Wednesday, June 30, 2010

Sold 50 Wain at $18.7-Being Acquired/Bought 200 WIW at 12.29/Bought 50 CCNE at 11.06/Case Shiller/Hussman Stark Warning to Investors/

Fidelity started a new service which allows their customers to measure the performance in their accounts. I made a snapshot of the graph for my main taxable account since 2009. If I am fearful of anything now, it is losing what I have gained over the period of time shown in this graph, which put me significantly ahead of the balances from October 2007 adjusted for the maximum contributions made into the IRAs from this account. The graph understates performance in 2009-2010 since I withdrew $6,000 from the account shown in this graph to fund the IRAs in early 2009 and again in 2010. I have not contributed any funds to the taxable accounts since 1984 and have been funding the IRAs out of the main taxable account. I am up slightly in 2010 in this account and more in the IRAs bringing the year's appreciation to around 2.6%. I am not satisfied with the result so far this year.

I am conflicted however. While concerned about potential losses, I see a large number of opportunities being presented daily in common stocks. And, the alternative "safe" investments such as U.S. treasuries, already extremely unattractive from a yield standpoint, are becoming even less desirable as fearful investors flock to them and away from risk assets. One way that I have historically resolved that conflict is to buy stocks in very small increments with cash flow coming into the accounts. My money management revolves around increasing cash flow and investing that cash flow mostly in a manner to generate a compounding effect over time. I do not have any psychological or financial issues about investing cash flow even in the most fearful of times, as I continued to do in the October 2008 to March 2009 Near Depression period. However, that approach is limited to the taxable accounts. Cash flow into the retirement accounts will not be invested in stocks anytime soon. In fact, I have just about eliminated my exposure to to stocks in those accounts.

The ^VIX rose 5.13 or 17.69% yesterday to close at 34.13. We have been in what I call an Unstable Vix Pattern since August 2007. Vix Asset Allocation Model VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern I view this pattern to be a dangerous one for most individual investors, all buy and hold investors facing situational risks, and one that has to be traded to advance one's capital position.

The 10 year treasury yield fell to 2.94% yesterday. Bloomberg The five year note is yielding 1.77%. The two year note closed at .6%. The 3 month T Bill is at .16, free money for the treasury for all practical purposes. Randall Forsyth in his column opined that these yields indicate a market "discounting deflationary, depression conditions". I would tend to agree that the treasury bond market yields are certainly more consistent with a far more dramatic slowdown in growth than mainstream economists currently predict.

1. Sold 50 WAIN at $18.7 (see Disclaimer): I thought that the rise in Wainright Bank (WAIN) shares yesterday had to be a misprint when I first opened the stock portfolio containing my regional bank stocks. The stock was up almost 100% as the market was tanking. I then noticed that Eastern Bank was acquiring WAIN for $19 in cash: MarketWatch The shares closed on Monday at $9.62. I bought those 50 shares at 8.72 about a month ago. I did not see any reason to keep the shares so I sold them yesterday at $18.7. This one falls under that category about the blind squirrel. Still over the life of the regional bank basket strategy, which will be 5 to 10 years from its inception in March 2009, I do anticipate that a number of these small banks will be acquired, hopefully at premiums.

2. Bought 50 CNB Financial (CCNE) on Monday at $11.06 (Regional Bank Stocks Basket Strategy)(See Disclaimer): CNB is another micro cap bank with 22 banking locations in Pennsylvania: CNB Bank - Locations & Hours At a $11.06, the dividend yield is about 6.1%: CCNE: Summary for CNB Financial Corporation. The one analyst that follows the company estimates that CNB will earn 98 cents in 2010 and $1.16 in 2011. CCNE: Analyst Estimates

CNB Financial was one of the 10 banks mentioned in this article from TheStreet as having a solid dividend. I would point out that the author has the bank's location in error.

CNB recently completed a stock offering at $10.25 per share raising net proceeds of 32.1 million: Press Release This stock offering represented a substantial increase in this small banks market capitalization. The prospectus for the offering can be found at the SEC's web site. CNB did not participate in the TARP program: SEC Filde Press Release

The bank earned 25 cents in the last quarter, down from $.26 in the year ago quarter (page 4 Form 10-Q) As of 3/31/2010, non-performing loans as a percentage of total loans was 1.21% and the net interest margin was 3.57%. The tier 1 capital ratio was at 10.47%, well in excess of the 6% for well capitalized banks.

