Monday, November 16, 2009

Bought 50 of the TP KEYPRB/Retirement Account Allocation & Management Style/

1. Sold the ADRD shares at $22.34 Yesterday Erroneously Bought by the OG in the Taxable Account (see Disclaimer): I have some stock exposure in the Roth account, mostly in a few CEFs, one stock mutual fund, and some dividend paying stocks like DuPont and AT & T bought during the meltdown period. One of the ETFs in that account is ADRD, where I reinvest the dividends to buy additional shares. The Old Geezer meant to add shares to the existing position in the Roth and added them to a taxable account at the same firm. Having sent the OG back to the Old Folks home, for that transgression and his overly cautious trading style, and replaced him with the 17 year old Young Stock Stud LB pictured to the right, for now at least, whose spirit and ability to focus is currently being channeled over a 41 year time span (from 1969 to today), the LB bought the ADRD shares in the right account a few days ago Bought ADRD Again-This Time in the Right Account), and sold today the same number of shares for a small profit which OG bought in the wrong account. Bought 100 GJX & ADDED to ADRD

2. Retirement Account Allocation: My current allocation in the retirement accounts is about 70% bonds or bond like investments (preferred stock) and 30% in high dividend yielding stocks purchased during the meltdown period when the dividend yields were juiced by the price decline with a small amount in high yielding stock CEFs and ETFs. I am down to just one stock mutual fund, the Janus Contrarian fund. I entered 2008 at about 60% stocks and 40% bonds. Fortunately, many of my stock positions were sold during September 2008, when the Phase 2 of the Unstable Vix Pattern formed, or during the weeks preceding September. This included for examples my shares in Pepsico at over 70. SEPTEMBER 2008: FORMATION OF THE DEADLY PHASE 2 OF THE UNSTABLE VIX PATTERN Volatility, Catastrophic Event Formation, Asset Allocation Decision for Pepsi September 2008 At that time, many of them had been rising in price. I then moved into a trading pattern, and gradually used the historic opportunity in the October 2008 to March 2009 period to build up my corporate bond allocation in the retirement accounts.

On allocation decisions, there is certainly no one size that fits all. Based on my own peculiar circumstances, I am likely to maintain the current allocation in the retirement accounts long term. I have always been more conservative in them, not only in the type of securities bought but also in the way that I have managed risk. I manage money with varying degrees of conservatism and cautiousness. I missed the Nasdaq and internet bubble entirely, both the up and the down for instance.

I am much more aggressive in harvesting profits in the retirement accounts. Generally, as a consequence of the opportunities that started last Fall, I have built them up to throw off about 10% per year in cash distributions, and will simply use the distributions to buy more securities as the opportunities arise. Most likely, I will never need those funds. But the focus will still be on income generation. And, I have no bond mutual funds in those accounts. The closest that I come to a bond fund in the retirement accounts is a small number of shares in the closed end investment fund (CEF) FAX (australian bonds) and a security like JDD: Bought 100 JDD in Roth Both of those funds were bought at substantial discounts to net asset value. Instead of going with a bond fund, I own an assortment of floating rate equity preferred stocks, synthetic floating rate bonds, trust certificates containing senior and junior bonds, trust preferred issues (TPs), and REIT cumulative preferred stocks bought during the meltdown, maybe fifty of those type of securities covering a broad spectrum of industries and firms. Another opportunity to buy those securities at such favorable prices may never come up again in my lifetime. I suspect that many of those purchases have run their course in price appreciation, but I am content to collect the income.

3. Bought 50 of the TP KEYPRB (see Disclaimer): I am not brimming with confidence about Key bank (KEY). But, given the option of earnings .01% in a tax free money market account, my standards for generating some income are not as high as they used to be. I do not want to take much risk with KEY, so I just bought 50 shares of its Trust Preferred KEYPRB at $17.74. This TP has a 6.125% coupon, and a maturity date in December 2033. At my price, the yield is around 8.6%, paid quarterly. KEY.PRB Stock Quote - Keycorp Cap Vi PFD TR 6.125% Par value is $25. This is a typical TP issue. Interest may be deferred for up to five years, but distributions are cumulative and interest is payable at the coupon rate on any deferred amount (page S-30). The stopper provision is standard (page 33).

There are several KEY TPs and the list can be found at Quantum Online under "trust preferred" securities. I rule out all of them just on the maturity dates other than KEYPRA and KEYPRB.

This is a link to the prospectus: Final Prospectus Supplement for Capital VI Key is still paying a common stock dividend, a penny a quarter, which is relevant to an owner of the TP under the stopper provision (see page 33)

KEY common stock is one of my bank LTs so I already monitor important news and earnings. This is a link to ist last 10-q filed with the SEC: e10vq

KEY did issue cumulative preferred stock to the government and this is a link to that agreement: EX-3.1 I view the subordinated bond that is the underlying security in KEYPRB to be senior to the government's preferred stock. Thus, Key would have to eliminate its common stock dividend, and defer the government's preferred stock dividend, in order to defer the interest payable on its junior subordinated bonds.

