Wednesday, November 24, 2010

Bought 50 ZBPRB at 25.05/Sold 50 ISCA @ 23.66-Bought 50 TRK @ 14.55/Bought: 100 KMP:CA @ 10.17 CAD & 100 ZCM:CA @ 15.3 CAD

The Fed released yesterday the minutes of its meeting held earlier in November. FRB: FOMC Minutes, November 2-3, 2010 The members "noted a number of factors that were restraining growth, including low levels of household and business confidence, concerns about the durability of the economic recovery, continuing uncertainty about the future tax and regulatory environment, still-weak financial conditions of some households and small businesses, the depressed housing market, and waning fiscal stimulus." They also noted that the housing sector "remained depressed" and the foreclosures were continuing to place downward pressure on home prices. The members were disappointed in the slow pace of job creation. There was also disagreements on whether QE2 would work and whether the potential benefits were greater than potential risks. 

It was not surprising that the FED downgraded its growth forecasts for both 2010 and 2011. The new forecast for 2010 is for growth of 2.5%, down from the previous 3% to 3.5%.  The forecast for 2011 is now 3% to 3.6%, a reduction from the prior estimate of between 3.5% to 4.2%. I doubt that many would be surprised by further reductions in the 2011 estimate during the course of next year. 

The 3rd quarter GDP estimate was revised up to 2.5% from the earlier estimate of 2%. News Release: Gross Domestic Product The firing of some artillery shells by the incorrigible North Korea, along with the continuing sovereign debt problems in Europe which refuse to go away, were viewed as far more important than that GDP revision for traders yesterday.

Allied Irish Banks, whose ADRs closed 89 cents per share on the NYSE, reported last Friday that it had lost 18 billion dollars or 17% of its deposits since June.

1. BOUGHT 50 ZBPRB at $25.05 on Monday (see Disclaimer): This TP is deservedly rated as junk, and I view it as too risky to own in an IRA. Based on the information at, Moody's rates this security at Caa1, while S & P has it at "B".

I would prefer to own a bank TP in a retirement account, primarily due to their distributions being taxable as interest rather than as qualified dividends. And, if I am unfortunate enough to get caught holding one that defers its interest payments, I avoid the unfavorable tax consequences associated with such a deferral when the security is held in a taxable account. With a bank like Zions, deferral of interest payments is certainly within the realm of possibilities.  

I have an extremely negative view of Zions Bancorporation, whose managers dug a very big hole for Zion's shareholders by fueling an obvious real estate bubble in Nevada and Arizona and suffering the natural and inevitable consequences of that imprudence.  The impact can be seen in the massive losses experienced by the bank in 2008-2010. (net loss in 2009=$9.92 per share, Form 10-K) Horrendous does not adequately describe it. The last quarter was just another loser: Form 10-Q

But, I have a problem.  Notwithstanding my extremely negative view of Zions' management, bonds in all of my accounts are being called now virtually every week. Given the Jihad by the Federal Reserve against responsible Americans, and the strong desire of those in power to make responsible Americans pay for the sins of the Masters of Disaster and the millions who participated in the creation of the real estate bubble,  I have run out of acceptable individual bonds to buy which is why I have come back to the ZBPRB, previously bought and sold at lower levels. Bought 50 ZBPRB in Roth at $19.9 Sold 50 ZBPRB at 24.38 If ZBPRB tanks on me, I am going to send a bill to the Fed or maybe a real estate appraiser.  

As previously discussed, ZBPRB is a typical trust preferred security. Zions creates a Delaware Trust, called Zions Capital Trust B, who then sells preferred stock in that trust in a public offering and uses the proceeds to buy a junior bond issued by Zions. The "preferred stock" represents an undivided beneficial interest in those bonds owned by the trust. This bond matures on 9/1/2032. In effect, ZBPRB is a junior bond that makes quarterly interest payments. Those payments can be deferred for up to five years.  Any payments deferred accumulate and earn interest at the 8% coupon rate.

I discuss in prior posts that this security is senior in priority to ZBPRA, ZBPRC and the governments' cumulative preferred stock still on Zion's balance sheet. This is viewed by me as an important point.  Zions would have to eliminate the dividends currently being paid to its common shareholders, and to the owners of both ZBPRA and ZBPRC which includes me, and defer payments to the U.S. government, before it could defer paying the owners of ZBPRB.  Several banks have eliminated their common and equity preferred dividends and deferred paying the government, so this can happen. It would be a big step for Zions to do it. I would regard such an action as an admission of serious trouble.  SEE Discussion at ITEM # 7 Bought 50 ZBPRB in Roth at $19.9

Trust Preferred Securities: Links in One Post
Regular Preferred and Trust Preferred
I also currently own 100 shares of the floating rate equity preferred stock with a guarantee, ZBPRA, bought  at $7.8. I also made three chicken buys of the fixed rate equity preferred stock, ZBPRC, which has a $25 par value and a 9.5% coupon. (Buys at $18.423.75 and recently at 25.28

