Monday, October 25, 2010

Sold 75 GDO at 19.24/VZ EXC OCFC/SOLD 100 of 200 OSM at 18.18

A man in Florida has now been living in his home for 8 years, without making a mortgage payment, since the lender can not produce the 1.5 million note signed by the borrower. BusinessWeek J P Morgan noted that the average time for a borrower to stay in their home after defaulting on the mortgage payments was 678 days in Florida and 792 days in New York. NYT For the most part there is not any question about the borrower defaulting, and the legal game is to keep them in their house, free of charge, for as long as possible. For Some Homeowners in Foreclosure, a Rent-Free Approach - This legal stratagem is successful in a large number of jurisdictions and is encouraging strategic defaults by borrowers who are able to pay. Mortgages: Just Walk Away? - (see Item # 4 Strategic Defaults) A corollary to this legal strategy is to find members of the press who will be sympathetic to those who have defaulted on their obligations and to write articles mostly about the lenders' failure to follow certain procedures, such as the use of Robo-signers. The ultimate goal is for the defaulting borrower to live in their home for a year or two rent-free, and then to either invalidate the mortgage or force a substantial modification of the debt, both in the amount and the terms, in favor of the borrower. Some of the legal arguments on invalidation of the mortgage are summarized in this article in the NYT.

1. Sold 75 of the bond CEF GDO in Roth at $19.24 on Thursday (see Disclaimer): I pared a small part of my overall position in this CEF, which stood at 556 shares before I reduced the position in the ROTH IRA from 175 shares to 100. The shares sold on Thursday were part of a 100 share lot bought at $18.63. I am reinvesting the dividend in the taxable account, where I currently own 311 shares. The fund is currently paying a monthly dividend of 13 cents per share which results in a 8.09% yield at a total cost of $19.27. The last distribution went ex dividend on 11/17.

While I will add to and sell shares in GDO, hopefully to reduce my overall cost basis in the shares, I intend to keep a significant position until this CEF liquidates in 2024. The importance of a term date liquidation as a means to reduce interest rate risk in a bond fund is discussed in several earlier posts. Item # 4 More on GDO; Bought 100 of the CEF GDO at 18.6

Since this CEF holds foreign bonds, its asset value will fluctuate some based solely on currency fluctuations. Over the past few weeks, the USD has fallen in value against the Euro, and that decline has benefited U.S. shareholders of GDO. The opposite happened when the Euro plunged in value, falling below €1.2 per $1 during the recent European sovereign debt crisis, and the price of GDO fell below $17 in May: GDO Historical So with the rally in the foreign currencies, this presented an opportunity to trim GDO, and then hopefully pick up those shares again at a lower price.

2. Verizon (own stock and bond in TC form): Excluding one time items, Verizon posted earnings of 56 cents per share, besting the consensus estimate by 2 cents. GAAP earnings were 31 cents per share. VZ added 997,000 new wireless customers, down from 1.2 million in the 3rd quarter of 2009. There was 226,000 net FiOS internet and 204,00 net FiOS TV customers additions during the quarter. Free cash flow for the first 9 months increased to 13.4 billion in 2010 compared to 10.7 billion in the first nine months of 2009. VZ said that its adjusted E.P.S. for the second half of 2010 will be at the high end of the range of its previous guidance.

VZ fell 43 cents on Friday to close at $32.09. (BOUGHT 100 VZ at $26.74)

3. OceanFirst (OCFC) (own- Regional Bank Stocks' basket strategy): OCFC reported net income of 5.2 million or 29 cents per share, up from 27 cents in the 3rd quarter of 2009. The consensus estimate by 4 analysts was for 28 cents. As of 9/30, the net interest margin was 3.75%; NPLs as a percentage of total loans was at 2%; the allowance for loan losses as a percentage of NPLs was 55.05%; and the efficiency ratio was at 57.85. Bought 50 OCFC at 10.4

4. Exelon (EXC)(owned): Exelon's adjusted E.P.S. rose to $1.11 per share from 96 cents in the 3rd quarter of 2009. This utility raised its guidance range for the full year to $3.95 to $4.1 from $3.8 to $4.10 per share.

Exelon fell 3.49% or $1.52 in trading on Friday. Exelon traded briefly over $90 in 2008: Exelon Corporation Common Stock Stock Chart | EXC If I had to ascribe a reason for the decline on Friday, it would not be the earnings report for the 3rd quarter or the guidance for the remainder of the year. Instead, I suspect it has to do with weakness in Exelon's merchant power business, as shown by the low prices received for forward sales of generation output. Exelon hedged an additional 5% of its output for 2012. Management reduced its high end guidance for 2012 gross margins by 200 million for Exelon Generation, and this apparently caused some analysts to reduce earnings estimates for 2012 and 2013.

5. Sold 100 of the 200 Shares of OSM at $18.18 (see disclaimer): This was my only trade from Friday. I have discussed this floater in several posts, and have bought and sold it many times. When I started to talk about it, it was trading at around $10 a share. CPI FLoaters PFK AND OSM (12/2008) CPI FLOATER: OSM (12/2008) CPI and CPI Floaters-OSM (12/2008)

OSM is a senior bond issued by SLM, known as Sallie Mae, that pays monthly interest based on a spread to an obtuse CPI calculation that I explain in this post: Item # 1 Sh-- Happens/CPI It has a $25 par value and matures in 2017. So this security would have a decent yield based just on the spread between its par value at maturity and the current market price, assuming SLM survives to pay off the note.

For some time, I have been concerned only about the credit risk of this issue given the government's takeover of student lending, and the end to its guarantees for lenders like SLM. I am far more comfortable holding until maturity a similar type bond issued by Prudential that matures in 2018: Added 50 PFK at $17.83 Bought 100 PFK at $18.466 Bought 90 PFK in IRA at $18.94 Added 50 PFK in Roth at 20.88-Averaged UP Unfortunately, PFK is now selling at over its $25 par value, and I have no interest in it at the current prices. (note: a similar CPI floater from SLM is ISM, with a 2018 maturity which I no longer own: prospectus at

6. CZNC Dividend Raises: Citizens & Northern, part of the regional bank basket, raised its dividend to 12 cents from the 10 cents paid last quarter. For the 2nd quarter of 2010, the bank paid 9 cents and 8 cents in the first quarter. The bank raised its annual rate gradually from $.60 in 2000 to $.90 in 2005, then cut it to 71 cents for 2006-2007, and then raised it again to $.96 for 2008, and lowered it again during the Near Depression period to 72 cents in 2009. The rate in 2010 will be 39 cents, but the Board appears to be in a raising mood. If the bank makes it bank to $.90, and based on my average cost for 100 shares of around $11.12, then my yield under that assumption would be about 8%. CZNC closed at $14.62 last Friday.

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