Personal Risk Ratings For Junk Bonds/MBC/Bought 50 GSBC at 18.55/The Flowering of Extremism in Tennessee

After noting that the "principal protected note" MBC experienced a maximum level violation, I ceased paying any attention to it.  MBC Reverts to the 3% Minimum Payment (4/4/2011 Post) The maximum level violation caused a reversion to the 3% minimum coupon payment.  I noted last Friday that this payment was received by me on 5/27.  The annual interest payment was $30 per 100 shares.  I own 200 shares of this senior note issued by Citigroup Funding.   Bought 100 MBC at 9.84 Bought 100 MBC at 9.78 Par value is $10, payable in 2014. 

When an investor ventures into this type of security, it is important to calculate the values for the current coupon period.  This senior note pays the greater of 3% or up to 30% per year based on the percentage increase of the Russell 2000 Index.  Now, that sounds pretty good, but there is a catch.  If the Russell 2000 index closes one day above a 30% increase, then the investor receives 3%, no matter what happens thereafter.  So, if Citigroup survives until 6/9/2014, the worst that can happen to me is to receive the 3% annual coupon payment, and then I will make a couple of bucks when this $10 unsecured senior note matures since I bought all of my shares at below par value.  

I now have to calculate the starting value of the Russell 2000 for MBC's third coupon period.  This period started on May 20, 2011.  The period ends at the close of trading on May 21, 2012. (see page PS-2 Final Pricing Supplement)

According to YF, the Russell 2000 closed at 829.06 on 5/20/2011:   ^RUT Historical Prices | Russell 2000  The maximum permissible increase is 30% in that index during a coupon period. This places the maximum level for the 3rd coupon period at 1,077.778 for the Russell 2000 Index (rounded to 1,077.78?).  So, if there is a close in the Russell 2000 on or before 5/21/2012 above that maximum level, say 1079 just on one day, the coupon for the third period would be 3%. However, say there was no such maximum level violation at anytime and the index closed on 5/12/2012 at 1076, then the coupon for the 3rd period would be 29.78% (ending value 1076 minus 829.06 starting value= 246.94 dividend by the starting value of 829.06=29.78%)

The ten year treasury note closed last Friday with a yield of 3.07%.

Norfolk Southern sold $400 million dollar of 100 year bonds, maturing on 5/23/2111, with a 6% Coupon.  Prospectus   Form 8-k  The bond is rated at BBB+ by S & P. FINRA  Another NSC bond maturing in 2097 is trading at a substantial premium to its par value with a 7.9% coupon. FINRA Another 6% coupon NSC bond maturing in 2105 with a 6% coupon is now trading at a small premium to its par value. FINRA  Madness?

Expressed on an annualized basis, real GDP growth in Canada for the first quarter grew 3.9%, after expanding 3.1% in the 4th quarter of 2010.   The Daily, Monday, May 30, 2011. Canadian economic accounts  In case anyone needed to be reminded, the Canadian statistics agency pointed out that growth in the U.S. was 1.8%.  Canadian Dollar (CAD) Strategy

This article at  Roll Call  discusses how the Democrats in Illinois, who control the state legislature, are redrawing congressional district maps to win back at least the four seats lost to the GOP during the last election.

1. Flowering of Extremism in Tennessee: The GOP is now in charge of Tennessee's state government and their members have been busy passing laws deemed extremely important to their party. It is always interesting to me what the TBs view as important. I mentioned earlier that the first order of business, one of their most cherished dreams, was to pass legislation permitting guns to be carried in bars and into state parks.

The GOP has now succeeded in enacting another, long sought after goal, requiring voters to show an acceptable photo identification to vote. Worse than a poll tax | timesfreepress.com Many spurious reasons were used to justify that requirement. For example, it was noted that the election commission had found several thousand felons on the voting roles, who were not eligible voters. Those names were purged from the roles.  Then, some liberal commie pointed out that felons lawfully have picture driver licenses, the required picture identification under the GOP's proposal.  Since facts do not matter, the GOP nonetheless continued to use that justification.

The GOP's real purpose was to disenfranchise the poor and the elderly, who do not have driver's licenses.  The mere fact that those folks largely vote for Democrats has nothing to do with the reasons for the bill according to the state GOP. The Tennessee Attorney General weighted into the fray, stating that the GOP was violating the State and U.S. Constitutions (2011/04/photo-i.d.-ag-opinion.pdf), which probably solidified GOP support for the legislation.

Before the passage of this law, a voter had to produce their voter registration card. When I voted, there was a careful examination of the signature on my voter registration card with the signature that I have to make in front of a poll worker.

The Tennessee GOP also recently stripped teacher's of their collective bargaining rights. timesfreepress.com The teacher's union was part of the vanishing Democrat coalition in Tennessee, and it was time for pay back. The LB just said that maybe this will slow down the property tax increases on HQ.

As reported in a weekend article in the Nashville Tennessean, many in the Tennessee GOP view their GOP state representatives as way too moderate since they failed to pass measures allowing guns to be carried onto campuses and requiring creationism to be taught in schools. {The former Governor of Minnesota who is running for the GOP nomination for President, Tim Pawlenty, believes that "intelligent design" needs to be taught in schools. YouTube} The general idea is to turn the public schools into Americanized versions of the Madrassas. GOP leaders in Tennessee promised to try harder next year.

Possibly next year, our teachers will be able to tell the youngsters how Adam and Eve walked with the dinosaurs, taking the kids on field trips to the creation museum in Kentucky for their science lessons.   Creation Museum  And we can all hope that our first graders will be able to exercise soon their Second Amendment gun rights by being allowed to bring their AK-47s to class.  A liberal in Tennessee is someone who believes that 1st graders should not be allowed to carry machine guns to class.

And for the tens of millions of TBs in America, it is certainly good news that Justice Roberts and Alito are moving the Supreme Court ever closer to elevating the States' Rights doctrine into the supreme law of the land, while degrading the importance of the Supremacy Clause.  The general idea is to make it far easier for the states to violate federal law with impunity.  The reactionaries, misidentified as conservatives, need one more vote as noted in the NYT to resurrect States Rights as a dominant legal doctrine.  The case in question, showing their reactionary proclivities to overturn a century or so of Constitutional law, can be found in the dissenting and concurring opinions in Virginia v. Stewart,  Virginia Office for Protection and Advocacy v. Stewart /Dissent of Justice Roberts and Alito and the concurring opinions of Thomas and Kennedy,  Concurrence in that case.

