Monday, January 24, 2011

Bought 50 MSPRA @ 19.57, 50 PYT at 18.06, & 50 GYB at 18.63 in the Roth IRA/ UNB OCFC

I discussed another purchase made last Friday in an earlier post. Bought 50 HBAPRF at 20.69/ Fidelity Prohibits Purchase of HBAPRF   As discussed in that post from last Friday, I discovered that Fidelity prohibited me from buying this easily understood equity preferred stock.  The inclusion of a preferred stock like HBAPRF on Fidelity's no buy allowed list, along with some baby bonds previously mentioned, belies the purported reason given by Fidelity for its ever expanding prohibitions, that their customers are not intelligent enough to understand the security.  Of course, when did it become a prerequisite for an online brokerage customer to understand any security traded on the stock exchanges?  And, assuming Fidelity has one or possibly two customers who do not understand HBAPRF, which I seriously doubt, why does that justify prohibiting all of its customers from purchasing it or DFP or JBK?  These unreasonable restraints on customer purchases is without question entirely unjustified and based on considerations that have nothing to do with the reason given to date.   I ended up placing the order to buy HBAPRF at Vanguard.  Over 300,000 shares of HBAPRF traded last Friday.  According, all of the equity preferred stocks issued by HSBC USA are rated investment grade,  A- by Moody's and Baa1 by S & P.

I would add one caveat to my earlier posts that discussed these preferred stock issues from HSBC USA.  This firm is wholly own by HSBC North America Holdings, which is wholly owned by HSBC Holdings, plc.   One legal protection of a preferred stock owner is that their dividend has to be paid whenever a dividend is paid to the common shareholders.  If a company wants to eliminate the non-cumulative preferred dividend, it would have to eliminate the common share distribution first.   All of these banks that have issued equity preferred floaters have independent shareholders who expect to receive a dividend and have voting rights for the Board members.  I would not say that situation is applicable to a parent and its wholly owned subsidiary.   This is a link to the last filed Form 10 Q.

Of course, there is another explanation for Fidelity's ever expanding list of securities on its no buy list.  The people making the decision are incompetent and/or not very bright.

1. Bought 50 MSPRA at 19.57 and 50 GYB at 18.63 last Thursday in the Roth IRA (see Disclaimer):   Both GYB and MSPRA are floating rate securities that I have discussed in several posts. 

MSPRA is a non-cumulative equity preferred stock originating from Morgan Stanley.  I decided to up my stake in MSPRA to 100 shares after Morgan Stanley reported its 4th quarter earnings.  As previously discussed, MSPRA pays qualified dividends at the greater of 4% or .7% above the 3 month LIBOR rate, calculated on a $25 par value.  At a total cost of $19.57, the yield at the guarantee of 4%, the current applicable rate, would be about 5.1%.  This would be the minimum rate at the foregoing cost per share number.  Theoretically, there is no upside limit on the coupon.   If MS did not call this security at its par value, and the 3 month LIBOR rate hit 10% during the applicable computation period, then the coupon would become 10.7% which translates into an effective yield of 13.67% at the constant total cost number of $19.57.  MS may redeem the shares at $25 plus accrued dividends at its option at any time after 7/15/2011.   The primary advantages of this type of security is that the guarantee provides some protection in a low inflation or deflation scenario, whereas the LIBOR float provision will give the investor an increased coupon when rates rise to potentially problematic levels for the vintage fixed coupon bond.   Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Normally, I would buy a security that pays a qualified dividend in a taxable account, and a bond in the retirement account.  I have included some equity preferred floaters in the retirement account, for one reason or another.  I bought AEB which pays qualified, cumulative dividends in an IRA during the Dark Period since I was concerned about a deferral of that dividend, which would have unfortunate tax consequences for a U.S. taxpayer in a taxable account.  The total cost of those 100 shares of AEB currently owned in the Roth is $6.06 per share.  When I transferred the Roth IRA account to Vanguard from Fidelity, due entirely to Fidelity's prohibitions on certain exchange traded bond purchases, I lost my cost basis information.  This is a snapshot of the AEB Roth IRA holding taken from my brokerage statement as of 12/31/2010, and I still own those shares:


