Wednesday, March 16, 2011

RB Buys 5 GOOG at 578/EK/SOLD 100 AHLPRA at 24.44/GS Floaters with Minimum Payments/CBU/The China Syndrome

The elevator going down is always faster than the one going up.  So far, the U.S. stock market is holding up well considering the situation in Japan, the Middle East, and the sovereign debt issues of some Euro zone countries.

For some of the OGs among us, the most recent nuclear plant fiasco, which of course could not actually happen, is reminiscent of the Three Mile Island incident, which occurred 12 days after the movie The China Syndrome was released about a nuclear accident at a California based utility.  While the  utility had a fictional name in the movie, many drew parallels with two California utilities that had built nuclear stations near faults. (see: CBS News Video  and During the movie, a hypotheses was floated about a nuclear meltdown, where the nuclear rods would sink into the earth's core and reappear in China, hence the name of the movie.  No doubt, the Chinese would not be amused by such an eventuality, but might prefer the nuclear rods to owning a trillion dollars in greenbacks in a few years.

Eastmam Kodak (EK) closed on its private placement of 250 million in 10.625% senior secured bonds maturing in 2019.   In the context of the current low interest rates, the terms of that placement spell distress in my book.  Nonetheless, as I previously noted, 50 million of the proceeds from that bond issuance will be used to redeem the 2013 senior unsecured note which is my only connection with this struggling company.  SEC Filed Press Release  EK did note in the foregoing linked press release that it "expects" to end 2011 with a cash balance of $1.7 billion to $1.8 billion.  RB Bought 1 Eastman Kodak Bond Maturing 2013 Junk Bond Ladder Strategy

I found myself agreeing with many of the opinions expressed by Ray Dalio, founder and CEO of Bridgewater Associates, in his interview.  Dalio has sold out of bonds. I do not intend to do the same. Instead, I will attempt to manage my bond position in the coming years, shortening the duration when I deem it to be appropriate, emphasizing the purchase of individual bonds rather than bond funds, and paring my bond fund positions once the 10 year treasury note exceeds 4%.  I have been intending to hedge part of my corporate bond portfolio with what I consider the most vulnerable class of bonds, long term U.S. treasury notes and bonds, for the same reasons expressed by Dalio.  For double shorts, timing is critical and I was fortunate to make some quick bucks from my last purchases of the  UltraShort 20+ Year Treasury (TBT)  and  the UltraShort 7-10 Year Treasury (PST). As previously noted, these double shorts have difficulty in tracking their relevant indexes after one day. Item # 4 Hedging Bond Positions;  Sold TBT Near $45 (April 2009); Item # 5 Sold PST at 57.52 (June 2009). Please note that I would have lost money by holding those hedges until today.

If I had a margin account and could short securities, I would consider shorting TLT or IEF, thereby avoiding the numerous problems associated with the double shorts.  The double shorts do give me more bang for the buck however.  I have not yet re-established a position in either TBT or PST.  My thinking is to wait until the crisis in Japan dissipates, since these kind of traumatic events seem to encourage a flight to safety and many still view the U.S. treasury securities as safe.  I also want to see how successful my stock double shorts will be, a profitable outcome may encourage me to use the proceeds from selling those positions to start the hedge for my corporate bonds.

The DJ UBS Commodity Index had a particularly bad day yesterday, falling 5.56% to 157.580.  This decline makes it more likely that MKN will not suffer a reversion back to its 3% minimum payment during its second annual coupon period ending on 3/30/2011.  Now, the question is how much will this note pay, given its starting value of 132.67 in the commodity index. MKN  A close at 157 on 3/30 would result in a  coupon payment of about 18.3%, for the current annual coupon period, close to what I received on this $10 par value note for the 1st period. Note ON MKN (3/31/2010 Post)   Principal Protected Notes (4/12/2010 Post).  So for owners of MKN, and I am still one of them, the hope now is that the commodity index will quit going down and go back up some. Bought 100 MKN at 9.85 (Jan 2010).  According to the OG's calculations, something that always has to be checked, the maximum level is 176.45 for MKN's second annual period.

