Tuesday, August 31, 2010

Added 50 FFIC at 11.05/Bought: 50 GJS at 14.6/Make Whole Provisions For Long Term Bonds/Bought 50 PYB at 22.83 and 50 JZS at 22.95/Sold All PZB

The billionaire Koch brothers are starting to receive some publicity, shining a light on their unusual beliefs. Their father was one of the original members of the John Birch Society and the sons make Dad look like a liberal. A recent story in the The New Yorker magazine, written by Jane Meyer, exposes how the Koch brothers are funding the tea party movement. Frank Rich discusses the brothers and their agenda in his opinion column in the NYT. Koch industries makes several well known consumer products in the U.S. including Brawny paper towels, Angel Soft & Quilted Northern bathroom tissue, Sparkle paper towels and various brands of carpet including Stainmaster.

Consumer spending rose .4% in July. The estimate was for a .3% increase. Personal incomes rose .2%. News Release: Personal Income and Outlays, July 2010

A story in the USATODAY summarizes a study by Mark Zandi, an economist who backed John McCain, and Alan Blinder, former Vice-Chairman of the Federal Reserve, that the Democrats' stimulus plan did create 2.7 million jobs and added 460 billion in GDP. Zandi and Blinder estimate that unemployment would now be 11% without the stimulus. Without both the 700 million dollar bank rescue plan passed under Bush with some GOP support and the fiscal stimulus bill passed early in the Obama administration with no GOP support, Zandi and Blinder estimate that unemployment would be 16.5%.

I believe without any equivocation that the economic system was on the verge of collapse in September 2008, and would have imploded soon before the end of 2008 without the passage of the bank bailout legislation. Unemployment would now be over 20%. The broader index that includes those who have given up or working part time involuntarily would probably be over 25% or even 30%.

The bank rescue legislation was far more important to a recovery than the subsequent stimulus bill which really needed to focus on long term infrastructure projects that the nation needed anyway and would provide jobs for years to come. Of course, virtually all of the few Republicans who voted for TARP now claim, under pressure from the Know Nothings in the Tea Party movement, that they made a mistake or were mislead in some way to cast a Yes vote. The True Believers and their kindred spirits did not learn anything from the first Great Depression and are not going to draw anything remotely resembling factual lessons from the recent Near Depression. Occasionally, I will run into a TB who does have some factual knowledge about the causes of the recent Dark Period, and will even acknowledge that the world's financial system was on the verge of collapse. And, then, I heard one say back in September 2008 , "let it collapse".

An article in Barrons summarizes the investigation of Eric Scott Hunsader into the May 6, 2010 flash crash. He suspects that it was caused by ultra-high speed frequency traders who use their unique access to exchange data to gain momentary advantages over individual traders who do not have that privileged access. I really expect nothing but a whitewash from the exchanges who are in bed with those traders and profit greatly from their business. And the SEC has lost its focus on protecting the individual investor from Wall Street shenanigans long ago, a financial version of the Minerals and Management Service. If the government rounded these Masters of Disaster up, dumped them all in Waziristan buck naked and left them there with some satirical cartoon about the Prophet stamped in indelible ink on their foreheads, I would not object.

The Aegon and ING hybrids that I own (AEB, AEF, AEH, INZ, IND) were ex dividend yesterday for their quarterly payments. Aegon Hybrids: Gateway Post ING HYBRIDS: Links in one Post

The long bond had a one day correction last Friday. On Monday, TLT gained $2.02 or 1.91% to close at $107.37. TBT, Proshares double short ETF for the 20+ year treasury, declined 3.72%. So far, I have successfully resisted the temptation to buy TBT.

1. Added 50 FFIC at $11.05 Last Friday (Regional Bank Stocks' basket strategy)(see Disclaimer): This brings my position in Flushing Financial up to 100 shares, and I hope that no more is bought by the HT. The quarterly dividend is currently 13 cents which translates into a 4.7% yield at a total cost of $11.05. This was an average down from my last purchase at 12.18. The purchase price for the lot bought last Friday was below the secondary offering made by FFIC of 8,317,400 shares at $11.5 (www.sec.gov) with the proceeds used to pay back TARP.

Flushing was listed among 10 banks stocks with solid dividends in this article from TheStreet. In my regional bank stock basket, I own 6 of the 10 banks listed in that article (FNB, HCBK, TRST, TRMK, FFIC, OCFC). I have thankfully sold CVBF and have no current intention of buying it back anytime soon. Sold 50 CVBF at 9.65; Item # 5 CVBF.

FFIC fell 33 cents in trading on Monday to close at $10.88.

2. Added 50 GJS at $14.60 in the Roth IRA on Friday (see Disclaimer): This security is not going to pay me much interest in the current abnormally low rate environment. Knowing that to be true, I have not been able to hold onto GJS for any length of time, trading it several times for profits. Bought 100 GJS at 10.5 (April 2009) Sold 100 at 11.09 (April 2009) Bought 100 GJS at 12.25 (July 2009 SOLD GJS at 13.06 (Aug 2009) Bought 100 GJS AT $13 (Oct 2009) Sold 100 GJS at 15.6 (Nov 2009). I realized that I did not have a post telling me what happened to the shares bought at $10.5. I checked my records, and I sold those shares on 4/24/09 at $11.09. Realized gains on this security to date are $412.68 mostly in the IRA. I switched to holding the synthetic floaters in the retirement accounts in 2009 after realizing that they had some unique tax issues. When I finally came to the realization that I was almost playing with the house's money on GJS, I decided to venture into it again.

GJS is a synthetic floater tied to a senior Goldman Sachs bond maturing in 2033. This security does not have a guarantee and pays interest monthly at a .9% spread over the 3 month treasury bill rate which is near zero currently. Par value is $25. So, I am not buying GJS for the current yield. Instead, I justify adding a small amount in the Roth in the event there is a spike in short rates down the road which will make the yield on this security attractive. Historically, a 5% 3 month treasury bill rate is not uncommon. The Federal Reserve has a list of the daily data going back to 1982, www.federalreserve.gov. Just eyeballing that data, I would guess that the average since 1982 would be close to 4.5% to 5%, though the length of the current abnormally treasury rates is certainly bringing that average down.

