Friday, August 20, 2010

Bought 50 of the CEF IDE at 17.4/Bought 50 AEB at 19.74 in Regular IRA/Sold 50 AMPPRA at 28.11/Sold 50 SBIBN at 24/Bought TRST at 5.45 & FNFG at 11.7

An article in the NYT confirms my earlier decision to sell shares in CVB Financial and adds some new information about the potential problems at this bank . See: Sold 50 CVBF at 9.65 & Item # 5 CVBF

The Philly Fed manufacturing survey fell into negative territory, falling from 5.1 in July to -7.7 in August. This was the lowest level since July 2009. NYT The consensus estimate was for a positive 7 reading. Both the shipments and new orders are in negative territory. .pdf Another disappointing report yesterday that added fuel to the treasury bond rally was a rise in initial unemployment claims. ETA Press Release: Unemployment Insurance Weekly Claims Report It would be reasonable to expect a slow recovery in jobs as the best case scenario. For now, there does not appear to be any catalyst for job creation to replace the stimulus provided by excess leverage during the Age of Leverage. The Age of Leverage was born soon after the election of Ronald Reagan in 1980 and subsequently died of self-inflicted wounds in 2007. After thinking about this latest dose of unfavorable news, I decided to leave alone, for now, the long term bonds in the retirement accounts selling at premiums to par value. I thought that a 150 point decline in the DJIA was about right for this latest batch of bad news, The ^DJI fell 1.39% or 144.33 to close at 10,271.21 yesterday. The S & P 500 has returned to where it was in March 1998, the sine qua non of a long term secular bear market.

The Bundesbank says there is little chance that the U.S. will fall back into a recession.

1. Bought 50 FNFG at $11.7 on Thursday (Regional Bank Stocks Basket Strategy)(see Disclaimer): Two of the banks in my Regional Bank Stocks' basket are combining into a super regional. NewAlliance and First Niagara are combining to create a top-25 U.S. bank. NewAlliance shareholders will receive at the holders option 1.10 shares of FNFG, cash, or a combination of cash and stock. Since I was contemplating adding to my 100 share position in FNFG anyway, I will most likely keep my NAL shares, and just wait to convert them into more shares of FNFG. Bought 50 FNFG at 13.7 Added 50 FNFG at 12.62 Bought NAL at 11.76 A more detailed discussion of the merger can be found at MarketWatch and at the

FNFG fell on the news and was down almost 9% when I decided to add another 50 shares late in the day to my position bringing the total to 150 shares (see Disclaimer). I bought the shares yesterday at $11.70. I have a favorable long term view of both NAL and FNFG and view the combination positively. Both banks are very well capitalized. (See last discussions of FNFG at Item #7 and on NAL at item # 3). FNFG closed at $11.95 yesterday. At a total cost of $11.7 price, the 14 cent per quarter dividend results in about a 4.79% yield. I am reinvesting the dividend.

2. Bought 50 of the CEF IDE at $17.4 on Wednesday (see Disclaimer): When I bought this CEF, it was selling at a 6-7% discount to its NAV. The fund is called the ING Infrastructure, Industrials and Materials Fund. This is a a new fund that started earlier in the year and has been paying out a 45 cent per share quarterly dividend since its inception. Distributions If that continues, the yield at a total cost of $17.4 would be around 10.34%. The fund does sell call options. The last quarterly report filed for the period ending in May 2010 can be found at

IDE closed at $17.02 on Thursday. I will be looking for an opportunity to buy the another 50 shares on further weakness.

