Tuesday, April 12, 2011

Redemption KTV/Bought 100 NPBCO at 24.91/Sold: 100 of the Stock ETFs VWO at 50.22 & SCHE at 29.99/Donald Trump Tries To Breathe LIfe into the Birthers/

I thought that John Stossel's special on Fox News, called Freeloaders, was interesting, pointing out just a few instances where the federal government wastes money.  

A story yesterday noted that PIMCO had started to short U.S. treasury debt. Reuters

P&G increased its dividend by 9%. The next quarterly dividend will be $.525 per share. PG would qualify for purchase under the dividend growth strategy: Item # 6  Common Stock Dividend Growth vs. Long Term Investment Grade Bonds It is borderline for purchase under the Large Cap Valuation Strategy, Unfortunately, the Nerd Machine has sold all of HK's shares, trading for short term profits, with its typical "tunnel vision" mentality, as RB just said. But who listens to RB in this operation? {e.g.  Bought PG at 47.59 (3/17/2009 Post) Sold PG at 56.89 (7/30/2009)   Bought 100 PG at $52.85 (9/4/2009 Post)  Sold  PG at $59.45 (11/5/2009 Post).  LB just said "what is wrong with that".

A majority of republicans are convinced that Obama was not born in this country despite overwhelming evidence that he was born in Hawaii. Evidence inconsistent with a TB's belief is of course false by definition. The belief is formed first and then whatever evidence deemed necessary to support the belief can be created later.

Donald Trump recently rose to number 2 among GOP Presidential hopefuls (NBC/WSJ poll) after making television appearances appealing to the Birthers who dominate the modern day "conservative" GOP.  A True Conservative of course does not engage in reality creation finding such a practice abhorrent.  According to the Birthers, Obama was not born in the U.S. and is a secret Muslim.  To legitimately be President, he would have to be born in the U.S.   (Article II, Section 1 The United States Constitution; see also United States Code: Title 8, section1401). 

Trump blames the liberal press, meaning any media organization other than Rush Limbaugh and Fox, for being complicit in the "greatest scam in the history of the U.S." that has allowed someone born outside of the U.S. to become President. Trump is pandering to the TBs and either distorts or ignores the evidence supporting Obama's claim to be a natural born citizen, as documented in Gail Collin's recent  NYT column and by independent non-partisan fact check organizations PolitiFact and FactCheck. (see also the revealing recent interview with Ex-Hawaii official) When you live in a bubble, ignore the best evidence, routinely create facts to justify beliefs, and are incapable of distinguishing fact from fiction, you will refuse to pay any attention to the facts disclosed in those articles from the non-partisan fact checkers. Trump's distortion of the interview with Obama's grandmother is what I would expect from him.

FactCheck posted another article on 4/9 responding to Trump.  Of course, the Birthers could care less about supporting their opinions with accurate information.  

Trump said recently that he is only interested in Libya if the U.S. "can keep the oil". (see interview with this GOP candidate at TODAY.com) If a U.S. President made that kind of reckless statement, the diplomatic fallout would be long lasting and severe in the Arab world.   

1. Redemption of KTV (own):  I previously noted that Wells Fargo had filed a notice indicating that it would redeem several trust preferred issues. KTV and Wells Fargo Notice of Redemption of Certain of its TPs  One of those TPs was the First Union Capital TP that was the underlying security in the trust certificate KTV. For the reasons discussed in that post, I was not 100% sure that KTV would be redeemed at $26.11, plus accrued interest, a premium to the $25 par value, as provided in the prospectus.  I have now confirmed based on a recent SEC filing that KTV will be redeemed at $26.112518 per share plus accrued interest of $.831388. firstunion_institutioncap-8k.  The redemption date will be 4/27/2011.  I see no reason to do anything with my 100 shares of KTV. I regret losing the shares bought at a total cost per share of $18.16.

2. Sold 100 of the Stock ETF VWO at $50.22 and 100 of the Stock ETF SCHE at $29.99 (see Disclaimer): Both of these ETFs invest in emerging market stocks and were sold for small profits.Bought 100 VWO @ 48.93   Bought 100 of SCHE at 28.9 Emerging market stocks will generally move in the same direction as the S & P 500 but with a much higher beta. Emerging Market Currencies and Bonds as Non-Correlated Asset Classes  instability & volatility in asset correlations Seeking Alpha article

The reason for selling stock ETFs recently is to lower my stock allocation after the tremendous rally off the March 2009 lows. This also reflects my opinion that the market is forecasting an overly optimistic economic recovery based on currently observable data. I am also concerned that the Shiller P/E is currently 23.6, well above the 16 average. WSJ.com This P/E ratio is based on average inflation adjusted P/Es over the past ten years.

Some argue that the current high reading needs to be ignored by investors including the BofA/ML market strategist David Bianco, whose views are discussed in the WSJ article.  Mr. Bianco wants to massage the historical earnings numbers to exclude items that detract from earnings, including periods of time when earnings were distorted by events like wars and depressions. In short, he wants to concoct a phony number that would make the market look undervalued based on historical standards. For anyone interested in the Shiller P/E, this is a link to an excellent article on the subject: dshort.com: Is the Stock Market Cheap?