At a 5% treasury bill rate, assuming that was the average over the course of 1 year, GJS starts to look attractive provided I buy the security at a substantial discount to its $25 par value. The spread of .9% brings the coupon rate to 5.9% at that 5% rate, but the yield to a purchaser at $14.6 is not 5.9%. The yield at a total cost of $14.6 would be 10.1% in this example.

Unlike the GS equity preferred floaters, GJS does have a maximum interest rate which is a negative when I am using the security as a hedge against an unexpected rise in short term rates. The maximum rate is 7.5%. www.sec.gov While my actual interest payments will fluctuate each month based on the fluctuations in the 3 treasury bill rate, I can calculate my minimum and maximum current yields based on a total cost of $14.6. My minimum coupon would be .9% with bills at zero and the maximum is 7.5% which will be hit with the bills at 6.6%. At a total cost of $14.6, this gives me a range of between 1.54% (near where it is now) to 12.84%. Importantly, the YTM would be greater given the large discount to par value.

As with the other synthetic floaters, the float is created by a swap agreement. Synthetic Floaters As long as that agreement remains in force, an owner of GJS will receive .9% above the 3 month treasury bill rate. If the swap agreement is terminated for any reason, then the owners of GJS will receive the fixed coupon rate of the underlying GS senior bond which is 6.125%, paid semi-annually, a much better deal for the TC owners. This bond is now trading over its par value. FINRA I would not anticipate this actually happening. The swap counterparty was Wachovia, now part of Wells Fargo. I would not predict that WFC will be going bankrupt like Lehman anytime soon.

The swap counterparty has a good deal at present, receiving from the trustee for GJS the interest paid by Goldman Sachs into the trust at 6.125%, and then paying the trustee .9% above the 3 month T Bill rate to be distributed to the trust certificate owners. It beats working for a living. In effect the swap counterparty has no economic stake, the trust owns the bonds that were in effect bought by the trust through the issuance of the trust certificates to the public, and the counterparty receives now around 5% without any risk or skin in the game. If GS went bankrupt, the losers would be the owners of the GJS, with the counterparty just foregoing the cash flow from the swap transaction.

GJS closed at $14.7 on Monday on 100 shares of volume. Limit orders have to be used for these thinly traded securities. Sometimes I will enter a limit order at the ask price if that is an acceptable price to me.

3. Call by the Issuer of a LONG TERM Corporate Bond: Many of the long term bonds that are the underlying securities in trust certificates have some variation of the following applicable to a call by the issuer:

REDEMPTION:  We will have the option to redeem the notes, in whole or in part,   at any time, at a redemption price equal to the greater of (1) 100% of the   principal amount of the notes to be redeemed or (2) as determined by the   quotation agent described below under "-- When We Can Redeem the Notes", the   sum of the present values of the remaining scheduled payments of principal and   interest on the notes to be redeemed, not including any portion of these   payments of interest accrued as of the date on which the notes are to be   redeemed, discounted to the date on which the notes are to be redeemed on a   semi-annual basis, assuming a 360-day year consisting of twelve 30-day months,   at the adjusted treasury rate described below under "-- When We Can Redeem the   Notes" plus 20 basis points, plus, in each case, accrued interest on the notes   to be redeemed to the date on which the notes are to be redeemed.

www.sec.gov at p. S-3. The treasury rate is the rate on a treasury with a maturity comparable to the remaining years left on the GS bond. This would make it unlikely that bond would be called by the issuer, although it conceivably could happen at some point closer to maturity for the GS 2033 senior bond. Since a bond with this provision is less likely to be called by the issuer due to this penalty, compared to one without it, they consequently will be more likely to sell at larger premiums to their par values in a period of low interest rates. By including a call warrant provision in the TC prospectus containing a long bond with a make whole provision, the brokerage that originated the TC has the option of capturing that premium by exercising the warrant, paying off the TC owners at par value plus accrued interest, and the selling the bonds.

I am not set up to run calculations on the present value of future payments which would be a requirement for me to assess when a firm might actually pay that penalty and call the bond. If someone gave me a software program and told me how to work it, I might take the time to do it. Besides, I have been a stock investor for over 40 years and a bond investor for about 4 years which simply highlights my true interests. As previously related in this blog, I became a bond investor at the tender age of 55, buying my first one ever, after I started to listen to Frank Sinatra, which somehow rewired my brain, and I then came to a realization that I was no longer a Young Stock Stud.

So, I can not decide on a good price to pay for a bond selling at a premium that is subject to a make whole provision. I can, however, evaluate when it would make sense for the owner of the call warrant to exercise that right and to redeem a TC at par value. The call warrant holder has the option to exercise that right, and does not have to do anything. One owner may be satisfied to exercise the warrant for a TC containing a bond selling at a 15% premium while another would hold out for more.

Redemption by the issuer is separate and distinct from evaluating the likely redemption by the owner of the call warrant. Many of the TCs that contain bonds selling at premiums to their par values have been called recently by the owner of the call warrant, not by the issuer of the bond. The fixed coupon TCs (as opposed to the most of the synthetic floaters) have a call warrant provision that allows its owner to basically pay off the TC owners at their par value plus accrued interest, take possession of the underlying bonds in the trust thereafter, and then sell the bonds at a profit in the bond market. {I believe that both the synthetic floaters GYB and PYT have call warrants; GJS does not}

Over the past few weeks, there has been several exercises of call warrants. I recently had my positions in JZE and XFL fully called, and JZJ partially called by the owners of the call warrants. The QuantumOnline.com notes in red those TCs that have been called and the date of the call. HJE, another TC with the same Verizon bond as PJL and XFL, has been called in full for 8/30/2010. HYA was partially called with the same Verizon bond as its underlying security. It would not surprise me to see PJL called at anytime, and I own that one. KVJ, with a Disney bond, has just been called for a redemption date on 9/10. Conditional Redemption of CorTS Trust for Walt Disney Notes (see Call Warrant Exercised on JZE and JZJ More on the Call Warrant in TCs Call Warrant Exercised on Verizon TC XFL Call Warrants and Trust Certificates)

I am in the process of updating gateway post on Trust Certificates Links in One Post to link more information in one place, including the prospectus for the TC, the underlying bond prospectus, and the FINRA information on the underlying bond.

