Tuesday, September 28, 2010

Sold: 50 NPBCO at 25.2, 50 RNST at 14.91, 50 FBNC at 13.25, 50 SNY at 33.85, 100 MSF at 15.3, 50 PJL - 26.5/Bought: 50 BMLPRH at 16.2, 50 TDA at 25.5

This post will be primarily devoted to the remaining trades made last week. Most were GTC orders placed before 9/17. I did have sufficient time to look briefly at a monitor list and enter some day orders. I am still working on other matters but have some time to write posts without a lot of my normal verbiage which will be the case for the remainder of this week. I was able to devote several hours last Friday to sell some stocks that reduced my cost basis using FIFO accounting in my remaining shares. Although I did not exactly plan on raising capital last week, it turned out that most of the GTC sell orders were filled which resulted in close to a 20 thousand net reduction in stock exposure.

The GOP candidate for the U.S. Senate seat in Delaware told Fox in 2007 that "American scientific companies are crossbreeding humans and animals and coming up with mice with fully functioning human brains." YouTube And Christine, who believes a woman's place is in the home, once said that condoms were anti-human. I will not mention about her dabbling in Witchcraft. I am trying to determine whether she is a bigger fruitcake than the GOP's candidate for the Senate in Nevada. (see also YouTube - Christine O'Donnell's 90's MTV Anti-Masturbation Campaign Christine is one of Sarah's favorites.

1. New BAB ETF: Pimco launched a Build America Bond ETF last week, BABZ, which has a .45% expense ratio after a waiver of .10 in effect through 10/31/2011. PIMCO Build America Bond Strategy Fund

Back in July, I bought 100 shares of BAB at 25.98 that is a Build America Bond ETF from Powershares. The expense ratio is .35% for BAB: PowerShares Exchange-Traded Funds | Build America Bond Portfolio | BAB In late June, I also made a small purchase of 50 shares in a closed end fund (CEF) that invests in these bonds:Bought 50 NBB at 19.67. This CEF is currently selling at a small premium to its net asset value, NBB - Nuveen Build America Bond Fund, which makes it unappealing to me compared to the lower cost ETFs that are available in this bond category. I still own both BAB and NBB.

2. Sold 50 NPBCO at $25.2 and Bought 50 TDA at $25.5 Last Week (see Disclaimer): I am just more comfortable holding a senior bond from Telephone & Data Systems (TDS) than a junior bond in TP form from National Penn Bancshares. The TP, NPBCO, was bought at at 23.09. At a $25.2 total cost, the yield is about 7.79%. TDA has a 7.6% coupon on a $25 par value, and has a 7.45% yield at a total cost of $25.5. Generally, one of the main differences between a junior and senior bond is that a firm has the option of deferring interest on a junior bond, frequently for five years or sometimes longer, provided no distributions are made on a more junior security such as common or equity preferred stock. As discussed, this kind of stopper provision may be activated by the purchase by the issuer of the junior bond of common or preferred stock under certain circumstances. The senior bond covenants do not generally permit any deferral of interest payments, and have a higher priority than the junior bond in the event of bankruptcy. Lastly, in a bank failure, I would not expect the owner of a bank TP to receive anything, but the owner of a senior bond issued by a telephone company would likely receive some sum north of zero.

I previously purchased 100 shares of TDA at 25.22. This is a link to its prospectus: SEC Filing for TDA CORPORATION This bond matures in 2041. This is the link to the Reuters description of TDS and to its key developments page. This is the kind of bond that will be sold as soon as I become more concerned about interest rate risk. TDA does make quarterly interest payments and is ex interest today: Telephone and Data Systems Inc, TDA

I also own 150 shares of a senior bond (UZV) from United States Cellular (USM), a TDS subsidiary that is publicly traded. Bought 100 UZV at $24.42 Added to UZV at 25.16

3. Bought 50 BMLPRH at $16.2 Last Week (see Disclaimer): For some time, I have been in a trading mode on floating rate equity preferred stocks with a guaranteed coupon issued originally by Merrill Lynch (now part of BAC) or Bank of America. The goal is to arrive at that point where I am playing with the house's money on this grouping of securities. For those unfamiliar with these non-cumulative securities, I have previously summarized the Advantages and Disadvantages of Equity Preferred Floating Rate Securities. That post also contains a list of the exchange traded BAC floaters.

