Monday, July 26, 2010

Sold: 50 HRBPRD at 24.23 & 50 GSPRA at 20.03/CPP/VZ/Bought 300 JPC at 7.62/Bought 50 AHLPRA at 22.35 KMB UBSI

The Iowa Tea Party was responsible for a billboard comparing Obama to Adolf Hitler and Lenin. Los Angeles Times

A large number of classified documents about the Afghanistan war have been leaked to an organization called WikiLeaks who in turn has allowed the NYT to review them. As suspected, Pakistan intelligence is providing widespread support to the Taliban's war effort against the U.S., including assisting in training of suicide bombers. The documents further show that Pakistan's intelligence service is providing the Taliban with a safe haven in Pakistan.

I was listening to a segment last night on sixty minutes narrated by Leslie Stahl that focused primarily on how large numbers of second and third generation Pakistani's in Britain supporting al Qaeda and terrorism. Toward the end of the segment, Stahl visited some students from the Peshawar and Swat Valley of Pakistan. She was peppered with questions from the Muslim versions of true believers such as why "does democracy lead to homosexuality" and why "do western countries want to destroy Islam". Some students claimed that al Qadea was created as a CIA plot and Osama bin Laden was instructed by the CIA to attack on 9/11 so that the U.S. could wage war on Islam. CBS News

The American True Believers have a "news" network devoted to catering to their beliefs. By definition, a person properly classified as a true believer is out of balance. What is meant by "balance"? I am not referring to having two unknown, generally uninformed people (one with faux blonde hair) present their differing warped views of reality during the same segment. Instead, balance refers to the desire to seek out all relevant and material information on a topic and to assess that information independent of any pre-existing belief system. A True Believer can not perform that simple task. It is just impossible for them.

Instead, the TB seeks out only information that conforms to a pre-existing ideology, formed with inadequate and inaccurate information, and dismisses any information inconsistent with that ideology as unreliable and/or erroneous. In practice, the TB makes a conscious effort to avoid any factual information inconsistent with the ideology, and large number of news outlets will consequently never be assessed by them. In the U.S. the TBs will watch only Fox, listen to the likes of Rush Limbaugh and read the articles written at Newsbusters. While they view themselves as conservative, there is almost nothing consistent with conservatism in their opinions. What is the Appropriate Political Label Distortion of Reality to Serve an Ideology Ideology and Facts: Coexistence Not Allowed Accurate Information is Not a Side to an Issue Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent? Fail to Remember or Refuse to Learn?

The latest example of a lack of balance comes from the widespread dissemination of a heavily edited version of a speech given by Shirley Sherrod. The purpose of the editing, which was done by an unapologetic Andrew Breitbart mistakenly labelled a "conservative" by the NYT, was to deliberately mislead anyone watching it. Misleading Stories About Race Raise Questions - NYT Fox of course ran with the Breitbart video without checking the speech in its entirety, as any real journalist would do. Spreading malicious and untrue stories is not a conservative value. Peggy Noonan, the former speechwriter for Reagan, and a real conservative, wrote an excellent article in the WSJ titled about the The Power of Redemption that has intelligent comments about the speech actually given by Ms. Sherrod as opposed to the one fabricated by Fox and its ally Andrew Breitbart. WSJ's Peggy Noonan: Sherrod was "smeared by right-wing media"; victim of "high-tech lynching" | Media Matters for America

1. United Bankshares (UBSI-own- Regional Bank Stocks Basket Strategy): United Bankshares reported net income of 17.9 million or 41 cents for the 2nd quarter, up from 19 cents in the 2nd quarter of 2009. The consensus estimate was for 40 cents. The NPLs to total loans was 1.35%. UBSI mentioned in the press release that the Federal Reserve has NPLs to total loans at 4.37% for UBSI's peer group, as of 3/31/2010.

"United continues to be well-capitalized based upon regulatory guidelines. United’s estimated risk-based capital ratio is 13.1% at June 30, 2010 while its Tier I capital and leverage ratios are 11.7% and 9.6%, respectively. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10%, a Tier I capital ratio of 6% and a leverage ratio of 5%." Net interest margin was 3.69%. I am satisfied with the report. The stock rose 79 cents to close at $25.62 last Friday.