4. Bought 50 of the TC PYB at $22.83 and 50 JZS at 22.95 in the Roth IRA on Monday (see disclaimer): PYB is a trust certificate that contains as its underlying bond the senior Goldman Sachs bond maturing in 2033 which is also the underlying security in GJS. JZS is a TC which has the same underlying bond as its underlying security.

As to PYB, par value is $25 and PYB has a call warrant provision in the prospectus: www.sec.gov The underlying GS bond is trading at a small premium to its par value. FINRA I do not know who owns the call warrant now, but I would suspect that Merrill Lynch, the originator of the trust for PYB, would own it. Whoever owns it, it is a guessing game as to how much premium in the underlying bond will tempt the warrant holder to redeem PYB (or the other fixed coupon TCs containing this bond: JZS PYB PJI DKP DKW HJG)

The exercise of the call warrant would just be a bonus for the owners of PYB, in that it would result in the payment of the $25 par value and accrued interest. If it is not exercised, then I am barely satisfied with interest paid by this security. The coupon is just 5.75% which translates into a 6.3% yield at a total cost of $22.83. The TC and the underlying senior GS bond mature on 2/15/2033. This is a link to all of the SEC filings for PYB. The last filed Trustee's Report shows 73 million in principal amount of the GS 2033 bonds.

I placed this security in the ROTH IRA. In that account a 6.3% yield does not look so bad since it is analogous to a tax free bond in the taxable account. Of course, I do not pay taxes on the interest payments, nor do I pay a tax when I withdraw funds from the ROTH after age 59 1/2. In my planning, the ROTH IRA will be my very last source of funds. If I ever have to tap it, I will be most likely in a financial pickle. It is unlikely that I will ever have to tap any of the retirement accounts.

The senior GS 2033 bond is rated A1 by Moody's and A by S & P.

The foregoing discussion is equally applicable to JZS with a few differences. The coupon JZS is 5.8% and it is likely to have a different owner of the call warrant (CW) than PYB. I do not know that for a fact but these TCs were originated by different brokerage firms. JZS is a Lehman ABS origination, and I have had two recent calls by the CW owner(s) in two Lehman ABS originated TCs, JZJ and JZE. By spreading what I am willing to invest in fixed coupon TCs with this senior bond, which is less than $2500, I at least increase my odds of a call by the CW owner by owning two separate TCs rather than just one. This is a link to the prospectus: www.sec.gov The CW provision can be found at pages S-4 & S-7. This is a link to all of the SEC Filings for JZS. The trustee's report on distributions is contained in Form 8-k, and this is a link to the last filed report. Trustee's Distribution Statement This report shows that the trust owns 25 million in principal amount of the 2033 GS bonds.

There are only a few TCs left that are selling below their par value, which have a call warrant (CW) attached, and where the underlying bond is selling at a premium to its par value.

A few weeks ago, I added 50 shares to my position in JZV based in part on the CW issue. Bought 50 TC JZV at 22.6 The underlying bond in JZV is a senior CNA Financial bond that is currently trading above its par value. FINRA I successfully traded that TC during the Dark Period and my last trade was a purchase at 9.93. I still own those shares. My first discussion of JZV was soon after I started this blog, where I discussed a purchase of 100 shares at $12.78: TRUST CERTIFICATE CNA BOND JZV (October 13, 2008). JZV is currently trading near its $25 par value. As investors who play this niche area already know, the TCs are generally lightly traded and 5000 shares in a day can be characterized as heavy trading for most of them. I noted that the volume in JZV was picking up in June to higher than normal volume: JZV: Historical Prices for Lehman ABS Corp 7.00% Corporate One explanation is that some investors are just searching high and low for any kind of yield. Another reason would be a combination of the foregoing rational and the CW play.

5. Sold 50 PZB at $22.3 and 50 PZB at 22.49 on Monday (See Disclaimer): Shortly after this trade, HK criticized the LB for trading too much and was not exactly supportive of this sell. The shares which were sold were bought in a taxable account at $16.05 and the gain just turned into a long term capital gain. LB's reasoning was that is better to harvest some of these long term capital gains in 2010 since who really knows what will happen to the tax rates in 2011. HK replied that a tax is still owed, and he liked the income being generating by this security. The current yield was about 10.44% at a total cost of $16.05. As readers know, the LB is confident that every decision made by it is the correct one, never makes a mistake, and is sensitive only about one thing-being criticized and falsely accused of making a mistake. So LB quit yesterday as our head trader leaving the HK in a pickle.

This security did just go ex interest for its semi-annual payment on 8/27: PPlus Trust Series LTD 1, PZB Stock Quote

It was Headknockers intention to hold onto 50 shares of the TC PZB bought recently at 19.85 in the Roth IRA. However, our new HT, Honey Girl, always obedient to the LB, while ignoring of course the OG or trying to cause the OG as much exasperation as possible, consequently sold the PZB in the Roth at $22.49 after being barked at by the LB.

I initiated a small position in a CEF and added to a TC on Monday, and I will discuss those trades in the next post.

Monday, August 30, 2010

Added 40 Intel at 18.35/Sold 50 SLGPRC at $24.76/Sold 100 GJD at 20.2 & Bought 50 XFJ at 25.38/Sold 50 NAL at 12.7 & Bought 50 FNFG at 11.74/Sold HPI

Investors had second thoughts about buying long term treasuries last Friday. The 30 year treasury fell 3 9/32, and the 10 year declined 1 15/32. TLT, the ETF for the long treasury, declined $3.07 or 2.83%. EDV, the Vanguard ETF for treasury strips, magnified those losses, as one would expect, by losing 4.13% of its value.

