Thursday, October 8, 2009

Bought 100 GJP at $18.97/Bought 100 BCE at $24.75/Bought 50 AHLPRA at $19.75/Sold 100 IRR at $17.4/ALCOA/IPB/GJS VS. PYT NOW

1. Sold 100 IRR at $17.4 (see disclaimer): Yesterday, I discussed the possibility of adding Exxon. In case I decide to add 100 of XOM, I went ahead and sold one of the closed end funds that invests in natural resource stocks. I choose to eliminate ING Natural Resources (IRR), since it was selling at close to a 7% premium now to its net asset value. ING Risk Managed Natural Resources Fund - Overview IRR just went ex dividend, and I had a good profit on the shares bought at $12.5 with 3 dividend payments on those shares: IRR BUY

2. ING (own hybrids only-IND, INZ & IGK): ING announced yesterday that Julius Baer had agree to acquire ING's Swiss asset management business for 520 million Swiss Francs (about $506 million). This transaction will net ING with about a 150 million Euro profit and free up 250 million in Euros of capital. This news apparently helped the prices of the hybrids which rose yesterday.

3. Apple Iphone in Canada: Until recently, Apple had an exclusive agreement with Rogers Communications to sell the Iphone in Canada. I noticed a story from Reuters yesterday that both BCE and Telus had struck deals to sell the Iphone. That is interesting based on what may happen in the U.S. soon.

4. Bought 100 BCE at $24.75 (see Disclaimer): The Old Geezer mind set, once it becomes embedded and starts to dominate the thought process or what remains of the thought process in the GL's aging brain, produced the buy yesterday of Canada's largest phone company, BCE, known as Bell Canada Enterprises. I would suspect that the deal with Apple to sell the Iphone was generally expected given the market's muted reaction to the announcement. Telus and BCE were not able to offer the Iphone since their wireless networks were incompatible with what was needed for the smartphones. I can not even begin to explain those technical issues. Whatever was the problem has now been solved as Telus and BCE will be able to offer service for the smartphone devices in their respective wireless networks which have been upgraded to 3G high speed packet access (HSPA) starting in November. Bell

I was attracted not to the growth prospects of BCE in a highly competitive Canadian phone market but to its financial strength and attention to creating shareholder value. The firm increased its dividend this year by 5%, raising the payout to $1.62 Canadian, which currently equates to about a 6.1% yield at my cost: BCE Stock I own a number of Canadian stocks, and I would assume that BCE withholds 15% of the dividend to pay a tax to the Canadian government. This is one reason why I would prefer to own foreign dividend paying stocks in a taxable account rather than in an IRA. In a retirement account, you lose the tax credit for foreign income taxes paid in connection with dividends.

Most reports that I read about BCE have it rated as an average type of stock selection. It certainly faces headwinds from losses in its land line business and increasing competition within its geographic area of service. The company provides service to about 70% of Canada's population, primarily in Ontario and Quebec. BCE was the subject of an earlier failed acquisition attempt, which was what caused the price spurt in 2007 and the price decline in 2008.

For the last quarter, BCE reported U.S. .55 for the 2nd quarter, before restructuring charges, compared to $.47 in the year ago quarter. Analysts are not expecting much earnings growth in 2010 compared to 2009, with the current consensus estimates being $2.42 in 2009 and $2.46 in 2010. BCE: Analyst Estimates The actual numbers will be dependent on the economic recovery, its speed and strength.

5. Yamana Gold (owned): Yamana reported on Monday that its production had increased 9% since the second quarter while its costs were maintained in line with expectations.

6. Bought 50 AHLPRA at $19.75 (see disclaimer): This is a non-cumulative perpetual equity preferred issue from the reinsurance firm Aspen Insurance. It will have a fixed coupon of 7.401% until 1/1/2017. At that fixed coupon rate, which is paid in quarterly installments, my yield is around 9.3%: AHL.PRA Stock After 1/2017, the dividend will start to float at 3.28% above the 3 month Libor rate. Aspen has the right to call for redemption at its option any time after 1/1/2017.

This is a link to the prospectus:

For what might be the clearest statement on priority issues, I would refer any fellow nerd interested in those type of issues to pages S-3 and S-4.

This is a link to the last quarterly report.10-Q

S & P currently has the common stock rated five stars.

I would just refer to my previous post discussing in more detail the advantage and disadvantages of equity floating rate preferred stocks. Advantages and Disadvantages of Equity Preferred Floating Rate Securities

7. Bought 100 GJP at $18.97 in Roth (see disclaimer): The Roth IRA still has too much cash earning nothing after this buy. I previously bought this synthetic floater at a lower price in a taxable account, and it was sold along with all of the others when the decision was made to hold all synthetic floaters in the retirement accounts.

