Tuesday, December 7, 2010

Tentative Deal on Bush Tax Cuts/Bernanke on 60 Minutes/Bought 100 NPP @ 14.05, 50 BMLPRL @ 17.35, 1 QuickSilver Resources Bond @ 96.87/Sold: 100 OEF at 54.94, 50 STIPRA @ 21.24, 100 SJV @ 10.8

In an interview on 60 minutes, Bernanke said that it was a "myth" that the Fed is creating money as a result of quantitative easing, asserting that the amount of money in circulation does not change in a "significant way" when the Fed buys securities. Maybe that is technically correct.  The FED increases bank reserves by buying these securities, and the banks are not lending that money out.  For those increased reserves to "create" money, the bank would have to circulate those funds in new loans.  USATODAY.com   There may simply be a distinction between a common sense view of money creation and the one advocated by practitioners of a pseudo science.

He is "100%" positive that the FED can act quickly enough to prevent inflation.  The price for gold offers a dissenting opinion to that belief. He believes that the "fear of inflation" is "way overstated".  He does not believe that it is "likely" that the U.S. will have a double dip recession, since the cyclical parts of the economy like housing are already so weak that they can not "get much weaker".

An intelligent critique of Bernanke's beliefs, as stated in this interview, can be found in a press release by the  National Inflation Association.

The tentative deal worked out by Obama and the GOP on taxes and unemployment benefits may provide a near term jolt to the economy, but the estimated cost of something for everybody will be 900 billion dollars over two years.  Maybe the members of the two tribes want to see what happens when the U.S. hits a two trillion budget deficit in a single fiscal year.  After all, surpassing 1 trillion by a few hundred billion did not seem to be so bad, at least for the time being.

The GOP wants to extend the Bush tax breaks to the wealthiest Americans, their main benefactors, based on  the thoroughly discredited belief that tax cuts for the wealthy pay for themselves.  The GOP strategy of holding hostage the extension of the Bush tax cuts for 98% of the population in order to secure an extension for the wealthy will prove to be successful, as the proposed deal calls for the extension of all of the Bush tax cuts for two more years.

Ultimately, the GOP wants to make the tax cuts permanent. The net effect of a permanent extension according to the CBO will be "to reduce income relative to what otherwise would occur in 2020" due to the cost of the increased debt burden. PolitiFact  WP   cbo.gov-.pdf

The Democrats received in return the GOP acquiescence in yet another extension in unemployment benefits.  Both parties apparently want a two year reduction in the 6.2% social security tax by two percent.  NYT  As one would expect, all of the foregoing will add more to the deficit,  which is the default resolution to every problem in need of a political solution.  Any amount added to the deficit will most likely be part of the nation's debt for as long as the U.S. exists as a country.   It is hardly surprising that gold continues to set new records.  It is really easy to be irresponsible.

I do recall that Mark Zandi testified that a previous extension of unemployment benefits would increased GDP for every buck spent.   The reason is that those benefits are quickly spent.  Testimony of mark-zandi .pdf (see page 5) Tax cuts for the wealthy have far less positive impact on GDP since a significant portion will be saved rather than spent.   I do have to wonder, however, how many recipients of the continually extended unemployment benefits have refused to accept or even look for a job that is viewed as beneath them.    I see a lot of $8 to $10 hour jobs with a lot of vacancies, and some of them are not exactly physically demanding or taxing to the intellect.

1. Bought 100 of the municipal bond CEF NPP at $14.05 on Friday (see Disclaimer): NPP is a leveraged municipal bond CEF. NPP - Nuveen Performance Plus Municipal Fund, Inc. The expense ratio is .74% NPP Fund Data  As of early October 2010, the fund had 279 holdings with an average maturities in years of 18.66.  So in addition to the risks inherent in leveraged bond funds with no term date, I also have significant interest risk associated with long bonds.   The overall credit quality is investment grade with 22.5% rated AAA, 37.4% at AA and 25.2% at A. NPP - Holdings Detail 

The current distribution rate is $.0785 per month.  NPP Distributions  If that rate continues for one year, then the tax free yield would be about 6.7% at a total cost of $14.05.

