Friday, October 29, 2010

Sold 50 PYI @ 25.66/Added 30 to FE @ 36.1/Bought 100 PMACK at 10.01/TOBC SUSQ WASH RA XOM DUK BDN FBNC SBSI/Bought 100 PYB @ 23.81

As previously noted, the senior bond originally issued from PMA Capital, PMK, was delisted from the NYSE on Thursday as a result of PMA Capital being acquired by Old Republic International who no longer wanted to continue with the necessary SEC filing requirements. Item # 2 PMK I own 150 shares of PMK, and decided to stay with it after this announcement, due to its decent yield, monthly payments, intermediate term maturity, and the better credit rating of PMA's new corporate parent. Apparently, this senior note was picked up by the pink sheet exchange after the voluntary delisting from the NYSE: PMACK PMA Capital Corp. (Added: I found out later this morning that the listing on the pink sheet exchange with that symbol was just for yesterday, and it is not listed today under that symbol) I wanted to see how much trouble it would be to buy or sell this security on the pink sheet exchange, so I managed to buy 100 more shares yesterday without any problem at $10.01 as discussed below.

I no longer own two CEF bond funds, HSF and BDF, and would simply note that the Rivus Bond Fund (BDF) has completed its acquisition of the Hartford Income Fund (HSF): Rivus Bond Fund

DFY, the senior bond from Delphi Financial Group was ex interest yesterday for its quarterly interest payment, as was the junior bond DFP.

I read an article in MarketWatch that quoted Bill Gross as called QE 2 a "Ponzi scheme". Some would argue that the issuance of vast sums of new debt by the treasury is nothing more than a Ponzi scheme.

Fortunately, the LB was at the helm of the trading desk on Thursday, for the Old Geezer was just spooked by the 6.5% downdraft in MMM's stock, and had to take a nap during the trading day. HK has no current position in MMM but has owned it from time to time. There is no interest in the stock here even after Thursday's decline. MMM said that the market in both the U.S. and Europe was "uninspiring" and that it expected an "extended period of slow recovery". OG, having awaken from its nap, and rather than saying buying a 1000 of whatever, was heard to murmur incoherently of course, "sell everything". LB just writes down in these minutes of HQ's operation what actually happens, and does not make those value judgments so common among the masses. RB wanted to know what happened to its Microsoft shares. The OG muttered "sell everything, and move to Tibet, and start reading the Bible more".

1. Earnings from Regional Banks: TOBC SUSQ WASH FBNC (all owned-Regional Bank Stocks' basket strategy)

Tower Bancorp reported operating net income of 2.6 million or 37 cents per share (35 cents GAAP). The bank earned 30 cents on a GAAP basis in the 3rd quarter of 2009. The estimate was for 34 cents. TOBC Analyst Estimates | Tower Bancorp As of 9/30/2010, the total capital to risk-weighted assets was 13.2%; the tangible equity to tangible assets ratio was at 9.41%; NPLs to total loans was 1.15%; the net interest margin was at 3.64% (down slightly from 3.73% for Q/E 6/30/2010), and the tangible book value per share was $21.02. The Board declared the regular quarterly dividend of 28 cents per share.

Susquehanna Bancshares released another uninspiring earnings report. My SUSQ shares will remain in Category 1 of the regional bank basket, reserved for those banks deemed the most risky and/or having other characteristics deemed undesirable. Banks in Category 1 can be bought subject to a limit of $300. The current limitation on Category 2 is $3000. The capital ratios for SUSQ appear to be fine, though part of the bank's equity capital consists of some government TARP money (1/3rd of original issue) and a significant amount of trust preferred stock which is not viewed as equity here at HQ. As of 9/30, the total risk based capital ratio was 15.76%; the tangible common equity ratio was 7.64%; and the tier 1 capital ratio was 13.54%. One problem now is the earnings are just not impressive at just four cents, one cent below the estimate of 5 cents. But, I would still keep SUSQ in Category 1 if it had reported 10 cents. The dividend rate is still just a penny a quarter. Net interest margin is okay at 3.58%. SUSQ continues to be a weak hold for the 50 shares bought at $5.85. A more positive view that focuses on different metrics can be found in this article at TheStreet. About the only positive thing that I can say is that SUSQ is not a Regions Financial, so I can at least read its earnings release without becoming nauseous.

