Wednesday, July 28, 2010

Added 30 GYB in IRA at 17.97/Sold 100 BDF at 17.90/Sold 50 PYS at 20.76/HMA MBVT DD/Sold 50 NYB in IRA at 17.51 & Bought 100 JSN at 12.8

RB bought 50 shares of Regions Financial at $3.47 back in March 2009, and those shares were appropriately placed in what I call Category 1 of the Regional Bank Stocks' basket strategy. I reviewed the "earnings" report from Regions yesterday, and I made some decisions about my immaterial position. First, I am just amazed about how many financial institutions select their top managers. Randomly picking names out of a phone book would probably produce better results for the shareholders. Second, the reports from Regions are in my estimation just awful, but the market is reacting positively to the latest one since the losses were less than expected by the consensus estimate. To avoid the heartburn and negative vibes associated with reading a RF quarterly report, and to mollify the LB who is already sick and tired of reading earnings reports from well run banks, Headknocker decreed that no further earnings reports from RF will be read for at least the next five years. Possibly, I will be surprised by something positive after the expiration of that five year period.

The Old Geezer woke up from his nap just in time for the staff meeting prior to the market's open yesterday, and promptly asked the RB whether there were any stocks it wanted to buy this morning. A voice from out of nowhere said, "you have got to be kidding". RB was thrilled with the opportunity to prove itself, as it did after its coup d'etat at the trading desk here at HQ on 3/3/2009. RB blurted out that it likes blonds and the name Virginia, which just rolls of one's lips, and causes the RB to think of amour. While those comments will not make any sense to many as stock selections, the OG is used to translating the RB's recommendations. Some members of the staff thought they heard the LB say a prayer, but knew that this had to be some sort of delusion.

Housing prices will be in the crapper in many areas "for an extended period of time". Some metropolitan areas in California, including San Francisco, are experiencing a decent recovery in housing prices, but most major metropolitan areas will likely take several more years to return to 2006 prices. The Case-Shiller 20 city composite index of housing prices did show a 1.3% increase in May, compared to April, and was up 4.6% in the past year. SF was up 18.3% over the last 12 months, while Las Vegas has declined 6.5%. Both the 20 city and 10 city composite indexes are where there were in 2003.

The Conference Board's confidence index declined to 50.4 in July, as consumers continued to sour about both the present and the future. Consumer Confidence

1. FNB (own - Regional Bank Stocks basket strategy): FNB was expected to earn 14 cents. After the close on Monday, F.N.B. Corporation reported a net income of 17.9 million or 16 cents per share, up from 14 cents in the linked quarter. Before the earnings release on Monday, the stock rose 51 cents to close $8.5. As of 6/30/2010, tangible equity to tangible assets was 5.97%; the allowance for loan losses as a percentage of NPLs was 103.57; and NPLs to total loans was 1.39%.

2. Sold 100 of the 200 BDF at $17.90 and 50 of the 100 of the TC PYS at 20.76 on Monday (See Disclaimer): These transactions were part of the bond pare on Monday in taxable accounts. The CEF Rivus Bond Fund (BDF) was ex dividend on Monday and I sold the 100 shares bought in the taxable account at 17.2. I am keeping the 100 BDF bought in the ROTH IRA at 17.1.

Using FIFO accounting I sold the highest cost shares of the TC PYS purchased at 20.01 and kept the lower cost shares purchased at 19.59. If I can pick the 50 shares sold last Monday at less than $18.50, I will consider it. I am far more wary of interest rate risk in my long term corporate bonds than other bond investors, judging from the current yields for both long term treasuries and investment grade corporates. This constant paring and re-purchasing at a lower price is part of the way that I am managing interest rate risk. Managing Interest Rate Risk

3. Added 30 GYB in Regular IRA at 17.97 to Bring Lot up to 100 shares on Monday (See Disclaimer): GYB is a synthetic floater tied to a GS TP maturing in 2034. I have had some success over the past couple of years trading the synthetic floaters tied to GS junior and senior bonds, and fixed coupon trust certificates containing GS bonds as the underlying security. I have traded in and out of the synthetics several times. I sold 100 GYB in the same IRA account at 18.09 purchased at $10.95 in April 2009. Part of the reason for paring the position was the negative news about GS at that time.

GYB is a trust certificate containing a GS Capital Trust Preferred maturing in 2034. The float is created by a swap agreement. As long as that swap agreement is in force, the owner of GYB will not receive the fixed coupon of the GS TP which is 6.345%. Instead, GYB will pay the greater of 3.25% or .85% above the 3 month Libor rate currently at an abnormally low rate. There is a maximum rate, 8.25%, which would be hit when the 3 month LIBOR rate exceeds 7.4% during the relevant computation period. (prospectus: At the maximum rate, the yield at a total cost of $17.97 would be around 11.48%. At the 3.25% minimum rate, which is in effect now, the yield would be around 4.52%. So, the rate paid by GYB will fluctuate between 4.52% and 11.48% at a total cost of $17.97. Since the security was bought at a discount to its $25 par value, there would be an additional return realized by holding GYB until maturity in 2034, assuming Goldman is still around to pay the $25 par value.