3. The Malaise in the Hampton's: I would submit that an objective view of the Obama administration can not possibly be formulated by Cramers of the world. You here them complain repeatedly about new federal regulations and Washington's Jihad against American business. When Cramer is venting the most hyperbole on this subject, as he did on Monday's show, the low multiple of the stock market is caused by the Democrats trying to destroy the very fabric of American business in his opinion. Due to the "palpable and justifiable fear that earnings will be crimped by Washington", the market is not cheap at just 12 times earnings and the shrinkage in the market's multiple is deserved given Washington's hostility toward business. Earnings are "under attack" or "even wiped out by meddling, meddling from an activist anti-business federal government". (2:30 to 3:05 CNBC). I have no doubt, by watching the interviews with so called professional money managers on CNBC, that his views are shared by many of those managers who probably share their opinions frequently with one another. And unfortunately for their clients, they manage money with those information biases front and center.

I suspect when the earning from the financials and the healthcare companies, apparently the two primary targets of Obama's Jihad against business, are reported in the months ahead, the preposterous views being expressed by those who believe any regulation will bring an end to American capitalism will be exposed as meaningless, unfounded gibberish. I would view the regulations in the "financial reform" bill to be a modest response to the wreckage brought to the world by the Masters of Disaster. The healthcare bill will probably end up benefiting virtually the entire healthcare industry: hospitals, device companies, and Big Pharma.

4. Hussman's Stark Warning to Investors: In his most recent market commentary, John Hussman, manager of the Hussman Funds, gives a stark warning to stock investors. He believes that the American economy is headed into a second leg of a "challenging downturn". While I do not agree with him, he offers a cogent analysis to support his position. His Hussman fund was up just 5.9% in 2009 reflecting his on-going bearishness. HSTRX - Fund returns I regard his argument that a fall in the ISM purchasing managers index below 54 to portend all kinds of economic pain to be just silly however. His funds are currently positioned for a downward spiral. HSTRX - Fund Top 25 holdings This fund did perform well in 2008 with a total return of 6.3%. Morningstar has it rated five stars and classifies it in the conservative allocation category.

I do not have a position in Hussman's mutual funds and have no intention of starting one. I can implement the fear trade without assistance.

5. Zions (own ZBPRA, ZBPRB, ZBPRC): This article from TheStreet names Zion's as one of the financial institutions, along with most regional banks, that mostly dodged the "financial reform" bullet.

6. Case Shiller: The headline of the Case Shiller report, covering home prices in April 2010, was that home prices do not yet show "signs" of a "sustained recovery". The 20 city composite did show a gain of 3.8% over the levels from April 2009. The chart at page 3 shows prices hovering at 2003 levels. Most cities showed gains in April compared to March. The data can be downloaded from

7. Sold 2 Double Shorts When DJIA Fell More than 300 Points Yesterday-Bought 200 WIW and 500 CAD with Most of the Proceeds (See Disclaimer): I guess the double shorts made me feel a little better yesterday. I decided that I would prefer having an income producing security so I bought the 200 WIW back which I just sold at $12.5. WIW is a CEF that invests mostly in U.S. treasury inflation protected bonds. Fund Overview The CEF was selling at over a 7% discount to its net asset value. This is a link to the fund's last annual filed with the SEC.

The fund closed yesterday at a $12.3 with a net asset value of $13.3. This translates into a 7.52% discount to NAV at yesterday's closing price.

I previously discussed buying shares in Item # 4: Bought 300 of the CEF WIW at $11.94

I can not buy a U.S. 10 year note yielding less than 3%. I refuse to do it. About all that I can do is to buy this TIP CEF at a discount to its NAV, which gives me close to a 3.9% yield paid monthly with some inflation protection provided by the TIPs. The NAV can be found at the Western Asset site, the CEFA - Closed-End Fund Association web site, or at the WSJ CEF page for Investment Grade CEFs. This brings me back to owning 600 shares of the Claymore TIP CEFs since I still own the 300 shares of the CEF IMF bought at 16.51 in May. IMF closed yesterday at $16.62 and a discount of 8.38% to its NAV of $18.14.

Both of these CEFs pay monthly distributions which is always a plus for me. Still, these kind of buys are very low expectation purchases. I would be satisfied to collect a few monthly dividends and to sell some of the shares at a $1 profit. Buying those WIW shares back yesterday was more of an insurance kind of buy in case the dire forecasts being thrown around turn out to be prescient rather than the usual fear mongering. I view many of the recent bond buys to be placeholder kind of purchases.

The CAD also fell against the USD as part of the fear trade so I added $500 to my CAD position.

