Monday, February 7, 2011

Bought 100 VALE @ 34/Sold HSE:CA @ 27.70 CAD & Bought 100 ZCN:CA @ 18.82 CAD/Sold 50 AEF @ $24.71/Sold RFPRZ @ 25.98-Bought 50 PIS @ 24.32

I have yet to read an article by a financial journalist that indicates a basic comprehension of the significant differences in traditional preferred and trust preferred stocks.  Regular Preferred and Trust Preferred Their confusion is aided by the names of ETFs and closed end funds that start with the word "preferred", which creates the erroneous impression that the fund contains primarily equity preferred stocks that pay qualified dividends.  In reality, those funds are loaded with trust preferred stocks that pay interest and are in effect bonds. {Preferred Stock ETFs: Bought 200 PGX at 13.53 (sold); and Item # 7 Discussing the John Hancock CEF "Preferred Income Fund II" Bought 100 of the CEF HPF at 19.09 in Roth IRA)  The TP is a stock issued by a trust that owns a junior bond and the TP represents an undivided interest in that bond. It is in no sense a traditional equity preferred stock.  The underlying bond is senior to common and traditional preferred stock from the issuer.    The most recent column that furthers this common misunderstanding is the one from Jason Zweig in Saturday's WSJ.   And, another error is the assertion that distributions from REIT traditional preferred stocks are classified as qualified dividends.   REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages (see also:  Trust Preferred Securities: Links in One Post  Possibly, a very small percentage of a REIT's distribution will occasionally be classified as a qualified dividend, but no one should ever buy a REIT preferred stock based on the belief that its distributions will be so classified in any significant way.

Last Friday's jobs report from the Labor Department was interesting in that the government reported a fall in the unemployment rate to 9% from 9.5% while estimating the creation of only 36,000 jobs during January Employment Situation Summary.  After reading that report, I concluded that the U.S. labor force must have shrunk to the size of the one in Mongolia or possibly Albania.  How else could you explain a 1/2% lower unemployment rate on such a paltry increase in jobs?   I heard a number of pundits attempt to explain the conundrum, something about the snow and two different surveys, and so on.  I suspect that the snow had something to do with the low jobs number, and the household survey has been picking up job creation that would not show up in the payroll numbers from established companies.

I am done discussing regional bank 4th quarter reports. I will simply reference the press releases of those banks which have not been previously discussed.  Three banks in my Regional Bank Stocks' basket reported earnings last Friday:

Jimmy Carter and his publisher have been sued for five million dollars for alleged violations of N.Y. consumer protection laws.   A copy of the lawsuit can be found at the .pdf.  The suit claims that Carter's book, "Palestine: Peace Not Apartheid",  published in 2006, contains factual inaccuracies and knowing misrepresentations.  I do remember that Carter's book was criticized for being one sided soon after it was released by a number of critics.  Any fair minded person, all ten of them, could find factual inaccuracies in virtually any statement containing more than 50 words made by a politician, conservative or liberal, Republican or Democrat. Needless to say, such inaccuracies, even when knowing, are protected by the First Amendment, and are not actionable under any legal theory other than libel and slander.

While I have not read Carter's book, and view reading any book authored by a politician as an unproductive use of my time, this kind of lawsuit is just another exhibit in why the American legal system is in need of reform.  A defendant, subjected to incurring costs to defend against a frivolous lawsuit, needs a fair mechanism to recover those costs, including reasonable attorneys' fees, against both the plaintiffs and their attorneys.  The law of malicious prosecution is simply inadequate and recognized as such by those who routinely abuse the legal system with frivolous claims that have no chance of being successful.  A defendant should be allowed to file a counterclaim in the same proceeding as the plaintiff's claim, so the Court and Jury hearing the plaintiffs claims can decide whether there was probable cause to bring the suit.

A "conservative" columnist, MONA CHAREN, who graduated from George Washington law school much later in time than our LB, points out some of the alleged inaccuracies in the book and then notes that courts have no business deciding whether statements in a book are accurate.  I would add, except in a libel suit.