2. Rating Risk in the Junk Bond Ladder Strategy:  I mentioned to a reader that I will classify my junk bonds into three tiers:

Category 1: Extreme Risk  Rating 8 - to 10 +

Category 2: Substantial Risk Rating 5- to 7+

Category 3: Significant Risk Rating 1- to 4+

Please note that the word "safe" is not used to describe any of these categories.  I view all of them to have varying degrees of danger attached to them.  I have been forced into the junk bond ladder strategy by Uncle Ben, as I continue to adapt to the Fed's Jihad against savers, designed with the intent of making those who had no responsibility for causing the Near Depression to pay for the sins of others and to enrich the Masters of Disaster, who in their quest for ever greater sums of money, would sacrifice the welfare of hundreds of millions to satisfy their unquenchable thirst for money.    

My classifications will not be in alignment with the credit ratings.  Instead, I am making a gut, personal judgment based on my review of factors which I consider to be important.  No sensible person would hire me to make these ratings.  But, I have to rely on my own judgment when making decisions on what to buy and how much exposure to accept.  The forgoing is meant to be my personal guidelines on credit risks. 

I will make the credit risk assignment based on the following:

(1) the amount of debt and the maturity schedule of that debt in relation to the free cash flow; 

(2) whether the company is making any progress in paying down the debt and/or improving profitability and revenues;

(3) the likelihood that the firm will survive to pay off the note and the shortness of the maturity comes heavily into play for this factor;

(4) the amount of assets compared to the debt, excluding goodwill and other intangibles, and recognizing that assets may be worth significantly less than the amount shown on the balance sheet; 

(5) the priority of the debt, which includes an assessment of the amount of more senior debt, particularly secured debt, and when that more senior debt comes due. 

(6) and the assignment will be influenced by the possible recovery in the event of a default, so a senior subordinated bond issued by a highly leveraged company will receive a higher score than senior debt from the same issuer.

I will attempt to show subsequent changes in the risk rating at the end of this section.  Some of these bonds will be sold, and I will not make adjustments to the risk rating when I no longer own the bond. 

I will change the classification for a particular bond when I digest new material developments, usually generated by a quarterly report filed with the SEC.  For the bonds currently owned, this is how I classify them now:

Category 1: Extreme Risk-The Highest Risk of a Potential Default (RATINGS 8 - TO 10+)
1 AGY Second Lien Maturing 2014 (rated at 9+) (risk rating increased to 10+, see below)
1 AMR Senior Maturing (rated at 8+) Filed For Bankruptcy 11/29/11
1 First Data Senior Sub Maturing 2016 (rated at 10)
1 General Maritime Senior maturing 2017 (rated at 10+) FILED FOR BANKRUPTCY 11/17/11
1 Gray Television 2nd Lien Senior maturing 2018 (rated at 8)(added November 2011)
1 Knight Ridder Senior Maturing 2017 (rated at 10 -) 

1 Reddy Ice Second Lien Maturing 2015 (rated at 9+) (risk rating increased to 10+, see below)

1 Solo Cup Senior Subordinated (rated at 9+)  

3 Travelport Bonds  (2 seniors maturing in 2014 and 2016 rated at 9, and the 2016 senior sub at 10) (risk ratings increased to 10- for the senior bonds and 10+ for the senior subordinated) 

Based on these assignments, I have ended up with too many Travelport bonds given my assessment of the risk.  

Category 2 Substantial Risk-but less risk of default than the ones in Category 1(RATINGS 5- TO 7+)
3 Albertson's Long Bonds (rated at 7+ see below)
1 Appleton Paper 2nd Lien Maturing in 2016 (rated at 6+) (risk rating increased to 8, see below)
1 Apria Healthcare Senior Secured "A" Series maturing 2014 (rated at 6-) (raised to 7+, see below)
1 Apria Healthcare Senior Secured "B" Series maturing 2014 (rated at 7) (added November 2011)(raised to 8+, see below)(raised to 9+ see below)
1 ArvinMerior Senior maturing 2015 (rated at 7)(added January 2012)
1 ArvinMeritor Senior maturing 2018 (rated at 7)(added November 2011)
1 Belo Senior Maturing in 2027 (rated at 6)
1 Borden Chemical Senior Bond maturing  2016 (rated at 6+)
1 Boyd Gaming Senior Sub maturing 2016 (rated at 6)
1 Boyd Gaming Senior maturing in 2015 (rated at 5) (added October 2011)
1 Brunswick Senior Maturing in 2023 (rated at 5+)
1 Cascades Senior Maturing 2017 (rated at 5) (added Aug 2011)
1 Cenveo Senior Sub Maturing in 2013 (rated at 5-)
1 Colt Defense Senior maturing in 2017 (rated at 7 -) (raised to 8- and then to 9+, see below)
1 Cooper Tire Bond Maturing in 2027 (rated at 5)
1 Cricket Communications Senior (rated at 6+) (added June 2011)
1 Dillards Senior Maturing in 2027 (rated at 6+) 
1 Edgen Murray Senior Secured (rated at 5)

1 Edison Mission Senior Bonds Maturing in 2016 (rated at 6+)(risk rating increased to 8 then to 9-,  and then to 10- see below) 
2 Exide Technologies Senior Secured Maturing in 2018 (rated at 7-)

3 GMAC Senior Bonds Maturing between 2017-2019  (rated at 6)

1 Harlan Clarke Senior Maturing in 2015 (rated at 6)(currently at 3 bonds)
2 HCA Bonds Maturing in 2023 and 2025 (rated at 6+)
1 Mueller Water Senior Subordinated (rated at 7-) (added June 2011)
1 Norcraft Maturing in 2015  (rated at 6+) (added March 2012)
1 Penn Virginia Resources Senior Maturing 2018 (rated at 6) (added August 2011)
1 Select Medical 7.625% Senior Subordinated Bond Maturing 2/1/2015 (rated at 7+)(added August 2011)
2 Radioshack 2019 (rated at 7) (risk rating raised to 9)

3 Tenneco Packaging Senior Bonds (two maturing in 2018 rated at 5, the others maturing in 2025 and 2027 at 7) (risk rating increased see below) Added 1 2018 in October 2011
1 Terex Senior Sub Maturing in 2017 (rated at 7-) (added August 2011)

1 Texas Industries Senior (rated at 7) (added July 2011)
1 United Refining Senior Secured Maturing in 2018 (rated at 6)
1 United Rentals Senior Sub (rated at 7+)(added August 2011)

1 USG (rated at 7) (bought back 8/17/2011)
2 Vulcan Senior Bonds maturing 2018 and 2021 (rated at 6)  

1 Wendy's Bond Maturing in 2025 (rated at 5+)

1 Goodyear Tire Senior Maturing 2020 (rated at 5+)  

Category 1: Risky but  viewed now as  less likely to default compared to the two previous categories, subject to change (RATINGS 1- TO 4+)
1 Albertsons Senior Bond Maturing in 2030/1 Albertsons Maturing 2027 (rated at 4 - ) Risk rating raised to 7+, see below)
3 Cincinnati Bell Senior Subordinated Bonds Maturing 2018 (rated at 4-)
1 Cincinnati 2020 Senior (rated at 3)  

