Wednesday, September 15, 2010

NABZY and the AUD/USD Exchange Rate/JZH/RB Buys 30 PICO at 27.89/BOUGHT 90 NIE in IRA at 16.62 & 200 in Taxable Account at 16.61

The Japanese government publicly intervened this morning to stop the Yen's rise for the first time since 1994. DailyFX MarketWatch WSJ Last week, I bought the double short for the YEN. Item # 2 Bought 50 YCS at 16.92 This is a link to the USDJPY quote.

In an appearance on CNBC last Monday, Collyn Gilbert who is the senior banking analyst at Stifel Nicolaus recommended First Niagara (FNFG), New York Community Bank (NYB), Sterling Bancorp (STL) and Northwest Bank (NWBI), all owned as part of my Regional Bank Stocks basket strategy. She also mentioned that SUSQ was ripe for being acquired, along with other banks in the Pennsylvania market.

The Commerce Department reported that retail sales rose .4% in August, better than the expectation of .3%. ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES: Latest Release

Goldman Sachs cut the packaged foods industry to "cautious". GS also reduced its recommendation on Campbell Soup (CPB), recently sold at 35.7, to sell. Bloomberg According to the WSJ, GS also recommended that investors reduced their weightings in industrial and energy companies from overweight to neutral.

Gold had one of those days that makes me wonder what is going to happen next. Gold for September delivery rose $24.6 to $1,269.7 per troy ounce. The principal protected note that I own from Citigroup Funding is tied to the spot gold price which closed at $1269.1: 24-hour Spot Chart - Gold Jan Hatzius at Goldman Sachs apparently made some noise yesterday, opining about the possibility that the Fed might announce before the end of this year another round of massive purchases of U.S. treasury debt, possibly as much as 1 trillion dollar in an effort to jump start the economy. WSJ

Since I view gold to be primarily an alternate reserve currency to the USD, the yellow metal rose on this kind of speculation regarding the further debasement of the U.S. currency. Both the Australian and Canadian dollars had a spirited rally yesterday, and the Swiss France broke through parity with the U.S.D. USDCHF By far my largest currency exposure is to the CAD and to securities priced in Canadian dollars, but I also own individual securities priced in Australian dollars and the EURO.

I have discussed in several prior posts have the currency exchange rate impacts the price for foreign securities.

The True Believers secured another upset, as Christine O'Donnell defeated Mike Castle in the GOP primary for the Delaware U.S. senate seat: WP Christine is described as a conservative by media outlets due in part to her opposition to premarital sex. NPR The conservative publication The Weekly Standard, summarized in an article Christine's earlier effort to recover 6.9 million in damages against a former employer, a conservative non-profit organization in Delaware called the Intercollegiate Studies Group, with some bizarre allegations according to the Standard.

1. Trust Certificate JZH Containing a Senior Prudential Bond: I spent a few minutes yesterday trying to figure out what to do with 50 shares of JZH, a trust certificate containing a senior Prudential bond, that was bought in a regular IRA at a total cost of $14.81 in September 2008. I am keeping shares of JZH bought in the taxable account at less than $10. Bought JZJ at $9.75 Par value of this TC is $25 and it is currently selling at over $24. The TC and the underlying bond mature on the same day- way out into the future- on 7/15/2033. The coupon on the TC is just 6%. There are two ways to look at it.

In one way, the Prudential senior bond is a decent long term credit risk and the current yield at my total cost including commission is 10.13%. That is 10.13% for every year until maturity in July 2033 plus the additional yield generated by capturing the spread between my cost and the $25 par value. The YTM is however only 11.04% and I can capture most of the spread yield by selling the security now rather than by waiting another 22 years and 10 months to hopefully be paid par value at maturity.

Another way to look at it is that no tax is recognized by selling the shares now in the tax-deferred regular IRA. Sure, I have a current yield of 10.13% based on my original cost in the JZH shares, but that cost number is $740. What if I took the proceeds from selling JZH and bought a security yielding over 8% that had a liquidation date in 2024 that owned investment grade bonds, something like GDO which is already owned in three of my accounts including the regular IRA. At the current price of around $18.9, GDO is yielding close to 8.25%. At that price I could buy around 64 shares which would generate close to $100 per year in dividend income. The 50 JZH shares produce about $75. Without even figuring the interest earned on the differential over 23 years, the $25 extra dollars would total $575 over 23 years (GDO liquidates in 2024 and my hypothetical therefore assumes the purchase of another security to hold until 2033 with the same yield).