Tuesday, June 29, 2010

Krugman-World on the Cusp of a New Depression/Bought 50 TC JZV at 22.6/Bough 50 USBPRF at 22.54-Sold USHPRH at 20.35/Bough 50 NBB at 19.67

Markets are having a bad day. The Shanghai Composite (SSE) fell 4.27% and Hong Kong's Hang Seng index lost 2.3%. The Shanghai Composite is at a 14 month low and is trading below its 200 and 50 day moving averages. SSE Composite Index Index Chart All of the major Asian indexes fell in trading today: Asia Pacific Indices The major European indexes were falling over 2%. Europe Indices The Euro has resumed its slide against the USD. There is also some concern about liquidity in the European banking system, as their banks have to pay the European Central Bank back on Thursday 442 billion in Euros that the banks borrowed at low rates one year ago. Reuters It does not help matters that the Greeks have just shut down public services in one of their periodic strikes protesting the mild austerity program of their bankrupt government. WSJ There is also some nervousness in general about the slowdown in the U.S. economy and the upcoming jobs report on Friday. So, I expect a bad day today with the DJIA falling below 10,000.

1. Paul Krugman-On the Cusp of Another Great Depression: Most of the time, it is hard for me to take Krugman seriously as an economist since his political views heavenly influence his economic opinions. I could say the same about "conservative" economists. Economists: Secular Theologians with a lot of Numbers In his column in the NYT, Krugman argues that the world is in the early stages of another depression. A discussion of Krugman's column can be found in this Seeking Alpha article and this discussion at Tech Ticker.

The problem in Krugman's view is that governments around the world need to increase their spending to fight deflation. Although governments in developed countries will still be running large budget deficits as a percent of their respective GDPs, even after the G-20 nations announced their professed intent to cut spending, Krugman views those measures as a return to the Herbert Hoover mentality and a resumption of "hard-money and balanced -budget orthodoxy". Perhaps, some people confuse austerity with less profligacy.

There is nothing in the current policies of the Federal Reserve or the European Central Bank that would support Krugman's "hard money" thesis. The current policies are nothing like the rigid adherence to the gold standard and the tightening of monetary policy which probably turned a recession into the Great Depression after the 1929 crash. Item # 4 More On Parallels with the 1930s/ Governments around the world are still spending borrowed money like crazy including the U.S., which is currently running one trillion dollar plus budget deficits. If I did not know that tidbit, and my knowledge was limited to only the liberal hyperbole masquerading as an opinion of an economist, I would believe the U.S. and Europe are on the verge of having balanced budgets. How could anyone with a semblance of objectivity call the current budget deficits in developed nations a product of "balanced-budget orthodoxy".

An opinion more ominous than the one expressed by Krugman is expressed by the RBS credit chief, Andrew Roberts, and summarized in this CNBC article. Roberts believes that stocks and commodities are about to collapse, and the only refuge will be in gold and maximum long-duration bonds in safe-haven markets which would include U.S. treasuries in his view. Other than the views currently being expressed by Robert Prechter, who apparently believes the DJIA is headed for a sub-1000 number ( MarketWatch), it would be hard to find anyone more bearish on equities than Roberts.

ETFs that would be consistent with Robert's forecast and recommendations would be treasury bond ETFs including iShares Barclays 7-10 Year Treasury Bond Fund (IEF); iShares Barclays 20+ Year Treasury Bond Fund (TLT), and PowerShares Exchange-Traded Funds | 1-30 Laddered Treasury Portfolio | PLW. The 10 year treasury continued to rise in price and fall in yield yesterday, with the current yield sitting just a tad over 3% at 3.02%: Bloomberg This is the link on the weekly 10 year treasury yields since 1962: There were some lower yields in the period between 12/5/2008 to 5/1/2009, but my heart started to race some scrolling through the numbers since 1962.

A believer in the scenarios outlined by Krugman, Roberts, and Prechter would also not be buying any bank bonds, particularly junior securities. So everyone needs to form their own opinions about such possibilities.

2. Sold 50 USBPRH at 20.35 and Bought 50 of the TP USBPRF at 22.54 (See Disclaimer): This is a typical trade for the LB, HQ's current head trader. Over the past three months or so, the general thrust has been to improve cash flow into the accounts in a variety of ways, while at the same time booking both short and long term capital gains. I have also been moving up the capital structure to improve the overall credit quality of my bond portfolio. USBPRH, the equity preferred stock, yields less than USPRF which is a TP. Both securities originate from U.S. Bank.

USBPRH is an equity preferred floater, issued by U.S. Bancorp (USB), that was ex dividend yesterday. The shares were purchased at $17.47 and sold at $20.35. Since I view it as likely that the applicable rate for this floater will continue to be the 3 1/2% guarantee for several months, I decided to sell it and move up the capital structure by buying a TP that contains as its underlying security a junior bond issue from USB.

