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 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: 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. 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 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."

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 Quote
PYC 6.59% at $22.76 Quote
PYY 6.53% at $22.52 Quote
PYK 6.66% at $23.4 Quote
HJJ 6.59% at $22.75 Quote
HJL 6.58% at $22.75 Quote
HJN 6.41% at $22.73 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, 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

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 ( 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.

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