Minutes Afternoon Staff Meeting/Bought BMLprg at $8.8/ Sold 2 HSBC Bonds

   RB looked up the meaning of nerdiness in the dictionary this morning, the first time it had cracked a dictionary in a decade, and found that no word in the English language was a more apt description of LB than "nerdiness", yeah LB was pure nerdiness, the sine qua non of nerdiness, defined by that wise dictionary to mean a socially inept person slavishly devoted to intellectual pursuits.  RB does not want to listen to another spiel like the one given by LB this morning and pleaded with the Headknocker to never again cut LB loose on the world .Nerd Talk by LB this Morning 5/20/09

1. Dynamic Asset Allocation: Continued Shift out of Short Term Bonds:  This morning I continued selling some short term bonds, disposing of some HSBC notes maturing in 2012 at close to 95.(UPDATE 5/22/09: Broker corrected the price even higher to 96.6, so much for the Third Party Price shown on that one)   I was surprised about this fill, since I had a limit order in place just below the third party price which was around 91.5.   Part of the proceeds will be used to fill the kitty for RB's next frolic into the stock market, and 1/2 will be used to shift more into equity preferred floaters to pick up more yield and a currently tax advantage stream of income compared to the tax rate applied to interest paid by my short term bond holdings.  The short term bond holdings being sold were purchased prior to 2008 with funds raised from an allocation shift out of stocks.  So, this process is being reversed, with the first batch of funds raised re-allocated to common stocks.( item #8: Potpourri This Evening May 18th/Bought More AT & T)   The new funds will  gradually be re-deployed.  

2. Buy of 50 BMLPRG:  I discussed in the post this morning several Merrill Lynch equity preferred floaters.  (item # 2: Nerd Talk by LB this Morning 5/20/09). 

This is now a BAC obligation after its acquisition of Merrill.

I elected to buy just 50 shares of BMLPRG with a limit order at $8.8 which was filled this morning.

This one has a  lower guarantee at 3% than BMLPRJ but I did not feel that the price differential this morning justified paying up for BMLPRJ which was trading at around $10.25 when I placed my order (now at around $10).   This one is an equity preferred paying the greater of 3% or .75% above 3 month Libor. QuantumOnline has it listed under those preferred securities that pay qualified dividends.  This is a link to the prospectus: Prospectus Supplement

This security has a $25 par value. At a total cost of $8.8, the yield at the guaranteed rate of 3% is 8.52%.  At a 5% 3 month Libor, the yield would rise to 16.33%.  The issue is non-cumulative, always a bad thing, but common among equity preferred issues with certain exceptions.   

I mentioned in a prior post that Karen Finerman said she was shorting BAC common and buying the preferred.  I do not short stocks. Some of the weakness in the BAC preferred issues may be due to the unwinding of that kind of trade. I expected more of a rally because it is my view that more capital from the sell of common stock is a positive development for the preferred shareholder. The common is rallying, never good for the short seller who always has an open ended potential for losses.  This trade may have worked for a brief period, and I have no idea whether she still has it in place.  But it would  not be working now. Hartford Bond Sold/ Modoff: No Evidence of Trading/bought 50 INZ at 6.52/

I view the BAC's sale of common stock to be more beneficial to the preferred shareholder, since it provides a much larger cushion of equity capital and makes it more unlikely that the preferred dividend will be eliminated for the equity preferred shareholders or deferred for the BAC's Trust Preferred issues.

3. HERTZ:  I view Hertz's equity capital raise to be positive for senior debt holders, providing the company with much needed capital to pay off some maturing debt. Yahoo! Finance My sole interest in Hertz in a 50 share position in a TC DKR bought at $6.45, which contains as its underlying security a senior Hertz bond maturing in 2012. TRUST CERTIFICATE HERTZ BOND DKR Since I made a profit selling the other 50 shares on a previous spike, I have almost nothing in this position after adjusting for that profit and one interest payment.  It is now trading at $18 at around noon C.S.T, up almost 25% today. DKR: Summary for MS SATURNS HERTZ 7% - Yahoo! Finance

RB just said that this is a perfect example of why Headknocker has less money than Uncle Warren, so RB  suggested that it needed to be given control over the keyboard at HQ, it would have bought a 1,000 of DKR at $6. LB replied "yeah, but Headknocker is not sleeping under some bridge and eating supper at the Mission either which is where RB would have had him fifty times in the past if RB had made the calls" Headknocker said both had good arguments, but when it is all said and done, he would prefer not to be sleeping under a bridge right now. And Headknocker thanked LB for all of its hard work to preserve the capital base here at HQ during these difficult times.  

4. VIX:  The VIX traded as low as 26.57 this morning and retraced some of its gains as the market retreated toward the noon hour.  LB wondered if the options traders were currently pricing volatility correctly.  Since I have never bought an option, I do not have an answer for my own question. I simply use the VIX to make long term changes in my stock allocation based on my VIX Asset Allocation model.  Only a few single day moves over the past two decades or so of data have significance under the model, such as 9/29/2008 and 2/27/2007.

First Alert in VIX Model in 2007: Clearly Tied to Mortgage Problem

SEPTEMBER 2008: FORMATION OF THE DEADLY PHASE 2 OF THE UNSTABLE VIX PATTERN

This linked article from an analyst at Charles Schwab has an interesting chart on the returns in the market after a peak volatility period.  VIX Up, Market Down? I discussed this article in a prior post:Trading and Asset Allocation in Stable and Unstable VIX Pattern  I thought the chart as least supported my continued investment during this bear market, rather than just waiting for the green light from the VIX model, though my new common stock investments until  March 2009 were limited to cash flow since October 2007, or to using the proceeds of a sale to buy another stock.  I was critical of this analyst for failing to see how the VIX could be used as an indicator for making longer term asset allocation decisions.  The Charts from 2004 through 2007 are most revealing, and similar patterns existed prior to the current bear market and the cyclical bull that proceeded it.   

5. Hewlett-Packard: I was not impressed by HPQ's report.

HP plans to cut another 6400 jobs. HP also cut its full year revenue guidance to a fall of 4% to 5% from its -2% prior forecast.  It expects flat to down 2% in sequential quarter to quarter revenues for the current quarter.  Cash flow from the last quarter beat expectations at 5 billion. I do not own HP, and would consider buying some shares at below $30. There is not enough in this report to cause me to buy shares now.  HPQ is on my small monitor list for tech names.