Wednesday, July 21, 2010

JNJ/Sold 50 ZBPRB at 24.38 /Bought 50 PSEC at 9.5/Bought 100 BTZ at 12.05/FFIC MI ZION

I own 400 shares of the Claymore 1-5 Yr Laddered Government Bond ETF - CLF., primarily to earn some kind of yield on my long term Canadian dollar position. I clicked on a link provided by Claymore to quote information about this security and found it to be useful. Stock Market Quotes I own the shares listed in Toronto.

The rally yesterday originated from the successful effort to end the GOP's filibuster of the bill to extend unemployment benefits. That type of government program is one of the most effective stimulants to the economy since the money will be spent, as distinguished from tax cuts for the wealthy that would mostly be saved by them. Testimony of mark-zandi .pdf Zandi estimates that extending unemployment benefits would increase GDP by $1.61 for every buck.

The Old Geezer seems content at the Old Folks home, eating a bag of popcorn every day, and watching the soaps. His only comment about what is happening in the world, copied verbatim by the forever reliable LB, was "Did LB know that Guiding Light had been canceled after a 57 year run on CBS?" What an embarrassment!

The intravenous transfusion of Valium has calmed the Old Goat's nerves to some degree. LB suggested to Headknocker that the Docs substitute Valium for the OG's blood as a potential solution to the OG's angst and anxiety when confronted with volatility. Just a thought. The LB wants more volatility, since the market for the past 13 years has given it a laboratory to modify and expand the now famous Trading Rule Book by a few billion details, modifications, exceptions to exceptions and so on and so forth. LB is looking forward to another decade just like the last one. Out of nowhere came a voice saying "what a boring, insufferable NERD!".

1. Sold 50 ZBPRB in Roth at $24.38 (SEE Disclaimer): This security is no longer viewed as appropriate for a retirement account due to credit risk. ZBPRB is a trust preferred issue from Zions Bancorp ( ZION). The shares were bought at $19.9 September 2009. Several quarterly interest payments were received, and I realized a decent percentage gain on this type of security. I did not want to press my luck given the overall conservative management strategy of the IRA accounts.

Zions Bancorporation reported another awful quarter after the close yesterday. The net loss was 135.2 million or 84 cents, up from a 57 cent loss in the 1st quarter. Net interest margin declined from 4.03% in the first quarter of 2010 to 3.58% due to subordinated debt conversions, an accounting issue beyond my comprehension. Without that issue, the core net interest margin was 4.14%. Nonperforming assets declined 8.5% to 2.547 billion. Delinquent loans declined 19.7% from the 1st quarter. Nonperforming assets to total assets was a staggering 6.67%. The allowance for loan losses to nonperforming loans was 79.69%. The tangible equity ratio was 6.86% at the end of the quarter. All figures are as of 6/30/2010. This bank has not redeemed the government's preferred stock. I do not expect this to occur anytime soon.

Zions is a large regional bank with close to 500 branches in 10 western states. The bank has over 50 billion in assets. Management made disastrous decisions in Nevada, California and Arizona, helping to fund the real estate bubble in those states. Shareholders have paid dearly for the consequences of those poor decisions, including a substantial decline in the value of their shares and a 98% decline in the quarterly dividend from 43 cents to just 1 cent. I am not a common shareholder and would not consider becoming one with current management still in place. Harris Simmons has been CEO since 1990.

I am becoming somewhat concerned about the possibility of a double dip recession and how that would impact the survivability of some of the banks who have lost and continue to lose boatloads of money.

I still own 100 ZBPRA bought at $7.8 in May 2009 and 60 shares of ZBPRC bought in two 30 share lots at 18.4 and at 23.75. The average yield on those non-cumulative equity preferred issues, deservedly rated deep into junk in my opinion, is over 10% at my cost and the dividends are qualified for U.S. taxpayers. Those shares are held in a taxable account where I will assume more risk. It is entirely possible that I may take at some point my $800+ long term gain in the floater and then possibly add a small amount to one of the fixed coupon traditional preferred stocks at much lower prices than prevailing now. Before adding to this immaterial position, I would want to see more than a small glimmer of light at the end of a very long, dark tunnel.

I have nothing positive to say about Zions management. It would be difficult for any reasonably intelligent, well informed person to duplicate their mistakes without intentionally trying to destroy shareholder value.

