Bought 50 PJI at 20.85/SEC Charges GS with Civil Fraud/Sold 101 SO at 33.93 & Added 50 FE at $38/GE Uninspiring/BAC/The Entitlement Society

1. VIX: The VIX did not particularly like the news about Goldman, hitting 19.7 intra-day after closing on Thursday at 15.89. The VIX closed at 18.31. I only use closing numbers in the Vix Asset Allocation Model. And I did not care for what I viewed as lackluster earnings report from the perennially hapless General Electric.

2. Bank of America (own common, equity preferred floater, bonds): Bank of America had a decent 1st quarter report. The bank earned 3.2 billion in the quarter. Provision for credit losses fell 3.6 billion from the year ago quarter. Revenue increased 27% from the 4th quarter of 2009. The capital ratios fell slightly from the last quarter. As of 3/31/2010, the tier 1 common ratio was 7.6%, the tier 1 capital ratio was 10.23%, the total capital ratio was 14.47%, and the tangible common equity ratio was 5.24%. The bank explained that the capital ratios weakened slightly in the quarter due to new accounting guidelines on consolidation, and the liquidity position of the bank actually strengthened during the quarter. Credit quality across most commercial portfolios improved during the quarter. Earnings beat expectations by 19 cents per share. Brian Moynihan said that 2010 "appears to be one of a continuing credit recovery".

3. General Electric (own common): There is nothing positive that I can say about GE, compared to other industrial companies or to other large financial institutions with the possible exception of Citigroup. GE reported earnings of 21 cents a share from continuing operations, a 18% decline from the 1st quarter of 2009. Revenues missed estimates and declined 5% from a year ago. While Immelt said that he saw encouraging economic signs, orders for big ticket items fell 8% to 17.1 billion compared to the year ago period. The non-GAAP did beat expectations but GE warned last month that earnings would be weaker than a year ago.

GE Capital went into the Near Depression period peddle to the meddle, and their collective management skills make Chuck Prince look good. It will be impossible to believe the hype about the alleged management skills at this company ever again.

4. The Entitlement Mind Set: A few days ago, there was a story about the financial problems of Los Angeles on the CBS Evening News. The Mayor of Los Angeles was saying that the city was going to run out of cash in May and he wanted to cut services. The response was about what you would expect, protests about cutting any service notwithstanding the fiscal crisis. Sometimes, I do not believe the vast majority of people would learn anything of a lasting nature even if all of the government checks started to bounce. There is simply a deep, ingrained mind-set of entitlement regardless of the ability to pay for it. L.A. is no different than many large cities and states.

Greece is the latest example of the end game for an entitlement society. Basically, the best thing that could happen to the citizens of Greece is to let them pay the price, no matter how painful, that is the natural and inevitable consequence of their actions. The WSJ ran a story today about a Brookings study which concluded that bribery, corruption and cronyism deprive the Greek state of 20 billion Euros per year. Will anything change as a result of the massive bailout being discussed by the IMF and the EU?

5. Goldman Sachs (own TCs JBK, GYB, & PYT-all containing a junior GS TP): I thought the market was having a nervous breakdown on Friday after the SEC filed civil fraud charges against Goldman Sachs and one of its 31 year old wunderkinds. If the allegations are true, then GS deserves it. There can be no doubt in anyone's mind that the Masters of Disaster only give lip service to the interests of their clients. The SEC suit just exposes another of a very long list where a brokerage firm acted in a manner contrary to the interests of their clients. The charge is that a hedge fund, Paulson & Company, who made a fortune on the subprime meltdown, helped GS design a pool of subprime mortgages which the hedge fund would bet against, and then GS sold that fund to its unsuspecting clients. WSJ.com (PDF of the Complaint: online.wsj.com.pdf) Here is some pertinent language in the Complaint which is just disgusting if true:

"5. The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion for Paulson. "

After reading the Complaint, the SEC had no choice but to file civil fraud charges. Even so, it is a civil case, not a criminal one, and will likely be settled for a sum of money in my opinion. It is not the end of the world. 

An article in the NYT claimed that Goldman's losses would "most likely" be "considerably less" than 100 million. The market took around 13 billion out of GS's stock price on Friday, and I noted that many of the GS long bonds were trading down 4 to 5%.

The NYT summarized the SEC allegations succinctly. The subprime pool was created with the help of a hedge fund, sold to investors without disclosing material information and was designed to fail.

Goldman claims that it did nothing wrong. In its press release, Goldman called the factual and legal assertions made by the SEC to be "completely unfounded in law and fact". Goldman Sachs Responds

So the Masters of Disaster have found yet another way to charge me for the consequences of their insatiable avarice. There seems to be endless ways that average Americans pay for the unrepentant sins of Wall Street.