I have a decent percentage gain in the 100 shares of Washington Trust (WASH) bought at $15.26 last January, and this bank pays a good dividend (currently 84 cents annually). Washington Trust reported net income of 6.4 million or 39 cents per share, up from 31 cents in the 3rd quarter of 2009. The consensus estimate from 3 analysts was for 36 cents. As of 9/30/2010, the net interest margin was low at 3.01%, though up slightly from the prior quarter; the total risk based capital ratio was at 12.5%; the tangible equity to tangible assets ratio was at 7.07%; allowance for loan losses to nonaccrual loans was a comforting 143.8%; NPAs to total assets was low at .79%; and nonaccrual loans to total loans was .97%.

First Bancorp (FBNC) reported net income of 2.8 million or 17 cents per share. This missed the consensus estimate from 5 analysts of 19 cents. The net interest margin increased to 4.3% from the 3.83% as of the Q/E 9/09. The net interest margin declined from 4.35% from the 2nd quarter of 2010, however. As of 9/30, the total risk based capital ratio was 16.74%; tangible equity to tangible assets was 8.52%; and the ratio of non-covered assets that are non-performing to total non-covered assets was 4.16%, up from 3.89% at the end of the last quarter. The bank said that demand for loans remains weak. Based on that comment and more particularly the elevated NPAs, which I regard as worrisome, I view my 50 shares of FBNC to be a weak hold. By weak hold, I mean that it could liquidate my position at any time, notwithstanding the long term holding period of this basket strategy, but I may continue to be hold a small position for one or more reasons. For FBNC, the reasons for continuing to hold just 50 shares in the regional bank basket would include geographic diversification, particularly after I sold my other NC based bank (SOLD 100 FSBK @ 10.1), and the potential growth due to a previous FDIC assisted acquisition. This one is also in a trading mode classification, where I will buy and sell in an effort to lower my overall cost basis, while keeping only 50 shares as a core. In that type of trading mode, I will be allowed under that trading rule to temporarily increase the holding up to 100 shares as a maximum. Bought 50 FBNC at 12.58 Bought 50 FBNC at $12.01 Sold 50 FBNC at 13.25

Southside Bancshares (SBSI) reported net income of 11 million for the 3rd quarter or 70 cents per share, up from 67 cents in the 3rd quarter of 2009. As of 9/30, the net interest margin was 3.35%; nonaccruing loans to total loans was at 1.41%; and the allowance for loan losses to nonaccruing loans was at 128.02%. The bank repurchased during the quarter 254,276 shares at an average price of $18.45, as the bank started its authorized buyback of up to 6 million dollars of stock. I am not sure about the consensus estimate which has a 46 cent estimate for the quarter. SBSI Analyst Estimates | Southside Bancshares If that is correct, SBSI beat the consensus estimate by 24 cents.

2. Bought 100 of the TC PYB at $23.81 on Wednesday (see Disclaimer): RB just said that the NERD is definitely back at the helm of the trading desk, as demonstrated by this buy, along with the recent buys and sells of the TCs containing the Goldman Sachs senior 2033 bond.

I bought 100 PYB at $23.81, which contains that GS bond as its underlying security, after selling 100 of DKW, another TC with the same GS bond which was called by the owner of the call warrant. Bought 100 DKW at 22.86 Sold 100 DKW @ 25.25 Alert on TC DKW-Exercise of Call Warrant/SOLD 50 OF 150 @ 25.20 Bought 50 DKW @ 23.07 Apparently the NERD has been flipping those TCs, and there are several of them, for awhile now, holding them for a short period. Bought 50 PJI at 20.85 Added 50 PJI at 20.17 Sold 50 PJI at 23.52 Sold 50 JZS @24.15 Bought 50 PYB at 22.83 and 50 JZS at 22.95

PYB prospectus: The trustee's last distribution report shows that the trust owns 73 million in principal amount of this GS bond.