The prices for those long term securities assume the existence of deflation interrupted by brief spasms of low inflation for most of the remaining years in our Old Geezer's life. Such an assumption, which flies in the face of the last 70 years of U.S. history, is not rated a mere possibility or even more probable than not, by the denizens of bond land. Instead, to justify the current price of the long treasury bonds, the Japanese scenario for the U.S. economy has to be considered a virtual certainty. When there is an inkling of data which suggests that such a dire future may not after all be quite so certain, just a whiff will do, the bugle is blown sounding the retreat, and the herd starts to stampede out of long treasury bonds.

I suspect that the decline last Friday in the long treasury paper was due mostly to the revised 2nd quarter GDP. News Release: Gross Domestic Product The downward revision to a 1.6% increase in GDP from the 1st quarter's revised number of 3.7% was not as bad as predicted by the pundits and doomsayers. The first estimate for 2nd quarter GDP was 2.4%. A spike in imports subtracted more from GDP in the second quarter than at any time on record. Personal spending and business investment was revised upward. The GDP price increase was also revised up to a 1.9% annualized rate from 1.8%.

Alan Abelson has found a kindred spirit in Albert Edwards who is predicting a fall in the S & P from its current level of 1065 to 250: Barrons.com Apparently, David Rosenberg was not pessimistic enough for Alan causing the wit from Barron's to search the world for someone more ghoulish than David. Alan submits that the market did not find a true bottom after the S & P 500 declined from 1560 in October 1997 to 670 in March 2009, as it did in 1973-1974 when stocks experienced a similar percentage decline. dshort.com: Bear Markets Since 1950 Such a remark by the sage at Barron's caused the RB to ask what was Alan smoking, RB wants some of it. Alan's contention on that point was clearly non-sensical and belied by the data. In every long term secular bear market for stocks, there is one catastrophic phase where there is a decline of over 50%. For the three major long term secular bear markets in the last 100 years, those horrendous declines ended in 1932, 1974 and 2009.

This article from Saturday's NYT summarizes the risks of bond funds compared to owning individual bonds. For those who own funds, the author made the point of checking the bond funds "duration". For each 1% change in interest rates, the fund's value will generally change by 1%. So a duration of 8 years would suggest a 8% decline in the fund's value after a 1% increase in rates. Measuring a Bond's Interest-Rate Sensitivity That would be a rough estimate and the actual amount will vary by the type of bonds owned by the fund. An increase in rates would have the most severe adverse impact on a fund owning U.S. treasuries and possibly less on a junk bond fund where the increase in rates is due to an economic recovery gaining steam.

I bought Amazon's new Kindle last week after reading several favorable reviews. All members of the staff here at HQ are readers, though their interest vary of course. The Kindle's price has come down to $139 and improvements have been made in the device. Apparently, Amazon is being swamped with orders since no promise was made on the delivery date. Instead, I was informed that I will receive an email when it is ready to ship.

Richard Lehmann recommended AEB in his column in this week's Forbes. I have discussed this security in a number of blogs starting in October 2008. Item # 5 LIBOR (Post 10/6/2008) AEB is a hybrid security (bond/equity features) that pays the greater of 4% or 7/8 % above the 3 month LIBOR rate. (prospectus: www.sec.gov & see generally: Aegon Hybrids: Gateway Post Advantages and Disadvantages of Equity Preferred Floating Rate Securities)

1. Added 40 Intel at $18.35 on Thursday (see Disclaimer): Intel is an existing position. I thought that the recent price decline from a close at $21.78 on 7/22 (Historical), based on fears of a slowdown and the McAfee acquisition, was overdone. At $18.35, the current dividend yield is about 3.48%, close to the yield on a 30 year treasury bond now (Java Chart - WSJ.com), and Intel has been raising its dividend in recent years.

The analyst from JMP Securities did maintain his outperform rating on Intel on Thursday with a $30 price target. Barrons.com He cut slightly his 2010 and 2011 earnings forecasts, however, to $2.05 and $2.25 respectively based on softer PC demand and the small dilution expected expected from the McAfee acquisition.

The current consensus is for an E.P.S. of $2.1 in 2011. The stock is selling at a 8.74 P/E on that 2011 price based on the $18.35 price.

I am reinvesting the dividend to buy additional shares, having recently changed my option back to reinvestment from cash payments.

My previous buys of Intel were noted in the following posts: Bought INTC at 14.46 Bought Intel at 15.25 Bought Intel at $15.87 Added to Intel at $19.08

I mentioned in a prior post that I would likely add to my Intel position after selling Cisco earlier this month.

After I made my purchase on Thursday, the stock continued to decline, closing at $18.18.

On Friday, Intel reduced its forecast for 3rd quarter revenues to 11 billion, plus or minus 200 million, based on softening demand for PCs in developed countries. The previous guidance was for revenues in the range of 11.2 billion to 12 billion. INTC reduced its estimate for 3rd quarter margins to 66% from 67%. Intel's Third-Quarter Below Expectations Maybe that announcement was not as bad as anticipated, the stock rose 19 cents in trading on Friday to close at $18.37.

2. Sold 50 shares of SLGPRC at $24.76 in Roth Thursday (see Disclaimer): I decided to refrain from pressing my luck on large unrealized gains in REIT preferred stocks held in retirement accounts. The shares of SLGPRC were bought in March 2009 at $10.50, so I had a gain just on the shares of over 130%. I still own 30 shares in the regular IRA bought at about the same time which I may keep. SLGPRC is an equity preferred stock issued by S. L. Green (SLG) with a $25 par value and a 7.625% coupon: www.sec.gov I am building up some cash in the ROTH which hopefully will be deployed when an opportunity develops, and I am not adverse to buying a stock CEF or ETF in the retirement accounts provided the fund has a good dividend yield.