The two synthetic floaters that I own in retirement accounts that contain the GS TP maturing in 2034 as their underlying security had particularly bad days on Friday. GYB fell 9.85% today which is just bizarre. Added another 100 GYB in Regular IRA AT $11 Bought GYB at $11 PYT, a similar security linked to the same GS TP also had a bad day. Bought 70 PYT at $15.75 Bought 50 PYT at $11 Bought 50 PYT in Roth at $ 13.34 Sold 70 PYT at 18.66 and Bought 70 GYB at 18.49 in Regular IRA The volume for both of these securities was substantially in excess of the average.

See Generally: Synthetic Floaters & Analysis of Prior Question about Goldman Sach's Floaters

See discussion about fraud charges at Tech Ticker. The SEC's charges against Goldman were foreshadowed in a December 2009 NYT investigative story.

6. Sold 101.358 of SO at 33.93 and Added 50 FE at 38 (see Disclaimer): These transactions were in a satellite account that is primarily devoted to a savings account used to purchase FDIC insured certificates of deposits in staggered terms. I opened a brokerage account tied to the savings accounts a few months ago since I was unwilling to rollover my CDs as they came due. The stock purchases are relatively conservative and consist of higher yielding common stocks. In this account, I am not a long term investor on any stock purchases, mostly just biding time until CDs start to pay me more. So there is going to be a lot of short term trading in that particular account.

The Southern shares were purchased at 33.27 with the proceeds from the sale of 100 XLU at at 31.25, which clipped a quick $200+ profit on the XLU shares with a dividend. With the SO transaction, I clipped a small profit on the shares plus one dividend. I view that as a success considering my objective, and comparing the result with what I would have earned on the amounts invested in that online savings account or buying a CD paying 1 to 1 1/2% for a year.

I bought another 50 shares of FirstEnergy (FE) at $38 which has a higher yield than SO at my purchase price. The other 100 shares of FE were recently purchased at $39.54 in another account which is not managed with such short term objectives. So, I am likely to keep those 100 shares bought at a higher price far longer than the 50 shares bought on Friday in the satellite account.

FE's quarterly dividend is 55 cents per share. At a current $2.2 per share annually, the yield at a total cost of 38 is about 5.8% with the next ex dividend date on 5/5. I have nothing to add to my previous discussion of FE from the April 8th post. The SO yield at the price sold is around 5.16%.

7. Floyd Norris Column on Savings Account Yields: None of the daily readers of this blog need to be reminded about the low yields paid on savings now. Still, the column written by Norris in the NYT highlights the problem and also contains an informative chart on the spread between the 1 year and 10 year treasury. This spread is at a historic high. Norris looked around to see what the big banks were offering for $5,000 in a regular savings account. The online bank that I referenced is paying a tad over 1%. J P Morgan and Wells Fargo were offering .05%. This will generate around 21 cents per month in interest income before tax, and before taking into account the lost purchasing power due to inflation, now running at over 2% per year. So, if I wanted to earn say $50,000 to support me during my retirement years, I would need around 100 million in that savings account now according to Norris. RB just said time to raid the piggy bank.

Yes, the banks and Masters of Disaster are rolling in dough again thanks to Uncle Ben's Jihad against savers. Now, doesn't that create a warm glow in everybody knowing they are doing their fair share to fatten the wallets of bankers at Goldman Sachs and their Wall Street brethren who made billions for themselves as their collective reward for bringing the financial system to its knees. I am not bitter, just stating the facts.

8. Bought 50 TC PJI at $20.85 (see Disclaimer): This had to be a LB buy near the close today. LB kept commenting throughout the day the bizarre behavior of those selling GS bonds based on the SEC's civil charges. So, the LB decided to throw its weight into the ring and buy 50 shares of the TC PJI at $20.85. This TC contains a senior GS bond maturing on 2/15/2033. The TC has a 6% coupon and a $25 par value. The underlying senior bond has a slightly higher coupon at 6.125%. The trading in the underlying bond was active today as shown at the in the relevant FINRA page. The closing price was 96.501 on 4/16/2010 for a current yield of 6.35% (the last trade on 4/15 was at 101.82). The TC's current yield at a $20.85 total cost would be 7.194%. The YTM would also be greater for the TC given its larger percentage discount to its $25 par value. Using the Morningstar Bond Calculator I came up with a YTM on the TC PJI at a $20.85 cost to be 7.64%, and a 6.51% YTM for the underlying bond at the 96.501 price.

PJI Prospectus: www.sec.gov

The prospectus for the underlying bond can be found at www.sec.gov.