My shares of UBSI were purchaed at $16.65. The dividend yield was almost 7% at that price and UBSI has been raising the dividend annually including 2008. The pace of the dividend rises is slow however. The Morningstar data shows 84 cents in 2000 and $1.17 in 2009. This slow pace would eliminate this bank for consideration under the dividend growth strategy and is one reason why I purchased only 50 shares. In retrospect, I made a mistake in not selling UBSI when the shares crossed $30 in April 2010 and would probably sell this stock if and when the price hits $30 again. That price is probably close to its potential for the five to ten year time frame of the regional bank basket strategy.

2. Kimberly-Clark (KMB)(owned-dividend growth strategy): Kimberly-Clark reported earnings per share of $1.20, seven cents better than expected, with only a 2.8% net increase in revenues (2% organic). KMB purchased 350 million in stock during the second quarter. Sales of consumer tissue products fell 5% in North America and Europe from the 2nd quarter of 2009. In the rest of the world, consumer tissue sales rose 6%. KMB did better in North America with sales of its consumer personal care products with a 7% increase, but sales of those products declined 5% (2% due to currency). Those products include Kotex, Huggies, Poise and Depend. KMB kept its 2010 profit forecast in a range of $4.8 to $5, but leans toward the bottom of that range. It did cut its sales forecast some which seems prudent given the 2nd quarter sales numbers.

3. Verizon (VZ)(owned-Large Cap Valuation Strategy Primary and Dividend Growth Strategy Secondary/And own senior bond in TC form-PJL): After Verizon's dividend yield rose to over 7% due to a decline in the price, I re-purchased 100 shares shares at $26.74. At that price and a yield over 7% in an interest rate environment where the ten year treasury was yielding less than 3%, it just seemed that there was little in the way of downside risk.

Verizon reported earnings of 58 cents excluding charges for the 2nd quarter, two cents better than the consensus estimate. Revenues missed the estimate declining .3% to 26.8 billion. Verizon Wireless added 665,000 contract customers. This handily beat the expectation of 570,000 net adds.

The market reacted favorably toward this report, sending the shares up $1.02 to $28.02. The shares are trading up about 25 cents in early morning trading today.

4. CPP (sold): A reader asked me why I sold this TP, originally issued by a Delaware Trust controlled by Countrywide. LB thinks too much is one reason, and RB just added "the best reason". Part of my reasoning is explained in my email response to that question:

"In managing the large interest rate risk of long term bonds, I will frequently move in and out of positions. An example is the sale yesterday 50 REPRB and keeping the lower cost 50 shares using FIFO accounting. Then, when the shares fall below $19, I will buy back those 50 shares. In the meantime, I collect quarterly interest payments and realize small gains on the shares.

It is only a question of time before the long bonds get smashed. Without a doubt, I will be holding some that I should have sold when rates start to rise, the deer in the headlight syndrome. During the life of these long bonds maturing in the 2030 to 2040 time range, I would expect far better buying opportunities in the not to distant future (2 to 5 years), compared to now or over the past year. I believe now that the better prices will be caused by interest rates rising rather than concerns over credit risks in a low interest rate, Near Depression rate environment. So I fully expect to buy back some of the BAC TPs recently sold or possibly another with a higher rate, at much lower prices than prevailing now.

I do not intend to increase my equity position by more than 50 shares and am in no hurry to do that. I have eliminated the BAC equity preferred floaters and currently own only 50 KREPRE among the BAC TPs. I have 5 thousand in SIPs from BAC and Merrill and may add one or more to that list. I am currently about 2 thousand under my $10,000 limit for BAC securities and more likely to use the other 2 thousand to buy SIPs rather than TPs which do not appear to me to have much left in appreciation potential.

The futures market is predicting a continuation of the Fed's Jihad until August 2011. DailyFX Based on earnings reports and forecasts from firms around the world, particularly industrial firms, there appears to be a major disconnect between Bernanke and what is actually happening. I am more positive on equities now, and less so on bonds."

Regarding that last paragraph, it is entirely possible, even likely, that the Federal Reserve will keep its foot on the monetary gas far longer than necessary, due in part to an underestimation of the pace of an economic recovery. This could potentially cause serious and problematic inflation. The FED can not move from a zero federal funds rate to 5% all at once, and it would take time to reach an appropriate level. With the lag effect of a change in the policy, inflation could gain a foothold and rise unexpectedly before monetary policy could have even a minimal impact. This is one possible scenario and a bad one for long term bonds.