2. JNJ (owned): The FDA has found problems with a third JNJ plant responsible for manufacturing consumer products.

Johnson & Johnson reported 2nd quarter earnings of $1.21, excluding a 67 million gain from a litigation settlement. While this number matched the consensus estimate, revenues were 300 million dollars light of the consensus estimate. JNJ also lowered the upper and lower numbers for its 2010 E.P.S. forecast by 15 cents. JNJ now expects 2010 earnings of between $4.65 to $4.75. The earlier forecast, made in April, was also a cut from a prior estimate.

I view my 50 shares as a weak hold at this point. This year's revelations about numerous and extensive problems involving safe manufacturing of consumer products, including those for children's use, demonstrates an inattention to details and a profound managerial ineptness. JNJ has suspended production at its Fort Washington plant, which may remained closed at least through the middle of 2011 as JNJ spends hundreds of millions repairing the plant. The plant was closed two weeks before the FDA publicly disclosed 20 significant problems at the facility in its Form 483: Reuters Philadelphia Inquirer Some of those problems included "filthy equipment", "thick dust", grime, and bacterial contamination. Reuters While some top managers at the plant were relieved, the problems are ultimately caused at the highest level. Only when the FDA cracked down does JNJ management authorize hundreds of millions to upgrade the facility. RB said for the LB to take some of the OG's chill pills.

JNJ fell 99 cents in trading yesterday to close at $58.58.

3. Southwest Bancorp (OKSB) (owned-regional bank strategy): Southwest Bancorp beat the consensus estimate by 7 cents, reporting net income of 3.4 million or 19 cents per share. Southwest sold 4.6 million shares during the quarter raising 54.3 million dollars. That offering was priced at $12.5 per share. As of 6/30/2010, the total capital to risk weighted assets ratio was 17.78% and the tangible common equity to tangible assets ratio was 10.02. The nonperforming loans to noncovered loans was too high for me at 4.64% which is why I own only 50 shares, though I have a good unrealized gain on those shares bought at 6.84.

This bank has 6 offices in Texas, 11 in Oklahoma and 8 in Kansas. A primary reason for owning it is geographic diversification.

4. Marshall & Ilsley (MI)(Regional Bank Stocksbasket strategy): I really do wonder sometimes how top management is selected at America's financial institutions. Among the legion of baffling selections is the top management at Marshall & Ilsley. Common sense is certainly a rare commodity in the rarefied ranks at the top. MI moved away from its roots in Wisconsin, got a big head, and entered the Florida and Arizona market in time to lose billions of shareholder money.

My shares of MI were placed in Category 1 of the regional bank strategy due to a recognition of the obvious. Management of this bank had already blown it up when I purchased shares 50 shares at 5.84. It was a close call then whether or not to buy any shares.

Marshall & Ilsley continues to release disgusting earnings reports. For the 2nd quarter, this bank reported a greater than expected loss of 173.8 million or 33 cents per share. An MS analyst apparently believes there is credit improvement. MarketWatch I interpret that to mean moving from unbelievably bad to just plain awful.

I do feel sorry for those shareholders who believed in the competence of management of this bank and stayed with it as the stock moved from $50 in May 2007 to $3 in March 2009. MI slashed the annual dividend from $1.27 in 2008 to 4 cents now, which just rubbed salt into the wounds. My entry point is low enough, and the amount invested is insignificant, that I can afford to wait and see.

5. Added 50 of the BDC Prospect Capital Corporation (PSEC) on Monday at $9.5 (see Disclaimer): Business Development Corporations (BDC) are a disfavored security class here at HQ. Like real estate investment trusts, a BDC has to pay out 90% of its income to preserve its tax status. While this can result in a high dividend yield, it also depletes the BDC of capital which can become an undesirable situation when a significant percentage of the BDC's investments turn sour. Over the past year or two, I have seen several BDC's request shareholder approval to sell common stock at below net asset value. I view those proposals to be primarily for the benefit of management's compensation. Once that approval is secured from the lemming shareholders, shares are then issued at prices below book value per share. While this has been happening, dividend reductions have also been occurring.

