds but not lower than to 6.375%. In the event of a downgrade, the coupon yield would be increased by .25% for each notch. As a result of several upgrades in the debt rating since this TC was created, the coupon has fallen to the minimum guarantee level of 6.375%.
If the underlying bond is called by the owner of the call warrant, that would result in a call of the TC and the payment of $25 plus accrued interest in November 2008. An optional call by ATT probably will not happen since an optional call requires a "make whole payment".
The current yield is close to 9% at the closing price today of $17.60. Interest is paid semi-annually at about .80 for 1 TC or $1.60 per year. At a total cost of $17.6, the yield at the current coupon rate of .06375% would be 9.09%. If the debt is downgraded one notch, the coupon rate would go up .25% and so on for each downgrade. This gives you some downside protection by increasing your yield in the event of downgrades.
Disclaimer: In full disclosure, I own shares of JZJ and will continue to buy additional shares at or below the current price, or even slightly above. This is not a recommendation to buy or to sell. Trade at your own risk, and perform research about this security by reading the prospectus at sec.gov and further studying the financial health of AT & T (symbol T at yahoo finance) before making any investment. Consult with your financial advisor prior to making any purchase. In this blog, I am merely describing my reasons for purchasing this security and the potential pitfalls that I identified prior to purchase. This security may not be suitable for others based on their unique financial position and risk profile.
THE PROSPECTUS ON THIS TC CAN BE FOUND AT SEC.GOV:
READ THE FIRST PROSPECTUS FILED WITH THE SEC ON 11/18/2003 UNTIL YOU BECOME COMFORTABLE WITH THE TC ISSUE AND UNDERSTAND WHAT IT IS. ANY TC PURCHASE MUST USE A LIMIT ORDER DUE THE LOW VOLUME OF TRADING AND THE FREQUENT WIDE BID/ASK SPREAD. IF YOU HAVE ACCESS TO QUOTES OF THE UNDERLYING AT & T BOND IN THE INSTITUTIONAL BOND MARKET, THEN CONSULT THAT PRICE TO DETERMINE WHETHER THE TC PRICE IS AT A SUBSTANTIAL DISCOUNT TO THE SAME BOND TRADING IN THE INSTITUTIONAL MARKET. THE CUSIP OF THE BOND IS 001957ND0. THE LAST PRICE FOR THE UNDERLYING BOND WAS 100.48 WHICH IS SLIGHTLY OVER THE 100 PAR VALUE AND THIS WAS A 5000 UNIT TRADE ON 10/2/2008. THE BOND IN TC FORM IS TRADING AT A 29.6% DISCOUNT TO PAR VALUE.