I would add my usual caveat about bank TPs. If the FDIC seizes a bank, the owner of one of that bank's TP issues will be holding a worthless piece of paper. So, the downside to any bank TP issue is zero, and that is assumption that I operate under.

4. UNCLE BEN: I sure hope that Bernanke knows what he is doing keeping the federal funds rate at near zero. I for one am not reassured that the Fed will keep this abnormally low rate for an extended period, possibly well into 2010. When Ben reiterates this policy, it knocks the dollar down some more, but Ben says he is keeping an eye on it. FRB: Speech--Bernanke, On the Outlook for the Economy and Policy--November 16, 2009 I can save him the trouble of looking in that direction, the direction is down Ben and Ben might want to take a peek at gold prices too. Bernanke said in that speech linked above that he expects moderate economic growth next year.

Cramer seems to think that Ben knows what he is doing. I would give him high marks starting in September of last year, and an F before then. I believe that keeping rates at near zero for as long as he is indicating will set the stage for another bubble in asset prices. The most serious bubble in my view has already arrived, and it involves the pricing of treasury securities. Investment grade corporates are not far behind. This is how I would expect a long term secular bull market in bonds to end, by an artificial pumping of demand that results in a a rise to multi-decade lows in yields. It was not that long ago that the 30 year treasury hit a 50 year low in yield.Rally In Long Term Investment Grade Corporates/TBT/BTE/AVY/REITS

It may take some time for a bubble in stock market and real estate prices to come back, but I would not expect a different result this time than on prior occasions. Maybe the Federal Reserve expects a different result than what happened when Greenspan's Fed left rates abnormally low between November 2002 when the Fed cut the Federal funds rate by 1/2% to 1.25% and another 1/4% to 1% in June 2003, and kept that 1% rate until June 2004, when it started to raise it slowly at 1/4% per meeting for the next 16 meetings. The current Federal funds rate is 0-.25%, much lower than anything during that earlier period, and the one year anniversary of that low rate will be this December. FRB: Monetary Policy, Open Market Operations The FED cut a full point in two 1/2% reductions in October 2008 to take the rate down to 1%.

It is recognized now that the level and duration of abnormally low rates in the 2002 to 2004 period played an important role in creating the bubble in housing prices. But it took another two years after the Fed started to raise rates again in 2004 for the home prices to start to top out, with many markets continuing parabolic rises in 2005 and 2006 when the Fed was hiking the Federal funds rates. The psychology behind the bubble creation had already been set firmly in motion before the Fed started to hike rates again.


  1. TI:"Another opportunity to buy those securities at such favorable prices may never come up again in my lifetime."

    Congratulations on seizing that opportunity! Well done and thanks for the blog. Very informative and thought-provoking.

  2. Luther: The next major buying opportunity for longer term bonds will likely come with a 1970s style inflationary period which marked the worst period in my life to own longer term bonds. I would view that as a more likely future scenario than the a repeat of the events that happened in 2008, though that is possible too. This is an excerpt from a speech by the President of the Philadelphia Fed that has me worried some:

    "While I see little risk of inflation in the near term, I do see greater risk of higher inflation in the intermediate to long term for several reasons. First, monetary policy is extremely accommodative. We have expanded the Fed's balance sheet to an unprecedented degree since last fall and have kept interest rates at historically low levels. Second, I put less weight than many other economists do on the idea that economic slack or low resource utilization is a reliable predictor of inflation....

    It is particularly hard to measure slack near the turning points in business cycles, so making policy decisions based on measures of such slack becomes problematic....

    Our current circumstances pose an eerily similar set of conditions to those in the mid-1970s. The nation had experienced a severe recession, in part due to a large oil-price shock. Many economists and Fed policymakers believed that a large amount of slack existed and it would help slow inflation and keep it low, even as the Fed undertook a rapid monetary expansion to spur economic growth and lower the unemployment rate.

    Unfortunately, slack was poorly measured and turned out to be not as significant as first estimated. Thus, the Fed's monetary expansion led to rising inflation for the balance of the 1970s.

    If history does repeat itself the buying opportunity will be different than the one from October 2008 to March. The initial reaction would be to lighten up on the long term fixed rate coupon bonds. Then, it might be a long time to wait before the buying opportunity arises. The buying opportunity for long dated treasuries did not come up until 1980 to 1982 when 30 year treasuries passed 14% yields. The inflationary problem had its origin in the 1960s and gathered steam in the 1970s.

  3. TI, thank you for these comments and the supporting Philly Fed quote.

    Thanks for waking-up LB when making investment decisions.

    Like many in this market, I'm happy and content making 7-8% with fixed income assets. Having said that, many of the instruments I have that are returning 7-8% have proven they can depreciate 30%quickly. I reconcile accepting this risk by convincing myself that there is a low probability of a recurrence of the type of displacement that occurred between Sept '08-March '09.

    Re:'s just hard for me to accept that inflation will be a problem even in 2010 with U.S. unemployment at around 10.5 (or is the real number 17%?)and not coming down. When unemployment actually starts to reverse, I will more readily accept the case for inflation worries. Having said that, I believe this is RB at it again.