One reason for these purchases, as previously discussed, is the possibility of a call by the owner of the call warrant. The underlying GS 2033 senior bond is currently trading over its par value. FINRA While the owner of the call warrant is under no obligation to do anything, it would be profitable to exercise that call, redeem the TC's at par value, take possession of the bonds, and then sell them at a profit in the bond market. If this does not happen, then I will continue to receive the semi-annual interest payments. The current yield at a total cost of $23.81 is around 6%, and the YTM is around 6.24%, Morningstar Bond Calculator: Yield to Maturity. The underlying bond at a 107 price has a current yield of 5.724% and a lower yield to maturity due to its premium to par value.

I became aware last night that two other TCs (DKP & HJG) containing the same 2033 GS bond have received partial calls by their respective call warrant owners. DKP, HJG and DKW all originate from Morgan Stanley. Structured Asset Trust Unit Repackagings (SATURNS) Series 2003-6 Trust Receipt of Notice of Intent to Exercise Call Options in Part Structured Asset Trust Unit Repackagings (SATURNS) Series 2004-2 Trust Receipt of Notice of Intent to Exercise Warrants in Part

3. RailAmerica (RA)(owned): RailAmerica reported income from continuing operations of 15 cents, up from 8 cents in the 2009 third quarter, on a 16% increase in revenue from the 3rd quarter of 2009. The consensus estimate from 11 analysts was for earnings of 11 cents. RA Analyst Estimates | RailAmerica, Inc RA was a recent purchase at 9.75.

RailAmerica had a volatile day yesterday, rising as high as $12.74 before closing up 5.71% to $11.47.

4. Exxon (owned): XOM reported net income for the third quarter of 7.35 billion or $1.44 per share, up from 98 cents in the year ago quarter. This beat the consensus estimate by five cents.

Exxon Mobil Corporation closed up 55 cents yesterday to $66.22.

5. Duke Energy (own-core electric utility holding): Duke Energy (DUK) reported net income of 670 million or 51 cents per share, beating the consensus estimate by 9 cents. The utility was favorably impacted by unusually warm summer weather in its service territory. Duke increased its outlook for 2010 to a E.P.S. range of $1.4 to $1.45.

Duke Energy Corporation closed up 20 cents to $18.07.

6. Brandywine Realty (BDN)(own): While I sold out of BDN's preferred stock, I still own just 100 shares of its common. Brandywine Realty raised its FFO guidance for 2010 to a range between $1.32 to $1.34. As of 9/30, BDN's core portfolio consisted of 237 properties, with an occupancy rate of 84.9%. With new leases signed after the end of the quarter, the leased rate increased to 86.5%. BDN is an office building REIT. Brandywine Realty Trust

Brandywine Realty Trust closed down 4.09% to $11.95 yesterday.

7. SOLD 50 PYI at $25.66 on Thursday (see Disclaimer): This TC popped almost 6% yesterday on huge volume for it. I was barely interested in this security when I bought those 50 shares at 23.98. I had previously bought and sold this TC, and never had a material position in it. Bought TC PYI at $19.05 The TC has a $25 par value and a 6% coupon. The underlying security is a senior bond maturing in 2029 from Time Warner. One reason for doing the recent nibble was the possibility of a call warrant exercise, which had just happened for another TC containing this same TW bond. The underlying bond has been trading recently at more than a 10% premium to its par value, and has a 6.625% coupon. The rise yesterday in PYI on Thursday brought the current yields of the TC and the underlying bond roughly in balance.