No doubt, Mona would not want her columns to be subjected to the same scrutiny.  If such claims could provide the basis of a legal claim, Mona would need to find another line of work, since writing columns would soon be an unprofitable line of work for her.  Just as an example, Ezra Klein dissected some of Mona's statements in just one of her recent columns published in the National Review Online, focusing on one paragraph that had three factual errors and the paragraph only made three factual statements.   While I do not want to take sides, professing proudly non-membership in either Political Tribe, I find Klein to be persuasive on his claims about Mona's factual inaccuracies, though he refuses to express an opinion on whether Mona knowingly made false claims.

According to Mona, one of Carter's "knowing" factual inaccuracies, in a "skein of falsehoods", is the claim that Israel attached Jordan in 1967.  Now, is Mona's claim factually accurate?   I would suggest reading the historical account of the Six-Day War in Wikipedia under the heading "Israel, Jordan and the West Bank Palestinians." Frequently, when I hear or read what purports to be a statement of fact, it is really an opinion masquerading as a factual statement, and the opinion is blatantly biased,  glossing over a more complicated and nuance set of facts in service of an ideology which just leaps off the page.   Possibly, it would do Mona some good to be cross examined about the accuracy of her statements, by a seasoned, well-informed trial attorney, and to have a decision about her truthfulness made by 12 truly impartial citizens, rather than a bevy of True Believers.

Tomorrow, I will address some demonstrable factual inaccuracies recently made by GOP politicians, who may need to be sued by some liberal group under state consumer protection laws.  Really, it is just a patently absurd legal claim, and those involved in bringing it need to pay a financial price.

1. Opnext (OPXT) (own: LOTTERY TICKET strategy):  Opnext rose 58 cents or 29.15% on Friday after reporting a narrower loss on a GAAP basis on higher than expected revenues of 97 million (90 expected), and provided an upbeat forecast for its fiscal 4th quarter ending in March.   Our RB has been responsible for buying OPXT,  given all of its "cool" stuff, while the LB will sell all of RB's Lottery Ticket positions for good percentage gains, whenever it deems prudent.   The last purchase was 100 shares bought  @ $1.6.  Prior to that purchase, the previous transactions were    chronicled in the following minutes of HQ's trading operation:   Bought 100 OPXT at 1.89 Sold 100 OPXT at $2.47/Bought 50 OPXT at $1.91  Sold LT Opnext at $3.1

2. SOLD 100 Husky Energy (HSE:CA) AT $27.70 CAD & Bought 100 ZCN:CA at 18.82 CAD/Both on Friday (see Disclaimer):  ZCN is an ETF traded on the Toronto exchange that is sponsored by BMO and called the Dow Jones Canada Titans 60 Index ETF.  This ETF has an expense ratio of .15% and owns 60 large Canadian based companies.  A list can be found at  Holdings.  The current yield is around 2.37%.  As with all of my securities bought on the Toronto exchange, I will take the dividends in CADs.   The Canadian dollar is currently trading over par with the USD. 

I noticed while visiting the BMO ETF website last Friday that it had launched several target date Canadian corporate bond funds.  I will keep my eye on the following three:

Bonds are getting hammered now, so I am in no hurry to buy a bond fund, even one with a target date.  For those three ETFs, they will need to garner far more assets for me to buy one. 

The Husky shares served their purpose, in that I received several quarterly dividends in Canadian dollars and made a profit on the shares.  My main goal with my Canadian securities is simply to generate income on my significant Canadian dollar position.  This Husky shares were purchased at 26.25.  This was my second round trip on Husky shares.    Sold Viterra to Buy 100 Husky at 28.99 Canadian Sold HSE:TO at 30.48 CAD 

3. Bought 100 VALE S.A. at $34 on Friday (see disclaimer):  I had read an article that  Goldman Sachs' had recently raised its price target on Vale to $50 from $47, arguing that the shares were considerably underpriced by the market. Needless to say, Goldman is in a far better position than the OG to make estimates about iron ore prices.   The price declined some after the release of that report. I do not have access to it.

I also recall that Scot Black recommended Vale in his segment of the 2011 Barron's Roundtable.  He believes that iron ore prices may rise 25% this year, which may translate into earnings of $4.40 per share.  At a $34 price, that would be close to a 7.7 P/E.  He thinks that the stock could go to $45 or $50.  He also stated that the company generates between 500 million to 1 billion in free cash flow and has net debt to equity of .2.

Last Friday, the share price had declined 70 cents when the RB requested that the Old Geezer buy a 1000 shares.  Fortunately, the OG has trouble dealing with sums greater than a 100, so only 100 shares were bought at $34.   