1 Commercial Metals Senior (rated at 4)  
2 CoreLogic Senior 2028 (rated at 3) Risk Rating Raised to 5 (see below)
1 Eastman Kodak Senior 2013 (rated at 4) (risk rating raised to  10+ from 9 on 9/30/11, see below) FILED FOR BANKRUPTCY JANUARY 2012 
1 J.C. Penney 2020 Senior (rated at 4)

1 Macy's 2030 Senior (rated at 3)

1 MeadWestvaco Senior 2032 (rated at 3 -)
1 Nextel 2015 (rated at 4+) (added August 2011) Risk Rating Raised to 8 see below-Sprint 

2 OfficeMax Senior 2016 (rated at 3)
1 Quicksilver Resources 2016 Senior Sub (rated at 3) Risk Rating Raised to 6 (see Below)  
2 R.R. Donnelley Senior Bonds Maturing in 2017 and 2029 (rated at 3)
1 Sears Holding Senior Secured Maturing in 2018 (rated at 4 -)

2  SuperValue Senior Bonds Maturing in 2014 and 2016 (rated at 2+)  Risk rating raised to 6- see below 

1 Warner Music 2014 (rated at 4) (redeemed by issuer August 2011)
3 Windstream Senior Bonds Maturing in 2019 (2) and 2020 (1) at 4 (added August 2011) Sold All Winstream 
1 Sprint Nextel 2017 (rated at 4+) (Risk rating raised to 8, see below)

My credit risk ratings are based on my gut judgment on the relative risk of not being paid back my principal in full at maturity.

Changes: 
Tenneco Packaging 2025 and 2027 raised to 8+/Pactiv 2018 Raised to 7:  Tenneco Packaging and Pactiv Bond-Increasing Personal Risk Ratings
Reddy ICE risk increased to 10+ from 9+ on 8/12/2011 Reddy ICE
Edison Mission risk increased to 8 from 6+ on 8/12/2011 based on last earnings report and new environmental regulations recently issued by EPA. Risk rating increased to 9- for reasons set forth in 3/1/12 Post Sold 2 Edison Mission 7.75%. Risk rating increased to 10- for the detailed reasons given in Item #1 Risk Rating Raised on Edison Mission Bond to 10- from 9-
CoreLogic risk increased to 5 from 3 on 8/17/11 based on 2nd quarter earnings report
Quicksilver Resources risk increased to 6 from 3 on 8/25/11 based on several recent adverse developments:  QUICKSILVER RESOURCES (KWK)
Travelport risk ratings increased to 10+ for the senior subordinated and 10- for the senior bonds, due to a failure to resolve the PIK bond maturity issue, see Travelport.
Eastman Kodak risk rating raised to 9 after it drew $160 on its credit facility. EK  The rating will be lowered in the event there is a successful outcome on the sell of its patents or a huge settlement in the ongoing ITC case against Apple and RIMM.  Based on developments on 9/30/11, the risk rating was further increased to 10+ from 9  Eastman Kodak (EK) Bonds-Own 2013 Senior Bond)
Sprint Nextel risk rating was raised to 8 based on its presentation to analysts summarized in this WSJ article.
AGY Holdings risk rating raised to 10 based on the third quarter earnings report and the need to borrow money to pay the 11/15/11 interest payment. Item # 4  Earnings: AGY Holdings  Risk Rating raised to 10+ 3/30/12 after reviewing SEC Filed 2011 Annual Report
Appleton Papers risk rating raised to 8, see Item # 1  Appleton Papers
Apria Healthcare risk ratings raised after reviewing 2011 Annual Report on 3/30/12. Item # 3  Apria Healthcare Risk rating raised again, Item # 1 Apria
Colt Defense risk rating raised to 8- after reviewing 2012 first quarter report: Colt Defense The rating was raise to 9+ after I learned that Colt had lost the contract to supply the M4 to the U.S. Military, Colt Defense-Raising Risk Rating to 9+
SuperValu risk rating raised to 7+ on the long bonds and 6- on the short/intermediate term bonds (2014 & 2016) after an unexpectedly bad earnings report. SuperValu's Earnings and Debt Problems-Raising Risk Ratings for SVU Bonds
RadioShack risk rating raised to 9:  Increasing Risk Rating on RSH Bond to 9 from 7

3. Bought 50  Great Southern Bancorp (GSBC) at $18.55 on Friday (Regional Bank Stocks' basket strategy)(see Disclaimer): GSBC is another small cap bank that is growing.  At a $18.55 price, the dividend yield is about 3.9% and the market capitalization is around $251 million.  The consensus earnings estimate, made by 3 analysts, is for an E.P.S. of $1.5 in 2011 and $1.78 in 2012. GSBC Analyst Estimates  This bank is headquartered in Springfield, Illinois, and has branches in Missouri, Kansas, Iowa, Arkansas, and Nebraska: www.greatsouthernbank.com LocationsBranches.pdf The bank has 76 branches. Great Southern Bank

The bank still has 58 million in government preferred stock on its balance sheet.  While I can not be certain, it appears to me that this bank does not need the capital and is using it as a cheap source of funding.  The current dividend on the government's preferred stock is 5%, but that rate will rise to 9% five years after its issuance, or the later part of 2013.

Before the rate rises the bank needs to redeem the preferred.  Equity preferred stock dividends, like common stock dividends, are not deductible, unlike interest payments on debt obligations. The bank discusses a possibility of transferring that obligation to the Treasury's Small Business Lending Fund, through participation in the Small Business Jobs Act passed in 2010. (see page 44 Form 10-Q)  While I am not familiar with legislation, the bank claims that the initial dividend rate would be 5%, but could fall to as low as 1% depending on the amount of small business lending.  This would appear to extend the period of time to late 2015 before the rate is bumped to 9%.  The bank has submitted an application for inclusion in the SBJA program but has not decided whether to participate assuming it is later approved for participation. I would assume this community bank could find enough small businesses in its service area that it could make enough loans to at least approach the 1% dividend rate, if it chose to do so.  

The bank reported diluted earnings per share for the first quarter of 36 cents, up from 34 cents in the first quarter of 2010.

The current dividend rate is 18 cents per quarter which can not be raised prior to 12/5/2011 or the bank's repayment of the TARP funds (page 45). The bank did not reduce its dividend during the Near Depression period.  However, the current annual rate has been in effect since the 2008 calender year. The annual rate was at 25 cents in 2011, and was raised every year before hitting the 72 cent plateau in 2008.