BMLPRH has a $25 par and distributions are non-cumulative. Dividends are paid based on the greater of 3% or .65% over the 3 month Libor rate. Final Prospectus Supplement Given the Fed's Jihad against savers and other responsible Americans, the 3% guarantee is the current applicable rate, and I would expect the guarantee to be greater than the LIBOR computation for many months to come. Before the Near Depression, the 3 month LIBOR +.65% would have been the applicable rate most of the time. LIBOR Rates History (Historical) The float will kick in when the 3 month Libor exceeds 2.35% during the applicable computation period.

I also own currently 50 shares of another floater, BMLPHJ, purchased at 17.74, having previously sold 50 shares. That security pays the greater of 4% or .75% over 3 month Libor. Final Prospectus Supplement BMLPRJ has mostly been trading around $19.5 over the past few days.

I have also bought and sold BACPRE and BMLPRG. Bought BMLprg at $8.8 Sold BMLPRG at 12.45 Sold BACPRE AT $15

While these securities currently pay qualified dividends to the best of my knowledge, it is still uncertain whether the favorable tax status of qualified dividends will remain after the end of 2010. This tax issue will have an impact on their desirability.

In the past I have made computations trying to compare the BAC floaters when making a decision to purchase one of them: BMLPRH vs. BMLPRJ

I ran a quick computation before buying BMLPRH back last week, and did not have time to perform an extensive calculation. I compared BMLPRH with BMLPRJ. I assumed a $1000 purchase of both securities at the ask price of both securities at the time the order was about to be placed. And this is a summary of my calculations:

BMLPRJ: 51 shares
BMLPRH: 62 shares
BMLPRJ 4% guarantee produces annually $52.14 in dividends.
BMLPRH 3% guarantee produces annually $47.54 in dividends
ASSUME A 5% LIBOR: 51 BMLPRJ=$73.31 annually; 62 BMLPRH= $87.58 annually

4. Sold 50 SNY at $33.85 Last Friday (see Disclaimer): Basically, I do care for Sanofi's ongoing effort to acquire Genzyme. I did note that S & P has a $33 price target. The shares were sold near break-even after adjusting for one dividend payment. Bought 50 SNY at 34.21 This was not a GTC order. I noticed a pop in SNY shares on Friday due in large part to a rise in the Euro against the USD.

5. Sold 100 of 200 of the CEF MSF at $15.3 Last Friday (see disclaimer): This is another typical trade. I first bought 100 shares of MSF at 14.4. Thereafter, I bought 100 shares at a lower price: Added 100 MSF at 13.57 I will keep the shares bought at the lower price using FIFO accounting. The net asset value (NAV) closed at $15.43 on the day of my purchase and the discount was at -8.3%. As of last Thursday's close, the NAV was at $16.05 and the discount was at -6.48% based on a closing market value of $15.01. Daily Prices If I believed that the current rally this September was the start of a long term secular bull market, I would not have sold any shares in MSF. The trading pattern currently in effect is one developed for an Unstable Vix Pattern in a long term secular bear market.

6. Sold 50 of the 150 PJL at $26.5 Last Friday (see Disclaimer): While it is just an opinion, I believe that it is likely that the TC will be redeemed by the owner of the call warrant, which has already happened for the TC XFL containing the same bond, and this could happen at anytime. Item # 6 Call Warrants and Trust Certificates

The underlying bond is selling at close to a 30% premium to its par value. FINRA The owner of the call warrant can redeem PJL at the $25 par value,plus accrued interest, at anytime it so desires now. This would place a maximum value of the TC at around $25.92. (six month's interest plus the $25 par value). The call warrant provision in the PJL prospectus can be found at page S-4: www.sec.gov The 50 PJL shares were sold out of the Roth IRA, and those shares were bought at $24.52 in April 2009: Bought PJL So I received 3 semi-annual interest payments and made a small profit on the shares.

I am more inclined to keep the 100 shares in my taxable account, and just wait to see what happens. See also, Trust Certificates PJL and XFL: Verizon Bond (Oct 2008); Functional Equivalence in Bond Trading.

7. Sold 50 FBNC at 13.25 Last Friday (Regional Bank Stocks' basket strategy)(see Disclaimer): FBNC popped $1.20 on Friday or 9.95%. Possibly, the gain was in part due to Sandler O'Neill initiating coverage with a buy rating and a $15 price target.

I am just reducing my overall dollar exposure to the regional bank strategy while reducing my cost basis for my remaining shares in some securities. I sold the higher cost 50 shares bought first at 12.58 and will keep the 50 shares purchased shortly thereafter at $12.01. Then if the shares fall below $11.5, I will consider buying back the 50 shares sold on Friday. This process involves using the volatility in share prices, both up and down, to book profits, to collect distributions and hopefully to lower my cost basis for shares to be held long term using FIFO accounting. Again, this is one of my most important trading strategies for an Unstable Vix Pattern within the context of a long term bear market.