3. Sold 100 shares of the TC GJD at $20.20 and Bought 50 shares of the TC XFJ at $25.38 (see Disclaimer): Maybe if the LB keeps moving, it will be hard for the Masters of Disaster to land a solid punch. Movement, for the sake of movement, may be the only rational explanation for this exchange.

I did mention in my posts involving the purchase of TCs containing a Sprint Capital senior bond that I wanted to keep my exposure to less than $2000. Item # 1 Current Yield and Yield to Maturity: Comparison of Sprint TCs I was temporarily over that limit before the recent purchase of DHM, which had a higher current yield than GJD at the prices prevailing at that time of that last purchase. Bought 50 DHM at 22.84 GJD is the security that I tried to sell with a AON order at $20.09 earlier last week, for the purpose of realizing my second trading profit on TCs containing this Sprint Capital bond and to bring myself back into compliance with my maximum exposure limit. I am in a trading mode with the TCs that contain this bond and hope to be playing with the house's money on them within a couple of years.

After selling 100 GJD, I currently own only 100 of DHM. The shares of GJD sold on Friday were purchased in two 50 shares lots at 17.49 and at 17.95, and I held those shares long enough to receive one semi-annual interest payment. To determine when I am playing with the house's money, I will add the realized gains to the dividend or interest distributions received over time. I sold the 50 shares of GJD bought in Roth at at 17.8 on the ex interest date. Sold 50 of the 150 GJD at 18.59

The underlying Sprint Capital bond in the TCs DHM and GJD is junk rated. I partially replaced GJD with XFJ, a TC containing a Motorola bond maturing in 2038 that is rated investment grade. At their respective closing prices on Friday, XFJ has a higher current yield than GJD, but GJD has a higher YTM since it is selling at a discount to par value whereas XFJ was selling at a small premium. GJD matures on 11/15/2028 and XFJ has a 11/15/2028 maturity date.

XFJ has as its underlying security a senior bond from Motorola that has 6 1/2% coupon. This bond is currently selling at a premium to its par value.FINRA XFJ has a higher coupon at 8.375%. At a total cost of $25.38, the XFJ current yield is about 8.25%. Based on the last trade of the bond, its current yield is around 6.25%. While the Finra page shows that all three rating agencies have assigned an investment grade rank to this bond, I would classify this bond as in between high grade junk and the lowest investment grade rating. I am uncomfortable giving MOT an investment grade bond rating.

Motorola has gained some momentum with its new Droid phone. Morningstar has a page that summarizes the maturity dates and amounts of Motorola's debt.

This is a link to the XFJ prospectus: www.sec.gov

The owner of the call warrant for XFJ exercised its conditional redemption right in June. Conditional Full Redemption of Corporate Backed Trust Certificates, Motorola Debenture-Backed Series 2002-14 Trust Class A-1 Certificates (CUSIP: 21988G387; NYSE: XFJ) Class A-2 Certificates (CUSIP: 21988GBX3). The funds were to be delivered to the trustee on 6/23, and apparently this did not happen since XFJ is still trading. The existence of the call warrant does place a cap on XFJ's appreciation. As previously discussed, the rational cap is par value plus accrued interest when the underlying security is trading above par value. So, I would not want to pay much more for XFJ than my purchase price last Friday.

4. Sold 50 NAL at $12.7 and Bought 50 shares of First Niagara at $11.74 (FNFG)(Regional Bank Stocks' basket strategy) (see Disclaimer): NewAlliance Bancshares (NAL) is being acquired by First Niagara. I could wait for the merger to be completed, and then exchange my NAL shares for FNFG shares. Instead, I decided to make the exchange myself now at current prices. I now own 200 shares of First Niagara. (see discussion at Seeking Alpha). I would agree with Cramer that FNFG appears to the following the Fleet Bank playbook from the early 1990s after the S & L crisis. (CNBC) I had bought the 50 NAL at $11.76.

5. Sold 100 of the CEF HPI at $19.5 (see Disclaimer): The bond CEF HPI was just bought last month in a taxable account at 17.76. This CEF will not be paying qualified dividends. So I bought a similar CEF HPF in the Roth IRA with the intent of harvesting a profit on HPI. Bought 100 of the CEF HPF at 19.09 in Roth IRA I am in a trading mode on all of these bond CEFs bought in 2010 due to my concerns about interest rate risk. I believe that inflation is a far greater risk than deflation over the intermediate and long term.

I bought as the replacement for HPI in the taxable account another John Hancock CEF, HTD, that is set up to pay qualified dividends. Bought 200 of the CEF HTD at 14.13 All of the foregoing was done primarily for tax reasons, and secondarily to harvest a small profit in HPI. It just makes more sense for me to hold HPI and/or HPF in a retirement account and HTD in a taxable account, at least for as long as the favorable tax treatment for qualified dividends is continued by the U.S. government.

Two more trades were made on Friday which will be discussed in the next post and hopefully I will catch up on Tuesday.

Friday, August 27, 2010

Bought 50 FBNC @ 12.58/Sold LXPPRD & CUZPRB /Bought: 100 CDZ.TO @ 18.64 CAD, 200 MOL at 9.95, 50 PYI @ 23.98, 50 JBK @ 19.63 in Roth IRA

The Labor Department reported yesterday a 31,000 decline in claims for unemployment benefits, better than the 10,000 decline predicted by the consensus estimate. ETA Press Release: Unemployment Insurance Weekly Claims Report Initially, the market received a lift from these news before resuming its funk.

