Tuesday, December 1, 2009

Bought 50 RFPRZ at 22.88/BOUGHT 50 of the CEF GCS at 8.34/ Bought 100 DBU at 22.37/Bought 50 GBCI at 13/Freedom & Responsibility

1. BOUGHT 50 of the TP RFPRZ at $22.88 Yesterday-A Rule Violation (see Disclaimer): Since the LB is doing its best to find income for the Headknocker, looking far and wide, sometimes it is necessary to bend a rule here and there to accommodate the HK's desires. The rule violated in the purchase of RFPRZ is the one dealing with maturity dates for TPs, with the outer limit being a maturity in 2039. RFPRZ has an initial maturity date of 6/15/2048, when Regions Financial has to make a commercially reasonable effort to redeem this security by issuing new securities. I am not going to bust a brain cell summarizing the details of that obligation, or thinking about it, since HK is not likely to be around then anyhow. If Regions is unable to issue those securities, then the term could be extended to 2078. Regions has the option to call this security on or after June 15, 2013. Given the coupon of 8.875%, and assuming RF recovers and interest rates are low after the 6/15/2013 call date, then it is conceivable that this security would be redeemed early, but I would not count on it.

The coupon of this TP is high at 8.875%. Par value is $25. Interest can be deferred for up to five years provided no distributions is made on a junior security. Regions is currently paying a 1 cent quarterly dividend to its common shareholders. Interest is cumulative, and any deferred payment earns interest at the coupon rate. This is a typical bank Trust Preferred issue. The issuer is a trust, Regions Financing Trust III, who sold preferred shares in the trust to the public and used those proceeds to buy junior bonds issued by Regions Financial (RF).

This is a link to the prospectus: Final Prospectus Supplement

Given Regions' problems, this issue is rated junk, and deservedly so. That explains the limited exposure of just 50 shares. The yield is the reason for buying some shares. The yield at a total cost of $22.88 would be about 9.7% paid quarterly. This is the second rule violation for this security, with the prior sell close to two bucks higher and sold after the prior ex dividend date. This security is on a short leash.

Since the underlying security in the TP is a junior bond, that security will be senior to common and equity preferred stock. Regions did issue equity preferred stock to the government for TARP funds: Letter Agreement

I have a low opinion of Regions' management. Cramer has expressed an even lower opinion. Item # 3 AFTERNOON COMMENTS: 6/23/09 The common stock of Regions was a Lottery Ticket purchase at $3.47: Lottery Ticket in 50 shares of RF Regions is still losing money as shown in its last quarterly report. Net additions to nonperforming assets were 1.1 billion in the third quarter and charge-offs increased to 680 million. A lot of the problems originate from a a dim bulb headlong plunge into Florida real estate. Any competent and prudent banker could have seen the Florida bubble forming by 2006 and would have pulled back substantially then in my opinion.

As long as Regions maintains the common dividend, I know that I will paid on the TP. If RF eliminated that one cent per share common dividend, then the only conclusion that I could draw is that the bank is in dire financial condition. While as a technical legal matter, Regions would have to defer the government's cumulative preferred stock dividend in order to defer the TP distribution, I would expect RF to defer the TP if it ever made the momentous decision to defer the government's dividend. And, lastly, as I have said many times, a TP issue of a bank seized by the FDIC would in my opinion be a worthless piece of paper. So the downside for a bank TP is zero which would be the same as what a common or equity preferred shareholder would receive in such an eventuality.

I would also note that J P Morgan increased its estimate for Regions loss in 2010 to 72 cents per share from 60 cents: J.P. Morgan

2. Added 50 of the CEF GCS at $8.34 Yesterday (see disclaimer) I am in the black with this closed end fund taking into account the cash dividends received since my original purchase, but in the hole based on just the share price. My purchase yesterday lowers my cost basis. I take the dividends for this one in cash. For its fiscal year ending in June 2008 and 2009, GCS paid total distributions of $4.82 and $4.03 respectively. The sponsor is DWS investments, a Deutsche Bank group company. This is a link to the web site for all of the DWS closed end funds. DWS Investments : Closed End Funds: Prices & Performance This link may not work for very long in the future given the prior history of DWS in changing its web site address. GCS invests in natural resource stocks on a global basis. The most recently filed quarterly report filed with the SEC can be found at www.sec.gov/ gcs_ The expense ratio is 1.4% based on the information contained on page 19 of the GCS annual report: www.dws-investments.com/EN/docs/fund-literature/fund-report/GCSa.pdf But anyone can find its filing by going to the SEC Edgar site and entering the fund name as a search term: Company Search

