Wednesday, December 16, 2009

CPI & CPI Floaters/Bought Lottery Tickets: 50 AEG at 6.36 & 50 GRT at 2.79/Euro & U.S. Dollar/TC: IPB/

The RB is really confused. Yes, LB said, perpetually confused even for a No Wit. Needless to say the RB would readily admit that it knows nothing about accounting. China says the U.S. is the rich nation and consequently needs to do more than China to reduce emissions. RB asked, if China is poor and the U.S. rich, why has the U.S. borrowed close to a trillion dollars from China? RB thought that it had the answer yesterday when the discussion turned to debt being viewed by many as just another asset, but that did not sound right even to the RB. Then the light bulb went off on RB's side of the brain. Yes, if you borrow 1.4 trillion dollars more than you earn in one year, and spend all of it so that you need to borrow another trillion the next year and so on, you must be very rich indeed, the RB can see that now. But, then again, is the lender or the borrower the rich one, RB was confused, so it asked Headknocker why he did not become rich by borrowing a lot of money and spending all of it? Headknocker could only sigh, maybe it is time to go outside the organization to find a new Head Trader HK mused, so the GL instructed the LB to call one of the Mexicans on the phone. LB said that it did not speak Mexican, whereupon the HK said that LB had five minutes to learn it.

Yesterday, before staff had to leave HQ, the RB, acting Head Trader, entered two limit orders for 50 shares each and both were filled:

1. Added 50 to Glimcher Realty at 2.79 (GRT)(Owned LT Category-common and preferred) (see Disclaimer): Glimcher Realty declared a 10 cent dividend on its common shares, and the regular dividend on its cumulative preferred stocks, which includes GRTPRF. I believe that my buy of GRTPRF about a year ago is my largest percentage gain over a year or so, bought at $2.9 (GRTPRF: A WALK ON THE WILD SIDE) and those shares are currently trading over $19, plus four dividends at a rate of 75% per annum at my cost. LB said that it was responsible for that buy, no one disagreed, and RB said why didn't the Nerd buy a 1000. I added 50 shares to my LT position in the common (GRT) yesterday at 2.79. I still view this REIT as risky. At the current rate of 40 cens per year, the yield at a total cost of $2.79 would be around 14.3%. My last buy mentioned in this blog was at $1.61.

2. Bought 50 Aegon at 6.36 (AEG)(Assigned to Lottery Ticket Category)(See Disclaimer): Although the buy yesterday exceeded the $300 maximum, I am allowed now under LB's trading rules for Lottery Tickets to increased that $300 by the amount of dividends received from both Aegon common and preferred shares. I currently own AEB, AEF and AEH generating preferred dividend income. I mentioned in an earlier post that Aegon's last earnings report was okay for a preferred stock owner, but I would view it as a disappointment for the common shareholders. Aegon A general discussion of that last earnings release can be found at MarketWatch. Aegon has also eliminated its common share dividend. Hopefully, the worst is over, and Aegon's results will improve in the quarters to come. In better times, Aegon did earn around $1.5 per share (based on IFRS-International Financial Reporting Standards) excluding capital gains and losses on its investment portfolio. The 2007 Annual Report shows a history of earnings for 2007, 2006 and 2005 using both U.S. GAAP and IFRS: Form 20-F

Morningstar, which rates AEG at 4 stars. VL has it selling below its estimate of book value in 2009, but VL also shows a decline in book value from a peak of $16.91 in 2005 to an estimated $6.9 in 2009.

3. CPI and Producer Prices: The BLS reported this morning that CPI for November increased .4% on a seasonally adjusted basis. Consumer Price Index Summary As I have mentioned in several recent posts, this number would replace a deeply negative from last November and turn inflation positive year over year. The CPI is now positive year over year by 1.8% before seasonal adjustments. When the December number is released in mid January, the last significant negative number from 2008 will be replaced.