As of 3/31/2011, the net interest margin was excellent at 5.05%; the tangible equity to tangible assets ratio was at 7&; the tier 1 total risk-based capital ratio was 16.7% and the total risk-based capital ratio was 16%; NPAs to total assets was at 2.47%; NPLs to total loans was at 1.9%; and the efficiency ratio was at 57.49%.  SEC Filed Press Release  The bank plans to open two or three branches in 2011.

The capital ratios for year end 2008, 2009 and 2010 can be found at page 162  2010 Annual Report.

As noted in the 2009 Annual Report and the last filed Form 10-Q at pages 17-19, GSBC has expanded its geographic area by FDIC assisted acquisitions of failed banks in Kansas and Iowa.  Those acquisitions increased the full service branches from 39 to 72 in 2009:  2009 Form 10_K 

KTX Redeemed on 5/26/2011 at $25.3676 per Trust Certificate Plus Accrued Interest

These redemptions are really starting to irritate LB, who almost lost its cool when it noticed this morning that KTX had disappeared from two accounts.  KTX was a trust certificate with a 8% coupon on a $25 par value. The underlying security was a 8% trust preferred originating from Xerox Capital Trust I, and guaranteed by XRX as provided in the prospectus.  TP's are in effect junior bonds. 

The redemption was made at $25.3676 per certificate, a small premium to the $25 par value, plus accrued interest. Notice of Full Conditional Call on the Term Assets: CorTS Trust for Xerox Capital Trust I 

I owned 100 shares bought near par value.  I owned 50 of the 100 shares in a taxable account: 

The other 50 shares were held in the Roth IRA:

This redemption was by the issuer, rather than the owner of the call warrant.  I did not notice it, but XRX recently sold 1 billion of unsecured senior notes and the proceeds were going to be used to redeem the TP.  Xerox Closes on $1 Billion of Senior Unsecured Notes 

LIQUIDATED MDT AT 40.68/HNZ/Cicada Cookbook-Free of Charge/Added 1 Senior Sub 8.75% Cincinnati Bell Bond at 97.45 Maturing on 3/15/2018/Sold 2 Dean Foods 6.9% Senior Bonds at 98.25

In his Barrons.com, Randall Forsyth argues that the old adage, "sell in May and go away", may be appropriate advice now, as several technical factors point to a continued correction in stock prices.

The government did not revise its first estimate for 1st quarter GDP growth yesterday. News Release: Gross Domestic Product The estimate remains at a sluggish 1.8% increase. Corporate profit growth in the first quarter shrank at a .9% rate, much worse than the consensus estimate of a 2.3% increase. 

LB is becoming annoyed with the 17 year Cicadas that have recently emerged and have surrounded HQ in force. web.utk.edu/ /Cicadapage. LB is always thinking about the angles, however, and it occurred to him that the Cicadas might be a food source.  Since they were in such abundance, and were free with a small degree of labor necessary to catch them, LB reasoned that this could cut down on the food bill here at HQ.  LB is always looking for ways to cut expenses here at HQ. 

LB discovered after much research that the female Cicada is a better source of "meat" than the male, and most cookbooks recommended that the wings and legs be removed prior to cooking. Apparently, it is optional whether the cook needs to remove those large eyes. And, some of them could be frozen for later use, throughout the winter months, and probably through 2012 as well according to some sources which may not be reliable. LB found a cookbook produced by the University of Maryland, with a large variety of tempting recipes, and has offered to provide  a copy to all of the people under HK's direction, recognizing that many such persons need the protein for their own good provided by this delicacy enjoyed worldwide: www.umd.edu/pdf/cicada

One way to cut down on Medicare costs is to quit paying for expensive procedures that have no proven benefit. The primary beneficiary of such procedures are the physicians that perform them, the hospitals where they take place, the hospital support personnel, and the companies that provide the product which is not needed by the patient. These procedures are summarized in an opinion column published in yesterday's NYT. In short the government needs to learn how to say "no". An example is that 1/5th of all implantable cardiac defibrillators are placed in patients that will not benefit from them, at a cost of $50,000 to $100,000 per patient.    

1. Sold 209 shares of MDT at 40.68 on Wednesday (Large Cap Valuation Strategy)(see disclaimer):  I am going to re-deploy the cash proceeds gradually into large cap tech stocks.  The recent earnings report and guidance from MDT was sufficiently disappointing to me that I no longer wanted to own the shares.

This is a link to an article in Barrons, published after the MDT latest earnings report, acknowledging that the recent dip in the share price "could represent a buying opportunity", but it will take time for MDT's wounds to heal. Our LB says in response that there "could" be a lot of buying opportunities after a dip in share prices after the wounds heal, but LB's patience is not exactly an unlimited reservoir. And that reservoir has run dry for MDT.

I did net an okay profit on the shares, but will not start buying back any of the shares sold north of $36:

MDT 2011 Realized Gains Short Term +$521.06; LT +$362.47/Total= $883.53

Medtronic closed yesterday at $40.41.

2. Heinz (own Common Stock Dividend Growth): I bought shares in HNZ at $31.67 during the Dark Period. (March 11, 2009 Post). Based on the dividend in effect at that time, the yield at my cost was around 5.4%. Since then, Heinz has raised the dividend annually. The company announced yesterday another increase. The quarterly dividend rate was raised from 45 cents to 48 cents, or $1.92 annually. This increased rate would result in a yield of about 6% at my constant cost number. 

HNZ also announced results for its fiscal 4th quarter yesterday. Heinz Sales grew by 6% to $2.89 billion. E.P.S. grew by 15% to $.69 which included a 2 cent acquisition related charge. On a constant currency basis sales grew by 2.7% and E.P.S. by 11.7%. 

H.J. Heinz Co rose 43 cents in trading yesterday to close at $53.82. I noted when I bought shares at $31.97 that several brokerage firms had just downgraded the stock.

An article in Barrons.com yesterday argues that the shares have further to run. 