Prospect Capital recently reduced its distribution for the reasons discussed in this Seeking Alpha article. The author of that article knows a lot about BDCs. While reducing the amount, PSEC did change the distribution period from quarterly to monthly. At the reduced rate and with a total cost of $9.5, the yield is about 12.7%: Prospect Capital Corp, PSEC Stock Quote I sold 50 shares in an IRA last March at $12.16 after concluding that the stock was too risky for the retirement accounts. Another reason for selling PSEC is that I anticipated a dividend cut then based on part of the dividend being supported by a return of the investor's capital. Even after the dividend reduction, I still view PSEC to be too risky for the retirement accounts and consequently bought the last 50 shares in one of the taxable accounts. That buy brings my total position up to 200 shares.

I discussed this company in more detail in several prior posts: Item # 5 PSEC; Item # 2 Bought 50 PSEC at $10.48; Item # 3 Federal Reserve; Item # 5 Bought More GEP (noting that I viewed the purchase of PSEC shares as a mistake in 7/2009; Yes, I am Chicken Now, and Proud of IT (post dated 11/7/2008).

This is a link to the PSEC web site that lists the companies where PSEC has taken a position and a description of each position: Prospect Capital Corporation

In the last 10-Q, PSEC claimed that the net asset value was $10.09 per share, a number that has been trending down for sometime now. 10-Q As noted on page 3 of that 10-q, the NAV was at $12.4 on 6/30/2009. The NAV was $14.58 on 12/31/2008 (page 3 I do not think that the managers of this company are making much progress on behalf of their shareholders.

6. Bought 100 of the CEF BTZ at 12.05 (see Disclaimer): This is a link to the semi-annual report for the period ending 4/30/2010. Semi-Annual Report file with the SEC The fund has changed its focus toward owning more investment grade corporate bonds. In fact, while it used to be listed with preferred stock funds at the WSJ, it is now listed with the investment grade bond CEFs. This report shows that corporate bonds rose from 6% of the portfolio to 51% between 10/31/09 to 4/30/2010. As to credit quality, 31% of the securities are rated A and 40% BBB/Baa, and 7% AA. So that is 78% investment grade and 8% is not rated and 13% is junk rated.

Several of the Blackrock CEFs are included in the above referenced semi-annual report. The BTZ holdings can be found at pages 25-27. The fund is leveraged at close to 23.3%: Fund Profile - BTZ Dividends are paid monthly and the distribution was cut from 13 cents to 10 cents in 2009. BTZ DIVIDEND HISTORY When the dividend was cut again in June from 10 cents to 7.9 cents (BlackRock CEFs), I decided to liquidate my positions in BTZ. Sold 100 BTZ at 11.84 (noting the dividend cut) After looking at the portfolio, I am sufficiently comfortable with it to buyback 100 of the 200 shares previously sold. Overall, I think Blackrock is in the process of upgrading the overall quality of the BTZ's bond portfolio. However, given the use of leverage, I will dump this CEF again based on a 3 month LIBOR trigger.

As of 7/19, the NAV was $13.74 and the discount to NAV was -12.08 at Monday's closing price of $12.08. NAV as of yesterday's close was $13.75, up 1 cent from Monday, but the closing price fell two cents. The discount to NAV consequently increased a tad to -12.29.

Under the current circumstances, involving a two year Jihad by the Federal Reserve against responsible Americans and all savers, the annual penny rate of 94.8 cents produces a decent yield of 7.87% at a total cost of $12.05. Hopefully, there will not be any further dividend cuts this year.

In addition to the WSJ and Blackrock's CEF web site, information about NAV can be found at CEFA - Closed-End Fund Association. The fund has already gone ex dividend for its July distribution.

Management fees are about 1.06% excluding interest expense.

7. Flushing Financial (FFIC)(owned-regional bank basket strategy): Flushing Financial Corporation reported core earnings per share of 27 cents for the 2nd quarter, unchanged from the linked quarter. This was one cent less than the analyst consensus estimate. Tangible common equity to tangible assets increased to 8.57% as of 6/30/2010. Tangible book value is $11.62 per share. Total non-performing assets as a percentage of total assets was 2.8%.

I see nothing in this report that would cause me to buy more shares or to sell the 50 shares previously bought at 12.18.

I was channel surfing last night and happened to come upon a segment in Rachel Maddow's show. I do not generally watch her show, but she managed to hold my attention long enough that I continued to watch the segment. She was focusing on yet another example of Fox's routine and deliberate distortion and fabrication of information to fit into the reactionary worldview of its core audience. Show The latest example involves Fox cooking up a story involving the alleged racism of a black woman who worked for the USDA until Fox and its allies managed to get her fired.

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