The replacement of these negative numbers from 2008 will have a significant positive impact on the penny rates to be paid by the CPI floaters: OSM, PFK and ISM. I have noted that OSM has started to move up over the past few days, as possibly more investors come to this realization. The CPI Index for November 2009 on a non-seasonally adjusted basis, which is the index used to calculate the interest payments in these floaters, is 216.330. The calculation of the penny rate is a tad obtuse, but it covers a 12 month period with a three month lag. I explained how to do this calculation in two posts from mid-November { Item # 1 CPI and CPI Floaters OSM and PFK and more detail in Item # 7: Bought 100 XLU} I am now able to calculate the OSM penny rate for March 2010:

November 2009 NSA CPI: 216.330
November 2008 NSA CPI: 212.425
Difference: +3.905
Divided by 212.425= .01838
Add the Spread (.02 for OSM; .024 for PFK)= .03838%
Multiply .03838% x par value of $25=$.9595 on an annualized basis
Divide by 12 months since the interest is paid monthly: $.079958 per share for March 2010

Now I did these calculations early this morning. They are subject to further check. If anyone finds an error, just leave a comment.

If the investor had bought OSM at 1/2 of par value, or $12.5, which could have been done recently (OSM: Historical Prices for SLM CPI LKD NT), but not now with OSM closing yesterday at $14.01, the annualized yield at the March 2010 penny rate would be double the .03838% mentioned above.

I do not even evaluate my investment in these CPI floaters based on making these monthly calculations. I recognized that the CPI numbers will be all over the place, and that there is a lag in how the penny rate is calculated, which will hurt for a time when CPI is rising after some historical negative numbers as now. The lag will help when CPI starts to turn down after some historical positive numbers. When I first started discussing the CPI floaters last December, the penny rate was still high due to the lag even though the CPI had turned negative. CPI FLoaters PFK AND OSM CPI FLOATER: OSM CPI and CPI Floaters-OSM/CDs v Treasury Bills in Dynamic Asset Allocation/ Numb to bad news Some recent discussions of PFK are in these posts /Added 50 PFK at $17.83 Bought 100 PFK/ Bought PFK in IRA/ My focus is simpler. I try to come up with what I consider a reasonable annual average estimate of CPI for the remaining life of these floaters (OSM matures in March 2017 e.g.). This smooths out the lag, and gives me an idea of what I would earn on average based on my cost. I then calculate the additional annualized yield based on capturing the spread between par value and maturity. This was a big number when I bought OSM at less than 1/2 of par value with a maturity date in March 2017. The issue with me for OSM (an not for PFK which is a senior Prudential bond) was whether Sallie Mae will survive to pay me par value. I was not the least bit concerned about the fluctuations of the penny rate and the low number over the past few months given the negative CPI numbers from late last year. Consequently, I frequently discuss news about Sallie Mae in an effort to evaluate the likelihood of survival until March 2017, always an uncertain process with many unknown and unknowable variables.

Those are just a sampling of the posts where I discuss my credit concerns. The potential reward was just too large to ignore OSM entirely at discounts in excess of 50% to par value and a relatively short maturity date, so I own 200 shares which is de minimis for me, and reflects the balance reached by a conservative investor always mindful of the risk before even considering the potential reward.

The BLS released its producer price index for November on Tuesday: Producer Price Index News Release The index rose a greater than expected 1.8% on a seasonal basis. The consensus forecast was for a .8% rise. On an unadjusted basis producer prices rose 2.4% over the 12 months ending in November, the first rise yearly rise since 11/2008.

Alan Greenspan said in a Meet the Press interview last Sunday that the Federal Reserve has done all that it can do to lower unemployment and has to focus its attention now on inflation Reuters. Greenspan also pointed out the Census Bureau would be hiring almost 800 thousand workers by April of next year for the 2010 Census. I suspect the clock is ticking more rapidly than most think on when the Fed will have to start raising the abnormally low Federal Funds rate and end its Jihad against the responsible savers in our Nation.

