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: www.federalreserve.gov 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 - QuantumOnline.com-free 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. WSJ.com 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. www.sec.gov 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 Street.com. 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%.