As of Thursday 12/2, which would be the latest data that I had when I made the purchase on Friday, the fund had a net asset value of $14.53 per share and closed at $14.13.  The discount as of that date was -2.75%.  The discount expanded last Friday to -3.1%, as the NAV remained the same from Thursday close but the market price declined by five cents.  WSJ 

2. SOLD 100 of the 200+ shares of the stock ETF OEF at 54.94 on Friday (see Disclaimer):  Staff here at HQ forgot to hook up the Old Geezer to the IV filled with Maalox and chill pills before the OG resumed his Head Trader duties.  The electrodes were attached to the OG's brain, to administer shocks to wake the Old Goat from those periodic naps during the trading day.   After receiving one of those shocks, and before anyone could restrain him, the OG said "sell stocks" and promptly entered an order to sell 100 of the stock ETF OEF at $54.94.  Headknocker suggested that staff play pleasant sounding "elevator" music  prior to giving the OG a jolt in the future.  The RB added that all the OG and the LB accomplish with all of this trading is to help our needy and destitute Uncle Sam in his hour of need.

Using FIFO accounting, the lot sold was the highest cost shares purchased at $49.61 last June.  I kept the shares bought  at $49.11.   OEF is the ETF for the S & P 100.

3. Sold 50 STIPRA at $21.24 on Friday (see Disclaimer):  This floating rate equity preferred stock with a 4% guarantee was ex dividend in late November.   I thought that the BMLPRL, discussed in # 4 below represented a better value, so I sold STIPRA and bought another 50 of BMLPRL. STIPRA is a Suntrust (STI) preferred stock that pays the greater of 4% or .53% over 3 month LIBOR.   Final Prospectus Supplement  Due to the abnormally low rates now, the applicable rate is the 4% guarantee.  I bought those shares recently at  19.75.  I have previously bought and sold this security:  Bought 50 STIPRA at $17.2   Sold 50 STIPRA at $20.90 

4. Bought 50 BMLPRL at $17.35 and sold 100 of the SIP SJV at $10.8 (see Disclaimer):  On 8/30/2010, I included SJV and two other special investment products in a ROTH IRA conversion after they declined from my initial purchase price.  The decline for SJV was relatively small.  Bought 100 SJV at 9.67  The conversion value on the 100 SJV was $954.  If the S & P 500 closes above 1,114.05 on 12/28/2010, I would receive from Bank of America $10.925. So the current pricing of SJV captures most of that gain.   The primary reason, however, for selling SJV is that I wanted to average down on the floating rate equity preferred floater, BMLPRL, which was originally issued by Merrill Lynch and is currently a Bank of America obligation.  Given my limit of $10,000 for securities from a single issuer, I needed to sell one BAC security to buy another.   For BAC, to determine whether I am over my limit, I would include the common stock, the equity preferred stocks, the trust preferred and any other bond, and the SIPs since they are after all senior notes.    I would of course include any security where BAC is now the responsible party, irrespective of the firm who originally issued the security.  As a result, I would include in that computation the Merrill Lynch equity preferred floaters with guarantees and the MBNA trust preferred stocks.

As previously discussed, BMLPRL was originally issued by Merrill Lynch.   I have been trading the Merrill Lynch floating rate preferred stocks for close to two years now.  I discussed BMLPRL when I purchased 50 shares last October  at $18.17.  Due to the market's concerns about BAC, these securities have fallen in value over the past several weeks.   To save time, I will just copy my earlier discussion about BMLPRL from the October post:


"The LB has devised a new strategy for floating rate equity preferred stocks that are obligations of Bank of America. The idea is now to buy several of them and then sell whichever one pops first. BMLPRL is a non-cumulative equity preferred stock, originally issued by Merrill Lynch, that pays the greater of 4% or .5% above the 3 month Libor rate. Term Sheet Due to the Jihad against savers by central bankers around the world, I would anticipate that it will be many months (possibly a year or more) before the 3 month Libor rate will rise above 3.5%, the point where the Libor float + .5% would be greater than the 4% guarantee. A history of the 3 month Libor rate can be found at LIBOR Rates History (Historical). Historically, it would not be unusual for the Libor rate to be higher than 3.5%, but it is now hovering at an abnormally low level of .29%. The daily rate can be found at the WSJ.com under the heading "consumer money rates".

BMLPRL does pay qualified dividends according to QuantumOnline.com. Hopefully, Congress will extend that favorable tax treatment which is set to expire at the end of this year, but I would not bank on it. This security is rated as junk.

The dividend for BMLPRL can be eliminated provided BAC first eliminates the common shares dividend, currently at 1 cent per quarter. It would be embarrassing for BAC to eliminate a 1 cent per quarter dividend, and then eliminate the non-cumulative preferred stock dividends. If you had an amount in excess of the FDIC coverage limits at Bank of America, and learned that it eliminated those dividends to preserve capital, what would you do?