I am not too concerned about what may happen between now and 2034 since I am now playing with the house's money on these GS trust certificates, taking into account interest payments and realized profits compared to the cost of unsold positions. I believe that this objective was achieved by selling 50 of the 150 JBK. Bought 50 of the TC JBK at $16 (closed at $21.15 on Monday) The lowest cost shares remaining include 100 shares of PYT bought in two 50 share lots at $11 and $13.34, and the remaining 100 JBK purchased in the main taxable account at $16.15. I can not find where I sold the other 50 of GYB bought at $11 but this was apparently done at some point. I will only buy the synthetic floaters in retirement accounts due to tax issues related to the swap agreement.

Some of the transactions on trust certificates containing GS Bonds include the following:
(see generally: Synthetic Floaters)

4. Merchants Bancshares (MBVT) (own-regional bank basket strategy): Merchants Bancshares announced net income of 4.59 million for the 2nd quarter or 74 cents per share, up from 34 cents in the linked quarter. I thought that might be a misprint when I first saw it. The one analyst that follows the bank estimated 54 cents. As a result of improved credit quality, MBVT announced it had reduced its loan loss provision to zero. LB thought that had to be some kind of mistake. Maybe some of the swashbucklers from Georgia need to take a lesson or two from the Vermont bankers at MBVT. NPAs as a percent of total assets was .63%. The tier 1 leverage ratio was 8.02%, and the net interest margin was 3.81%.

MBVT rose 2.73% or 64 cents yesterday to close at $24.09.

5. Health Management Associates (HMA)(owned-2010 Speculative Strategy): Health Management Associates reported 2nd quarter earnings of 16 cents per share, an increase of 23.1% from the 2nd quarter of 2009 and 1 cent better than the consensus estimate. Revenues were 1.2478 billion. The provision for doubtful accounts was 12% of net revenue, down from 12.1% in the year ago quarter. HMA rose 2% in trading yesterday to close at $7.14.

The author of the most recent weekday trader column in Barrons believes Wall Street is underestimating HMA's "ability to generate profit". The obvious point made by the author is that the recently enacted healthcare reform legislation will substantially reduce the number of uninsured patients starting in 2014, thereby significantly limiting the bad debt problem experienced by all U.S. hospitals. An analyst at T. Rowe Price is quoted as saying that HMA will be one of the big winners from the Democrats legislation, opposed by all republicans in Congress who will do whatever they can to repeal it. HMA is discussed in the following posts: Bought 100 HMA at $8.82 Sold 100 HMA at 9.28 Bought 50 HMA at 7.55 Added 50 HMA at 6.75/ & item # 6 HMA.

6. Dupont (DD)(owned): Prior to Tuesday, I had only two individual stock positions in the IRAs now. One of the two is DuPont and the other was sold yesterday (see Item # 7 below) Keeping DD around has less to do with DD than the purchase price paid for the shares during the Dark Period. My yield at the purchase price of $16.68 in early March 2009 is near 10%. Still I may take the profit soon.

As I mentioned in a few recent posts, there seems to be a disconnect between the forecasts being made by American corporations and the ones made by practitioners of the dismal science, who may be infected with the perpetual pessimism of Alan Abelson. I suspect that Alan confuses being perpetually negative with being a contrarian.

Back to DuPont. DuPont beat estimates by 24 cents and raised its forecast. DuPont reported earnings of $1.26, or $1.17 excluding items, on a 26% increase in sales. DD increased its 2010 outlook to a range of $2.90 to $3.05 from $2.5 to $2.7. Before this release, the consensus estimate was for an E.P.S. of $2.64 in 2010.

Dupont rose 3.57% or $1.39 to close at $40.38 yesterday, but came off its intra-day high of $41.14.

7. Sold 50 NYB in Regular IRA at $17.51 and Bought 100 of the CEF JSN at 12.80 Tuesday (see Disclaimer): The profit on the NYB shares purchased in the regular IRA was too large to ignore. Item # 4 Added 50 NYB at $10.57  I previously sold a 50 share lot for a smaller profit. Added 50 NYB at $10.9 Given the conservative management strategy for the retirement accounts, and the size of the profit realized well within one year, I decided to take the profit rather than to continue to risk it. I will risk the profit on 100 shares of NYB in a taxable account bought at slightly higher prices. Bought 50 NYB at $11.3 50 NYB at $11 NYB was scheduled to release 2nd quarter earnings later this morning.

In its place, I bought 100 of the Nuveen CEF JSN at $12.80. I own 109.415 shares of JSN in the Roth with an average cost of $9.04. I quit taking the distributions in cash due to the narrowing of the discount to NAV. In the event the newly acquired shares fall significantly, I will include them in the next ROTH conversion.

JSN was selling at a negligible discount to its NAV before falling about 10 cents in price yesterday. JSN - Nuveen Equity Premium Opportunity Fund This CEF attempts to replicate the performance of a 75% weighting in the S & P 500 and a 25% weighting in the Nasdaq 100. "The fund also uses an index option strategy of selling S&P 500 and NASDAQ index call options in seeking to moderate the volatility of returns relative to an all equity portfolio." The current yield is around 10.43%. Dividends are paid quarterly. This is a link to the SEC filed quarterly report for the Q/E 3/31/2010.

NAV information can be found at the above referenced page at the Nuveen web site or at the CEFA - Closed-End Fund Association Total expenses are listed at .71%. JSN - Nuveen Equity Premium Opportunity Fund As of 5/28/2010, this CEF had 256 holdings

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