I bought some METPRA during the Near Depression in a regular IRA, and have since sold some, just because of the I had some cash and it looked like a good investment at the price paid: 

There is some benefit in having floating rate securities that pay guarantees in a retirement account, in that they do provide some balance to a bond portfolio that is heavy into longer term fixed coupons.   Still, I prefer to buy the floaters that pay qualified dividends in the taxable account, and will buy the Synthetic Floaters only in the retirement accounts due to their unique tax issues which I want to avoid.  

This brings me up to 100 shares of MSPRA with 50 shares held in a taxable account. I have previously bought and sold it, realizing one good gain: 

Bought 100 MSPRA at $12.88 SOLD 100 MSPRA at 21.43 Bought 50 MSPRA at 15.7 Sold MSPRA at 18.50

MSPRA has the same guarantee as STIPRA and ZBPRA, issued by Suntrust and Zions respectively, but has a better float provision.   According to, S & P rates the floater from Morgan Stanley at BBB, an investment grade rating, whereas the  Suntrust floater is rated BB and the one from Zions is rated "B" by S & P.   STIPRA, which I own, closed on Friday at $20.35.   ZBPRA, which I have sold, closed at $19. MSPRA closed at $19.33.  The float of both STIPRA and ZBPRA is .52% above 3 month LIBOR.   Final Prospectus Supplement  MSPRA's float provision is .7% above 3 month LIBOR.

As to GYB, I have bought and sold that one many times.  In a prior post, I totaled my trading profits from this security at $1071, never owning more than 100 shares at any point in time.  Item # 3  Bought 50 GYB @19.07.    It is a synthetic floater that pays the greater of 3.25% or .85% above the 3 month LIBOR, but not more than 8.25%.  I added 50 shares in the Roth IRA at $18.63 last Thursday.  I would just copy my previous explanation of this security: 

"GYB is a trust certificate that has as its underlying security a trust preferred issue from Goldman Sachs. While this security has multiple legal layers, I view the underlying security as a GS junior bond. While the underlying bond has a fixed coupon of 6.345%,, GYB is a synthetic floater that pays the greater of 3.25% or .85% above the 3 month Libor rate, but no more than 8.25%, The float is created by a swap agreement with UBS.
The trustee for GYB collects the fixed coupon payments at 6.345% from GS and then exchanges those funds with UBS for either the guarantee of 3.25% or the amount due under the Libor float. So, that is a good deal without question for UBS now. UBS takes no risk of a GS default, which is borne by the owners of the TC, and collects the difference between the applicable rate now which is the 3.25% guarantee and the 6.345% paid by GS. The worm will turn against UBS when the LIBOR rate exceeds 5.495%. It is what it is and I can not be concerned about the merits of the deal for UBS but only whether I am satisfied with the terms of GYB at the $19.07 price. I would say just barely satisfied, and only barely in light of the Jihad by the Fed against savers now in its third year. So, it is relative."

At a total cost of $18.63, I can now calculate the range of interest payments for this security.  The minimum payment would be the guarantee, the current applicable rate, which would result in an effective minimum yield of 4.36%.  The maximum yield is reached when the 3 month LIBOR hits 7.4%.  At that point, the effective current yield to a buyer at a total cost of $18.63 would be 11.07%.  If held to maturity in 2034, there would be an additional yield associated with capturing the spread between my cost and the $25 par value. 

2.  OceanFirst (own- Regional Bank Stocks' basket strategy): OceanFirst Financial (OCFC) reported 4th quarter net income of 5.8 million or 32 cents per share, up 3 cents from the 4th quarter of 2009.  The consensus estimate from 4 analysts was for 28 cents.  For the quarter ending 12/31/2010, the net interest margin was 3.52%; the efficiency ratio stood at 59.5; NPAs to total assets was at 1.77%; and the allowance for loan losses to NPLs was at 52.48%.