3. Sold 2 Dean Foods 6.9% Senior Bonds Maturing in 2017 at 98.25 (Junk Bond Ladder Strategy)(see Disclaimer): This transaction improved the yield of my junk bond basket some to 9.37% with an average maturity of 7.45 years. I bought the 2 bonds in two separate 1 bond lots, and made the most off the first lot. Bought 1 Dean Foods 6.9% Senior Bond at 89.48 Maturing 10/15/2017 (December 2010). I recently averaged up by buying 1 more which was also sold at a profit on Thursday. Bought  1 Senior 6.9% Dean Foods Bond at 93.5 Maturing 10/15/2017 (4/19/2011 Post)

I am keeping track of the realized gains from my junk bond ladder strategy in Item # 5 Realized Gains Junk Bond Ladder Strategy 

4. Added 1 Senior Sub Bond 8.75% Cincinnati Bell Maturing on 3/15/2018 at 97.45 (Junk Bond Ladder Strategy) (see Disclaimer):  This bond was bought in the regular IRA and is viewed by all staff members other than the NERD MACHINE as an inappropriate buy in that account. This brings me up to 4 Cincinnati Bell bonds, and 3 of them are this 2018 Senior Subordinated bond. The other two are owned in a taxable account, where a tax loss sell would have some value given the short term capital gains already racked up so far in 2011. Bought 1 Cincinnati Bell Bond Maturing 2018 at 94 (12/21/2010 Post) Bought 1 Cincinnati Bell Senior Bond Maturing in 2020 at 96.8 (12/9/2010 Post)

LB's only response was to say "stuff it" to other staff members. Headknocker wanted to remind the "Stock Stud" that there are now 3 separate junk bonds owned in the Regular IRA account, and possibly LB would want to consider "safer" investments for that account, otherwise we will need to hook the OG back up to an IV to dispense quarts of chill pills and Maalox into him. LB replied that due consideration will be given to our "Great Leaders" concerns.

This is a link to the Cincinnati Bell (CBB) profile page at Reuters.  

This is a link to the firm's last Quarterly Report for the Q/E 3/2011. CBB reported net income of $15.2 million or 8 cents per share on $311.4 billion in revenues. The long term term is too high in my opinion at $2.507 billion. The amounts and maturity schedules of that debt can be found at page 6. The 2018 is subordinate to other senior debt shown in the table. For my purposes, I would just refer to "senior subordinated" debt to be junior debt on CBB's balance sheet. It has a lower rating than the senior bonds. 

FINRA Information on 2018 Bond: FINRA

Prospectus: Final Prospectus Supplement

My confirmation states that my current yield is 8.905% at my total cost and the YTM is 9.096%. 

Sold 300 of the Bond CEF ACG at 7.82/Sold 50 NRIM at 20.05/Added 50 FMER at 16.18/David Stockman and the GOP/GOP Reaffirms Commitment to Ryan's Plan for Medicare, Medicaid and Food Stamps

The treasury auctioned five year notes yesterday with a yield of 1.813%. The 2 year note went at a .56%. Recent Note, Bond, and TIPS Auction Results Please note that the period is before the number on the two year note.

Hedge fund manager, David Einhorn, publicly called for the Microsoft Board to retire Steve Ballmer. NYTimes.com

David Stockman, Reagan's Budget Director and a former GOP Congressman, is not showing much love these days to the modern day GOP.  He penned an article blaming the GOP for wrecking the U.S. economy, which is article is discussed in Paul Ferrell's column at MarketWatch.

To be fair, Stockman would lay some of the blame on the Democrats. Ferrell is referring to Stockman's opinion column written in 2010 and published in the NYT. Ferrell opines that Stockman may be the GOP's best candidate to run for President. Stockman is no longer welcomed in the modern day GOP and would have to run as an independent. I would certainly give serious consideration to voting for him. But let's get serious for a second. Stockman proposes increasing taxes on the middle class, in addition to tax increases for the rich, along with spending cuts. That approach, while sensible and pragmatic, might get him a few hundred republican votes in the upcoming GOP primaries.  

In many states, there is a legal doctrine known as "comparative fault". When there is an auto accident, for example, both drivers may be at fault but to different degrees. So, the jury is asked to assign a percentage of fault to both drivers where both are found to be negligent in some degree. Both the Democrats and Republicans are at fault for causing the Near Depression and the current and reasonably anticipated death spiral for U.S. government debt resulting from exponentially growing budget deficits. While there is certainly room for disagreement, I would assign the GOP about 60% of the fault and 40% to the Democrats.

Some would raise a number of objections to that assignment. When assigning blame for the Near Depression, which has greatly contributed to the budgetary problems, why not assign blame to the Wall Street Masters of Disasters responsible for such satanic creations as CDOs squared, fraudulent loan applications, and the aiding and abetting by the rating agencies in pursuit of their private gains. Ultimately, the government provided the milieu for those conditions to thrive.

Both parties drank the kool aid of financial deregulation, giving the Masters of Disaster free rein to bring down the world's economy by allowing them to police themselves and to increase their leverage by the 2004 SEC Rule change.

Both parties contribute to the worsening debt crisis, each in their incompetent and irresponsible ways. The GOP, for example, gave us the 1 trillion IRAQ WAR, justified with what was known to be unreliable and even false reasons. The Democrats gave us a 700+ stimulus program that was poorly designed given the long term budgetary problems that such a massive spending program will cause for generations to come. Just those two decisions, incompetent and irresponsible in their own ways, will add close to two trillion dollars to the long term debt, which will have to financed and re-financed for generations to come.   

While I do not want to write several hundred pages justifying my assignment of comparative fault, I would briefly discuss another typical problem. The GOP has a tendency to slash taxes for the wealthy, including a desire to eliminate the estate tax for billionaires, and it is unquestionable that the BUSH tax cuts have contributed significantly to the current budget woes.

On the flip side, the Democrats insist on passing new programs, such as the recent health care "reform" law, without making any serious attempt to fund the massively underfunded existing social programs, particularly medicare. Yet, part of the funding for the new program comes from increasing taxes on the well off, as if increasing taxes on the wealthy was a bottomless well that the Democrats could tap. (for a discussion of how that legislation increases tax rates, see Wichita Business Journal) Though, the GOP is constantly misrepresenting the scope of that increase as noted in this article from PolitiFact.

My point is simply that the nation is running well over a trillion dollar budget deficits per year now, and has not even addressed the looming crisis in funding medicare and social security for the baby boom generation. So, while the rich could be required to pay more taxes, the trade off has to be the repeal of several recently enacted programs, including the drug benefit plan for medicare and the health "reform" bill.  And that would just be the start of the "shared" pain. This is not going to happen, so I view the situation as hopeless. The U.S. federal and local governments make the Greeks look responsible.

I do pay attention to the medicare drug benefit plans being administered by private companies, and have been helping some older folks make choices among the very large number of competing private plans. My opinion is that it is a costly federal program that needs to be eliminated to save money. It is about to become more costly starting this year for the federal government due to the gradual elimination of the doughnut hole (Medicare Part D coverage gap), and substantial discounts for those hitting the doughnut hole starting this year. Medicare's Drug Coverage Gap to Shrink Away Under Health Care Reform

I have noticed several trends occurring under my mother's plan. The cost goes up every year while the coverage goes down. Some drugs are not covered at all. For most generics, the plan provides no financial assistance. The generics could be purchased just as cheaply by someone with no insurance. Other more expensive brand names drugs were originally covered but have since been dropped from coverage.  She had to switch one of her brand name prescriptions to a lower cost generic, and now receives virtually no financial assistance from the plan for the required generic. The universe of non-favored brand name drugs seems to increase every year. In short, I have already decided to forego participation in this crap program when I become eligible for medicare, in the not too distant future.