3. Added 50 AEB in Regular IRA at $19.74 on Wednesday (see Disclaimer): I recently sold 100 shares of AEB, a hybrid security issued by Aegon, in a taxable account. SOLD 100 of 300 AEB at 19.72 This was a day before Aegon finally reached a settlement with the European Commission approving AEG's viability plan and receipt of state aid back in 2008. This gave me slightly more confidence in the Aegon hybrids since a part of the approved plan provides that Aegon will repurchase some of the securities issued in connection with the aid provided by the Dutch government in 2008 and to make an interest payment on those securities. Aegon and the European Commission Since I view those securities to be junior in priority to the hybrids, any such repurchase or distribution triggers the mandatory payment event provision in the hybrid prospectuses. (see, e.g. S-22 of the AEB prospectus at This removes for another year a concern that has been omnipresent with European hybrids since the EC announced its burden sharing policy back in the summer of 2009, the concern being a possible forced deferral of the hybrid coupons by the EC. (see page 8 paragraph 26 .pdf)

(see generally Aegon Hybrids: Gateway Post and posts linked therein)

I have discussed this security since starting this blog in October 2008. In fact, my second post was about AEB: LIBOR AND THE AEGON FLOATING RATE PREFERRED STOCK (October 6, 2008) At one point in March 2009, it traded below $3 per share. Par value is $25. Prior to this last add of 50 shares, I had sold 150 shares to book a profit and had kept 200 shares with a total cost basis around $6 per share.

AEB pays the greater of 4% or 7/8% above the 3 month LIBOR. At a total cost of $19.74, the guarantee, which is now the applicable rate, is worth around 5%. If the 3 month LIBOR rose to say 5% during the applicable computation period for this security, then the coupon would be 5 7/8% which would translate into a 7.44% yield at the $19.74 cost figure.

I do not think AEB's float provision, which provides some inflation protection, is worth the current yield differential between it and the fixed coupon Aegon hybrids, unless the investor believes that problematic inflation lies in the not too distant future. That differential is around 2.6% currently. I decided to buy 50 AEG rather than another 50 shares of the higher yielding AEF based on my views about inflation. I view inflation to be far more of an intermediate and long term threat to bonds than the consensus opinion now. If I am proven right, and who really knows what will happen, AEB will hold its value better during periods of problematic inflation due to the float provision and is therefore a somewhat safer investment over the long term than a Aegon fixed rate coupon hybrid which would likely suffer in a rising rate environment. In that respect, AEB is more of a hedge against greater than anticipated inflation which I view as a more probable than not future scenario. If for example the 3 month LIBOR rose to 10%, the yield at a total cost of $6 would be 45.3% and 13.77% at the recent $19.74 price. This kind of scenario which has happened in my adult life would crush the value of a fixed coupon perpetual bond paying 7% and bought near its par value, even if there was no problem with the issuer's credit risk. I placed AEB in the regular IRA since that gives me the option of receiving a benefit in the event the price falls substantially, the benefit is the lower amount of tax owed after transferring a security from a regular IRA to a ROTH IRA after a decline in value. Other reasons for buying back some of the AEB previously sold is that it has been good to me and I am partial to it.

AEB is a bond, but it will be the most junior of any bond issued by Aegon. Since the European hybrids are also treated as part of equity capital for regulatory purposes, similar to TPs in the U.S., the distributions made by AEB have been classified as qualified dividends. This makes AEB a rare bird. It is an exchange traded bond, treated like an equity preferred stock for U.S. tax purposes, that pays the greater of a guarantee or a percentage above 3 month LIBOR, and its distributions are cumulative.

4. Sold 50 AMPPRA at 28.11 Wednesday (see disclaimer): Since I believe bond investors have gone off the deep end, I am trimming some of my long bond positions. AMPPRA matures in 2039 at $25. It is a senior bond from Ameriprise, and my position was acquired at $24.75. I received a few quarterly interest payments. I would not even consider buying this bond at a 12% premium to its par value considering the huge amount of interest rate risk inherent in owning any bond maturing in 29 or so years.

5. SOLD 50 of the 100 VNOD at $26.67 Wednesday (see Disclaimer): This one was sold for the same reason as AMPPRA. While VNOD is a senior bond that makes quarterly interest payments, it matures in 2039 at $25. BOUGHT 50 VNOD AT 24.85 I am keeping on a very short leash the 50 of VNOD held in the Roth IRA. Bought in ROTH 50 VNOD at 24.86