This is a low expectation buy. The Trust Certificate (TC), GJP, has at its underlying security a senior bond from the large Virginia based electric utility, Dominion Resources (D). That bond has a coupon of 5.95% and matures in 2035. The coupon of the GJP is created by a swap agreement with Wachovia, now part of Wells Fargo. The GJP coupon is the greater of 3% or 1.15% over the 3 month treasury bill rate with a maximum yield of 8%. Distributions are paid monthly. For those unfamiliar with this type of security, the senior bonds are owned by a trust, administered by an independent Trustee, who collects the interest payments from Dominion at the coupon rate. As long as the swap agreement is in effect, the Trustee swaps that payment with Wachovia in exchange for the payment due to the owners of GJP. The treasury bill rate plus 1.15% is below the guarantee of 3% so Wachovia is collecting from the Trustee the 5.95% coupon and paying the Trustee for re-distribution to the owners of the TC 3%, keeping the difference of course. Once the 3 month T Bill rate rises to above 1.85% during the applicable computation period, the float provision kicks in and the TC owner will receive a coupon at the higher floating rate. Since the TC has a cap of 8%, the coupon rate for GJP will top out when the 3 month T Bill rate exceeds 6.85%. At that 8% rate, the effective yield at a total cost of $19 would be 10.526%. The minimum guaranteed coupon of 3% works out to a yield of 3.95% at the $19 total cost.

So, in short, the rate for the owner of GJP will fluctuate between a low of 3.947% and a high of 10.526% at a total cost of $19. That spread will of course change as the cost of purchase changes. Given the combination of the high float of 1.15% over the 3 month T Bill rate and the low guarantee of 3%, I would expect the float to be the applicable rate for the vast majority of time until the underlying bond matures in 2035, with the exceptions being the periods like now with abnormally low T Bill rates.

This is a link to the prospectus:

This prospectus describes the underlying security in Appendix A, found after page S-41. Page A-2 says that the underlying security is a senior unsecured obligation of Dominion.

FINRA information on the underlying bond: FINRA - Investor Information - Market Data - Bonds - Bond Detail
If you bought the underlying bond at yesterday's price of over 106, the buyer would lock in for the next 26 years, if held to maturity, a 5.65% annualized rate and would lose money upon redemption having bought the security at 106 when par is 100. The buyer of GJP would make money at maturity with a purchase of 100 shares at $19, with a par value of $25. And who is more likely to receive more interest over the life of these securities, the purchaser of the floater or the one who buys the underlying security?

8. Alcoa (owned): AA reported earnings for the 3rd quarter. Revenues increased sequentially in the 3rd quarter to 4.6 billion from 4.2 in the Q/E 6/09, helped by a rise in realized prices for primary aluminum to $1,972 per metric ton from $1,667. Alcoa stated that its key markets are stabilizing and expects aluminum consumption to increase 11% in the second half of 2009. Analysts were expected a loss in the quarter. Sales also beat the consensus expectations:

9. 20 Year Treasury Auction (LB would be fired if it bought anything at that auction): It is simply beyond my ability to comprehend why anyone would lend two bits to the U.S. government for 10 years at 3.2%. But there was a large crowd submitting bids at the 20 billion dollars of 10 year treasury notes auctioned yesterday, with a bid to cover of 3.01 to 1. The high yield was 3.210%.

10 REVERSAL FOR PYT AND GJS: Another pricing issue is the current price of PYT in relation to GJS. PYT closed yesterday at $14.5 and GJS closed at $15.05. Based on the kind of analysis that I have been doing on these securities, PYT is a better buy at $14.5 than GJS at its closing price from yesterday.

11. New IPB and OLD IPB Compared at Yesterday's Closing Prices: I did another calculation on the 15 corporate bonds and treasury strips contained in the TC IPB. For anyone interested, if you wanted to duplicate IPB by buying the underlying securities, you would end up at yesterday's prices being able to duplicate IPB at a 9.47% discount to par value. At the current price of $18.5, IPB is selling at a 26% discount to par value. This is not an argument to buy IPB, since someone might not want all of the bonds contained in it. I know that I didn't when I bought it. The analysis which takes some time to do simply points out that it would be cheaper to buy IPB than to reconstitute IPB at today's prices. I discuss how to do this computation in this post: Calculations On How to Recreate Trust Certificate IPB The yield on the new IPB would be around 7.16% calculated as shown in that prior post except for using yesterday's prices, and IPB's yield at an $18.5 cost is 8.18%.

I own 100 IPB bought at $16.99: Bought 100 of the TC IPB at $16.99 This one was bought in the Roth due to the presence of a treasury strip as one of the holdings.

When I last compared the the new recreated IPB and the existing IPB on August 12th, which takes a good ten minutes of time, IPB was selling at 31% discount to par value with a yield at $17.25 of 8.77%. The new IPB could have been created then at a 15.5% discount to par value and a yield of 7.64%. More On IPB Part 2

So this is the table now and then:

Old IPB Yield Discount to Par /// New IPB Yield Discount to Par
August 12th 8.77% 31%/// 7.84% 15.5%
Now 8.18% 26%/// 7.16% 9.47

This shows a decent gain in the underlying corporate bond prices, and concomitant reduction in yield, over the past two months. The treasury strip, which of course pays no current dividend, has also rallied in price to around 42.5, up from about 38 in mid August.

12. COCA COLA (owned): Yesterday, Deutsche Bank raised KO to buy from hold with a $62 target. I doubt that I would sell my shares bought at $38.72 at $62 for the reasons discussed in this post from August: Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009

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