Cramer said "Don't Buy" Community Bank System (CBU) during his  Mad Money show yesterday.  CBU was a recent addition to my Regional Bank Stocks' basket strategy.  Community Bank System closed at $23.83 in trading yesterday, yielding around 4.03% according to Marketwatch at that closing price. Bought 50 CBU @ 23.18 Added 50 CBU @ 25.19

Cramer also said "don't buy" New York Community Bancorp (NYB) when NYB was at $11, yielding around 9%, just before it jumped in price by 50%.  Item # 8  NYB  The OG ignored that piece of advice: Added 50 NYB at $10.57 50 NYB at $11 50 NYB at 10.9 Bought 50 NYB at $11.3  I have booked profits on 100 NYB shares and will be playing with the house's money soon based on that realized gain and the dividends.

1. RB BUYS 5 shares of Google at 578.3694 Last Friday (see disclaimer): The price of Google shares have stalled twice in the $630 to $640 since the start of 2011.  Google Inc. Stock Chart | GOOG  On the second occasion, the stock hit $630 on 2/18/2011 and has declined thereafter over $50 per share.  The stock broke below its 50 day moving average in late February, but is still trading above its 200 day moving average line.   The recent price drop was a sufficient motivating factor to purchase five shares.  Based on the current 2012 E.P.S. consensus estimate of $40.12, YF, the P/E would be about 14.41, which seems very reasonable to me given Google's earnings growth, cash generation, and ability to innovate with new products and services.  Total cash is currently close to $109 per share. The operating margin is over 35%.  The P.E.G. ratio is less than 1. GOOG Key Statistics 

GOOG closed at $569.56 on Tuesday, down 43 cents for the day after hitting $555.50 during the day. YF has the simple 200 day moving average at $548.5 as of 3/14.

RB warned all Head Traders that there will be a price to be paid if any of the knuckleheads sells GOOG again. Sold Google at $447 (1/24/2009 Post).   RB assumed Head Trader duties as the OG was devouring a bag of hershey kisses to relieve his anxiety about world events.  The OG was heard to mumble something to the effect that it has not yet been scientifically proven that the liberal intake of hershey kisses is not a cure for cancer.   LB just requested that the foregoing sentence be deleted from the minutes of HQ's storied trading operation before publication.

2. Sold 100 AHLPRA at 24.44 on Monday (see Disclaimer):   AHLPRA is a non-cumulative equity preferred stock issued by Aspen Insurance, a reinsurance company. This transaction was due to a number of factors.  The sentiment on reinsurance companies will likely be negative, at least over the short term, while the market attempts to assess their  potential liabilities associated with the Japanese earthquake and tsunami.  I also had an unrealized gain in AHLPRA and was already thinking about harvesting that gain before the most recent devastation inflicted by mother nature. And, AHLPRA just went ex dividend for its quarterly distribution on 3/11 and was still selling at near its $25 par value.  I bought 50 shares at  over a year ago at $19.75, and I later added 50  at $22.35:

AHLPRA is currently paying qualified dividends according to my 2010 1099 at a fixed coupon rate of 7.401%. That fixed coupon rate is paid until 1/1/2017. Thereafter, the security becomes a floater, if not redeemed, paying a 3.28% spread to 3 month LIBOR.

I also traded this security in the ROTH IRA: Added 100 AHLPRA at 22.54 in the Roth IRA (September 2010) Sold AHLPRA @ 24.65 in Roth IRA (Nov 2010)

I am not adverse to buying AHLPRA back at a lower price when I am in a better position to assess Aspen's potential liability.  After I sold AHLPRA on Monday, Aspen Insurance Holdings  did issue on Tuesday morning a somewhat reassuring loss estimate for several recent disasters.

3. Which Was Better: GSPRD at $22.5 or PYT at $18.7 or GYB at $18.19 or GSPRA at $22.44/Would You sell one to buy another at those prices?

GSPRA Non-Cumulative Equity Preferred: Higher of 3.75% or .75% over 3 Month Libor on $25 Par: Prospectus
GSPRD Non-Cumulative Equity Preferred: Higher of 4% or .67% Over 3 Month Libor on $25 Par  Prospectus
PYT  Synthetic Floater: Higher of 3% or .85% Over 3 Month Libor on $25 Par  Prospectus
GYB Synthetic Floaters: Higher of 3.25% or .85% Over 3 month Libor on $25 Par

GYB and PYT have maximum rates of 8.25% and 8% respectively.  Due to the low LIBOR rates now, all three securities are paying their minimum payments, applied to their $25 par values.  It is not known how long LIBOR rates will remain abnormally low.  Based on historical rates, an average LIBOR of 4.5% would be a rational forecast for a 23 year period of time.