Most of my readers are already familiar with the TP legal structure. For USBPRF, US Bancorp forms a delaware trust that sells preferred stock in that trust to the public. The trust then uses the proceeds to buy a junior bond from USB. The TP security represents an undivided beneficial interest in that junior bond.

The TPs from U.S. Bank are rated investment grade. Moody's rates them A1. (see Trust Preferred Securities Table - site registration required). Given their higher credit rating than the BAC TPs which I have bought recently, the USB TPs have a lower yield than the ones issued by BAC.

USBPRF has around a 6.55% current yield at a total cost of $22.54. USB Capital VII, USBPRF Stock Quote At the current prices, USBPRF has about a 2.25% yield advantage, though the distributions would be taxed as interest whereas the equity floater pays qualified dividends. The equity preferred stock USBPRF has no maturity date and its dividends are non-cumulative. The TP has a maturity date, and its distributions are cumulative.

The TP USBPRF is a typical bank trust preferred security. Distributions are cumulative but may be deferred for up to 5 years provided no distribution is made on a junior securities, such as common stock or equity preferred stocks such as USBPRH.

Both the TP and the underlying bond mature on 8/15/2035. Par value is $25 and the coupon on the TP is just 5.875%. Interest payments are made quarterly with the next ex date in August.

This is a link to the prospectus: e424b5

While it is too early to know what USB will do with its TPs when and if the financial reform bill becomes law, it is possible that USB will redeem some or offer to convert them into common shares. Item # 1 Trust Preferred Securities & Financial Reform At the current time, this is just speculation.

Apparently, the death of Senator Byrd may complicate the passage of this legislation: CNBC Two Democrat Senators had voted against the original senate bill on the grounds that it was not tough enough. One of those, Senator Feingold, said that he will not vote "to advance it" because he does not believe the bill addresses cures the causes of the Near Depression. I would agree with him on that point, but would seriously doubt that Feingold or any politician would vote for a bill that actually addresses the root cause of Near Depression-easy credit that fueled a bubble in housing prices.

The two Maine republican senators may vote the bill but have not yet expressed their intentions. But Byrd's death does put the squeeze on the Democrat's to secure 60 votes in the Senate to cut off the GOP's expected filibuster. The Democratic governor of West Virginia can appoint a replacement to fill Senator Byrd's vacant seat which expires in January 2013.

3. Bought 50 JZV at $22.6 (See Disclaimer): JZV is a trust certificate containing a senior CNA Insurance bond as its underlying security. I bought these shares in the ongoing effort to improve cash flow into the taxable accounts, and this purchase was made in a new satellite brokerage account that allows me to buy exchange traded, principal protected securities. Item # 2 Principal Protected Notes . Fidelity may be the only brokerage company in the known universe that currently prohibits customers from buying these securities: Fidelity Prohibits New Purchases of SIPs

I was an active trader of JZV during the Near Depression period, racking several gains before ending up with 50 shares bought at 9.93 in March 2009. Some of the prior trades are linked in that post. Needless to say, I wish that I had bought more at the $9.93. The current yield at that price is around 17.6% at a total cost of $9.93 and the YTM is approximately 20.54% at that total cost number (using Morningstar Bond Calculator: Yield to Maturity) I still own those shares.

The TC has a lower coupon at 7% compared to 7 1/4 for the underlying bond contained in the TC. The underlying bond and the TC both mature on 11/25/2023. The FINRA page shows the underlying bond currently trading around its par value. Moody's rates the bond at Baa3 as shown on the above linked Finra page. Interest is paid semi-annually, with the last payment in May.

The current consensus E.P.S. estimate for CNA Financial is $2.52 in 2010 and $2.75 in 2011: CNA: Analyst Estimates for CNA FINANCIAL CORPORATION This insurance firm reported $.82 in earnings for the first quarter of 2010 (see page 4 e10vq)

As for the latest purchase, the current yield is a more sober 7.74% at a total cost of $22.60 with the YTM at 8.31%. Still that yield looks good compared to the alternatives now.

5. Bought 50 NBB at $19.67 (see Disclaimer): NBB is a closed end fund that is one of Nuveen's new products. I decided to initiate a position with 50 shares and buy more if and when the discount to net asset value expands. The current discount is less than 2%. NBB - Nuveen Build America Bond Fund As suggested in the title, this CEF will be buying taxable municipal bonds. The initial monthly distribution rate has been set at $.117 per share which gives the fund a current yield over 7% at the $19.67 price. NBB This fund will apparently be using some leverage. I discussed two recently launched ETFs that invest in Build America Bonds in a prior post: Item # 1 Build America Bonds These ETFs are from Powershares Build America Bonds (BAB) and SPDR Nuveen Barclays Capital Build America Bond ETF (BABS).

