Wednesday, June 23, 2010

Bought 50 KRBPRE at 24.62 in Roth IRA/WAG/Sold all GXP at 17.96/PJS

There was a chart in this WSJ article that shows the Case Shiller index of home prices recovering to the 2003-2004 level in 2015, according to forecasts made by economists and other analysts polled by MacroMarkets.

The Democrats still believe that anyone should be able to buy a house that they can not afford. Recently, they voted down a proposal by Tennessee Senator Bob Corker that would have imposed a 5% down payment requirement and some income verification. Democrats The proposal voted down by the Democrats is described in this link from Senator Bob Corker's office. I mentioned in an earlier post that politicians would never do what was necessary to prevent another real estate bubble caused by easy credit, which would include imposing a 5% down payment requirement. Item # 2 Delays in Foreclosure Encouraging Defaults

Obama's plea to the Europeans to keep spending like crazy has fallen on deaf ears. The U.K. government has prepared an austerity budget that has 40 billion pounds in spending cuts and tax increases, with about 77% in spending cuts and the remaining 23% in tax increases. 'Unavoidable' Budget - WSJ Merkel's government in Germany also just unveiled an austerity plan. NYT

1. Bought 50 KRBPRE at 24.62 in the Roth on Monday (See Disclaimer): This purchase marked the successful transition of a Bank of America trust preferred security out of the taxable account and into a retirement account. My overall exposure in dollar terms to BAC remains about the same, but I have transitioned 50 shares of the exposure to the Roth IRA. This transition was initiated by selling 50 shares of the trust certificate MJH, which contains a BAC TP as its underlying security and then completed with the purchase of KRPRE in the Roth on Monday. /Sold 50 MJH at 23.6

There is some concern about whether Congress, in need of funds at some future time, will change the current rules about distributions from a Roth IRA . This kind of concern can never be resolved with any type of certainty. Any politician who votes for taxing distributions out of a Roth, which would now be free of taxation, would earn the wrath of a large number of voters. I would certainly vote against any politician who supported such a change. And if the change was advocated by a majority of the members of one political party, I would vote against every candidate of that political party. In other words, I would view such a change with extreme dissatisfaction.

As it stands now, the primary benefit of the Roth to me, compared to the regular IRA, is that I do not have to take distributions at a certain age as I do with the regular IRA. Roth Or Traditional IRA The second benefit is that distributions from the Roth will be tax free whenever taken after a year or so from now for me, whereas I have to include distributions from the regular IRA in my gross income for tax purposes. Traditional IRAs: Distributions Roth IRAs: Distributions So, what I can do for planning purposes is to allow the Roth to appreciate free from taxation until I have exhausted all other funds which hopefully will never occur. But, if I am 100 and I have only assets in the Roth and social security left, I can start to take distributions at that time.

The current law governing Roth IRA dictates to a significant degree the kind of assets that I want to put into it. Based on my own current financial situation, a long term bond makes more sense in the Roth than in a taxable account. While I still face interest rate risk, I am more concerned about generating a stream of tax free income that can be reinvested into other securities that have good yields. If rates rise, I will have enough funds to invest in new purchases that pay an even higher yield, thereby increasing the compounding effect.

KRBPRE is what I commonly refer to as a typical trust preferred security. MBNA Capital E, KRBPRE It was initially issued by MBNA Capital, a Delaware trust, that was formed by MBNA, a credit card company later acquired by Bank of America. It is now listed by BAC as one of its trust preferred securities: Bank of America | Investor Relations | Capital Issuances Interest payments are made quarterly and may be deferred for up to five years provided no payments are made on more junior securities. Any deferred distribution will earn interest at the coupon rate. (see page S-3 Deferred distributions have tax consequences (see pages S-30 to S-31).

A TP is a preferred stock in a trust that represents a beneficial interest in the assets of the trust. For KRBPRE, the asset of the trust is a junior bond issued originally by MBNA. The underlying bond in the trust matures at the same time as the TP, with both maturing on 2/15/2033. As shown at the site, this TP is rated the same as the ones originally issued by a trust formed by Bank of America, as are the two shown on the same page originally issued by a trust created by FleetBoston.

The coupon on KRBPRE is 8.1% which gives me close to a 8.22% current yield at a total cost of $24.62. At a 8.22% rate, my money doubles in about 8.77 years. Estimate Compound Interest This is slightly better yield than the TPs originally issued by a trust created by Bank of America.