At the time that I bought the shares yesterday, I only had the closing NAV from last Friday, and GCS closed last Friday selling at 7.22% discount to net asset value, barely tolerable to me since I generally require at least a 10% discount. Closed-End Funds WSJ.com

3. Bought 100 of the ETF DBU Yesterday at $22.37 (see disclaimer): I made this buy in the same new taxable account as the ETF XLU. I am using money from an online savings account to buy a few ETFs. DBU was mentioned in a prior post when I purchased the XLU, which is the ETF for electric utility stocks contained in the S & P 500. Item # 4 Bought 100 XLU DBU is from Wisdomtree and contains large foreign utility stocks from developed countries: WisdomTree - WisdomTree International Utilities Sector Fund (DBU) I place a limit order on this one below the market early in the morning. While I own several individual U.S. electric utility stocks, and hence duplicated in part the holdings of XLU, I do not own a single foreign utility stock and DBU provides diversification. To say that I take diversification to an extreme would be an extreme understatement. DBU includes such names as RWE, E.ON, GDF Suez, Iberdola, Fortum Oyj, Electricite de France, National Grid and ENEL. Dividends are paid quarterly.

4. Bought 50 Glacier Bancorp Yesterday (GBCI) at $13 (see disclaimer): I used a limit order on this one. This is one of the five regional bank stocks recommended by Cramer in his new book. He discusses it as pages 149-152. There are several reasons for my purchase. First, I like the fact that this bank did not accept TARP funds. Second, I do not own common stock in any banks operating in Glacier's geographic region. The bank is based in Montana but has branches in Idaho, eastern Washington, Wyoming and Utah. Many of these states have low unemployment rates. The BLS issues monthly reports on unemployment by state and the latest report is from November: Regional and State Employment and Unemployment Summary The bank did report a loss of 3 cents a share for the last quarter: /www.sec.gov The bank provisioned 47 million for loan losses in the third quarter, an increase of 38 million from the 3rd quarter of 2008. Total loans as of 9/30/2009 were 4.046 billion. Book value was listed at $11.35 per share, and tangible book at $8.8, as of 9/30. On the earnings front, about all that I can say is that the bank will probably be profitable in 2009, and is currently estimated to earn 55 cents in 2010. GBCI: Analyst Estimates The dividend yield is close to 4% at a $13 total cost. So, this one will require some patience. I am putting it in my category 2, explained in a prior post: Regional Bank Stocks

5. Australia Rate Hike: The Australian Central Bank, who is not conducting a Jihad against the responsible savers in its society, raised its benchmark rate by a 1/4% to 3.75%. RBA: Cash Rate Target This is the third consecutive quarter point rise. I recently sold my Australian dollars at a good profit, and I may buy some back at some point.

6. The High Priests of Irresponsible Behavior & the Constitutional Right to Be Free From Responsibility: I did not take to task the CEO of Goldman for saying recently that Wall Street bankers are doing God's work. My only response was to say, if that is so, then we need to put all of them on a preacher's salary. Soon, the paper shufflers of high finance, those who take risks with other people's capital, will be receiving bonuses measured in millions, so it is fair to say that Wall Street is back to normal. Nothing has changed, no lessons have been learned, the risks of irresponsible behavior are still socialized while the benefits are clearly without question still privatized and claimed by the chosen few who are after all doing God's work.

It is apparent that irresponsible behavior is rewarded in American society. I do not mean on every single occasions but frequently. Freedom from responsibility has in effect been elevated to one of the cherished freedoms, of equal or even greater status to those enumerated in the Bill of Rights. Many who have studied the Constitution, and who have read many decisions from the Supreme Court, may be surprised to learn that Freedom from Responsibility is a Constitutional Right. Really, it has to be there because it is so sacrosanct in our society, so it has to be one of those penumbras that emanate from the Bill of Rights in the words of Justice Douglas. It am not just referring to the Wall Street "talent" who bear a great deal of responsibility for causing the Near Depression and were paid hundreds of millions for their trouble. It goes far deeper.