If I took the $100 in income generated by GDO and calculated my yield based on the original cost of the JZH shares, I arrive at 13.5%. In addition, GDO gives me greater diversity and liquidates sooner than JZH. And, there may be an opportunity to reinvest the proceeds close to or during 2024 at a higher right than 8.25%, (either on or before GDO liquidates).

A negative in this later scenario is that GDO may cut the dividend whereas the Prudential security is a senior bond whose payments can not be reduced or eliminated short of bankruptcy. On the flip side, it is almost a certainty that there will be at least one occasion over the next 23 years when a rise in interest rates will have a substantial negative impact on the value of JZH, probably enabling me to buy that security back at less than $20 assuming no call between now and then. With its foreign bond exposure, GDO also gives me both the risk and the potential benefit of foreign currency exposure. I currently own 553.881 shares of GDO. I postponed making any decision after the bid price for JZH fell below $24.25 as I was writing the foregoing in my usual stream of consciousness.

2. National Australia Bank (NABZY)(own 100 ADR shares): I want to highlight in today's post how the rise in the Australian dollar has had a favorable recent impact on the value of my ADR shares in National Australia Bank (NABZY), bought on May 26th at 19.51. A dividend of $.656 per share was paid in June: NABZY.PK Historical Prices The shares closed yesterday at $23.72 and at 18.71 on 5/26 adjusted for the dividend, or a total return gain of 26.7%.

The shares traded in Australia closed at 22.95 AUD adjusted for the subsequent dividend on the day of my May purchase and closed on Tuesday at AUD 25.22. NAB.AX Historical Prices | NAT. BANK That is a 9.89% gain. What accounts for the difference between an Australian buyer in his home market with their 9.89% and the LB's purchase of an ADR in the U.S. using U.S. currency? The value of the NAB.AX shares in Australia, when translated back into dollars, have risen given the recent rally in the Australian dollar against the U.S.D. On May 26, the USD/AUD was at .8214 and closed yesterday at .9441: AUD/USD Currency Conversion Chart The USD is buying 14.94% less in Aussie dollars as of yesterday compared to May 26th. Adding 14.95% to 9.89%, I get a total return on the ADR of 24.83%, compared to the actual of 26.7%. The numbers do not exactly match up since the exchange rate at the time of my purchase on May 26th was different than the closing price used in the foregoing calculation, as was the exchange rate at the close of currency trading yesterday afternoon and the earlier closing price for NAB.AX in Australia. Of course, what I am describing works both ways. Admittedly, this is a difficult concept for many investors to grasp. You do not escape currency risk by buying a ADR.

National Australia Bank just withdrew its bid to acquire AXA Asia Pacific after being blocked by Australian Competition Competition. Reuters That bid, which was 13.3 billion Australian dollars, was in my opinion hurting NAB shares. BusinessWeek

3. RB Buys 30 of PICO at $27.89 (see Disclaimer): LB was busy on other important matters yesterday, around 2000 or so, and did not have its attention focused on the trading desk. Suddenly, LB heard a giggle, some mumbling about "buy land and water", and then "Born to Run" started to play on the ITunes music player which is a sure sign of trouble on its way. RB started to howl "let's have some fun". While the LB reacted quickly to regain control, and managed to delete two zeros in RB's order before the button was clicked by the Lame Brain, successfully reducing the purchase to just 30 shares from 3000, RB was nonetheless successful in placing a buy order for PICO shares to LB's great consternation. LB and RB have had a tiff over PICO in the past, and the LB refuses to even consider researching it. After all the company does not have any earnings, nor is it projected to make money in the coming year. PICO Analyst Estimates And, there is no way for the LB to value the land and water rights that the company owns. The stock is selling near its book value which is the only comment LB is going to make about it: PICO Key Statistics