6. Sold 50 of 100 of the TP SBIBN at $24 on Wednesday (see Disclaimer): I view the stock ETF DEW, purchased on Wednesday and discussed in the prior post, to be the substitute for VNOD, SBIBN and AMPPRA. I just view high yielding stocks from well established companies to be a better value now than long term bonds. I am also uncomfortable with a 100 share position in SBIBN. Using FIFO accounting, I sold the 50 shares bought at 23.2 and I received one quarterly interest payment on those shares. I should have done a better job buying the second fifty share lot. After I purchased the first lot the shares sank to around $21.25, which is where I normally would have bought the second lot, except that I was uncomfortable buying 100 of this TP. Then I could have sold the first lot at $24 and kept the shares bought at the much lower price. Then, if the shares fell a couple of bucks below $21.25, I would consider buying back the 50 sold, and so on. Instead, I bought the second lot at 23. In that post, I mentioned that I might sell the first lot on any kind of pop given my view of this securities risk. I will hold up to a 100 of SBIBN, but hopefully not for long.

7. Added 50 TrustCo (TRST) at $5.45 on Thursday (Regional Bank Stocks basket strategy)(see Disclaimer): This add represents an average down. Bought 50 TRST at 6.3 Added 70 TRST at 5.9 I have the position spread out into two accounts. I bought the additional 50 shares in the account that had the 70 share purchase. In that account, I changed my distribution option to reinvestment into additional shares, while keeping the cash option in the account with the higher cost 50 shares.

TrustCo recently raised its dividend to $.066 per quarter from $.0625. SEC Filed Press Release While that is not much, it is still a dividend increase. If maintained, the annual rate would be $.264 which translates into a 4.84% yield at a total cost of $5.45.

On many of these small positions, I have not been discussing earnings reports or news which is understandable since I have about 400 positions. Since I just added some shares in TRST, I would note that the bank reported an E.P.S. for the June quarter at $.093, up from .07 in the second quarter of 2009. form10q.htm As of 6/30/2010, the net interest margin was 3.51%; the total risk adjusted capital ratio was at 13.94% (well capitalized at 8%); the coverage ratio was .8 (allowance for loan losses as a % of NPLs); and NPLs to total loans was at 2.14%. TRST operates primarily in NY and has 133 offices in NY, NJ, MASS, VT and FL. This is a link to its branch locations: Trustco Bank: Branch/ATM Locator - Home

TrustCo Bank Corp NY closed at $5.37 on Thursday, down 23 cents or 4.11%.

The $5.37 price is close to the five year low reached in March 2009: TrustCo Bank Corp NY Share Price Chart


  1. Regarding the IDE quarterly dividend, the ING website notes:

    IDE estimates that each distribution for the current fiscal year as of March 31, 2010, was comprised of approximately 8% short term capital gain and 92% return of capital. (emphasis mine)

    Correct me if I'm wrong but I thought those return of capital "distributions" are frowned upon since they give a false sense of true return.

  2. BRUNO: Since this is a new CEF, which went public in February 2010, it is too early to tell what the normal components of the distribution will be over the course of a year or two. I would not pay much attention to the fiscal year ending in March since the fund had just started its operation. Over time, I would expect more of a contribution from dividends, short and long term capital gains, and hopefully a successful call writing strategy.

    I would frown on a CEF supporting a dividend distribution with any return of capital, except in the circumstances of a new fund like IDE or as an exception to normal operations (e.g. a 1% to 25% of the dividend as a return of capital in a year like 2008). If a fund is not able to earn the dividend, I would prefer to see a cut in the dividend to bring it in line with income rather than to continue paying a dividend supported by a return of capital.

    I own both RVT and RMT that eliminated their managed distributions in 2009 since those distributions were not being earned, and I support that kind of decision. Both funds have historically been successful. I do not own a CEF like GUT where most of the distribution is return of capital which creates an illusion of success. And GUT sells at a substantial premium to its NAV making it undesirable just on that point.

    But for IAE, as I said, it is too early to tell whether the dividend will be supported by sources of income. Until I know more, I will limit myself to a small position of no more than 200 shares, and I now own just 50. It does fill a niche in my portfolio since I do not own most of the companies in the portfolio.

  3. There is a typo in that last paragraph. I refer to IAE which is another CEF that I own with a small position of 100 shares . I meant to say IDE.