There is one nit in NBB. The Build America Bonds program is set to expire at the end of this year. The Nuveen fund will liquidate in 2020 in the event no new BABS are offered at any time in the two year period ending on 12/31/2014.

I sold one of the Lottery Tickets that did not pay a dividend which has not previously been discussed as part of this ongoing effort to raise the cash flow in the various accounts. Those funds were used to buy NBB.

I will discuss my remaining trades in the next post. I did add a bank to the Regional Bank Stocks Basket Strategy, currently with 38 names, which was mentioned in this CNBC story which originates from the I already own several mentioned in that article including Wilbur (GIW), Merchants Bancshares (MBVT) and Trustco (TRST) 10 More Bank Stocks With Solid Dividends - TheStreet. The author of that article is using a screen that includes a Texas Ratio of less than 20%.

Monday, June 28, 2010

Barron's on BIG Pharma Stocks: NVS SNY BMY Roche PPH /St Joe/

While others may disagree, I believe that the fiscal restraint shown by the European leaders at the G-20 conference is positive for the markets. NYT I also suspect that it will provide some support to the Euro. The recent rapid decline of the Euro was caused by EU members unable to control spending as their budget deficits soared as a percentage of their GDP.

1. Barrons Favorable Article on Big Pharma {own Novartis (NVS), JNJ, Roche, Sanofi (SNY), Bristol Myers (BMY) and the ETF PPH): At the start of this year, I did not have a position in any of the Big Pharma stocks. I only started to add positions over the past couple of months based on what I believed to be favorable valuations. The bearish case is well known and revolves around the expiration of patents on a number of key drugs. The easier targets for blockbuster drugs, such as cholesterol and high blood pressure, have already been addressed for the mass market. Blockbuster drugs for those conditions have already lost their patent protection (Norvasc, Zocor, Pravachol) or soon will (Lipitor, Diovan). Over the last decade, moreover, several of the drug companies have spent billions with little to show for their efforts so far in approved blockbuster drugs. Pfizer would be at the top of my list in that category. All of those factors have led to many of the Big Pharma stocks to sell at low multiples with several sporting dividends in the 4% to 6% range. There also seems to be little or no focus on the good news.

One of my recent purchases was Roche. The article in Barron's highlights Roche's cancer franchise, its current P/E of 11 and the possibility that the stock could appreciate by over 30% "in coming years" by applying that same multiple to earnings growth. I bought 100 shares earlier this month: Added 70 RHHBY at 34.07-Completing Round Lot

Novartis is also mentioned. As the author notes, NVS has a 4% dividend yield at the current price, and is selling at less than 10 times earnings even though it "has one of the better growth outlooks in the group". I bought some shares last week. Bought 100 NVS at 49.08 One negative mentioned by Barrons was the multiple offered by Novartis for the Alcon shares that it does not already own. The Barron's article argues that the European companies "look better" than the U.S. drug companies, due to their greater presence in emerging markets.

For both of these Swiss companies, my prior discussions delved into the impact of the recent decline in the Swiss Franc on their respective ADR prices compared to the ordinary share price on the Swiss stock exchange.

I also bought the ETF PPH which seemed like a good idea at the time. This ETF has a fixed allocation to shares of several U.S. pharmaceutical stocks. I was early on this purchase, buying 100 PPH at 65.42 in mid April. Each 100 shares of PPH contain the following:

Abbott Laboratories 14 shares
Bristol Myers 18 shares
JNJ 26 shares
Lilly 10 shares
Merck 30.07 shares
Pfizer 69.82 shares

There are smaller positions in Allergan, Biovail, Forest Laboratories, Hospira, King Pharmaceuticals, Medco, Mylan, Watson, Zimmer and Valeant Pharmaceuticals. Pharmaceutical I would add that the other ETFs mentioned in the Barron's article (e.g. Vanguard Health Care ETF) do not focus on Big Pharma names and contain a mixture of healthcare stocks.

I have been considering the purchase of a small number of LLY shares, but have not made a decision. I was tempted last week when the price fell below $34. I am more likely to add 50 shares to my position in Sanofi (SNY) before initiating one in Lilly. Bought 50 SNY at 34.21 Those SNY shares were bought before the recent ex dividend date (5/17). Sanofi-Aventis SA, SNY Stock Quote SNY is selling for about a 8 P/E based on estimated 2010 earnings and has the largest presence in emerging markets at 30% of its revenues, as noted in the Barron's article. A significant part of the decline in SNY since November 2009 is attributable to the EUROs decline against the USD (see discussion at Item # 1 Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas)

2. St. Joe (JOE)(own): I bought shares of St. Joe at $15.69 in March 2009. I was thinking about selling those shares after they crossed above 30 but decided to stay with the shares. St Joe has historically been valued as an asset play, and its asset is around 405,000 acres of land within 15 miles of the Gulf Coast along the Florida panhandle. Almost 75,000 acres are in proximity to Panama City where a new international airport just opened. Item # 1 St. Joe There is a debate occurring now about the impact of the gulf oil spill on the value of those land holdings.

