Wednesday, August 11, 2010

Bought 50 of the TC IPB at 21.3/Bought 300 of the Bond CEF CMK at $8.39/FNB/Sold Cisco - Intel Downgrades/CVBF

Besides keeping the Federal Funds rate unchanged at 0 to 1/4%, and announcing again that economic conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the Fed importantly stated that it "will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities" FRB: Press Release--FOMC statement --August 10, 2010 This would be considered a step consistent with quantitative easing, in that the 1.7 trillion in securities purchased by the Federal Reserve starting in 2009 will remain constant at the same level, at least for now. Possibly, as some commentators have suggested, the FED will later expand its balance sheet with new purchases to jump start again a deteriorating economy accompanied by stagnant or decreasing job growth. The new purchases of treasury debt will be relatively small, estimated a 10 billion per month by the NYT. I would view this move as more symbolic than meaningful but it probably does indicate a move away from tightening and leaves open the door to further QE in the event conditions worsen. The Fed also downgraded it economic outlook, noting the "pace of recovery in output and employment has slowed in recent months".

Over the past few trading days, I have noticed that my electric utility holdings have been outperforming the market. While it is hard to get excited about a security yielding 5% to 6%, I no longer scoff at it. Apparently, other investors are coming to the same conclusion. Maybe 5% is mana from heaven when the 10 year treasury yields 2.8% and the 2 year is hovering at .5%. My holdings have been hitting new 52 week highs recently and are trading well above their 200 and 50 day moving averages:

FirstEnergy is my only laggard.FirstEnergy Corporation Chart | FE

1. F.N.B. (own-Regional Bank Stocks basket strategy): After the close on Monday, F.N.B. announced that it was acquiring a small Pennsylvania bank called Comm Bancorp (CCBP). The purchase price was at a 64% premium to CCBP's closing price on Monday. F.N.B. will pay $10 in cash plus 3.4545 its shares for each CCBP share. The merger announcement caused close to a 50% spike in CCBP's price. While I do not own CCBP, I do own CNB Financial which is based in Clearfield, PA and Tower Bancorp (TOBC) headquartered in Harrisburg.

I bought another small bank based in PA on Tuesday which I will discuss in the next post. That purchase was a replacement for OKSB. Sold 50 OKSB at 13.19

2. Trust Certificate IPB (own): This is an unusual TC in that it contains 15 corporate bonds and a treasury strip as its underlying securities. Yesterday morning, I attempted to determine what the yield would be for IPB if I recreated it, using the prices prevailing yesterday morning for the underlying securities. I arrived at a 6.38% figure excluding commissions for buying 16 separate securities. By buying the TC IPB at a total cost of $21.5, the yield would be about 7.04%. I also calculated that a recreated IPB would have to sell at around a $23.57 or at a 2.43% discount to a $25 par value. I would add that I may be doing this wrong. The purpose is to see whether an investor would be better off buying IPB or the individual securities at current prices.

While the treasury strips are selling at a deep discount to their par value, and I give them a double weight in the calculation, a number of the other bonds are selling at significant premiums to their par values at the current time. I discuss how I recreate IPB in this post: Calculations On How to Recreate Trust Certificate IPB. The principal amount of each corporate bond is the same, but the strip has twice the principal amount of one of the corporate bonds. ( see also Bought 100 of the TC IPB at $16.99; More On IPB Part 2; More on IPB) I use the 2030 treasury strip to make the computation and it was priced at 45 on Monday.

While IPB has several advantages, one disadvantage is that the investor has to accept the entire bundle. There is at least one bond contained in IPB where I prefer to see a replacement. And I would not want to buy any of the bonds contained in IPB that are currently selling at significant premiums to their par values, including the ones from Boeing, Credit Suisse, Daimler AG, and Verizon.

There are several reasons for buying this security only in a retirement account. First, the distributions will be taxed as interest. Second, as mentioned in yesterday's post, the treasury strips are taxed on the annual accreted value as ordinary income even though no interest is paid. Third, and this is important to me, a tax event is created whenever one of the constituent securities in IPB is called by the issuer or reaches maturity. This would create a burden that I prefer to avoid. (a call of one of the bonds would reduce the interest paid by IPB by the amount of that bonds contribution to the total)

3. Bought 50 IPB at $21.3 Yesterday (see Disclaimer): After doing all of that work to recreate the yield and price of IPB using current quotes of the underlying securities, I decided to add 50 shares with a limit order placed at $21.3 when the ask was $21.48 and 100 shares was bid at $21.3. With these lightly traded securities, it would not be unusual to receive either no fill or a partial fill with that kind of order. An alternative way to fill the entire odd lot would be a limit order at the ask price. Even that may come up short when there is no activity at that price and the ask round lot is AON. At a total cost of $21.3, I calculated the current yield at 7.11% and the YTM would be more given the discount to the $25 par value. The main advantage to IPB is corporate bond diversity in one purchase, buttressed by the treasury strip, and no ongoing management fees or load fees normally associated with a similar product offered by brokerage firms called a unit investment trust.