I can see how it might help some elderly folks who have to take a large amount of brand name drugs. Many take far too many in a futile effort to feel better, often making their overall quality of life worse with the side effects and adverse drug interactions. And, as we now know, this law was passed in a sleazy manner anyway, with Congress kept in the dark about the cost projections as just one example. {in an article by Tony Pugh, published in 2004 The Boston Globe, evidence was produced to show the Bush Administration ordered that the true estimates be withheld from Congress. After the bill was passed, the cost estimate was revised substantially higher  Los Angeles Times}

Due to lower enrollment than originally predicted, the use of more generic drugs and fewer brand name drugs coming to market, the cost to the government is running below projections, with 52 billion spent in fiscal year 2010 net of premiums. Reuters Wealth However, with the recent changes made in the Affordable Care Act, explained in this pamphlet from the Kaiser Foundation, I would anticipate those costs to accelerate significantly.  So, like every social program, it grows until everybody is happy with the bill sent to the Chinese.

This is a link to the critique, made by the National Council on Aging, to the GOP's plan for Medicare and Medicaid.

The House Republicans reaffirmed yesterday their intent to go forward with the Ryan budget plan. WSJ  An effort to advance Ryan's budget in the Senate failed on a 57 to 40 vote, with no Senate Democrats voting for the plan and none ever will. There were a few GOP defections, including the two Maine senators, Scott Brown from Massachusetts who is up for re-election and very vulnerable, Lisa Murkowski from Alaska and Ron Paul from Kentucky who said that Ryan did not go far enough in his cuts. POLITICO.com Senator Corker, who is up for re-election in Tennessee in 2012, voted to advance the Ryan budget plan.

1. Sold 50 NRIM at $20.05 on Tuesday (Regional Bank Stocks' basket strategy)(see Disclaimer): I bought shares of NRIM over a year ago at $16.66, so this is just more profit taking. I redeployed the proceeds into FMER which has better long term growth prospects and pays a higher dividend. This sale brings the total realized long and short capital gains for this strategy to over $6,600. Item # 3 Realized Gains Regional Banks I have taken a hit over the past several weeks in my unrealized gains, by over a $1,000.  I have nothing adverse to say about NRIM and would consider buying the shares back on a dip back to $17.

Northrim Bancorp closed yesterday at $19.72.

2. Added 50 FMER at $16.18 on Tuesday (Regional Bank Stocks basket strategy)(see Disclaimer): Bank stocks have started to roll over. This may be due in large part to the slowing economy and the ongoing double dip in housing prices. I suspect that the recently passed "financial reform" package is further weighing on the stocks. The purchase of another 50 shares of FMER was a quick average down, since I just purchased 50 shares at $16.96 earlier this month. I have nothing to add to that earlier post, except that the dividend yield is closer to 4% at my latest purchase price.  

FirstMerit closed yesterday at $16.23.

3. Sold 300 ACG at 7.82 on Tuesday (see Disclaimer): It will be impossible for me, given my views about U.S. government debt, to hold this bond CEF for very long. This bond fund uses leverage to buy mostly low yield U.S. treasury debt.  The fund is subject to what I sometimes call the triple whammy. This can occur with leveraged bond funds when the cost of the short term borrowings rise, the value of the bonds owned by the fund fall, and the discount to net asset value widens as investors flee.  For ACG, I am basically clipping the monthly dividend and hopefully making a few bucks on the shares which I have done successfully so far over the past year. Added 400 ACG at 7.85 Sold 200 ACG at 8.35 SOLD 200 ACG 8.45  The shares sold last Tuesday were bought about a month ago at $7.63.

AllianceBernstein Income Fund closed yesterday at $7.78.

Foreclosures and Home Prices/MDT/Added 30 MSFT at 24.15/Voters Send the GOP a Message/Eliminated Exposure to GS Bonds-Sold 100 PYB at 23.68/Sold 50 BMLPRH at 17.64

CNN, the Washington Post and the NYT predicted that the Democrat Kathy Hochul will win the special congressional election against the Republican Jane Corwin in a heavily republican district. CNN Political Ticker NYT  The Washington Post Jane Corwin was a solid candidate too.

It will not be hard to visualize the Democrat attack ads against GOP candidates in 2012. Those ads could even be accurate, a rarity for political ads from either Political Tribe, by simply stating the conclusions from the CBO's letter to Paul Ryan previously referenced in this blog.  The ads would simply state that the GOP has now shown who they really represent, voting en masse to cut the tax rate again for millionaires while in effect imposing a 100% death tax on the middle class with their radical plan to change medicare for those now under the age of 55.   The ad really does not need to say anything else.

According to study published in USATODAY.com this morning, the baby boom generation is already fearful of outliving their savings, now try to convince them that they need to pay twice as much for health insurance during their retirement, compared to traditional medicare, in order to save Medicare.

An article in the NYT, based largely on data from RealtyTrac, highlights why housing prices will continue to fall.  The main problem is the glut of foreclosed homes that are already owned by the banks or soon will be in the months and years ahead. As I have highlighted in several recent posts, the Case Shiller index of home prices, covering twenty major metropolitan areas, has been signaling a double dip in housing prices for several months now. The article in the NYT explains one of the major reasons for it. According to that article, banks already own 872,000 homes and are attempting to foreclose on a million more. When the repercussions of the housing bubble are finally tallied, the number of foreclosed homes will be well into the millions.

The NYT article further notes that Moody's is predicting another 5% nationwide decline in prices in 2011. Another statistic that is troubling is that ratio of foreclosed homes to homes sold by the banks. In Minneapolis, the ratio is six foreclosed homes for each foreclosed home sold by the bank.  The ratio is 8 to 1 in Atlanta.

The HSBC preliminary manufacturing PMI for China fell to 51.1, a 10 month low.

An article in the  NYT claims that Europe is splintering over the ongoing bailout problems with Greece. 

Dave Kansas penned an article, published over the weekend in the WSJ.com, about the compelling valuations of large cap tech stocks. This is not news to anyone. Nothing much has changed since I wrote a post last September making a similar argument. Explaining Low Valuations of Large Cap Tech Stocks One of my earliest blogs, written in October 2008, made the same point. TECH STOCKS The stocks mentioned in the WSJ article are Intel, Google, Microsoft, and Cisco. I would add HPQ to that list. I own all of those stocks and intend to buy more in small lots. I am not going to make a large investment in any of them. I now have only a profitable position in Intel. I have bought and sold, profitably, MSFT, HPQ and CISCO,  and have recently re-initiated positions in those stocks. I am in the red on all of those new positions so far. I can wait. 