8. Added 30 FE @ 36.1 (see Disclaimer): This brings me up to 130 shares, and I changed my reinvestment option on Thursday morning to reinvestment. I had previously been taking the dividend in cash. Both First Energy and Exelon have significant merchant power businesses, and both have declined almost in tandem after reporting decent third quarter results. This has occurred at a time when my other electric utility holdings, without the power generation business, have continued to increase in value. An example of that later type holding is Consolidated Edison (ED). Both FE and EXC have disclosed recent news that indicates that the sluggish U.S. economy is hurting demand for, and pricing of power generation sold in the open market. Eventually, with a more healthy economy, investors will be bidding up the price of these merchant power producers with significant regulated, retail operations. But, patience will be required which is why I am reinvesting the dividends paid by both FE and EXC to buy more shares at their current depressed prices.

First Energy appears to be making progress in overcoming the regulatory hurdles necessary for its proposed acquisition of Allegheny Energy (AYE), as noted in this press release from earlier in the month: FirstEnergy Corp. Investor: Investor Information: News Release Morningstar has a five star rating on FE. S & P has it rated 4 stars with a $45 price target.

After trading down to $35.88 intra-day yesterday, FE closed at $36.17, down 9 cents. At that price, the dividend yield is close to 6%.

9. Added 100 of PMACK at 10.01 on Thursday (see Disclaimer): This security was delisted on Thursday, voluntarily, from the NYSE. When it was trading on the NYSE, the symbol was PMK. I bought 100 shares on the pink sheet exchange at $10.01 on the day of the delisting from the NYSE. This is a senior bond, originally issued by PMA Capital, that has a $10 par value and a 8.5% coupon. Interest is paid monthly. So my yield will be a tad lower than the coupon at my cost. I discussed this bond in several prior posts, and now own 250 shares. Bought 100 PMK at $8.35 Added 50 PMK at $8.21 Bought 100 PMK at 9.71 Prior to PMA's acquisition, this bond was rated as junk. I believe that Old Republic bonds are considered investment grade, and the site does show this PMA bond now rated at Baa3 by Moody's. If that is correct, this bond, formerly traded under the symbol PMK, may be the highest yielding investment grade bond, particularly with an intermediate term maturity, currently available. The only bond issued by Old Republic (ORI) that I could find is rated Baa1 by Moody's and BBB+ by S & P: FINRA

(Added: I learned something about listing requirements on the pink sheet exchange after noticing later this morning that this security was not available today for purchase. OTC Companies and Advisors Frequently Asked Questions - In that link, it appears that this was what they call a "piggyback qualified quote". For this security to trade now, a dealer would have to go through the process of filing a form 211 with that exchange.)

I had quite a few more trades from Thursday which will be discussed in the next post.

Thursday, October 28, 2010

Bought 100 IGI @ 21.04 & Sold 90 NIE @17.41 in IRA/Sold 100 MSFT @25.75/PBIB, CBU, TRMK, NRIM, TOBC/Bought 100 XRB:TO @ 22.09 CAD

The movement in the VIX above 20 is sufficient to re-start the count, so the Unstable VIX Pattern continues with no days in the 3 month count necessary for the establishment of a Stable Vix Pattern. Vix Asset Allocation Model Explained Simply Current Status of The Vix Asset Allocation Model Signal The ^VIX closed yesterday at 20.71, up .49 for the day. If the VIX had been moving below 20 for several weeks, and then had three days between 20 and 21 over a ten day period, I would not restart the count. However, the three closes above 20 have happened since the VIX first closed at below 20 on 10/11. ^VIX Historical Prices

The downdraft in foreign currencies and commodities yesterday, along with other risk assets, was most likely due in my opinion to a story in the WSJ, which appeared to be based on sources with the Federal Reserve sending a signal to the market. The WSJ journalists claimed that the "central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months" The market was hoping for much more quantitative easing. Since the slide in the dollar recently was predicated on a much larger QE 2, this apparent market signal from the FED caused a reversal of the weak USD trade.