OCFC closed at $13.24 last Friday, up 24 cents.  Bought 50 OCFC at 10.4 (Dec 2009)

3. General Electric (own):  General Electric reported earnings of 36 cents per share from continuing operation on 41.4 billion in revenues.  GE stated that its backlog rose 12%, bringing the total to 175 billion.  The consensus estimate was for 32 cents on 39.9 billion in revenues.  Profits for GE Capital kicked into a higher gear, rising to 1.06 billion.

I have been buying GE shares mostly in a $10 to $16 range whenever the spirit moves me, and have been reinvesting the dividend. I am currently near 500 shares.  If and when the share price reaches $25, I will change the distribution option to cash payments.   My last two purchases, including commission cost, was just 30 shares at 15.64 last June and 40 shares on July 2 at $14.08.  Other adds in 2009, including commission costs, were at $15.48 in December, 50 shares at $12.54 on 1/23; 30 shares at $11.16 on 2/18; and 30 shares at $12.02 on 6/24.

GE had an usually good day last Friday, rising 7.11% to close at $19.74 and hit a new 52 week high intra-day.

4. Bought 50 PYT at $18.06 on Friday (see Disclaimer):  Last Friday, I noticed that the Synthetic Floater PYT, which is tied to the same GS TP as GYB discussed above, was falling due to heavier than normal selling volume.  The $18.06 price represented a 48 cents decline from the close on Thursday. I have bought and sold this security on several occasions. My last sale was 100 shares  at 19.25.  My prior trades have netted a total realized gain on the shares of $893.73.  Some of my prior trades are discussed in these posts: Bought 50 PYT at 11.2 Bought 50 PYT at 13.34 Sold 100 PYT at 19.25

So, I am playing with the house's money now on PYT.   Interest payments are made quarterly, and have also received several of those.

I will only buy it in a retirement account due to the tax issues associated with this type of security.

PYT pays the greater of 3% or .85% above the three month LIBOR rate with a maximum rate of 8%.  So it has the same float provision as GYB with a .25% lower guarantee.

Once I establish a constant cost figure, I can calculate the yield range for PYT.  The minimum yield would be at the 3% guarantee, which is now the applicable rate, and the effective current yield at a total cost of $18.06 would be 4.15%.  The maximum yield would be 11.07% reached when the 3 month LIBOR exceeds 7.15% during the relevant computation period.  I would also have an additional yield resulting from capturing the spread between the par value of $25 and the $18.06 cost, when the underlying bond matures in 2034.   Most likely, if GS is still around and prospering after 2030, I suspect that most of that spread could be captured without waiting for the bond to mature.    Please note that the decline in price of PYT caused its maximum yield at the $18.06 price to exactly equal the maximum yield of GYB at the $18.63 price which I paid on Thursday.

One way to evaluate this kind of security is to postulate a reasonable average coupon rate until PYT matures in 2034.   Based the history of the 3 month LIBOR rate, a rational prediction for the future would be an average rate of 4.25%, which would give me 5.1% with the .85% spread.   If I plug that rate into the Morningstar Bond Calculator, I arrive at a 7.96% yield to maturity figure.

The underlying fixed coupon bond has a current yield of around 6.87% based on Friday's closing price,  FINRA, and a YTM of around 7.29% using the same Morningstar bond calculator.   I could purchase the underlying bond now and receive more current income than with either GYB or PYT.   So, I am in effect paying for the inflation protection of the float over the short term, but not over the long term assuming my prediction about the average rate proves to be close.

Of course, the long term advantage of the synthetic floaters over the fixed coupon bond would increase with a higher average 3 month LIBOR rate than 4.25%. If the synthetics paid just their guarantees for the  next 24 years, then the fixed coupon bond would be superior.   I may buy the fixed coupon bond when and if its current yield exceeds 7.5%.