I was struck recently by an article in a liberal newspaper, similar to hundreds that I have read over the past year. The names change with each story, the facts differ, but the essence remains the same. The essence is that individuals are not responsible for their own behavior. In this particular story, a homeowner has a mortgage of say $150,000, and is able to service the mortgage on that home. The homeowner then decides to do some remodeling. There are no funds to pay for the remodeling jobs that occur over a few years, so the homeowner borrows all of the funds and adds them to a new mortgage. That is not their fault. You need to channel that thought to understand. Before long the borrower has say a $300,000 mortgage, and is unable to service the loan. A liberal reporter from a national paper is called to tell the homeowner's sad, woe is me story, and to paint the homeowner as a victim of bad behavior. The homeowner admits to being about 10% responsible for the current predicament which is in itself unusual to admit to any responsibility. The reporter agrees that others are to blame, and writes a story blaming it all on the mortgage company who clearly acted irresponsibly in extending loans beyond the reach of the homeowner's ability to pay. Those loans were financed by the clever creations of the Masters of Disaster, including CDO's squared and cubed, helpfully rated AAA by the ratings agencies to allow the unloading of those loans to gullible investors worldwide. Now, the angle of the story is that the last loan was one of the abominations created during the housing bubble, choose your own payment mortgage, so the homeowner chooses the lowest payment. And, the homeowner claims that the mortgage company did not explain that the low payment was only for a short time, part of each monthly payment was just being deferred and then added on later. But the homeowner is not responsible in this story for signing the mortgage, or failing to take any action whatsoever to become even minimally informed about one of the most important financial transactions in their life. No, when you are free from the burdens of being responsible for your own actions, then some one else is always to blame for the untoward consequences. So, who was to blame and how would you assign responsibility, even assuming that the homeowner was not told about the balloon payments in the mortgage (which may or may not be true) and just wanted the initial low rate because that was all that could be paid anyhow? I would say in this situation the homeowner is about 80% responsible and those responsible for extending the loans and financing them, would bear about 20% of the consequences. Now, who ends up bearing the consequences in our society? Oddly, since the risks are socialized, and given the fundamental right to be free from the consequences of one's actions, those who had no skin in the game, received no benefit from any of the transactions, had no say in the matter, are required to clean up the mess and to pay for it.

The system is quite clever in how it disguises how risks are socialized while the rewards are privatized. No agent of the government comes to my door, rings the doorbell, and informs me that I need to bail out some homeowners that I do not know or a Wall Street investment bank, or countless other financial institutions who acted in an improvident and reckless manner. Can you imagine the Headknocker's response if that government employee said "hey Headknocker, things have gone a little awry, time to pony up a million". Or maybe the conversation would go like this: "hey HK, we have assigned to you a family in California and the government will require you to clean up their mess." No, while something is lost when you simplify what has happened to its bare fundamentals, it is more like saying let's borrow a few trillion to bail out the irresponsible ones, and then put the responsible savers in the country in a penalty box for a few years earning nothing on what was saved rather than spent irresponsibly. And everyone then goes on their merry way as if nothing has happened, nothing has changed, and it will happen again. So, as LB is fond of saying, life can be unfair, deal with it.


  1. Excellent analysis of the Freedom from Responsibility picture. I laughed out loud about the "preacher's salary."

    Only one small quibble, overall: isn't it also true, to some extent, that the rewards ARE socialized? We do seem to enjoy a pretty nice standard of living here, after all. Not ALL the rewards are privatized.

  2. Cathie: I would say our standard of living has to do with the efforts made by hard working, responsible and innovative persons working in a free society. For those folks, both the risks and rewards begin and end with them. They have freedom and responsibility, enjoy both the fruits of their efforts and the consequences of their mistakes.

    For our Wall Street wizards, I suspect that they have destroyed more wealth over time than they have created, and they have received huge private rewards for engaging in irresponsible behavior. At that level, by severing the tie between the reward and the consequences of the action, the incentive is to increase one's private reward by being as improvident and irresponsible as possible, since other people have to pay for the consequences. This is totally unlike my situation for example, where I suffer the consequences of every wrongheaded decision which makes me more mindful of balancing the risks and rewards at the starting gate. Though, I am mindful of blaming the RB for most of the errors.

    The homeowners that I have referenced on several occasions in the blog have many different stories, and some of them have actually suffered the consequences. Many will be rescued at someone else's expense. But in the last analysis, none of those people living beyond their means has contributed to the rewards enjoyed by society in general. Instead, I would submit that their net effect, while positive in a short term sense, is overall a subtraction from the overall progress enjoyed by the nation over time.