1. Bought 100 of the CEF IGI at 21.04 on Tuesday & Sold 90 NIE @ 17.41 on Wednesday in the ROTH IRA (See Disclaimer): This purchase by the Old Geezer caused a ruckus here at HQ, with the RB going on strike, complaining about Girlie Men at the helm of the trading desk. The RB is in a depressed state, at least for it, wondering how HK was going to acquire Canada, all of it, with the OG making these kind of buys. The OG got spooked about the negative yield from the 5 year TIP auction earlier in the week, and was heard to say that the bond ghouls and the stock market wizards do not appear to be on the same page. The five year treasury bond is priced to yield about 1.25%, with the 10 year at 2.64%. Bloomberg The national average for a five year certificate of deposit has slide to just 2.15%. The LB recommended that the OG be immediately relieved from Head Trader duties, before his caution infects the legions of minion peon staff members here at HQ. At a minimum, LB recommends that the OG's IV dose of chill pills be doubled, with a quart of Lithium injected into the Old Goat just for good measure.

This is the third buy of IGI. My prior purchases and sales are discussed in the following posts: Added 100 of the CEF IGI at 19.78 Bought 100 CEF IGI at $19.89 Sold 100 IGI at 20.74 and Bought 100 GDO Sold 100 IGI at 21.26

This particular CEF invests mostly in investment grade corporate bonds, and has a 2024 liquidation date. The term date does provide a measure of protection against interest rate risk, assuming the manager of the fund buys mostly bonds that mature on or before the liquidation date. For the most part, the price for IGI has recently been at a small premium to its net asset value. Based on the decline on Tuesday of 50 cents per share, I believed that the CEF had returned to a small discount at the time of my purchase. Net asset value information can be found at the and at CEFA - Closed-End Fund Association.

The most recently filed Form N-Q, the fund's holdings, can be found at The last filed shareholder report can be found at The expense ratio is close to .8%: Morningstar. The current distribution rate is monthly at $.1045. This would translate into a yield of around 5.96% at a total cost of $21.04. This is a link to the sponsor's web page: /IGI.

On Tuesday, IGI did close at a 2.81% discount to its net asset value of $21.68. The fund does not use leverage.

The shares of NIE were sold based on a conservative trading strategy for the IRAs based on the movement of the VIX. I received one quarterly dividend paid by this CEF of $25.2 for the shares bought in mid September at 16.62. This CEF closed Tuesday at a 6.86% discount to its net asset value. Allianz Global Investors | AGIC Equity & Convertible Income Fund

2. Earnings Regional Bank Stocks: PBIB, ONFC, TRMK, CBU, TOBC, NYB & NRIM (all owned Regional Bank Stocks basket strategy):

Porter Bancorp is another disappointment. At least for the 3rd quarter, PBIB reported a profit. This small bank based in Louisville reported net income of 2.4 million or 16 cents per share, down from 46 cents per share in the 3rd quarter of 2009. The expectation was for 9 cents. Net interest margin increased to 3.73% compared to the linked quarter in 2009. NPLs stood at 3.45% of total loans, and the total risk based capital ratio was at 16.35%, both as of 9/30. Porter continues to be a weak hold for me. (sec filed press release on 3rd Q earnings:

Community Bank System, a recent addition from earlier in the week, reported net income of 17.3 million or 51 cents per share, up from 38 cents reported in the 3rd quarter of 2009. The consensus estimate, made by 6 analysts, was for 46 cents, m: CBU Analyst Estimates | Community Bank System As of 9/30, NPAs to total assets was extremely low at .37%, and NPLs to total loans was just .58%. I have not decided what to do with my 151+ shares of Wilber (GIW), GIW- Being Acquired by CBU.