The DJIA closed at 9997.62 on March 18, 1999: ^DJI: Historical Prices The DJIA closed yesterday at 9985.81. The S & P 500 closed yesterday at 1047.22, ^GSPC. On March 2. 1998, the S & P closed the day at 1047.7: ^GSPC: Historical Prices for S&P 500 Maybe Professor Siegel needs to incorporate the critical concept of situational risk and the reality of long term stock bear markets lasting around 15 years give or take a couple into his thesis about stocks for the long term. To Professor Siegel: Time for a Re-Think (May 2009 post) The Roller Coaster Ride of the Long Term Secular Bear Market During my limited life span, there have already been two long secular bear markets. If an investor bought the S & P 500 at the start of one, reinvested the dividends, the following would approximate their inflation adjusted return:

1/1/1966 to 12/31/1981= -1.04% annualized

1/1/1998 to 12/31/2008: -1.44% annualized

Annualized Returns of the S&P 500 I am sticking with my long term forecast that the current long term bear market will last two or three more years, with intermittent rallies, and the end result will be an inflation adjusted annualized return of between -1 to -1.5 after reinvestment of dividends since 1/1/1998.

1. Bought 50 of First Bancorp of North Carolina (FBNC) at $12.58 (Regional Bank Stocks' basket strategy) (see Disclaimer): I placed FBNC on my monitor list after watching an interview with its CEO at TheStreet.com that focused on a FDIC assisted acquisition of Cooperative Bank headquarted in Wilmington, N.C. FBNC picked up 18 new offices with that acquisition after consolidating some branches after bringing its total to 92 branches with 3.5 billion in assets. The bank has expanded into Virginia and South Carolina from its base in Troy, N.C. This is a link to the locations of its branches: First Bank - Who We Are - First Bank NC, SC, VA

The bank earned 17 cents in the last quarter and is currently paying an 8 cent quarterly dividend. form10q As of 6/30/2010, the net interest margin was 4.35%; the total risk-based capital ratio was 16.43%; the tangible common equity to tangible assets was 6.56%; non-covered NPAs to total non-covered loans was high at 3.89% for banks in my basket, and the allowance for loan losses to non-covered loans was 45.13%. I view FBNC to be a potential long term winner but a marginal add at this time due to the high non-performing loans that are not covered by the FDIC assisted acquisition agreement.

2. Sold 50 LXPPRD at $23.46 in the Roth IRA and Sold CUZPRB at 23.85 in the Regular IRA on Wednesday-De-Risking (see Disclaimer): Both of these securities are equity preferred stocks issued by REITs and are consequently junior to senior and secured debt. I was fortunate to buy the Lexington preferred shares at $7 in March 2009. Buy 50 LXPPRD That is around a 230% gain on the shares plus several quarterly dividend payments. I decided that it just was not worth risking the profit given the current uncertainty. The CUZPRB shares were just bought at 22.25, and I have received one dividend payment. In both cases, I intend to buy replacements that are further up the seniority ladder, and I did replace CUZPRB with what may be one of the more difficult to understand securities.

3. Added 50 JBK at $19.63 in Regular IRA Wednesday (see disclaimer): JBK is the replacement for CUZPRB in the regular IRA. At JBK's current distribution rate of $.7931 semi-annually, the yield at a total cost of $19.63 is about 8.01%.

The SEC filings for JBK can be accessed at the SEC web site. This is a link to its prospectus: www.sec.gov The LB does not like repeating the same information over and over again, but this security requires a synopsis of prior discussions. I still own 100 shares of JBK bought at $16.15. Several of the earlier discussions are in the following posts: more on jbk Bought 50 of the TC JBK Synthetic Floaters

When JBK was sold to the public, it was a synthetic floater. It paid the greater of 3.5% or .75% above the LIBOR rate, with distributions paid quarterly. That float and guarantee was created by a swap agreement with Lehman. Before Lehman's bankruptcy, the trustee would receive the interest payments from GS at 6.345%, the fixed coupon rate of the underlying security in JBK, and would deliver those funds to Lehman in exchange for amount due the owners of JBK. If the TC owners were entitled to receive just the 3.5% guarantee, then Lehman would pay that amount to the trustee and keep the spread between the 3.5% and 6.345%.

When Lehman filed for bankruptcy, the trustee took the position that the swap agreement was terminated by the bankruptcy filing and started to pay the owners of JBK the fixed rated coupon amount of the underlying GS TP. This was a much better deal for the owners of JBK in the current low interest rate environment where the guarantee would be the applicable rate if the swap agreement was still in force.

From the first payment at the 6.345% coupon rate made in February 2009, the trustee withheld $100,000 to contest some position being made in the Lehman bankruptcy hearing. www.sec.gov One of my readers called the trustee and was told that the Lehman bankruptcy estate was taking the position that it was entitlted to some compensation for all of its terminated swap agreements, and the JBK swap agreement was just included in a long list of others. The wording of all of these swap agreements varied, and some may not have been as clear as the JBK prospectus on the automatic termination of the swap agreement after a bankruptcy filing. I would add at this point that all of the foregoing is multiple hearsay. I have not discussed the matter directly with the trustee, nor have I examined any of the documents in the Lehman bankruptcy and have no intention of ever doing so.

Instead, I focused on the language of the prospectus which seems to support the trustee's position that the swap agreement terminated, see page S-30 www.sec.gov. And I would note a filing made by Lehman acknowledging the termination of the swap agreement in a SEC filing:

" Lehman Brothers Holdings Inc. (“LBHI”) is Credit Support Provider for Lehman Brothers Special Financing Inc.(“LBSFI”) under the ISDA Master Agreement dated as of March 19, 2004 between LBSFI. and Corporate-Backed Trust Certificates, Goldman Sachs Capital I Securities-Backed Series 2006-4 Trust, as supplemented and amended by the Confirmation dated March 19, 2004 and Schedule dated as of March 19, 2004, (collectively, “Interest Rate Swap”). The September 15, 2008 bankruptcy filing of LBHI, resulted in an “Event of Default” under (and as defined in) the Section 5(a)(vii) of the Interest Rate Swap. This is a Swap Agreement Termination Event but not a Trust Termination Event under the Standard Terms for Trust Agreements dated as of January 16, 2001 as supplemented by the Series Supplement, Corporate Backed Trust Certificates, Goldman Sachs Capital I Securities-Backed Series 2004-6, dated as of March 19, 2004. No further payments are required made by the Trust to the Swap Counterparty and no further payments are expected to be received from the Swap Counterparty. The Trustee will apply interest received on the Underlying Securities as set forth in Section 5 of the Series Supplement. Please note that interest payments on the Underlying Securities are scheduled to be received only on February 15th and August 15th of each year." www.sec.gov

Still, litigation is rarely 100% certain, and I have not heard the bankruptcy estate's argument on this issue, assuming they have one. JBK may also have the risk that the trustee could withhold some funds from a future distribution to pay legal fees, though it has not done so after that $100,000 draw on the 2/2009 distribution to the owners of JBK.