Fortunately, when the contretemps arose about PICO a few months ago, the LB resolved the issue by waiting a short period and then selling the 30 shares at $33.06. The shares were bought at $29.52, basically to shut the RB up after it launched into one of its land and water stories about Headknocker's ancestors. This is a summary of the "research", using that term in the most liberal and broad sense, that RB did before recommending PICO:

" RB went on strike after waking up after lunch saying something like it was under appreciated and never given enough credit in the operation here at HQ. It is always all about LB. All LB ever does is interfere with RB making money. Sure, sometimes the nerd saves a few bucks with one of its stinking models, but that is about the sum of it. If LB wants to buy a stock today, then it can do it on its own, though RB thinks that the story behind the quest for land and water may be a fruitful area for research. The story, and RB can only conceptualize concepts into stories, is how the ancestors dissipated all of the hard work Joseph did after arriving in America in the 1600s through drink and gambling. That set off a search for cheap land and water by the ancestors in subsequent generations, first moving to Western Virginia, then Western North Carolina and finally into Middle Tennessee during the 1820s in search of cheaper land and water rights. RB Wants to Tell a Story RB, never given its just due, points out that its St Joe purchase is up almost 60% since its "frolic and detour". Maybe LB will sink its teeth into PICO, for RB is going to start reading its book "A Whole New Mind: Why Right-Brainers Will Rule The Future""RB's Water and Land Story: PICO?

LB refuses to summarize any reasons for the RB's purchase. If anyone is interested in PICO, this is a link to its web site, PICO Holdings, and to its last quarterly report: june302010q. The only positives from LB's viewpoint are that the last purchase was below the former one, LB managed to salvage a profit from the prior purchase, and the current exposure is immaterial.

PICO closed at $27.69 yesterday down 23 cents and near its 52 week low of $27.18.

4. Cisco (own): CSCO rose yesterday after Chambers indicated a willingness to initiate a dividend in 2010, perhaps in the 1% to 2% range. CSCO traded as high as $22.17 yesterday before closing up just 19 cents at $21.45. Cisco was a recent purchase made pursuant to the Large Cap Valuation Strategy. Bought CSCO at 20.39

5. Bought 90 of the CEF NIE in the Roth IRA at $16.62 and 200 in a Taxable Account at 16.62 (see Disclaimer): Some readers may remember a comment made by HK, who some say is ready for the rocking chair at the Old Folks home, that LB did not have a plan for the cash recently raised in the ROTH IRA. Of course LB had a plan, billions of them to be sure, and was not able to buy 100 shares of NIE yesterday since there was only enough cash to buy 90 shares.

This is a link to the sponsor's web site. Allianz Global Investors | AGIC Equity & Convertible Income Fund At that page, the sponsor explains that it will typically write call options on the equity component of the portfolio generally in the range of 70% of the stock's value. This is a link to the last SEC filed shareholder report for the period ending in April 2010: As of 4/30, the fund had 71.9% in common stocks, 15.7% in convertible bonds and notes, and 15.7% in convertible preferred stock. The expense ratio is around 1.1%. This is a link to the Morningstar page on NIE.

Dividends are paid quarterly at the current rate of 28 cents. The next ex date is 9/16. NFJ, NAI, NIE, and NGZ Declare Quarterly Dividends - MarketWatch Assuming that rate is continued for 1 year, the yield at a total cost of $16.62 would be around 6.74%.

This CEF is not using leverage, can be viewed as more conservative compared to a fund that uses borrowed money in an effort to boost returns.

I felt that the fund was okay for the IRA given its call writing strategy for the equities and the allocation to convertible securities.

I also bought 200 shares of NIE at $16.61 in a taxable account. I will take more risks in the taxable account with stocks and stock funds. Those accounts are about 10 times larger than the retirement accounts.

NIE closed on Tuesday at $16.58.

Due to time constraints I will have to discuss the remaining five trades from Tuesday in the next post.

1 comment:

  1. Hey RB, actually you can buy FUN, it is an amusement park operator called Cedar Fair; right up your alley. Disclosure: no position in FUN.