4. Bought 300 of the CEF CMK at 8.3859 Yesterday (see Disclaimer): I place a market order when the bid was 8.38 and the ask was 8.39, and the order filled at $8.3859. I think that is strange but commonplace. CMK was ex dividend yesterday for its monthly distribution. The current penny rate is $.041. At a total cost of $8.39, the yield is around 5.86%. CMK is a CEF bond fund that was selling yesterday at a discount to its NAV. This CEF is part of the MFS closed end fund group: MFS Closed-End Funds One reason for buying this fund is that it has some exposure to non-U.S. sovereign debt, and I wanted to increase my exposure some in that area. As of 6/30/2010, the fund had 16.65% of its assets in non-U.S. sovereign debt, 43.41% in "high grade corporates", 16.65% in high yield corporates, 5.45% in emerging markets debt, and the remainder in miscellaneous categories. The average effective maturity was 6.77 years. MFS InterMarket Income Trust I At that time, there were 539 securities in this fund (37.57% rated AAA, AA, or A; 27.92% BBB)

NAV information can be found at Closed-End Funds Markets Data Center at the under the category "other domestic taxable funds". As of 8/9, before the ex date, the NAV was shown at $9.15, the stock closed at $8.46 and the discount to NAV was -7.54. NAV information can also be found at the MFS web site and at the Closed-End Fund Association site. As of the close on Tuesday, the NAV was $9.11 (ex dividend) and the discount was at -7.9 based on a close at $8.39.

This is a link to the last SEC filed shareholder report for the period ending in May 2010. MFS INTERMARKET INCOME TRUST I N-CSRS At page 34, the expense ratio before interest expense is 1.03% and 1.13% after interest expense. The fund is using a small amount of leverage (see page 49).

This is a link to the Morningstar page on CMK.

5. CVB Financial (CVBF) (no longer own): When looking at the earnings reports for banks, I understand that a bank may not be setting aside enough allowances for loan losses. I therefore like to see a large allowance already set aside compared to non-performing loans.

I do not remember all of the reasons that caused me to sell CVB Financial at 9.65 in January bought at $7.94 on 12/4/09. One reason had to do with a story about this bank at MarketWatch which I discussed in Item # 3 from this January post: CVB Financial. The article discussed just how bad economic conditions were in California's Inland Empire region, where the bank conducted some of its business. I sold the stock and started looking for another bank in a different part of California.

It was announced a few days ago that the CFO will retire by the end of this year. It was disclosed on Monday after the close that the SEC has subpoenaed records from CVB relating to allowance for loan losses and how the bank calculates those losses, as well as other matters. CVB slumps 22% after getting SEC subpoena While I do not know what motivated the SEC, it would not be surprising to learn that there was an informer inside the bank that has already furnished some documents. Another possibility is an investigation launched after a competitor of CVB raised some issues about loan losses given the economy in the region, or something was noticed by another governmental agency which was referred to the SEC.

The numbers reported by the bank for the last quarter looked okay, with an E.P.S. of 18 cents, up from 17 cents in the year ago quarter. The bank also noted that it had just completed a FDIC and Department of Financial Institutions Safety and Soundness Examination. Exhibit 99.1 This release showed an allowance for loan losses to non-performing assets at 121.15% which is a good percentage. The percentage of non-performing assets to total assets was 1.43%.

CVB Financial issued a press release last night responding to this recent development. A WSJ article discusses this development in today's paper.

6. Sold 50 Cisco (CSC)) at Near Closing Price/INTEL (INTC) (see Disclaimer): I just bought those 50 shares in late June at $22.45. CSCO closed yesterday at $24.31.

My intent was to use most of the proceeds to buy another 50 of Intel today or later this week, provided I can buy those shares at below $20. All of my previous Intel buys were below $20 and mostly in the $14 to $16 range, with a few shares bought with dividends. ( $15.87 $14.46 $19.08 $15.25)

Intel fell 83 cents in trading yesterday, a decline of 4.02%, and closed at $19.87. The decline in Intel shares was attributable to downgrades by the analysts at Robert W. Baird and Barclays. Reuters Both analyst see a subdued third quarter or an extremely myopic view even if it turns out to be true. The Barclay's analyst also mentioned the IPad as having a negative impact on the sale of PCs and notebooks containing Intel chips. CNBC

Eric Savitz noted that Taiwan's notebook makes, which make the hardware for branded names, suffered a sharp drop in July sales.

When discussing the Fed's action on Tuesday in his column, Randall Forsyth mentioned that a J.P. Morgan analyst had noted on Tuesday that personal computer orders "are falling off a cliff" in Taiwan. I suspect that the IPad is probably eating into notebook sales, but that effect will taper off.

My last discussion about Intel was in a July Post, responding to some bullish comments from Eric Savitz. Item # 3 Intel

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