4. EURO (OWN DOUBLE SHORT): I recently bought the double short ETF for the EURO (EUO) at $17.17 based on a hunch that it had risen too far against the dollar. That buy was not a bet however. If my hunch plays out, and the dollar strengthens against the EURO, I may buy some stocks on a European exchange, and convert U.S. dollars into Euros to make the purchase. By buying the double short for the EURO at what I viewed a high level, when € 1 would buy about $1.5 U.S, I provided myself with some protection on the currency risk, the risk being the Euro continuing to decline against the dollar after I buy that stock in Euros. If I get a 15% to 25% increase in the double short, I may take the profit and use the profit as a mental hedge. This would imply a price range on EUO somewhere in the $19.75 to $21.5 area. The WSJ ran an article yesterday on why the tables may have turned against the Euro. This includes some weak economic numbers recently, the problems with Greece's sovereign debt, and a continuation of woes in their banking sector. I would add that the industrial production data for the Euro zone area declined .6% in October, a negative development compared to the U.S. EUROPA - Press Releases - October 2009 compared with September 2009 Industrial production down by 0.6% in euro area Down by 0.7% in EU27 I have also given more reasons why I thought the Euro was overvalued against the U.S. dollar in several prior posts: Euro vs. U.S. Dollar /Bought 50 EUO at $17.17 as a Hedge Euro & The Dollar/ The Dollar Index started to show some upward momentum yesterday, after bouncing off the 74-75 level in late November: DXY Index Charts

5. S L Green Realty (SLG) (own common and preferred): SL Green Realty Corp. announced its regular cumulative preferred dividends and its 10 cent per share dividend on its common stock. Maybe I could have bought more SLG but my history on these purchases does show how a small investor can make money with only small investments. My exposure on the common never exceeded fifty shares, and I sold the first 25 shares bought at 23.25 and kept the shares bought at $15 using FIFO accounting. The shares are now trading around $50 per share, so that second 25 share investment of about $375 is worth about $1,250. The first 25 shares were sold at $37.25 That profit came close to paying for the remaining shares before tax. The preferred shares that I own are in a retirement account and have doubled in price from my purchases at $10.5 and $11.89. But those purchases were at the tail end of several trades in the SLG preferred, along with dividend payments, that left me playing with the house's money on the preferred shares yielding over 16% at my average cost for those remaining shares. Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages

6. IPB Ex Interest Today: This particular TC is different in that it contains more than one bond. IPB contains 15 corporate bonds and treasury zero coupon bonds. Before I decided to buy shares, I wanted to know whether IPB was selling at a discount to the value of the underlying securities, a calculation that would be accurate only in a snapshot in time, based on the then existing price of IPB compared to the value of the underlying bonds at specific point in time. I bought IPB at $16.99 in August: Bought 100 of the TC IPB at $16.99 I later gave a detailed process on how to make that calculation: Item # 3: More On IPB Part 2 and Calculations On How to Recreate Trust Certificate IPB I thought that I would run the calculation based on yesterday's closing price of $19.85 before today's ex interest. The yield is 7.62% and the discount to par value is 20.6%.

If I recreated IPB based on the closing prices from yesterday of the underlying bonds, or the last closing price if none was available for yesterday, I calculated the yield of that newly created IPB at 6.964%. Since I am not in the market to buy more IPB I did not double check that calculation and I would have done the the new IPB's discount to par value calculation which I did the calculation again early this morning. Many of the underlying bonds are trading at premiums to par value, or small discounts, and I suspect that there would be an even larger yield to maturity in favor of the old IPB (i.e. the currently traded TC IPB). This of course does not mean that IPB is a buy. An investor might not want all of the bonds contained in IPB. I know that I did not want some of them when I bought IPB. Also, if interest rates start to rise, the long bonds in this TC will be hurt. The treasury strips do not pay interest, and there are tax issues associated with those securities. So, I bought IPB in a retirement account. In addition to the links previously given, I discuss this TC in the following posts:
more on ipb/ /IPB/ The calculations necessary to ascertain whether IPB is a good buy compared to the value of the underlying securities is a form of entertainment for the LB. This TC does give the buyer exposure to 15 corporate bonds and treasury strips in one purchase, with one commission, and no ongoing fees or expenses after the initial brokerage commission is paid. This makes IPB similar to a unit investment trust without any of those front end loads. I wish more of these types of securities would be packaged but this is one of the few available. The others which I am aware of are rarely traded, and by rare I mean no trades in over a year. So the initial buyers must be content to hold them.