This is a link to the prospectus: /

I have been moving up the priority ladder on BAC securities. I have sold all of my BAC non-cumulative equity preferred floaters ( the last sell- Sold 100 BMLPRH AT 17.42). The bonds, which are the underlying securities in the BAC TPs, are more senior in priority than the traditional preferred stocks which are part of BAC's equity. In addition, unlike the BAC equity preferred stocks, the TPs have maturity dates and are cumulative.

The ratings for the BAC TPs can be found at Bank of America | Investor Relations | Fixed Income Investor Relations. Only Moody's has an investment grade rating (Baa3), whereas both Fitch and S & P rate the BAC TPs in the junk category. This kind of investment can never be out of sight, out of mind.

What I really like to see is for both retirement accounts to register gains when the market tanks, which occurred yesterday.

2. Walgreens (WAG)(owned): Walgreen reported awful earnings for its fiscal third quarter of 47 cents which included 7 cents in charges. Excluding those charges, the company missed expectations by 4 cents. Revenues increased to $17.2 billion slightly ahead of the consensus forecast of 17.14 billion.

Comparable store sales increased by .7% in the quarter and sales increased by 6.1%. Prescriptions, which accounted for 65.4% of sales, increased by 5.7% during the quarter and by 1% on a comparable store basis. WAG completed its acquisition of 258 Duane Reade stores in April and claims to be on track in its integration and pleased with the "strong performanc" of the new and renovated Duane Reade stores. Walgreens expects organic store growth of between 4.5 to 5% in fiscal 2010 and between 2.5% and 3% annually beginning in 2011. As of 5/31/2010, the company operated 8019 locations (7522 drugstores).

Some of the recent analyst recommendations are summarized in this article from the

I recently bought 50 shares of WAG at 30.15. In a long term secular bear market, it often pays to slice and dice buy orders into small pieces rather than taking a full position all at once. I am now free to average down at my leisure by buying another 50 shares to create a round lot of 100. I am in no hurry to add those 50 shares.

3. SOLD GXP AT 17.96 on Monday (see Disclaimer): GXP was a loser. It is an electric utility operating in Kansas and Missouri that cut its dividend in half after I purchased shares in 2008. Bought GXP at 19.25 The dividend was cut from a quarterly rate of $.415 to $.2075. The dividend has not been increased since that cut and I view other utilities as more attractive at current prices.

4. 2 Year Treasury Auction: The U.S. treasury sold 40 billion in two year notes yesterday at a record low yield of .738%. It is likely that these notes will provide a negative real rate of return over the next years before taxes. The current inflation rate over the past 12 months is about 2%. There were 137.7 billion in competitive bids submitted in this auction: .pdf In other words, the buyers of this 2 year note were falling all over themselves for the privilege of lending our destitute-binge borrower-Uncle Sam money at yields that virtually guarantees them a negative real rate of return. Apparently, the so-called bond vigilantes are in hibernation.. This auction illustrates that a lot of investors are far more interested in the return of their money rather than the return on their money.

Something is amiss. Either those investors lending money to the U.S. government at negative real rates of return have lost their marbles, or I am missing something that needs to scare me a lot more than the sum total of all of my concerns.

5. Trust Certificate PJS (no longer own): I sold my shares of PJS after First American made a tender at the $25 par value. {See item # 6 Sold 50 COP at 56.63; Sold ALL PJS at 24.75 & 24.65} At some point, I may buy back the shares. Of the original outstanding principal amount of 45 million dollars, First American bought $21,819,000 or 48.49% of the total. The First American Corporation Announces Results of Tender Offers and Consent Solicitations; Accepts Validly Tendered Securities for Purchase - First American - News - 2010 The PJS shares are still trading. This one had been bought as low as $7.2 and as high as $17.95.Bought PJS at 7.2-October 2008 /Bought 50 PJS at 17.95 August 2009 Bought 50 PJS at $17.8 in Roth First American has recently split into two companies. First American Financial Corporation and CoreLogic, Inc. Announce Completion of Spin-Off Transaction

Prior to the tender made by First American for both the TC shares PJS as well as the underlying bond, I had decided to limit my exposure to 250 shares, and I hit that limit. This limit is particular to my financial situation and risk tolerance. I am lowering my maximum exposure to 100 shares from 250 as a result of the break-up of FAF into two companies. I will need to research further which of the two companies, CoreLogic or First American Financial Corporation, will be paying the interest in the future on the underlying bond in PJS.

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