The market's verdict so far is the oil spill has impaired the value of St Joe's land. But, it is not clear how much of the fall from $37.13 on 4/29 to $22.87 as of Friday's close is due to the oil spill or the market's correction and heightened concerns about a double dip. The Deepwater Horizon exploded on 4/20/2010 and the magnitude of the spill was becoming apparent by the end of that month: Timeline The S & P 500 hit its high in the cyclical bull move starting on March 9, 2010 on April 23rd at 1217.28. The close last Friday was at 1076.76, a decline of 11.45%. JOE's decline from April 23rd is about 35.55% or about 24% more than the market.

While it is far from certain, it is difficult to see how the oil spill will have a long term impact on land values along Florida's panhandle. So, I would be in the camp that St. Joe's long term appeal has not been diminished by the oil spill. But it is clear that many market participants are not going to wait for that final verdict to arrive, and their reaction so far is to sell the stock. I did not anticipate the severity of this stampede.

Cramer put St Joe on his sell block last week with a "sell, sell, sell" recommendation even though the stock has lost almost 38% of its value from the recent high of $37.13 on 4/29. Dan Fitzpatrick, the technician a TheStreet agrees with Cramer. If I was inclined to take their recommendation on St Joe, I would go ahead and take my long term capital gain on the shares bought at $15.69. Instead, I am considering adding to my position with the caveat that any purchase now will have to be held for years. I will track just how prescient the sell recommendations from Cramer and Fitzpatrick turn out to be. The sell recommendation was made on Thursday, June 24 with the share price at $22.47: JOE: Historical Prices for St. Joe Company

I would agree with Cramer that it will be difficult for this stock to mount any sustainable rally given the short term thinking that dominates the market's approach to valuation which he shares in spades. I would also agree that a potential recovery of damages from BP is insufficient to stop the current bleeding, though it may help the stock to recover once the full extent of the damage is known. I would add that the spill is likely to delay the recovery of the panhandle's real estate market which suffered a substantial decline during the Near Depression period.

A more upbeat assessment can be found in this article in Barrons written by Bob O'Brien.

I am no hurry to add to my current position. I suspect that the stock is pretty much washed out based on what is known now. If BP's relief wells work, and most experts apparently believe they will, then I may be in a better position to assess the damage then based on news reports of how much oil is washing up on the shoreline. If the relief wells fail, then I would not add to the position.

For those who routinely engage in hyperbole about events or gyrations in the market, it is not surprising that they would elevate the oil spill to a far greater impact on property values than the ever present hurricanes which have caused widespread damage over the years along Florida's coastline.

A mutual fund with a large stake in St Joe is the Fairhome, whose lead manager is Bruce Berkowitz (FAIRX - Fund Top 25 holdings). Berkowitz recommended St Joe in a March interview in Barrons. Another major holder is the Janus Contrarian fund: JOE: Major Holders for St. Joe Company (The) Common This data may be stale.

Saturday, June 26, 2010

Trust Preferred Securities & Financial Reform/Bought 50 AFE and 30 SUSPRA in Roth IRA/Bought 50 CSCO and 30 MSFT/Sold 100 LINE at 25.90

1. Financial Reform and Trust Preferred Stocks: There is a provision in the "financial reform" bill that impacts trust preferred securities. In a prior post, I discussed how these securities are allowed to be treated as Tier 1 capital by the bank, while allowing the bank to deduct the interest payments. Item # 8 Added 50 of ABWPRA These securities are similar to the European hybrids, in that they are part of the bank's capital for regulatory purposes but are in reality bonds. This is part of my earlier discussion about them:

"The Federal Reserve requires several characteristics to be present before it will allow a bank holding company to include TPs as part of Tier 1 capital. One requirement, found in all of the prospectuses that I have examined, is a deferral right for a minimum of five years for distributions. Another is a long maturity, generally 30 years from the date of issuance is deemed to satisfy this requirement. There are other requirements not pertinent to the buyers of these securities. A third is that these securities have to be subordinate to all other debt. These requirements explain the deferral provisions, the low priority, and the long maturity. But, unlike the hybrids issued by the European financial institutions, the American institutions do have maturity dates for their TP securities, and a long one of 30 years is still better than no maturity at all. And, the American government has not come close to announcing, let alone implementing, a burden sharing policy for hybrid owners. Another distinction is that the American TPs do have limits on the period for deferrals, generally five years, and period limits are absent in the European hybrids."