My general approach will now be to nibble on them during downdrafts.  By nibbles, I am referring to purchases in the 30 to 50 share range except for GOOG where adds will be more like two or three shares. A more appropriate description would be "chicken buys", RB noted just in case anyone thought the LB was daring with this strategy.

I would add that patience will be required since all of those companies are hated by large segments of the investing public, and many of the reasons for that disdain are justified by the evidence.  The Masters of Disaster think in terms of days, and are simply incapable of valuing  a company based on a long term stream of earnings discounted to present value.

At times, it appears that CSCO may be attempting to imitate EK or XRX.

Notwithstanding a boatload of talented people, MSFT is easily surpassed by newer and/or smaller companies in innovation. Nimble is not a word that would be used by many to describe MSFT. And it would not be rationale to expect the next hot new gadget to originate from that behemoth. And, the 8.5 billion dollars about to be spent on the Skype acquisition makes sense only to a few analysts mentioned in Eric Savitz's Forbes blog and to Eric.  Eric argues in his article in this week's Forbes that the deal is a good one for MSFT.

HPQ has the most compelling long term valuation in my opinion at its current $35 to $36 price, but there are no short term catalysts to energize the stock.

Investors do not have confidence that their capital will be spent wisely by GOOG's current management and those concerns are rational ones.    

Still, MSFT, HPQ, and CSCO are cash machines with strong balance sheets, selling at substantial discounts to the market multiple, and with low P.E.G. ratios.  MSFT is now selling at less than 10 times earnings and at a forward P/E of 8.5.  The expected five year P.E.G. ratio is less than 1.  The company has almost $49 billion in cash or $5.78 per share. That kind of data can be found at Yahoo Finance under "Key Statistics".  MSFT Key Statistics  

And, for MSFT, INTC and CSCO, I would not have high expectations.  A price in the $32 to $35 range for MSFT within two or three years seems doable, but I would be surprised by a price higher than $35 during that time frame.  CSCO seems to be the most troubled company of the large cap tech companies, so I would be hoping for a $23 to $27 price at some point within the next two years.  I do not expect much from CSCO anymore and the market expects far less than I do.  

I thought that the deranged harangue by the Republican Patrick McHenry against Elizabeth Warran, summarized in this NYT's article was interesting, in that it shows the desperation of the GOP to shoot down an effective consumer watchdog over the financial industry.  

1. Added 30 MSFT at $24.15 on Tuesday (own: Large Cap Valuation Strategy)(see Disclaimer): After discussing chicken buys of large cap tech stocks, I decided to make one on Tuesday by adding 30 shares of MSFT to my losing position.  I did not own MSFT shares from at least 1999 to 2009, when I started to nibble at them.  While I in now in the hole on 230 shares recently bought, I do have some trading gains from 2009 and 2010 that more than offset my current unrealized loss, at least at MSFT's current price:

MSFT 2009 Realized Gain +$527.43

MSFT 2010 Realized Gain +96.46

This is a link to a recently published positive article about MSFT in Seeking Alpha. An article in  USATODAY.com this morning discusses the looming battle between MSFT and Google over cloud computing.  MSFT recently released a "near final version" of Office 365 for the cloud.

It is hard for me now to see much long term downside risk in this stock. It is certainly hated by a large segment of the investing public now. "RB is not a WIMP", a voice was heard to say in response to this 30 share buy by the Stock Stud LB.

2. Eliminated Exposure to Goldman Sachs' Bond-Sold 100 of the TC PYB at $23.68 on Monday (See Disclaimer):  I discussed the reasons for eliminating my exposure to GS bonds in yesterday's post.  Sold 100 GYB at 19.7 in Roth IRA-Reducing Exposure to GS Bonds to Zero  This TC contains the 2033 senior GS bond.  Given its yield and long maturity, I was also concerned about interest rate risk.  

3. SOLD 50 BMLPRH at 17.64 on Monday (see Disclaimer): I have been trading in and out of BAC equity preferred floaters for some time.  Floaters: Links in One Post I bought the shares sold last Monday at $16.2 and have bought them as low as $13.25 before selling those shares at $17.42.

I discuss this type of security in the following Gateway Post:  Advantages and Disadvantages of Equity Preferred Floating Rate Securities  BMLPRH was originally issued by Merrill Lynch and had a different symbol back then. When Merrill was acquired by Bank of America, the symbol changed to BMLPRH.  BAC pays the greater of 3% or .65% over the 3 month LIBOR rate on a $25 par value.  Dividends are classified as "qualified" but are non-cumulative.  

This leaves me only with 100 shares of BMLPRJ among the BAC equity preferred floaters with minimum payments.

4. Medtronic (MDT) (own:Large Cap Valuation Strategy): Medtronic reported lackluster results for its F/Y 4th quarter ending on 4/29/2011. SEC Filed Press Release On a GAAP basis, MDT reported an E.P.S. of $.72 per diluted share, down from $.86 in the year ago quarter. Revenues were $4.295 billion compared to $4.196 in the 4th quarter of F/Y 2010. Revenues were flat year-over-year on a constant currency basis.  On a non-GAAP basis, the earnings came were 90 cents, up from 89 cents.  The consensus estimate for Non-GAAP earnings was for 93 cents.  The market reacted negatively to the report and justifiably so in my opinion.

It is debatable whether an investor needs to pay attention to the GAAP number, rather than the Non-GAAP earnings, for purposes of valuation. Frequently, the company wants the investor to overlook charges included in the GAAP number, even though the charges occur with regularity and would be properly considered costs of doing business.  The charges excluded from MDT's GAAP number include such items as employee termination costs, asset write-downs, and contract termination fees, which amounted to 18 cents for the quarter.

I did recently pare my MDT position by selling 30 shares at $41 and may have an opportunity soon to buy those shares back at a much lower price.  Item # 4  Sold 30 MDT at 41  My average cost is $36.46 per share for the remaining shares.  And repurchase would have to be below that average cost number.  Based on this last report, I am not going to buy more MDT shares, and may dispose of my shares to buy shares in large cap tech companies.  I am reinvesting the dividend to buy additional shares and will continue to do so until I dispose of all of my MDT shares.  

