Monday, August 16, 2010

CPI for July/SOLD 100 of 300 AEB at 19.72 & Sold 50 of 100 AEF at 23.43/Added 30 MDT at 35.73/Bought 50 FTE at 21.09/Sold 50 of 150 DFP at 21.7

A graphic reproduced in Ezra Klein's column shows the differences between the two parties on extending the Bush tax cuts. There is no material difference in the two plans until the taxpayer exceeds $500,000 in income. The most glaring disparity between the GOP and the Democrats is the taxation of the super wealthy, defined as those making over 1 million per year. It will be interesting to see how the GOP explains a refusal to extend the tax cuts for virtually all Americans in order to preserve the deep cuts for those making over 1 million. The source of this chart is based on a nonpartisan study by the Joint Committee on Taxation: GOP plan to extend tax cuts for rich adds $36 billion to deficit, panel finds

Paul B. Farrell in his MarketWatch column discussed the recent article by David Stockman in the NYT, one of the architects of Reagan's economic policy, that I previously referenced in a prior post. David Stockman on GOP Tax Policy

While Brett Arends claims that he is not making any predictions, he gives 10 reasons in his WSJ column why a crash may be coming and why investors need to be cautious now.

Last week, JNJ sold 1.1 billion of 10 and 30 year bonds at the lowest rate ever for corporate debt securities with those maturities. JNJ's 10 year bonds were sold at a 2.95% yield and the 30 year at 4.5%. The common stock yields 3.71% at the closing price of $58.15 last Friday, and JNJ has a long history of raising its dividend every year. SEE ITEM # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds Who will do better over the next ten years, the buyer of that 10 year bond yielding 2.95% or a buyer of the common stock at $58.15 on an after tax, total return basis?

IBM issued a 3 year note at 1%. McDonald's sold 450 million of 10 year bonds with a 3.5% coupon.

I do not own shares in the middle Tennessee bank Pinnacle Financial Partners (PNFP) that recently reported a second quarter loss of 85 cents per share or $27.8M. Nashville Business Journal The market was surprised by the extent of the loss, and the shares fell almost 20% after the release. PNFP: Historical Prices for Pinnacle Financial Partners The stock was trading at over $18 in April 2010 and is currently hovering around $9. I am mentioning this series of events to highlight a problem with investing in banks. It is impossible for an individual investor to know whether management is adequately provisioning for actual and potential losses. The Tennessean ran a story over the weekend about some of Pinnacle's bad real estate investments. I seriously doubt that many investors in Pinnacle knew anything about any of the loans mentioned in that article.

1. CPI for JULY 2010: Seasonally adjusted, the CPI rose .3% in July. Consumer Price Index Summary A rise in energy prices, the first increase in 6 months, accounted for 2/3rds of the seasonally adjusted increase. The core index increased just .1% The non-seasonally adjusted CPI increased 1.2% over the past 12 months to 218.011. The historical data on the monthly non-seasonal CPI numbers, going back to 1913, can be found at The recent decline in the non-seasonal numbers will reduce the monthly interest payments made by the CPI floaters OSM and PFK in the months to come.

This is my calculation of the OSM November monthly payment which has 31 days in the pay period:

July 2010 218.011
July 2009 215.351
Difference 2.66
Divide Difference by 215.351=.01235
Add Spread .02 for OSM=.03235
Multiply .03235 x. $25 par value=$.80875
Multiply $.80875 x. 31/365=$.068688

The penny rate reached almost 9 cents earlier in the year. See Item # 9 Bought 50 OSM at 15.74

2. Sold 100 of the 300 AEB at $19.72 and 50 of the 100 AEF at $23.43 (see Disclaimer): The upcoming Aegon hybrid dividend payments, which go ex on 8/30, are the last mandatory payments connected with the 2009 4th quarter repayment of 1 billion Euros to the Dutch state. Aegon is not paying any common stock dividend. After the next payment on the hybrids, the Aegon hybrid owners will no longer have any legal protection against a deferral of the dividends. This does not mean that Aegon will defer any payment. It only means that Aegon could legally defer a payment if it chose to do so. A wild card is that the European Commission has not yet signed off on the state aid package received by Aegon in 2008. While I would view it as unlikely that the EC will require a deferral of hybrid dividends as a precondition to its approval of Aegon's viability plan, you really never know for sure what may happen. It is conceivable that something adverse will occur when the EC renders its decision. I wanted to place myself in a position of playing with the house's money on the Aegon hybrids, and I believe that objective was accomplished by selling 100 of the 300 AEB and 50 of the 100 of AEF, both at a good profit. The AEF shares were bought at $18.38 last October. The remaining fifty share have a lower cost basis.