Before adding even 50 shares of ZBPRB on Monday, I made the following calculations to be sure that I was not exceeding my comfort level by too much on this basket of deservedly junk rated securities. I added up all of the dividends received from these 3 issues as well as the profits already realized from trading them, and came up with $652.5. I then added up my total cost exposure to ZBPRA and ZBPRC, which was $2300 for the "C" shares and $788 for the "A" preferred shares. After subtracting realized gains and distributions previously received from that total, I calculated that I had a net exposure of $2435.5 after realized profits and distributions. My comfort level, as previously noted, is $3000 for this junk. By adding 50 ZBPRB at $25.05, I have gone over my comfort level by about $690, but that is not by enough to cause the Old Geezer to hide under the sheets.

And, all of these securities go ex later this month which will bring me a tad closer to that $3000 number. I mention all of the foregoing to show how closely I will monitor my exposure to a known risky issue, and will hopefully arrive at a point where I am playing with the house's money on this grouping of three securities. Part of the process of moving toward that goal involves occasionally exceeding my comfort level, then pulling back by selling some hopefully at a profit. I have a good unrealized long term capital gain in the 100 ZBPRA shares bought at $7.8, now trading at close to $19, and I successfully exited a smaller position in that security in the regular IRA. Bought 50 ZBPRA at 12.5 in IRA  SOLD 50  ZBPRA at $ 16.85.

See also: Analysis of Prior Question: ZBPRA vs. ZBPRC OR ZBPRB
Item # 2  More on Zion's Debt and My Limited Exposure to Junk Rated Issues

ZBPRB closed at its par value of $25 on Monday, down 19 cents. It was unchanged on Tuesday. I do notice it when securities hold their value or rise during periods of market turbulence and/or when the stock averages decline by significant amounts, as was the case yesterday. The next ex interest date is 11/26.

2. Medtronic (owned): Medtronic reported a Non-GAAP earnings per share of 82 cents, in line with the consensus estimate, on a 6% increase in revenue on a constant currency basis. Emerging market revenue grew 19% on a constant currency basis. The company lowered slightly its range forecast for F/Y 2011 E.P.S. to between $3.38 to $3.44 including 5 cents in dilution from its recent acquisitions of ATS Medical and Invatec but excludes dilution from its recently announced acquisition of Ardian.  Medtronic closed at $34.18 yesterday, down 52 cents. I was not impressed by the report.

3. SOLD 50 ISCA at 23.66  on Monday and Added 50 TRK at $14.55 on Tuesday (see Disclaimer): On Monday, I noted that Speedway Motorsports was sliding, while International Speedway (ISCA) shares were holding up.  I bought 50 shares of TRK and ISCA at the same time as a contrarian play. Bought:  50 TRK @ 15.77, 50 ISCA @ 23 Due to the decline in TRK, which accelerated some on Tuesday, I decided to go with that company as my contrarian play on U.S. motorsports and consequently averaged down by adding 50 shares at $14.55. TRK's price to book is less than 1. I had a limit order on Monday to buy TRK at a higher price, but it was not filled, saving me a few bucks.

4.  Bought 100  KILLAM PROPERTIES (KMP:CA) at $10.17 CAD and 100 of the Canadian bond ETF  BMO Mid Corporate Bond Index (ZCM:CA) at 15.3 CAD (see disclaimer): For both of these purchases, I did not use my existing stash of Canadian dollars to settle the purchases. Instead, as a result of the decline in the CAD against the USD yesterday, I settled the trades using USDs which Fidelity converted into CADs. Both of these securities have declined enough in price over the past few days to almost pay for my 19 Canadian dollar commission.

I mentioned the bond ETF from the Canadian brokerage firm BMO in connection with my 200 share purchase last Friday of another Canadian corporate bond ETF, the Claymore 1-5 Year Laddered Corporate Bond. Item 1: Added 200 CBO:CA @ 20.58 CAD The BMO ETF invests in investment grade Canadian corporate bonds with a maturity between 5 and 10 years. BMO Mid Corporate Bond Index ETF - Fixed Income The expense ratio is .3% and dividends are paid quarterly.  As with all of my Canadian holdings, I will take the dividends in CADs. This is a link to the list of holdings: Holdings.

Killam properties is my fifth recently added Canadian real estate company and my first non-REIT. Like the others, KMP pays monthly dividends, currently at a $.0467 rate, paid in Canadian currency. This results in around a 5.45% yield, the lowest among the REITs that I own, which is one reason for buying just 100 shares. Killiam does add some diversity. The company owns and operates 9524 apartment units primarily in the larger cities along the Atlantic coast of Canada. killamproperties August_2010.pdf Killam also owns Manufacture Home sites that are leased at levels close to 99% according to the previously linked fact sheet.  In those communities, the customer owns the home, and Killam leases the land. This is a link to the firm's web page for investors: Investors | Killam Properties

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

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