7. Credit Card Charge-Offs: Credit card charge-offs are increasing at a disconcerting rate. Citigroup reported Tuesday that its credit card charge offs rose to 10.29% of its total card loans. BAC has the highest at 13% and J P Morgan is at 8.81%.

LB reported before the start of trading today that it had secured a new HT as requested by Headknocker, a hard worker of Mexican descent, formerly head of weed eating operations for a local lawn firm, willing to be our HT for 500 Japanese Yen per month, possibly in need of a few minutes of training before investing HK's capital. While thinking that 500 Japanese Yen per month sounded like a great deal of money, and HK wanted to discuss that further with the LB, Great Leader wanted to make the new HT welcome and asked the HT to say a few words before kicking off the trading day:

" TAN FEIZ PARA SER NUEVO HT EN EL HG. Esta esuna gran promcion

de las malais heierbade comer a Logue cesped. Yo entiendo lo

que voy a hacer en el HQ como HT. Se que la meaing de luces

verdes y luces rojas. Si, vendo todo en royo y comprar si las

luces son bastante parpadea en verdi. SI."

WHOA, said the GREAT LEADER, this ain't American lingo! LB, one of the closet Republicans here at HQ, who had taken 3 years of Mexican many moons ago helpfully suggested it was the Mexican tongue because it remembered the word "SI" as Mexican lingo from its long study. The Great Leader promptly fired the new HT, saying he didn't give a damn what language it was, saying how can I kick his ass if he don't understand American? Whereas all the HTs held their collective breaths, worried about what would happen next and wondering of course that we were not sure anymore whether our native tongue was American or Mexican, but most thought that it had to be both. The former HT was heard to mutter while leaving HG something like "screw you Headknocker, recorder su propio arbustos." For any reader who speaks Mexican, we did out best to transcribe what was said by our former HT as he left HQ to resume his duties as the eater of weeds, but we are all most unworthy on all matters relating to any foreign language.

For a minute, the remaining assembled traders at HQ thought the Great Leader was going to start crying. Then he sighed again, and said: "Bring back the Old Geezer from the Old Folks Home. The Lord must be smiling down on HQ, that is my only explanation, for how else could HK's capital position be now up by 10% from October 2007?"


  1. The Mexican's words, loosely translated by Babel Fish:

    "SO FEIZ TO BE NEW HT IN THE HG. This esuna great promcion of malais heierbade to eat to Logue turf. I understand that I am going to do in the HQ like HT. That meaing of lights green and red lights. If, selvage everything in royo and to buy if lights are enough blinks in verdi. IF."

    And that's a very big "if."

  2. Cathie: si muchas luces verdes son intermitentes ahora, pero cuanto tiempo es la cuestion?

    Since this is Christmas, the RB becomes transfixed by the flashing red and green arrows here on the trading screen at HQ. I use the YF Marketracker service sometimes during the trading day (a subscription service which costs annually about $170 or so) which shows movement in green and red boxes and arrows and gives me real time quotes and news on my monitor lists, most of which contain 200 securities each. RB compares those lights to Christmas lights and starts to lose the small amount of focus possessed by it, so HK had no choice but to go with the Old Geezer as HT now.

  3. "Cuanto" indeed.

    Happy holidays!