JBK went ex interest for its semi-annual payment earlier this month. I have yet to see any financial site that has the correct yield information for this security. All of them assume that the 79.31 cent interest payment is made on a quarterly schedule when it is actually a semi-annual payment. JBK was paying quarterly when it was a synthetic floater but is now on the same semi-annual schedule as the underlying fixed coupon GS TP. Once the swap agreement creating the synthetic float terminates for whatever reason, the owners of the TC JBK are entitled to receive the interest paid by the underlying security on that securities payment schedule, which has been happening since the February 2009 payment.

The underlying bond is a trust preferred issue from Goldman Sachs Capital that is guaranteed by GS. It is rated A3 by Moody's, A+ by Fitch, and BBB by S & P according to FINRA. The underlying bond is currently trading near par value and has a coupon of 6.345%. Goldman Sachs 6.345% Junior Debenture Maturing on 2/15/2034

Due to the history of JBK, and for other reasons involving a lack of knowledge about this security, JBK sells at a discount to the other fixed coupon TPs that contain the same GS TP. The current discount yesterday depended on the particular TC but is averaging around a 1.5% higher yield for JBK than the others. The YTM is greater than that 1.5% since JBK is selling at the largest discount to its par value, and all of the TCs referenced below mature on the same day in 2034:

GYA 6.55% at $22.80 MarketWatch.com Quote
PYC 6.59% at $22.76 MarketWatch.com Quote
PYY 6.53% at $22.52 MarketWatch.com Quote
PYK 6.66% at $23.4 MarketWatch.com Quote
HJJ 6.59% at $22.75 MarketWatch.com Quote
HJL 6.58% at $22.75 MarketWatch.com Quote
HJN 6.41% at $22.73 MarketWatch.com Quote

I took the yield information from Marketwatch at the prices indicated on the day that I executed the trade, and I did not attempt to calculate the yields. When I bought JBK at $16.15, I made a note on the TC yields for all of the above, and it was not as tight then as now. Item # 5 Bought 100 JBK at $16.15 Now, there is a consistency among the other fixed coupon TCs containing the same GS TP maturing in 2034 with JBK having about a 1.4% yield advantage.

This brings me back to 150 shares of JBK which is all that I want to own. I also own in the retirement accounts shares of GYB and PYT, two synthetic floaters, tied to the same GS TP. I just sold out of my stake in a TC containing a senior GS bond, (Sold 50 PJI at 23.52), which gave me some space to add JBK back after it fell some in price subsequent to its ex interest date. By space, I am referring to the self-imposed limit of 10 thousand in exposure to any one company after aggravating my ownerships in all of its securities, from its senior bond all the down to the lowly common stock. Trust Certificates Links in One Post

4. Bought 100 of the Canadian ETF CDZ.TO at 18.64 CAD on Wednesday (see Disclaimer): This Canadian ETF was ex dividend for its monthly distribution on Thursday. This purchase was an average down from an earlier purchase in April at 19.24 CAD. As previously discussed, I have a long term position in Canadian dollars and am constantly looking for ways to generate some income on that position. I am not concerned about currency fluctuation given my long term focus on owning the Canadian dollar.

This Canadian ETF attempts to replicate before fees and expenses the Canadian Dividend Aristocrats Index. Claymore S&P/TSX Canadian Dividend ETF - CDZ - Claymore Investments, Inc. This is a link to the historical dividends which fluctuate up and down depending on the month. CDZ - Claymore S&P/TSX Canadian Dividend ETF - Claymore Investments, Inc.

I take the dividend distribution for all of my Canadian securities in Canadian dollars. Canada does withhold 15% as a withholding tax, and the foreign tax credit issue is one reason for owning these securities in a taxable account. My largest single position is 400 shares of the Claymore 1-5 Yr Laddered Government Bond ETF (CLF).. I also own the Claymore 1-5 Yr Laddered Corporate Bond ETF . Individual security positions include Brookfield Asset Management (BAM-A.TO)(BAM on NYSE) and ENERPLUS RESOURCES FUND (ERF-UN.TO) (ERF on the NYSE).

5. Bought 200 MOL at $9.95 on Thursday and Sold 100 MHC at $10.20 Earlier in the Week (See Disclaimer): A reader brought to my attention MOL, a "principal protected" note from Citigroup Funding about a week or so ago. I was not that interested in it for the reasons discussed below. But, MOL is linked to the price of gold and I did not own any other note link to gold specifically, though I do own MKN and MKZ which are linked to the commodity index. In case I changed my mind, I sold 100 MHC at $10.2 to provide some room for MOL, since I am already above my comfort level on exposure to Citigroup.

MHC is also a note issued by Citigroup Funding but its distributions are linked to the S & P 500. I bought those shares at 9.8. Both MHC and MOL have a $10 par value and a 2% guarantee. The other Citigroup Funding "principal protected notes", which are owned, have 3% guarantees. (see discussions at Item # 1 Bought 100 MBC at 9.78; Item # 8 MBC; Item # 6 Bought 100 MKN at 9.85; ITEM # 3 Bought 100 MKZ at 9.96; Item # 5 Bought 100 MKZ at 9.91 in the Roth IRA (SOLD); Item # 1 Bought 100 MOU at $10.12; Item # 6 Bought 100 MYP at $10.12; and generally Item # 2 Principal Protected Notes/Build America Bonds)

Anyone investing in these securities needs to spend some time becoming familiar with their advantages and disadvantages. I placed "principal protected" in quotes above for a reason. These securities are not insured by the FDIC. They are senior notes issue by Citigroup Funding. Like any senior unsecured note, there is no "principal protection" in the event Citigroup collapses and is seized by the FDIC. In that eventuality, I am just screwed.