The new financial reform bill prohibits some banks from using trust preferred issues as part of their equity. While I am not going to read this part of the bill, press reports say that TPs issued by banks with less than 15 billion in assets will be grandfathered so that they can continue to count the TPs as part of equity capital.

It is too early for me to form an opinion on what will happen with TPs issued by banks who will no longer be allowed to count their TPs as part of equity. I suspect that these banks may have to raise to equity capital to fill the hole left by the TPs. There is a 5 year transition period. Reuters

I personally never viewed the trust preferred issues as Tier 1 equity capital. Why? For one, the underlying security in the TP is after all a junior bond. In the last analysis, this provision was stuck in the bill because the FDIC Chairman wanted it, and it was an amendment offered by the republican Maine senator, Susan Collins, whose vote was needed to overcome the usual GOP filibuster.

The next question is what happens to the existing TPs? I will be interested in reading other people's opinions on this issue in the coming days, assuming this legislation passes. One option would be to just leave the TPs alone. Another would be use the proceeds from the new equity issuances to redeem the TPs. If that option is followed, and I do not have an opinion on its likelihood now, this could cause an early redemption at par value plus accrued interest, thereby creating a potential profit opportunity for those selling now at a discount and a possible loss of any bought at a premium to par. A third option might be to dissolve the trusts and then distribute the underlying bonds to the TP owners. A fourth option would be to offer an incentive for the TP owners to convert into common shares. I am just thinking out loud.

(For a subsequent discussion on how this legislation influenced a decision to sell a common stock of a bank with a large amount of TPs, and who has not yet paid back Tarp, see Item Item # 1 Sold KEY at 8.12/Sold 100 RHHBY at $36.2/NVS/More Evidence of a Slowdown/Sold 50 of 150 DKK)

1. Sold 100 Linn Energy (LINE) at 25.9 Friday (see Disclaimer): This netted close to a $1000 profit. I discussed buying some shares at $15.31 in April 2009. One reason behind this sell was to book a long term capital gain in 2010. 

2010 LINE 100 Shares +$971.97
I am also tired of the tax headache associated with these publicly traded limited partnerships. Lastly, I heard Cramer express some reservation about LINE as its hedges expire into 2011 and with the depressed state of natural gas prices possibly continuing. TheStreet I did not even want to make an effort to address that issue.

2. Bought in Roth IRA 50 AFE at 23.17 and 30 SUSPRA at 25.10 (see Disclaimer) AFE is a senior bond issue from American Financial Group Inc (AFG). I previously purchased this bond in a taxable account and discussed it in an earlier post. Bought 50 AFE at 22.87 Par value is $25. The bond matures on 2/3/2034. The coupon is 7.125%. At a total cost of $23.17, the current yield is around 7.69% with a YTM of about 8.09%. The bond is callable now. This is a link to the prospectus: American Financial Group, Inc. And this is the link to the Reuters profile page and to the analyst estimates for the issuer, AFG: Analyst Estimates for American Financial Group, Inc.. The bond is rated as investment grade according to QuantumOnline and FINRA, currently at Baa2 by Moody's and BBB by S & P.

SUSPRA is a trust preferred security issued by a delaware trust created by Susquehanna Bancshares Inc, (SUSQ) for the purpose of selling preferred shares in the trust to the public. The proceeds were then used by the trust to purchase a junior bond from SUSQ. The TP represents a beneficial, undivided interest in the bonds owned by the trust. The yield on this one is high due to its junk rating. At a total cost of $25.10, the current yield is around 9.37%. I bought 30 shares for one reason. I did not have sufficient funds left in the ROTH to buy 50 shares which would be my maximum exposure to this security. There are several reasons for the maximum limit. The most important are the junk rating of this security, the permissible time period for deferral of interest payments, and its maturity date (if extended as far as 2087) .

Unlike most TPs, which permit interest to be deferred for up to 5 years, interest may be deferred for up to ten years (40 quarters) for SUSPRA, but distributions are cumulative. After 20 quarters of deferral, an alternative payment mechanism is triggered. (see S-11: Final Prospectus Supplement) That provision is found in several junior bond type issues, and I discussed it some in a prior post in connection with an Aegon hybrid.

