Wednesday, October 20, 2010

Bought: 50 of the TC IPB at 23.11 in IRA/ JNJ KO BAC Gold-MOL

The market seemed more concern yesterday about China's first rate hike since 2007, a mere .25% for its deposit and lending rates. The 1 year lending rate was increased to 5.56% and the 1 year deposit rate was raised to 2.5%. NYT Chinese inflation hit 3.5% in August. This rise in rates was the apparent cause of a reversal of the risk trade. That trade included buying commodities, whose price is dependent on China's growth prospects, and commodity linked currencies like the Australian dollar. Both the currency ETF for the Australian dollar, FXA, and the commodity ETF, DJP, declined by more than 2% in trading yesterday. There was also an abrupt reversal in the tech stock rally, as IBM reported anemic revenue growth of 3% (4% on a constant currency basis), and Apple guided its E.P.S. for the current quarter below the consensus estimate ($4.8 vs. estimate of $5.03). I do not currently own either IBM or Apple.

The significant decline in the spot gold price gave MOL, the "principal protected" note issued by Citigroup Funding some breathing room. Bought 200 MOL at 9.95 The P.M. London fix for spot gold was at $1339 on 10/19, down from $1367.25 the previous day. Kitco Inc. - Past Historical London Fix The first annual coupon period for MOL ends on 11/18/2010. It will pay the greater of 2% or the percentage rise in gold from a starting value of $1169.5, up to 19%, provided there is no close above 19%. The maximum level trigger for the reversion back to 2% is $1391.705 (1.19 x. 1169.5). If there was no close above that level during the first coupon period, and gold closed at say $1350.50 on 11/18, then that would be a $181 rise in the spot gold price from the starting value or 15.48% (rounded). Then, under those assumptions, the coupon on this note would be that percentage increase, producing $1.548 in annual interest per one share calculated on the $10 par value. If the maximum level was violated by just one close, then the interest reverts to the guarantee of 20 cents per share. So that is a big difference, and I am glad to see gold pull back some. It just gives me a slightly better shot at receiving something more than the 2% guarantee, and possibly a very good percentage yield for the 1st annual coupon period.

I prefer MTY, at the right price, which has a much larger permissible maximum level at 35%. Bought 100 MTY at 10.49 Of course, these notes are principal protected only in the sense that Citigroup will pay the par value at maturity provided it is able to do so, i.e., not seized by the FDIC or in bankruptcy court. These notes are not insured obligations but are merely unsecured senior notes subject to the credit risk of the issuer. Item # 2 Principal Protected Notes

1. Coca Cola (KO) (own): Coca Cola reported earnings for the 3rd quarter of 88 cents and 92 cents before certain items. This beat the consensus estimate by 3 cents. Overall sales increased by 5%. Volume in Eurasia and Africa increased by 12%. Volume grew by 2% in North America. Currency neutral operating income grew 14% in the quarter. Cash flow for the first 9 months was up 15% to 7.2 billion dollars.

My maximum limit for exposure to the securities of one company is $10,000, and I am near that limit with the common shares of KO. I started my current position with a purchase at 38.72 in early March 2009 and subsequently added to itwith purchases at 53.77 and at 54.26. I am reinvesting the dividend, but may cease doing that at some point if the share price stays above $60 for an extended period. KO did rise 34 cents yesterday to close at $60.34.

KO is part of my dividend growth strategy. (criteria set forth in Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds) Historically, KO has been doubling its dividend every seven years. Item # 1 Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009

This WSJ article has a list of 20 dividend paying stocks recommended by Doug Cliggott, the Credit Suisse stock strategist, as being better than bonds. From that list, I own VZ, T, DUK, ED, MRK, KFT, JNJ and PG.

2. Johnson & Johnson (own): I own 50 shares of JNJ bought at 64.44 which was in retrospect a mistake since my the top part of my buy range was $60 at the time of that purchase last April. LB just said that the mistake was made by the Old Geezer who simply forgot LB's buy range. LB, of course, never makes mistakes.

While JNJ beat the consensus earnings estimate by 8 cents for the 3rd quarter, revenues missed expectations, growing only .7%. SEC Filed Press Release Worldwide consumer product sales declined 10.6% due to the numerous recalls. Domestic sales of consumer products fell 24.5%. Pharmaceutical sales did rise 4.7% and 5.9% prior to currency effects. Medical device and diagnostic sales increased by 1.3%.

A lower tax rate of just 19%, compared to the expectation of 24%, boosted JNJ earnings in that quarter Revenues were 14.98 billion, missing the expectation of 15.19 billion. JNJ reported an E.P.S of $1.23 compared to $1.23 earned in the 2009 third quarter. Due to more favorable currency exchange rates, JNJ raised its full year forecast to a range between $4.7 to $4.8 per share.

JNJ declined 57 cents to close at $63.39 yesterday.