5. SOLD 50 GSPRA at $20.03 on Friday (See Disclaimer): This non-cumulative equity preferred floater went ex dividend on Thursday and I decided to clip that dividend and sell my shares for a small profit. I previously sold 100 shares of GSPRA at $21.9 in October 2009. I bought 50 of those 100 shares back in mid-May 2010 at 18.8. And, I sold those 50 shares at $20.03 on Friday. I much prefer to own the synthetic floaters tied to a GS TP and I own two of those in retirement accounts, GYB and PYT. The equity preferred floater is non-cumulative and has no maturity date, whereas the synthetic floaters in trust certificate form are-in effect- tied to junior bonds with maturity dates. Synthetic Floaters I also own JBK, tied to the same GS TP maturing in 2034 as GYB and PYT, and the trust certificate PJI tied to a GS senior bond maturing in 2033. At some point I may also buy back GJS, a synthetic floater with no guarantee, tied to that same senior bond. I am not able to hold onto to that one due to the currently low Libor rates.

I am constantly trading GS preferred stocks and trust certificates that contain GS junior and senior bonds, both fixed coupon and floaters.

6. Sold 50 HBAPRD at $24.23 on Friday (see Disclaimer): HBAPRD is one of the few, cumulative floating rate equity preferred stocks. If you do not count AEB, which is a bond masquerading as equity, then HBAPRD may be the only U.S. exchange traded cumulative equity preferred stock . Still, I do not care for the float which is based on 81% of the highest of three rates. This needs to be compared with SCEDN which pays 1.45% above the highest of the 3 month Libor, 10 year and 30 year treasuries. HBAPRD was bought at $20.85 last December. I mentioned this unfavorable comparison with SCEDN, which I own, in the post discussing the purchase of HBAPRD.

7. Bought 300 of the CEF JPC at 7.62 and 50 AHLPRA at 22.35 Friday (see Disclaimer): These two purchases were made to replace HBAPRD and GSPRA, to secure a higher income stream.

AHLPRA is a non-cumulative equity preferred stock from Aspen Insurance. I previously bought, and still own, fifty shares at $19.75 last October. As discussed in that linked post, this security has a fixed rate coupon of 7.401% until 1/2017, whereupon it turns into a floater. The float is 3.28% above the 3 month Libor rate. Of course, I prefer the fixed coupon rate today and no doubt for months to come. I might like that float a lot in 2017. This is a link to the prospectus: At a total cost of $19.75, the yield is currently around 9.3%, and the dividends are qualified. However, by purchasing at a higher price on Friday, the yield on those shares would be about 8.28% at a total cost of $22.25. Dividends are paid quarterly.

Aspen is currently paying a common stock dividend which is extremely important to the owner of a non-cumulative equity preferred. As long as dividend payments continue on a junior security, the owner of AHLPRA will be paid in full. Things become very dicey when the common dividend is eliminated, however.

The current consensus earnings estimate for AHL is $2.69 in 2010 and $3.7 in 2011. As long as somewhere close to those numbers actually happens, I will not have to worry about my preferred dividend being eliminated as an owner of 100 AHLPRA. I still have interest rate risk, however, at least for so long as the distributions are fixed and much less interest rate risk with a float 3.28% above the 3 month LIBOR rate. (e.g. a spike to 7% in the Libor rate during the pertinent computation period after 1/2017, caused by inflation, would generate a 10.28% coupon, but that coupon generates a 11.5% yield at the $22.35 cost and more at the lower purchase price)

I bought 300 of the CEF JPC at 7.62 on Friday. This CEF has around 70% fixed income and 30% stocks. It is a leveraged fund. Dividends are paid quarterly. The discount to NAV was close to 13% when I purchased shares: JPC - Nuveen Multi-Strategy Income and Growth Fund The distribution yield at the 7.62 price is around 8.92% currently. This is a link to the last filed quarterly report filed with the SEC: I bought the 300 shares in a taxable account. I previously bought and sold 100 JPC in a regular IRA, where I am constantly trading to lower the risk profile of those accounts: Item # 4 Bought JPC at $6.85 & Item # 3 /SOLD: AMAT, ATVI, MRO, JPC, ZBPRA

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