When I use the phrase "playing with the house's money", I mean something very specific. I add all my distributions (dividends or interest) to my realized gains. I then compare that sum, before tax, to my total cost for the remaining positions. For AEB, my total cost for the 100 shares remaining in a taxable account is $6.8. The total cost (which includes commissions) for 100 AEB in the ROTH IRA is $6.06, bought in two lots. I own AEH in the regular IRA bought at $4.63 in March 2009, which will pay for itself in the near future just with its dividends. I also own another 50 of AEF in the Roth at a total cost of $16.99. Bought 50 AEF at $16.82

I am now in a position of not having to worry about Aegon anymore. And before anyone says there is no rational reason for any material concern, I would remind all investors that the ING and Aegon hybrids were trading in the low single digits about 18 months ago. One of my last purchases of AEB was 50 shares at 4.8 in February 2009 and that was not even the low price during that period of time. If this AEB Stock Chart link works, it will show a low of $2.83 on 3/6/2009.

I have a large number of posts discussing the mandatory payment event language in prospectuses for the Aegon hybrids, which became an important issue after the EC announced its burden sharing policy potentially applicable to the distributions made by these hybrids. One of the more recent posts is from December 2009: Item # 1 Aegon

3. Added 30 MDT at $35.73 (see Disclaimer): I have been buying shares of Medtronic for a couple of years now, usually in small increments of 30 to 50 shares, with my lowest cost shares bought in March 2009 at around $26 and the highest cost shares close to $40. The total number of shares is currently over 200. I recently changed my distribution option to purchase of additional shares. At the price paid last Friday, MDT is selling at around 10 times the estimated earnings for its fiscal year ending in April 2011 and less than 10 times the estimate for F/Y 2012. MDT: Analyst Estimates for Medtronic Inc. The shares were under pressure last week after a J.P. Morgan analyst downgraded the stock to neutral after recognizing the shares were cheap. MarketWatch

This is a link to a recent article in Seeking Alpha about Medtronic.

4. Sold 50 of the 150 DFP at $21.70 on Friday (see Disclaimer): DFP is a junior bond issued by Delphi Financial (DFG). On Friday, I pared my position in DFP by selling all of the shares held in the regular IRA which were the highest cost shares owned by me. Those shares were bought in early July at 19.75, and I will be receiving one quarterly interest payment today connected with those shares.

I am keeping the lower cost shares share bought at $17.1 in a taxable account and at $17.1 in the Roth IRA. The remaining shares left in the taxable account are part of a 100 share lot, where I have already sold 1/2 of the position at $18.9. This is fairly typical trading by the LB. The general goal, as always, is to arrive at a point where I am playing with the house's money on Delphi bonds. I am moving close to that objective with a few profitable trades, along with a partial redemption of Delphi's senior note and several interest payments. Sold 50 of the 150 DFP Bought 50 DFP at 17.1 & Sold 50 DFY in Roth I intend to use the proceeds to buy a higher rated senior bond from another firm.

Delphi announced another partial call of its 8% senior note, DFY, that will take place on 9/21/2010. After the last partial call, my position was reduced to 43 shares. I am just allowing this to happen without taking any action. Bought 50 DFY at 24.36 Bought DFY at 22.48

5. Bought 50 France Telecom (FTE) at $21.09 on Friday (see Disclaimer): What do I know about France Telecom? The answer is not much. The current yield on the ADR shares at Friday's closing price of $21.1 is around 7.55% according to Marketwatch. I calculated a higher yield at the current exchange rate. The next ex dividend date is on 8/25.