This is what the Shiller P/E chart looks like now:

3. Gencorp (GY)(own-LOTTERY TICKET strategy): I noted a 12.77% pop in GY shares last Friday. The shares were up 78 cents to close at $6.89.  I do not pay much attention to LT positions except when something unusual happens in the price.  GY reported earnings of 2 cents per diluted share for its first quarter, compared to a loss of 15 cents in the year ago quarter. Net sales increased 12.3%.  Since the share pop occurred after this earnings release, and there was no other news to account for the rise, this goes to show that it does not take much in the way of a positive surprise to energize some of these LTs. My interest in this company is limited and focused more on the long term value of its real estate holdings. The company owns about 12,200 acres of land near Sacramento, CA.  Item # 3 RB Buys 50 GY at $4.65 as a LT (9/17/2010 Post)

Any improvement in the firm's main businesses is just viewed as positive. I am near playing with the house's money on this stock after one prior profitable round trip. Bought 50 GY at $3.7 as Lottery Ticket (2/10/2010 POst) Sold LT GY at $6.4 (5/5/2010 Post)

4. Bought 100 NPBCO at 24.91 on Monday (see Disclaimer):  I split this order into two fifty share lots, with 50 shares bought in the ROTH IRA.  This brings me up to 150 shares of this trust preferred security.  The price of this TP had declined about 15 cents when I made my purchase, volume was heavy at over 2000 shares, and the bid/ask spread was just a penny, which was highly unusual for this security.

As previously discussed, NPBCO is a trust preferred stock issued by NPB Capital Trust II, a Delaware Trust, formed by National Penn Bancshares whose common shares are traded under the symbol NPBC.  I suspect that many investors do not fully understand trust preferred securities so I try to explain their essence whenever I buy one.  The TP is a preferred stock issued by a trust that represents an undivided beneficial interest in the assets owned by the trust. For a TP, the asset is invariably a junior bond issued by the creator of the Delaware Trust.  The trust preferred stock is not a traditional preferred stock ( a true equity security) that pays distributions taxed as dividends. A trust preferred stock is in effect a bond that pays distributions taxable as interest. The bond owned by the trust is more senior in priority than a traditional preferred stock or common stock.

The TP NPBCO and the underlying junior bond owned by the trust have a 7.85% coupon, payable in quarterly installments, and mature on 9/30/2032.  Par value is $25. The stopper provision is typical for this kind of security (i.e., deferral of interest payments are permitted for up to 5 years, provided no payments are made on a junior security, and deferred payments accrue interest at the coupon rate, pp. 25-26 prospectus). The next payment date is 6/30.  I do not believe the bond is rated, but I doubt that many would quibble too much with a high junk rating.  I would not give it an investment grade rating.

This is a link to the prospectus: www.sec.gov

I do not expect much, if any, appreciation in the shares.  Given the credit and interest rate risk, I do not have downside potential.

I have booked some profits trading this security.  Bought 50 NPBCO at 23.09 (April 2010)   Sold 50 NPBCO at 25.2

National Penn recently paid back TARP (150 million plus accrued dividends) : form8k  The TBs would have nixed the TARP plan, without question, if they had had the power back in 2008.  Without that infusion of government capital, the financial system would have collapsed but the TBs would still have their "principles".  The government now estimates that TARP will produce a 20 billion dollar profit for the treasury.  TheStreet  The know nothing zealots are still raving against that program even after it proved to be a success.

The bank did earn some money in the 4th quarter of 2010:  SEC Filed Press Release NPLs are trending down (page 11)

This is a link to the 2010  Annual Report.  As shown in that report (page 30), the bank is paying a 1 cent per quarter cash dividend to the common shareholders, a relevant consideration for the owner of the more senior TP.  NPLs to total loans stood at 1.57% as of 12/31/2010, see page 36.  The allowance for loan losses as a percentage of NPLs was 179%.

Based on recent operating performance I am slightly more comfortable with the credit risk of National Penn than I was when I last sold these shares.

Trust Preferred Securities: Links in One Post

Regular Preferred and Trust Preferred

On a tax basis, it would make more sense to own all 150 shares in a retirement account, particularly the Roth IRA.  For the 100 shares held in a taxable account,  I have to pay income taxes on the interest distributions at my highest marginal tax rate.  I do not of course pay taxes on the interest payments received in the Roth IRA account, nor will I be taxed on those distributions when and if they are ever withdrawn, assuming no change in the law which may be on the optimistic side.  So I view a security like NPBCO to be in effect a high yielding tax free bond when held in the Roth IRA. So why not buy all 150 shares in that account? It comes down to an assessment of credit risk and to a lesser extent interest rate risk. I believe now that I will never need the funds in the retirement account which will pass to my heirs without a single withdrawal ever being made in them.  But, if I ever need those funds, I will have suffered a series of unanticipated and major financial setbacks and the funds in the retirement accounts will need to be there.  So, it is conceivable that a bond with a 2032 maturity, which has a lot of interest rate risk, may have to be sold at an inopportune time, meaning a period when the value is being driven down by a rise in rates and/or a problem with the bank.  

NPBCO closed at $24.91 in trading yesterday, down 16 cents per share for the day.  Volume was 3,642 shares, about double the normal average volume. 

1 comment:

  1. Here's a good post re: market 41% overvalued. If the Fed is removed from buying stocks, this collapses. Hedgefunds have borrowed on margin over $300 Billion to buy stocks, highest since 2008. Subtracting margin from invested dollars in trading accounts is negative. (They're playing with the House of Fed's money)