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.

1 comment:

  1. The Barrons Flash Crash article quotes Eric Scott Hunsader of Nanex. The complete Nanex report is on their website.

    When the Flash Crash reports first surfaced, I thought the HFT outfits were prudent in pulling back in the face of weird quotes from NYSE ARCA and NASDAQ declaring self-help against NYSE ARCA. If HFT quote stuffing to induce bid/ask crosses was the true cause of the event, then corrective action needs to be implemented.