FTE recently committed to maintaining the dividend at €1.40 per year through 2012. The Euro has been volatile lately. If I assume 1 Euro for $1.27 U.S.D. (EURUSD), I arrive at roughly $1.79 U.S.D. for €1.4. Currency Converter At $1.79, my annualized yield would be about 8.48% at a total cost of $21.09. My actual yield will depend on the exchange rate at the time of payment. And, part of each dividend payment will be withheld to pay France's withholding tax. I have forgotten how much, but I do recall that France takes out more than Canada's 15%. Due to foreign tax credit issues, I will only buy these foreign securities in a taxable account.

There is a currency risk issue in buying ADRs. When the EURO was trading at USD on $1.19 on 6/4 (EUR/USD Chart), the shares of FT traded in Paris closed at €15.44. FTE.PA Those shares closed last Friday at €16.5 or a 6.87% gain. The ADRs traded on the NYSE closed at $17.44 on 6/4 and at $21.10 last Friday or a 20.98% gain. The difference is due to currency exchange as the Euro gained ground on the USD since 6/04. If the EURO fell back down to 1.19, the price of FTE would then be about $19.76, assuming the same price of the Paris listed shares from last Friday of €16.5. In other words, as an owner of the ADR shares priced in USDs, I want the Euro to gain against the dollar and for FT to rise in value on the Paris exchange at the same time.

This is a link to the last SEC earnings report: France Telecom Form 6-k The summary of FT's first half results begins at page 42. In the latest results, FT grew its wireless subscriber base 6.6% year over year to 123.1 million. FT has some operation in the Middle East and Africa where its subscriber base grew 18.4% to 34 million. Free cash flow for the first half of 2010 was at €3.989 billion. Morningstar has FTE rated 5 stars. FTE Morningstar. S & P is more subdued about this firm's prospects with a 3 star rating and a $22 price target.

I made a few other trades last Friday which I will discuss in the next post. I am just running behind.


  1. During the recent run-up in the Aegon hybrid preferred prices, I lightened my position in AED. I am wondering whether I should contnue to hold the rest of it (in ROTH account) through at least the 2010 call date this December. My thought is that they could conceivably call some of the notes.

    Extrapolating from the examples of JNJ, IBM and McDonalds, why wouldn't Aegon call some of its hybrid notes and replace that relatively expensive perpetual capital with shorter term, lower coupon debt? Paying more than 6% on their capital base forever does not seem like such a smart move in the current low interest rate environment. What am I missing?

  2. Cathie: I doubt that Aegon could refinance any of their hybrids at less than the current coupon amounts.

    AED has a 6.5% coupon. I sold some AEF at 23.43 last Friday which has a coupon of 7.25%. All of the Aegon hybrids traded in the U.S. are selling at below their par value. This means that a call followed by a refinancing would end up costing Aegon at current prices.

    One benefit to the hybrid for Aegon is that it is considered equity capital for regulatory purposes. I suspect that AEG can deduct the interest paid on them, which is another benefit to it.

    Possibly, Aegon could refinance at a lower rate by selling a short term senior note, but AEG needs the equity capital provided by the hybrids. Part of their equity capital now is the 2 billion in Euros that the firm still owes the Dutch government. So I do not see a call in the foreseeable future for all of those reasons.

    One benefit of the hybrids is their qualified dividend status to a U.S. taxpayer. If that legislation is not renewed, this may hurt the pricing of the European hybrids, all other factors being equal. You do lose the benefit of the qualified dividend tax treatment by holding securities in a retirement account that pay those dividends. I placed some Aegon hybrids in the retirement accounts when I was rationally concerned about a deferral given the tax consequences associated with the deferral of a cumulative dividend in a taxable account. Otherwise, when I do not have that concern, I will try to place an interest paying securing in the retirement accounts and then try to buy the qualified dividend payors in the taxable accounts.

    I also prefer to have senior bonds in the taxable account rather than junior ones, and then to have the seniors weighted in investment grade issues. This would be particularly true with the ROTH.

    As I mentioned in my post, a wild card is that the EC has not yet approved the AEG viability plan. The EC approved the ING plan many months ago. In so doing, the EC did not require a deferral of the ING hybrid dividends.

    Personally, I think that the investors who are running up bond prices now need to be placed in a strait jacket for their own protection. So I have no idea how long this craziness will persist. Possibly, the AEGON hybrids will continue to rally and even surpass their par values. I would not view that as rational however. I am certainly not interested in buying them at current prices.