Anyone buying PYT or GYB is subject to the credit risk of Goldman Sachs.   If GS followed in the foot steps of Lehman at some point down the road, PYT and GYB would likely become worthless securities since the underlying bond in both trust certificates is in effect a junior bond.   The owners of a senior bond would likely receive something in the event of a bankruptcy, something in the 10 to 30 cents per dollar range, but I would doubt that a junior bond owner would receive anything or at most a few cents on the dollar.

None of the synthetic floaters can be purchased by Fidelity customers.

5.  Union Bankshares (UNB)(own Regional Bank Stocks' basket strategy): UNB is a small bank based in Vermont whose shares are thinly traded.  Since I purchased 50 shares  at $18 last July, the stock has spent most of its time in a narrow band between $17.8 to $18.2.  The dividend yield is around 5.5% at my cost, so I am content to wait.

I am also satisfied with this bank's 4th quarter earnings report.   UNB reported 4th quarter income of 1.38 million or 31 cents per share, up from 29 cents in the 4th quarter of 2009.  This bank does not provide me with the kind of information that I am accustomed to seeing in earnings releases from banks.   I have to wait until it files the Form 10-Q.  The last filing for the Q/E 9/2010 showed a net interest margin of 4.66%; a total capital to risk weighted assets ratio of 15.54%; and an efficiency ratio of 65.18%.  

 This bank has 13 branches in Vermont and one in New Hampshire. 


  1. picked up some WHX 21.02 selloff ahead of dividend announcemt.

  2. pretty volatile, added 20.07
    can't brag on this one.

  3. I am aware of Whiting (WHX) and have taken a pass on it. I have never bought it. I do have it on a monitor list and am curious why it fell $5.01 to close at $16.67 today. The plunge in May was a sufficient warning to me to stay on the sidelines.

  4. I cut my loss on 150 shares, I got out at 19.95, took a walk, then came back to see it in the $16s, I screwed up, my macho brain said a good yield, my pragmatic brain said ok, keep it light, then my macho brain said "I think you're wrong" so I bailed with a $167 loss, and pragmatic brain said to entertain near $16, which macho brain said it "already bounced to 17.20, then we both decided if it can't hold 17, "we need to walk away..." because we didn't do our homework and the trust terminates in 2 years, so maybe not right.

  5. Based on the forgoing passage, lifted from Whiting's last filed Form 10-Q, I was reminded why I had never bought it before:

    The Trust was created to acquire and hold a term net profits interest (“NPI”) for the benefit of the Trust unitholders pursuant to a conveyance to the Trust from Whiting Oil and Gas. The term NPI is an interest in underlying oil and natural gas properties located in the Rocky Mountains, Mid-Continent, Permian Basin and Gulf Coast regions (the “underlying properties”). The NPI is the only asset of the Trust, other than cash held for Trust expenses. As of December 31, 2009, these oil and gas properties include interests in 3,086 gross (381.7 net) producing oil and gas wells.
    The NPI is passive in nature, and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties. The NPI will terminate when 9.11 MMBOE have been produced and sold from the underlying properties (which amount is the equivalent of 8.20 MMBOE in respect of the Trust’s right to receive 90% of the net proceeds from such reserves pursuant to the NPI), and the Trust will soon thereafter wind up its affairs and terminate. These reserve quantities are projected to be produced by October 31, 2017, based on the reserve report for the underlying properties as of December 31, 2009."

    What do you have exactly when the trust terminates?

  6. The decline today in Whiting may be due to many investors finding horse sense in a report from Citron Research that was posted today.

    I would take a look only when the price fell below $8, assuming that occurred soon.

  7. There was an excellent analysis about BPT on SeekingAlpha the other day. That may be affecting WHX.

    BP Prudhoe Bay Royalty Trust: The Most Overvalued Trust of All