8. Sold 50 RNST at $14.91 Last Friday (Regional Bank Stocks' basket strategy) (see Disclaimer): The reasons for this transaction are identical to Item # 7 above involving FBNC. I sold the higher cost shares bought first at 14.14 and will keep for now the shares purchased at 13.70. If RNST falls below $13.2, I will consider buying back the 50 shares sold on Friday.

Since I am busy on other matters, I will discuss the remaining trades from Friday in Wednesday's post. I am in a trading mode consistent with my characterization of the stock market as being in an Unstable Vix Pattern within the broad context of a long term secular bear market. In my system, I start the long term bear pattern in October 1997, unlike others who start it in 2000. Current Status of The Vix Asset Allocation Model Signal The Roller Coaster Ride of the Long Term Secular Bear Market Dating the Start of the Current Long Term Secular Bear Market During a long term bear market, buy and hold investing is replaced by a considerable amount of trading, buying the dips and selling the rips, with some long term positions taken during particularly nasty periods which would include always the catastrophic phase of that long term cycle (declines greater than 50%).

The VIX rose 3.82% yesterday to close at 22.54. To end the Unstable VIX Pattern, my current VIX model requires three months of steady movement below 20 while allowing some brief and minor movement over 20 without restarting the count. The market has been in an Unstable Vix Pattern after the Trigger Event in August 2007 that mandated a reduction in stock exposure. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern The prior Trigger Event occurred in October 1997, which marked the commencement of an Unstable Vix Pattern which lasted until 2003. This is a comment that made in an earlier post:

"Prior to 1997, the VIX had been moving continuously below 20 since forming a Stable Vix Pattern in 1991. During that Stable Vix Pattern period, the S & P 500 was in a steady climb: VIX and S & P Compared 1990 to 1997 Events in the later part of October 1997 decisively broke that Stable Vix Pattern when the S & P 500 came close to 1000. The S & P 500 now, almost 13 years later, is at 1135 and it would not be surprising to anyone to see it at 1000 again. Hopefully, this link will display the historical data for the S & P 500 in the last six months of 1997: ^GSPC: Historical Prices for S&P 500 INDEX

The VIX formed an Unstable Vix Pattern in 1997. It stayed in that pattern until 2003. The rise in the market in 1999 occurred with the VIX in an Unstable VIX Pattern, marked mostly by reading in the 20s, which I call a non-confirmation event.Vix Asset Allocation Model The VIX was not confirming the validity of the market move and was instead signaling investors to sell the parabolic increase. The Vix would briefly return to some movement below 20 during this 1997 to 2003 period, and this would actually be a sell signal in the overall context of an Unstable Vix Pattern. The first movement below 20 after the formation of the Unstable Vix Pattern was in February and March 1998 when the VIX returned briefly to readings below 20. ^VIX: Historical Prices for VOLATILITY S&P 500

The defining characteristics of the long term secular bear market are a lot of up and down motion, at least one catastrophic phase of losses exceeding 50%, and a long period where the investor has not made any progress by being invested in the market. After adjusting for inflation, the annualized return would be negative during such period even after reinvesting the dividends. All of those conditions are met starting in October 1997. The S & P 500 has had a lot of whipsaw up and down movement since then but has not made in progress in advancing the capital position of buy and hold investors. Unless the investor could time the market moves since October 1997, both up and down, the investor would have been better off buying 10 year treasury notes in early 1998 and selling out of stocks entirely. The ride since 1997 has been a roller coaster going nowhere, as distinguished from a steady, mostly a 45 degree angle slope, of a long term bull market: See S & P Charts from 1950 to 1966; and 1982 to 1997)" Dating the Start of the Current Long Term Secular Bear Market

I still have not finished discussing the trades from last week.


  1. I'm in several prefereds and CEFs. I notice my WCO where I have a big gain is holding up better than the standard Wells WFC-J. Any news on WFC calling any? I got WFS when it sold off to $25 the other day. I have PUK-A too (near $24)it's kinda unknown, and I like that. There definately has been a seller in prefereds and CEFs lately if they had premiums, maybe hedging cap gains?
    I'm in FCT for a good floating rate 5% -they raised div in Aug. Any opinion? I like RIT since it's declared 6cents rest of year but who knows about REITs paying next year. They buy 40% preferreds. TIA

  2. Gordon: I own two Wells Fargo TPs. I still own 50 shares of JWF which was bought in March 2009 at $9.15. I also still own 50 of KTV, a trust certificate containing as its underlying bond a Trust Preferred issued from First Union. This purchase was made at just a tad under $18. That bank was acquired by Wachovia which was subsequently merged into WFC. I am not interested in buying any of these large bank TPs at current prices.