3. Bank of America (BAC) (own common, equity preferred and TPs): BAC reported a net loss of 77 cents per share, which included a goodwill impairment charge of 10.4 billion SEC filed Press Release That charge is a non-cash item connected to the recently enacted financial "reform" legislation. Excluding that charge BAC earned 27 cents per share, which was better than the consensus estimate. As of 9/30, BAC had a tangible book value per share of $12.91, and all of the capital ratios improved over the reported numbers for the Q/E 6/2010. The total capital ratio increased to 15.65% from 14.77% at the end of the June quarter. The tangible common equity ratio was 5.77% as of 9/30.

A Bloomberg report, also summarized in this article from the TheStreet, discusses legal claims made by purported owners of mortgage securities who are reportedly demanding that Countrywide, now owned by BAC, cure its alleged defaults in servicing these mortgages. The purported aim of this claim is to require BAC to buy back the mortgages.

Another negative article about the huge foreclosure mess was a column written by Floyd Norris in the NYT that summarizes some legal arguments about the validity of mortgages registered with the Mortgage Electronic Registration System.

The Bloomberg report and the Norris article were sufficient to cause me to halt any plans for now to buy another BAC bond.

4. Bought 50 of the Trust Certificate IPB at 23.11 in regular IRA on Tuesday (see disclaimer): I have discussed this unusual trust certificate in several prior posts. I own it only in retirement accounts. I own 100 shares currently in the ROTH IRA bought in two lots: Bought 100 of the TC IPB at $16.99 Bought 50 of the TC IPB at 21.3 I made the mistake of selling 50 of the 100 shares bought at $16.99. Sold 50 IPB at 20.28 The mistake is one recognized based on 20/20 hindsight. When the shares were sold, I did believe that the Fed's Jihad against savers would extend into 2011.

This TC contains as its underlying securities 15 long term corporate bonds with various maturities and treasury strips maturing in 2030. One reason for owning the security in a retirement account is the tax issue related to treasury strips. Another reason is that I prefer owning bonds in the retirement accounts due to the higher marginal rate paid on interest income. If this bond was held until the underlying bonds matured, then I would have a headache accounting for the distributions made by this TC from the proceeds of maturing bonds. Lastly, since I believe that interest rates will eventually rise, and the price of this TC will fall, I will hopefully still have the opportunity to include it in a Roth conversion when the price falls substantially from current levels due to a rise in rates, pay the tax on the reduced value, and then allow it to recover to its par value of $25 in the Roth IRA.

One advantage of IPB is that some diversity in long bonds is achieved with one purchase, and the absence of any ongoing fees other than a small charge by the trustee for its collection and disbursement obligations. This is a link to the last trustee report filed with the SEC showing collections and disbursements. Of course, it would have been better to buy more shares at $16.99 rather than to average up.

IPB Prospectus:

The underlying corporate bonds in the TC IPB mature between 2031-2033. As they mature or are called, the trustee collects the proceeds and delivers those funds to the owners of the TCs. The following is some data about those bonds:

Bond/ Finra Trades Link/ Coupon/ current yield as of mid day 10/19/2010
Boeing FINRA/ 6.125% / 5.25%

Citigroup FINRA/ 5.875%/ 6%
Credit Suisse FINRA/ 7.125%/ 5.76%
Daimler FINRA/ 8.5%/ 6.31%
Ford Motor FINRA 7.45%/ 6.94%
General Electric Capital FINRA 6.75%/ 6.16%
GMAC FINRA 8%/ 7.34%
Goldman Sachs FINRA 6.125%/ 5.74%
Johnson and Johnson FINRA 4.95%/ 4.71%
May (now Macy's) FINRA 6.9%/6.76%
Time Warner FINRA 6.625% /6%
Valero FINRA 7.5%/ 6.96%
Verizon FINRA 7.75%/ 6.16%
Viacom (now CBS) FINRA 5.5%/5.63%
Weyerhaeuser FINRA 7.375%/7.375%

The corporate bonds are equal weighted as to principal amount and the treasury strips close to double weighted. So for purposes of making a comparison with IPB and the purchase of the underlying securities at current prices, I added up the current yields for the 15 corporate bonds and came up with 93.095 and then dividend that number by 17, which gave me a 5.48% yield. IPB yields about 6.58% at a total cost of $23.11. IPB goes ex interest for its semi-annual payments in June and December.

While I have not looked at the prospectuses of all of the corporate bonds in IPB, I am familiar with a few of them. For those few, the prospectus contains a "make whole" provision which makes it unlikely to be called which explains why the VZ and Daimler bonds are selling at such a high premium now to their par values. Make Whole Provisions For Long Term Bonds

I made one other purchase yesterday which I will discuss in the next post.

1 comment:

  1. How about this nugget?

    Gary(Shilling) writes, "Furthermore, false appraisals rose 50% in 2009 from 2008. The tax credit for first-time homebuyers cost taxpayers about $15 billion, twice the official forecast, in part due to fraud. Over 19,000 tax filers claimed the credit but didn't buy houses, while 74,000 who claimed $500 million in refunds already owned homes." Where are the regulators?"