Trustmark (TRMK) reported net income of 25.9 million or 40 cents per share, up just 1 penny from the 3rd quarter of 2009, but two cents better than the consensus forecast. TRMK Analyst Estimates | Trustmark Corporation The Board also declared a 23 cent quarterly dividend. As of 9/30, tangible common equity to tangible assets was 9.34%, the Tier 1 common risk-based capital ratio was at 12.72%; and the net interest margin stood at 4.39%. I own 50 shares as part of the regional bank basket: Bought 50 TRMK at 19.57

Northrim (NRIM) has not moved much, either up or down, since I bought 50 shares at $16.66, though the earnings reports have generally been favorable. This Alaska bank, bought primarily for geographic diversification, reported earnings of $.49 per share, much better than the consensus estimate for 35 cents. The total capital to risk-adjusted assets was 15.72% and the tangible common equity to tangible assets ratio was 10.5%. NPAs to total assets declined from 2.82% at the end of the 2nd quarter to 2.41%. The tangible book value was $16.86, slightly more than the closing share price on Tuesday and Wednesday. NRIM NRIM closed at $16.8, up 31 cents yesterday.

Oneida Financial Corp (ONFC) is one of the smallest banks in the basket, bought primarily for the good dividend yield, currently around 6.5%. This bank reported net income of 11 cents, up from 10 cents in the year ago quarter. The tangible value per share was reported at $9 per share as of 9/30, and the stock closed at $7.78 on Tuesday.

Although I have sold 100 shares of New York Community Bancorp originally bought in an IRA, realizing over a $300 net gain, I still own 100 shares bought in a taxable account that is part of the regional bank strategy, and that position is one of my largest unrealized gains in this basket. Added 50 NYB at $10.57 Bought 50 NYB at $11.3 50 NYB at 10.9 50 NYB at $11 Sold NYB in IRA at 17.51 The share price jumped after my purchases after NYB acquired a midwest bank in an FDIC acquisition. Item # 8 NYB (Dec 2009). This bank then expanded into Arizona with another FDIC assisted acquisition: Item # 8 NYB (April 2010) New York Community Bancorp reported operating earnings of 31 cents and cash earnings of 34 cents for the 3rd quarter. The consensus estimate was for 31 cents. NYB lost 1 cent yesterday, closing at $16.78.

3. Bought 100 XRB.TO at 22.09 CAD (see Disclaimer): The symbol for this ETF is XRB:CA at Fidelity. It is an Ishares Canada product. I noticed yesterday that it had declined 14 cents which was almost enough of a decline to pay for my 19 CAD commission on a 100 shares, so I went ahead and bought 100 at 22.09 CAD.

This ETF is basically the Canadian version of a U.S. ETF for government inflation protected bonds, except some of the larger provinces in Canada also issue these kind of securities. iShares DEX Real Return Bond Index Fund: Overview This is a large fund in Canada with almost 570 million in assets. The management fee is .35%. As you would expect from this kind of fund now, the yield is low, and the distributions are made semi-annually in June and December. XRB.pdf A description of Canadian Real Return bonds as they call them can be found in this publication from the Bank of Canada:

4. Sold 100 MSFT @ 25.75 (see Disclaimer): The purchase of IGI and XRB:TO, noted above, along with the sells of MSFT and NIE, were the result of anxiety attack number 1,394,302 experienced by the Old Geezer, who was promptly relieved of his duties as HT by Headknocker at 10:16 A.M. on Wednesday, after the HK noted the quart of lithium, laced with Xanax, appeared to have no effect on the OG who was starting to have his vision of living under a bridge and eating at a soup kitchen. The shares of MSFT were bought in two small lots: Bought 70 MSFT @ 24.55 (Oct 2010) and Bought 30 MSFT at $24.54 (June 2010)

5. Citigroup Funding Senior Principal Protected Note Guaranteed by Citigroup vs. a Fixed Coupon Citigroup Senior Note: In this section I am posing the following issue. Assume an investor wants to buy a Citigroup senior note with a fixed coupon maturing in 2014. Someone mentions an alternative, a senior "principal protected" note issued by Citigroup Funding and guaranteed by Citigroup that pays the greater of 3% annually or some percentage based on an index. I thought that I would examine this issue by comparing MBC, which I own, to a Citigroup fixed coupon senior note maturing at about the same time as MBC. Bought 100 MDC at 9.84 Bought 100 MBC at 9.78 (a similar one tied to the Russell 2000 is also owned: Bought 100 MOU at $10.12)

MBC matures on 6/19/2014. Final Pricing Supplement I found at Finra a Citigroup fixed coupon bond, maturing on 5/5/2014, with a 5.125% coupon. FINRA It is actively traded and closed yesterday at 107.35. This gives me a current yield of 4.77%. The YTM would be lower given the premium to par value, and there would be a loss on the note if held to maturity. Besides the fixed coupon payments, the buyer's only upside is to sell the note at even a greater premium rather than to realize a guaranteed loss by holding to maturity.