The current 2011 analyst estimate is for an E.P.S. of $4.79.  Black's estimate is more conservative.  

Vale closed at $34.4 on Friday, down 30 cents.  

4. Pared Trade Sold 50 RFPRZ at $25.98 and Bought 50 of the TC PIS at $24.32 (see Disclaimer):  In a pared trade, I am not arguing that the two securities are either good or bad.  Instead, I believe that one is better than the other for one or more reasons.

I recently purchased the 50 shares of RFPRZ  at $24.49 and received one quarterly interest payment.   RFPRZ is a trust preferred stock, issued by a Delaware Trust controlled by Regions Financial (RF).  The trust used the proceeds from selling trust preferred stock to buy a junior bond from Regions, and the TP stock represents an undivided beneficial interest in those junior bonds.  In effect, RFPRZ is a junior bond from RF.  Unlike other TPs issued by American financial institutions, this TP permits a deferral of interest for up to 10 years.  The more standard provision in a bank TP is for a maximum deferral of 5 years.   The maturity for this TP is 2048, provided RF can raise funds to pay the TP owners off at that time using commercially reasonable efforts.  If that is not possible, then the maturity is extended to 2078.  Either maturity is for all practical purposes equivalent to no maturity for me. Par value is $25.  The yield at $25.98 is around 8.54%.  This security is rated at B2 by Moody's and B by S & P.

I have discussed the TC PIS in several prior posts.  PIS is a trust certificate and that certificate represents an undivided beneficial interest in the assets owned by a grantor trust administered by an independent trustee.  The assets owned by the PIS trust are senior Liberty Media bonds maturing in 2030. So, already, I see three major differences in these securities

RFPRZ is a junior bond, whose interest may be deferred provided certain conditions are met, with a minimum maturity in 2048.  PIS contains a senior bond, whose interest can not be deferred, and matures at a minimum 18 years earlier.   PIS has a coupon of 8.75% on a $25 par value.  Besides the issues of deferral and maturity, the third difference is that the owners of the senior bond Liberty Media would likely to receive something in the worse case scenario of bankruptcy.

PIS has a 8.75% coupon on a $25 par value.  That gives me two more factors in favor of PIS.  I am buying the bond at less than its par value, so I will have a gain when the bond is called or matures.   Secondly, I have a higher current interest yield than on RFPRZ by almost a 1/2%.  And the Liberty Media bond is rated a notch higher.  Both of these securities are in junk territory.

PIS Prospectus:

I have recently returned to this TC as my options have dwindled, particularly as a result of several recent calls.  I now own 150 shares.  PIS had a better yield last Friday than PKK which contains another Liberty Media senior bond.  Bought 50 PIS at 25 Bought 50 PIS at 24.88 in Roth IRA  Those last two purchases were made before the recent semi-annual interest payment.  
5. Sold 50 AEF at $24.71 on Friday (see Disclaimer): I have traded the Aegon hybrids for about 2 1/2 years with success.   Aegon Hybrids: Gateway Post  This included a prior round trip on AEF in the Roth IRA: Added 50 AEF at $18.38 Bought 50 AEF at $16.82 Sold 50 of 100 AEF at 23.43 Sold 50 AEF at 22.25 in Roth IRA  The par value of this hybrid security is $25 and the coupon is 7.25%.  It is in effect a junior bond with no maturity date.  With the 30 year treasury being smashed on a daily basis now, as the price declines and the yield rises, a 7.25% yield at par value is starting to look a tad precarious to me. I bought the 50 shares sold last Friday in a taxable account  at $22.29.

On Friday, TLT, the ETF for the 30 year treasury, continued its waterfall decline, falling 91 cents to close at $88.81.  The chart action since October 2010 looks ominous: iShares Barclays 20 Year Treasu ETF Chart  As AEF has increased in value, moving close to its par value, the spread between this junior bond and the AAA rated 20+ year treasury ETF has narrowed more and more.

This leaves me with the floater, AEB, bought in the $4 to $8 range, and some AEH shares bought at  $4.63. Those positions are my bare minimum in Aegon hybrids.    

1 comment:

  1. You're correct about the jobs report. -504k drop in the labor force as people drop out looking for work. 'Labor force participation rate' (number of employed vs. non-institutional population) is at a 26 year low. Something to watch as the economy tries to reach escape velocity.