Interest payments may not be deferred as long as SUSQ continues to pay a common stock dividend or dividends on outstanding equity preferred stock. Although Susquehanna has redeemed some of the government's preferred stock, there are still shares outstanding. The bond contained in the TP SUSPRA would be senior to the government's equity preferred stock. In order for SUSQ to defer payments to the TP owners, it would have to defer paying the government its dividend, as well as eliminate the common stock dividend. This is call the stopper clause, found at page S-5.

This TP has a fixed coupon of 9.375% until 12/12/2037 and then this security becomes a floater. The float is 5.455% above 3 month Libor. The TP may be redeemed on or after 12/12/2012. The provisions for the extensions of the maturity date beyond 2057 are too complicated to discuss and are irrelevant to me anyway. I would expect this security to be called before 2037 given the high coupon provided SUSQ recovers and is able to refinance the security at a lower rate. The current credit ratings for this TP are Ba2 by Moody's and BB- by S & P.

I would add that SUSQ had, as of 3/31/2010, 13.779 billion in assets. Form 10-Q

I own 50 shares of the common in Category 1 of the Regional Bank Stocks basket strategy. That category is reserved for the more speculative names. SUSQ is on the borderline of being promoted to Category 2 based on recent earnings reports: Item # 7 SUSQ ; Item # 2 SUSQ The common shares were purchased at $5.85.

I own one TP with a lower credit rating in the ROTH, ZBPRB, which was bought at $19.9. The discussion in that post goes into detail about why that security is senior to the equity preferred stock issued to the government by Zions. The current yield at $19.9 price paid for ZBPRB is around 10%.

3. Bought 50 Cisco (CSCO) at $22.45 and 30 Microsoft (MSFT) at $24.54 (Large Cap Valuation Strategy-A New Long Term Strategy) (See Disclaimer) LB is not a wimp or a girlie man as the Lame Brain RB is fond of saying. To prove that point, and to demonstrate that the LB knows no fear, and is a risk taker known for its daring worldwide, LB bought 30 shares of Microsoft and 50 shares of Cisco last Friday.

RB could not maintain its silence any longer, saying, "Yea, the LB swings a really big you know what." RB added for good measure the remarks made in an earlier post: "Calling the LB a girlie man is an insult to girlie men worldwide, girlie man does not quite capture the essence of the LB. RB believes the LB has no Weenie at all, certainly no apparatus attached to the weenie, need the RB say more. Possibly, the RB is being too harsh, engaging in hyperbole about that weenie, if HK brought in an electron microscope to take a hard look at LB on high resolution, you know, take a look down there, something of a man nature might be detected under the highest resolution possible, RB would not totally rule that out, RB added in closing."

Not worth a response, the LB muttered. The large cap tech stocks do present interesting long term opportunities at their current valuations. IBM is one as argued by Bill Miller in this interview published at Morningstar. Microsoft and Cisco may present similar opportunities.

My last transaction on Microsoft was to sell my shares at $28.11, which had been bought at $17.99. I decided to re-enter that position with just a 30 share buy, given the current environment, after reading this summary of a Pacific Crest report at The report focuses on the accelerating enterprise sales of Windows 7. While I would acknowledge that it is difficult to teach an elephant to dance, the current price of MSFT is around 10.6 times the $2.31 consensus estimate for the fiscal year ending in June 2011. MSFT: Analyst Estimates for Microsoft Corporation MSFT has a cash hoard, a AAA debt rating, and prodigious cash flow of close to 1 billion dollars per month. It pays a dividend which is close to 2% at the current price.

CSCO is another tech titan that has fallen since the market topped out in April, falling to $22.18 at the close yesterday from $27.53 on 4/29/10: CSCO: Historical Prices for Cisco Systems, Inc. The current consensus estimate is for an E.P.S. of $1.79 in the fiscal year ending in July 2011, putting the forward P/E at around 12.39 at Friday's closing price. CSCO has close to 40 billion in cash, about $6.85 per share: CSCO: Balance Sheet for Cisco Systems, Inc. Free cash flow has converted over 20% of revenue into free cash flow over each of the past eight years. The estimated 5 year P.E.G. ratio is near 1: CSCO: Key Statistics for Cisco Systems

I last discussed Cisco briefly when making a 30 share purchase at $15.82 in January 2009.

Even the LB will admit that it is not much of a tech investor. Generally, I will stick to large cap tech purchases and then only when I believe the valuation is in my favor and my positions will be small. My only other position is Intel: Bought Intel at $15.87 Bought Intel at 15.25 Added to Intel at $19.08 Bought INTC at 14.46. I was reinvesting the Intel dividend, which is around 3% at the current price, but ceased to do that a few weeks ago.

I did change my distribution option on KO shares to reinvest the dividend.