With a limit order at the ask price last Monday, I could have bought PYT at $18.7, GYB at $19.19, GSPRA at $22.45 or GSPRD at $22.5.    If I wanted to buy one of those securities, which one would have been the best buy last Monday?   I could have sold GSPRD at $22.48, GSPRA at $22.44, PYT at $18.6 or GYB at $19.01.  As of Monday morning I own all four and now I own three out of the 4.

PYT and GYB are trust certificates (TCs).  The trust owns a Trust Preferred (TP) issued by Goldman Sachs with a 2034 maturity. In effect, the TP is in effect a junior bond whose interest payments may be deferred but not eliminated short of bankruptcy.  Both PYT and GYB have multiple legal layers.  Those securities are Grantor Trusts that own a stock issued by another Trust, called a TP, and that trust owns a junior bond issued by Goldman Sachs.    The payment provisions of the float is created by a swap agreement with a brokerage company.  As long as that swap agreement is in effect, likely for the entire term, the owners of those two TCs will receive either the minimum payment or the float rather than the fixed coupon rate of the GS TPs, provided there is no GS bankruptcy or a lawful deferral of the interest payments by Goldman Sachs.   If GS survives until 2034, the owners will receive the $25 par value.

Floaters: Links in One Post
Goldman Sachs Synthetic Floaters and Floating Rate Non-Cumulative Preferred
Analysis of Prior Question about Goldman Sach's Floaters
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Synthetic Floaters

Bought 100 GYB at 10.95 /Will Hold Synthetic Floaters In Retirement Account  Sold 100 GYB at 18.09
Added 30 GYB in IRA at 17.97
Bought 50 GYB at 18.63 in the Roth IRA (1/2011)
Pared Trades in Roth: Sold 100 PYT at 19.25 & Bought 100 GYB at 18.98
Bought 50 PYT at 11.2   Sold 100 PYT at 19.25
Bought 50 PYT at 18.06 (1/2011)
Sold 100 GSPRA at $21.9 Bought 50 GSPRA at 18.8 Sold 50 GSPRA at 20.03 Bought 50 GSPRA at 21 (12/2010)
Bought 50 GSPRD at 21.58 (1/2011)

I am amazed that some investors believe that a bond's payments are guaranteed, as if there is some supernatural force in the universe that will make them whole in the event of default. People are still asking today what happened to payments on their GM bonds after that company filed for bankruptcy and underwent a reorganization.  I read a story in USATODAY where an investor asked the columnist whether a bond's interest is guaranteed, meaning something like an insured deposit at a bank.

I hope that no one reading this blog is under any similar delusion.  If Goldman Sachs goes bankrupt, all of these securities mentioned above would likely be worthless.  Sure the TPs have priority over the equity preferred and common stocks, but all of those types of securities are situated below senior and secured debt in the capital structure.  It is conceivable that GS could in a pinch eliminate its common and equity preferred dividends, while continuing to pay interest on its junior bonds, short of a bankruptcy filing. I seriously doubt that would occur for GS.  The Lehman scenario would be more likely, where the investment firms goes from paying on all securities to paying on none in one day.  However, a number of financial firms eliminated their equity dividend payments during the recent financial crisis but continued to pay interest on their junior bonds so that is a possibility and needs to be considered when selecting securities.

When there is a bankruptcy, I would anticipate that the owners of both the TPs and the traditional preferred stocks (cumulative and non-cumulative) will be in the same sunk boat in a bottomless pit, while the senior note owners may be able to recover 10 to 25 cents on the dollar, with some luck.

I sold 1 of the equity preferred floaters on Monday to raise cash rather than to re-deploy the proceeds into another GS security at current prices. 


  1. checkout GOV for yield, up & down trading by hedgefunds but near 25.50-25.75 bottom of trading channel, Gov tenants. 6.3% yield.

  2. HBC-A around 23.50 worth a look, (HSBC preferred)
    got to 23.27 yesterday.