MBC was trading earlier in the week at $10.08 with a $10 par value. So, the premium issue is much better than the bond referenced above. This senior note from Citigroup Funding has a minimum guaranteed payment of 3%. A purchaser of that note at $10.08 would receive no less than a tad under that minimum guarantee as the worst possible payment option, assuming Citigroup survives to pay interest and the principal at maturity. So, the owner of MBC gives up some current yield to the owner of the bond but does not have to pay a 7%+ premium to par value either. Maybe, if that was the end of the comparison, there would be a slight advantage for owing the fixed coupon Citigroup bond.

Unlike the owner of that fixed coupon bond, the owners of MBC has a potential upside to their 3% guaranteed interest rate. An investor in MBC has the potential to receive annually up to 30% interest computed on the $10 par value, based on the percentage increase in the Russell 2000. I explain this provision in a prior post as follows:

"MBC is another Citigroup Funding unsecured senior note that matures on 6/9/2014. This security has a similar structure to the others which I have recently purchased and discussed in this blog.

Par value is $10 which will be paid upon maturity provided the issuer is still solvent. I view the issuer's credit risk to be the main risk of this security.

Citigroup will pay annually a 3% guaranteed interest rate calculated on that $10 par value or $30 per year for 100 shares. As with the other Citigroup principal protected notes previously discussed, it is possible for the investor to receive more than that 3% guarantee. This particular note will pay up to 30% based on the increase in the Russell 2000 index from the starting value for each annual coupon period, with the usual proviso. I call this proviso the reversion clause. If there is one day when the Russell 2000 index closes above that 30% maximum amount, there is a reversion to the 3% guarantee and the closing value of the index is no longer relevant for that coupon period. The index could end up 28% for that period but the investor would still receive that 3% due to a maximum level violation.

For MBC, a reversion has already occurred in the first coupon period which ends on May 21, 2010 (see page PS-2 Final Pricing Supplement which sets out the annual closing dates). Thus, notwithstanding the Russell 2000 indexes climb from the starting value of 481.22 on 5/29/2009, the owner of MBC will receive an interest payment based on the 3% guarantee, since the Russell 2000 had a close during that period above 130% of the starting value. While only one day is sufficient to cause this reversion back to 3%, the Russell 2000 has had multiple violations of the 625.586 maximum level in that index (1.3 x. starting value of 481.22=625.586). So when payment is made for the first annual period, I already know that I will receive the 3% guarantee." Bought 100 MDC at 9.84

MBC is in its second annual coupon period after suffering a reversion to 3% in its first annual period due to the maximum level violation described above. I believe the starting value in the second period for the Russell 2000 is 649.29, ^RUT, the ending value for the first period. The 2nd coupon period ends on 5/20/2011. The maximum level is 844.077. So I do not want a single close in the Russell 2000 above that number. There has not been a maximum level violation so far in the second period. The ^RUT closed yesterday at 704.23. If that was the closing value on 5/20/2011, then the percentage increase in the Russell 2000 from the starting value would be 8.46%, or close to double the annual yield of the bond. If I received one coupon payment of 20%, and the remainder at the guarantee of 3% which was paid in the first paid, then I would still be better off with MBC than the fixed coupon bond, and I could be much better off with two good paydays.

So, assuming I have everything straight, which one would you choose if you wanted to buy a Citigroup note? I certainly would understand the response, "I don't want to own a Citigroup note".

The remaining trades from Wednesday will be discussed in the next post.