If Citigroup does survive until these notes mature, and all of the ones owned by me mature in 2014, I will receive the par value of $10. Since the 200 shares of MOL have a $10 par value, I will not lose any money at maturity provided Citigroup survives to pay off the note. MOL matures on 11/26/2014. MOL is a senior note issued by Citigroup Funding that is guaranteed by Citigroup as provided in the prospectus.

What do I receive in terms of interest payments on the note? There is no excuse for anyone buying these securities to avoid reading the prospectus which can be found at the SEC's web site. MOL will pay annually the greater of 2% ($20 on 100 shares) or the percentage gain in the price of gold up to 19% with the following caveats. If the price of gold closes one day above a 19% increase from its starting value, then there is a reversion back to the 2% guarantee for that annual coupon period, no matter what happens thereafter. When I buy these notes, I want a larger percentage than 19% which gives me more leeway to avoid a reversion.

To evaluate these notes, you have to know also the Starting Value for the current annual coupon period and when that period ends. MOL is in its first annual coupon period, and has not yet exceeded that maximum level of 19%. The starting value for the price of gold for the 1st coupon period is $1,169.5. Nineteen per cent of that number is 222.205 which places the maximum limit at 1391.7 (or just multiply 1.19 x 1169.5). I then checked the spot price of gold, and it was trading yesterday morning at $1235. 24-hour Spot Chart - Gold I checked then to determine whether there has been any closes above $1,391.7 and there has been none during the current period. I subtracted the starting value of $1169.25 from $1235, resulting in $65.75, or about a 5.6% increase. Now, that does not matter ultimately but it does tell me that MOL is at least above the 2% guarantee at the moment.

The first coupon period ends on 11/18/2010 (p. PS-2). So, I do not have long to wait to receive a distribution that will either be $40 on my 200 shares or some sum greater. The coupon payment date for the 1st coupon period is 11/26/2010. My plan now is to sell 100 of the 200 at break-even when and if I receive a 10+% distribution. So my goal is very modest for this security.

Both MHC and MOL are less desirable than the other Citigroup Funding notes that I currently own since their guarantees are at 2%, as opposed to 3%, and their maximum percentage levels are low (19% for MOL and 21% for MHC on the S & P 500).

Another Citigroup Funding note is linked to gold also, and it just had a good payday. MTY has a 3% guarantee and a 35% limit: Final Pricing Supplement MTY has just ended its first coupon period on 7/27/2010. The starting value for gold at the beginning of that 1st period was $955. The starting value for the second annual period will be the ending value for the 1st period. Kitco is showing a closing number at $1168 on 7/27. So that was a good percentage gain of 22.3%. Marketwatch shows that MTY paid out $2.23 per share with an ex date of 7/29.

MTY is currently trading about 50 cents over the $10 par value even though a new buyer now has to wait almost a year before receiving the next distribution which may be 3% or some number between 3% and 35%.

Fidelity ceased allowing its customers to buy exchange traded principal protected notes earlier in the year. To my knowledge, it is the only broker that denies its customers the opportunity to buy these securities. I placed the trade for MOL in one of my satellite brokerage accounts with another firm. I mentioned earlier that I would never buy one of these notes unless it was traded on the stock exchange. If I get nervous about the credit of the issuer, I want a market where I at least have the option to sell the security.

6. Bought 50 of the TC PYI at $23.98 on Thursday (see Disclaimer): I had previously traded this TC, buying 50 at $19.05 and then selling those shares at 21.28 after collecting one semi-annual interest payment. PYI is a Trust Certificate that contains as its underlying security a senior bond from Time Warner maturing in 2029,www.sec.gov. The Time Warner bond is investment grade and is currently trading at around a 15% premium to its par value at yesterday's last trade. FINRA The bond has a coupon of 6.625%, higher than the PYI coupon of 6%.

The prospectus for the underlying bond originally issued in 1998 can be found at www.sec.gov.

I do not expect that Time Warner will call the bond, but that is a possibility. If the underlying bond is called by Time Warner then that will likewise result in a call of the TC. It is far more likely that the owner of the call warrant will exercise its rights, pay the owners of PYI the $25 par value plus any accrued interest, and then sell the bonds for a profit. This has been happening regularly now for TCs containing bonds that are selling at premium to their par value in the bond market. (see Call Warrant Exercised on JZE and JZJ More on the Call Warrant in TCs Call Warrant Exercised on Verizon TC XFL Call Warrants and Trust Certificates)

I am constantly tracking most of the TCs in a monitor list, and I noticed on Friday that a TC contained the same Time Warner bond as PYI had been called in full at its $25 par value plus accrued interest. The call is not by Time Warner but by the owner of the call warrant. Synthetic Fixed-Income Securities, Inc. Announces Conditional Redemption of STRATS (SM) Trust for Historic TW STRATS TRUST for Historic TW Inc. Securities, Series 2004-5 The symbol for that security was GJG ( www.sec.gov). The shares rose $1.41 on Thursday to close at $25.31. This does not mean that the owner of the call warrant for the TC PYI will exercise its option, but it would make sense for that owner to do so. If that happened, I would receive a small profit on the shares plus whatever interest had been paid prior to the exercise plus any accrued interest up to the redemption date.

The yield at my cost is not that attractive, around 6.25%, unless the currently abnormally low rates continue for an extended period of time measured in years rather than in months. Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans Quantitative Easing Redux?/More on Investments for Deflation (see discussion at MSN Money)

The remaining trades from Thursday will be discussed in the next post.