    I am not very familiar with WCO. It can be called after 9/15/2013. The maturity date is too far into the future for me.

    WFC will have to phase out its use of TPs as a source of Tier 1 capital as part of the recently enacted financial reform legislation. These TPs are in essence junior bonds, where the bank is able to deduct the interest and yet include the TP as part of its equity capital.

    And, WFC may be able to refinance the relatively high coupon of WCO at a lower rate in 9/2013, which is just not knowable now. So I would not be interested in it at its current premium given the possible call after 9/2013.

    WFC-J is a different type of security than WCO. WFC-J is a equity preferred stock that pays non-cumulative dividends. WCO is a trust preferred which is in essence a junior bond, more senior in priority than WFC-J, and distributions are cumulative. While WFC-J pays qualified dividends and WCO pays interest, the tax advantage for WFC-J for high income taxpayers in a taxable account may end at this end of this year unless Congress acts to extend this feature of the Bush tax cuts.

    For the most part, I have limited my ownership of bank equity preferred stocks to floaters with guarantees, though I do currently own 100 shares of ZBPRC which is a fixed coupon equity preferred stock from Zions. In times of turmoil, such as the Near Depression period, these low priority securities from banks, with non-cumulative distributions, will be extremely volatile with a profound downside bias.

    I do not own FCT for a few reasons. It is currently selling at a premium to its net asset value, closing today at a 7.4% premium. For bond funds, I limit myself to buying those selling at a discount to NAV. The operating expense number at 1.39% is also viewed as too high for me. My larger bond CEF holdings are GDO, IMF, and ERC.

    I do not own PUK-A, though I have looked at it a few times. I have limited myself to owning ING and Aegon hybrids as my individual European bond holdings. I do not have the time to sufficiently research Prudential PLC which I would have to do prior to making a decision on the credit risk side of bond investing.

  3. Thanks for the extensive reply. Makes sense WFC-J has been going down since 9-15 div because it's qualified, and some think higher rate. Most have these in IRA so it's surely an overreaction or some hedgefund taking premium profit. The banks will still get a % counting as TierI, and these before May 2009 issue will all be grandfathered-in, plus they have til 2013, but I may read this wrong>
    Plus the Reg isn't written yet and Dems lose some clout in Nov.
    I buy 1000-1500 sh or those CEFs when they get clobbered, then sell 1/3 into distribution ramp.If I get stuck with it, no harm (so far)
    Over 7% yield on all that stuff.

  4. Gordon: I think there will be a price adjustment for preferred stocks that pay qualified dividends if Congress does not extend their favored tax status beyond 2010. I will generally buy qualified dividend paying securities in a taxable account. If I have to pay the same tax rate on qualified dividends and interest, I will take that factor into account when making buy/sell decisions. When you take the tax advantage away, and taking into consideration that a junior bond has a higher priority, a maturity date, and makes cumulative distributions, then the spread in yield between the junior bond and an equity preferred stock from the same issuer will have to widen by some amount, potentially as high as the tax differential in a perfect pricing environment. If the yield of a TP from the bank remained the same, then that adjustment would mean a rise in the yield of its equity preferred stock resulting from a decline in price.

    Generally, I have noticed some buying interest before ex dividend dates and some selling pressure thereafter, as some investors try to clip the dividend and make a small amount on the stock transaction.

    I believe the 25% limit on Tier 1 capital applies to the maximum permissible limit for TPs as Tier 1 capital. The change in 2005 that you reference removed goodwill and associated deferred tax liability from the core capital number, in effect reducing the maximum limit. So, a bank could not have TPs providing 26% of Tier 1. I am not aware of any bank exceeding that limit. For large banks with over 15 billion in assets the TPs will have to be phased out altogether. For banks in need of equity capital to replace that provided by the TPs, redeeming the TPs from the proceeds of common stock sales would be one of many available options.

    Although I would not hazard a guess about what politicians may do, I would not predict a change in capital rules for banks. Many, including myself, regard TPs as a bastard form of equity capital. Personally, I find it to be somewhat silly to allow a bank to classify a bond as equity capital.