The guarantee provided in these securities provides some protection in a low inflation or deflation scenario. At the 4% guarantee, the yield at a total cost of $18.17 is around 5.35%. The Libor float provision in BMLPRL is not a good one, comparatively speaking, but it does provide some inflation protection. At a 6% 3 month LIBOR during the relevant computation period, and the $18.17 total cost, the yield becomes 8.94%. Par value is $25. So if inflation kicks in, causing a rise in short term rates after the central bankers end their Jihad against savers, then the increase in interest rate due to the float provision provides some protection to the value of BMLPRL, possibly even making it more valuable assuming no change in the credit risk. An improvement in BAC's credit risk may also improve its value.  Inflation or Deflation: Bond Alternatives 

I have a gateway post that discusses in detail my opinions on the Advantages and Disadvantages of Equity Preferred Floating Rate Securities."

The following are some links to discussions of buys and sells of other BAC equity preferred floaters with guarantees:   Added 50 BMLPRJ at 17.74 Bought 50 BMLPRJ at 18.50 Sold 50 BMLPRJ at $19.25 Bought 50 BMLPRH at $13.83 Bought 50 BMLPRH at $13.25 Bought: 50 BMLPRH at 16.2 Sold 100 BMLPRH AT 17.42 Bought BMLprg at $8.8 Sold BMLPRG at 12.45 Sold BACPRE AT $15  I now own 100 shares of BMLPRL and 50 shares of BMLPRH in this category. 

BMLPRL has almost a 6% yield at its 4% guarantee for a total cost purchase at $17.35.  STIPRA has about a 4.7% yield at a total cost of $21.26, and less at the closing price from last Friday.  The difference in the LIBOR float provision is not viewed as a material consideration.

The consensus view now that the Bush tax cuts will be extended for the wealthiest taxpayers makes securities like equity preferred floaters, which pay qualified dividends, and provide a measure of protection in both inflation and deflation scenarios, a more desirable investment.

5. Bought 1 Quicksilver Resources Bond at 97.675 Maturing on 4/01/2016 on Friday (see Disclaimer): The commons stock symbol for this oil and gas company is  KWK.  The current consensus estimate is for an E.P.S. of 68 cents in 2010 on 898 million in revenues and 35 cents in 2011.

My confirmation states that the yield to maturity is 7.662% and that the bond is rated B3 by Moody's and B- by S & P.

This is a link to the information at FINRA  for this bond.  The coupon is 7.125%.

 The prospectus states that this bond is a "senior subordinated" obligation, some kind of marketing phrase meaning that it is "subordinated to all our existing and future senior debt and rank senior to all our existing and future subordinated debt."  I would prefer to call it a junior bond with some characteristics normally associated with senior bonds but subordinated to them. 


The last earnings report, which I reviewed, can be found at the SEC's web site.  The long term debt, which is substantial for a firm this size, is listed at page 18.  The relative priority of the debt issues can be gleamed from the chart and data at page 19.

In October, KWK completed the sale of its interests in a publicly traded midstream partnership (CMLP)  for 701 million in cash, recognizing a gain of approximately 540 million, and has the right to earn up to an additional 72 million in earn-out payments in 2012 and 2013.   Form 10Q at pages 10 and 29.  (see also Quicksilver Resources) Some of the proceeds were applied to pay off the senior "secured" credit facility, which had an outstanding amount of 529.274 million as of 9/30.

Quicksilver recently entered a confidentiality agreement with an investor group, controlled by the Darden familiy, who expressed an interest in exploring strategic alternatives for KWK.   www.sec.gov   The stock jumped from a close of $12.61 on 10/15 to $14.65 the next day when the letter expressing this interest was made public.   If this process ends up with KWK being sold to a large integrated oil company like Exxon or Chevron, then this would have a positive impact on the pricing of this bond, due to an upgrade in credit quality.  However, if this process ends up in a leveraged buyout, and more debt, then the credit rating could sink.

I will discuss the trades from Monday, 12/6, in the next post.  

2 comments:

  1. According to Mish, Bernanke is liar, and Mish has a lot more credibility.

    http://globaleconomicanalysis.blogspot.com/2010/12/lies-half-truths-and-100-hubris-on-60.html

    ReplyDelete
  2. I generally do not use the word "liar" since it implies that I know another person state of mind. Let's just say that some of Bernanke's comments left me in a state of quizzical perplexion (a word in need of a dictionary)

    ReplyDelete