Sold 100 GYB at 19.7 in Roth IRA-Reducing Exposure to GS Bonds to Zero/Sold 50 STDPRD at 20.34/Travelport Earnings/Added 50 ARCC

Google (own common stock), which is sitting on a mountain of cash, sold 3 billion dollars worth of bonds last week.  As of 3/31/2011, the company had $34.975 billion in cash, cash equivalents and marketable securities with no long term debt. There was some 2.7 billion in short term commercial paper outstanding as of 3/31. Form 10-Q  More than 9 billion dollars of orders were placed for the those bonds with maturities of 3, 5 and 10 years, with the five year note yielding 2.125%.   Prospectus  Yes, investors are falling over one another, desperate to receive what will likely be a negative real rate of return on that five year note before taxes.

JNJ also recently sold some bonds, paying 2.15% for a note maturing in 2016 and 4.85% for another maturing in 2041.  Prospectus

I watched the HBO Film "Too Big To Fail" last night. It was riveting for a financial nerd who recognized that the world was on the edge of another Great Depression in September 2008.  While entirely predicable, it is perpetually unfortunate that virtually all members of one political tribe were unable to perceive reality in real time and do not recognize even now how close the world came to Financial Armageddon in 2008. HBO: Movies: Too Big to Fail: Home

1. Travelport (private company-own bonds only):  I mentioned in an earlier post that Travelport closed the sale of its GTA business and used $655 million of the proceeds to pay down part of its secured debt facility.  SEC Filing Subsequent to that note, Travelport reported a first quarter loss of 23 million on net revenues of 531 million.   Form 10-Q  The long term debt is discussed in note 9 at page 13. The GTA transaction is discussed at page 32.  The company claims at page 32 that it had 142 million of "unlevered free cash flow" in the first quarter (see page 32).

I own 3 separate Travelport bonds, maturing between 2014 to 2016, and view all of them to be extremely risky.  I believe that all of them are slightly in the red. 

1 Travelport 9.875% Senior Bond Maturing in 9/1/2014

1 Travelport Senior 9% Maturing 3/1/2016

1 Travelport 11.875% Senior Sub Maturing 9/1/2016

I mentioned recently that American Airlines filed an antitrust suit against Travelport.  Bought 1 AMR 9% Senior Bond Maturing 9/1/5/2016 at 99.375  I further referenced Travelport's response. Travelport The filing of private antitrust suits will sometimes draw inquiries from the Justice Department which has apparently happened with AMR's complaint. WSJ.com This is not surprising when the company operates in a concentrated industry with few competitors.  

2. SOLD 50 of 100 STDPRB at $20.34 on Friday (see Disclaimer): STDPRB is a floating rate, non-cumulative, equity preferred stock issued by Santander Finance that pays the greater of 4% or .52% over the 3 month LIBOR rate.  Given the extended Jihad by the Federal Reserve against all savers, the applicable rate has been 4% for an "extended period of time" as the Fed likes to say in its minutes when deciding to keep the Federal Funds rate near zero which will keep other short term rates like treasury bills and the short LIBOR rates abnormally low too.

I sold my highest cost shares held in a taxable account, bought for a total cost of $18.66, acquired in March 2010:

Added 50 STDPRD at $18.54  I am keeping for now my lower cost shares bought @ 17.96. (January 2011 Post).

My concerns involve the potentially worsening financial crisis in Spain.  A recent article discussing some hidden debt at local government levels was published last Friday in the  WSJ.com.

For this security I have netted capital gains of $265.01 in 2010 and $143.16 from sales in 2011, plus $228.61 in qualified dividends, which includes a distribution that recently went ex-dividend:

STDPRB Realized Capital Gain 2010 +$265.01

STDPRB REALIZED LT GAINS 2011 =$143.16

3. Sold 100 GYB at $19.70 in the Roth IRA on Friday (see Disclaimer):  I have been reducing my GS bond exposure, keying off a couple of developments.  I may be overreacting but I will frequently operate under the rule "better safe than sorry".

First, it would not be surprising to see another government civil case against GS growing out of the recently released 646 page bipartisan report from Senator Levin's committee: FinancialCrisisReport.pdf Criminal indictments against GS and/or one or more of its senior officer are certainly possible. At a minimum there is significant headline risk to owning GS securities now. I have been selling GS bonds since the release of that report, and Levin's referral of the matters discussed in that report to the  Justice Department  and the SEC. Bloomberg

I recall buying some GS bonds after they hit the skids after the civil complaint was filed against GS and its former employee, the Fabulous FAB. (SEC 2010  Complaint online.wsj.com.pdf)  Trust Certificates Containing a Senior Goldman Sachs' Bond Maturing in 2033/Goldman's Defense and Possible Penalties in the SEC Case (4/19/2010 Post).  I am selling these bonds at a profit.

My approach is to wait for the headline risk to actually hit, see what happens in the ensuing days thereafter to the GS bonds, and then decide whether I want to take the risk back at a much lower price.  I doubt that I will be buying any GS security back until there is a complete house cleaning at the top.

There are a lot of recent articles about the ongoing investigation that highlight some of Goldman's potential problems: TheStreet  WSJ One of those articles is by Matt Taibbi, recently published in Rolling Stone, probably the most scathing article on GS in my memory. Taibbi summarizing the case against GS in easily understandable terms for those who do not want to read Levin's 646 page scathing report.  GS is the main focus of the report, and evidence against the company is discussed from pages 376 to 636.  Financial_Crisis/FinancialCrisisReport.pdf  GS's behavior described in that report can only be characterized as disgusting.

There can be no doubt that Taibbi believes that criminal indictments are justified against the firm and several of its top officers and managers.

Another recent article from Taibbi that discusses some of the evidence in more detail can be found at Taibblog.

Needless to say, even if I had a billion dollars to invest, I would not do any business with GS or the other Masters of Disaster.  I would never trust any of their employees to act in my best interest, and do want to spend an inordinate amount of time trying to figure out how I was being screwed in pursuit of their greed.

The second point is that the common stock is telegraphing problems ahead.  After hitting $175 in January 2011, the stock has moved decisively under its 200 and 50 day moving average and has accelerated its decline in recent weeks. GS Interactive Chart

GYB is a trust certificate that contains a 2034 fixed coupon GS TP as its underlying security. It is also a Synthetic Floaters which means that the owner of GYB will not receive a fixed coupon for as long as a swap agreement remains in effect. Instead, the independent trustee for GYB  will swap the fixed coupon payments made by GS with a brokerage company who will pay the trustee the greater of 3.25% or .85% over the 3 month LIBOR rate but no more than 8.25% on GYB's $25 par value.

Given the Fed's 3+ year Jihad against savers, the applicable rate is the minimum payment.  www.sec.gov Interest payments are made quarterly.

Prior to this last transaction, I have done well trading GYB, realizing $1,071 in trading profits while never owning more than 100 shares at one time.   Item # 3  Bought 50 GYB @19.07 The trading activities can be found in these posts: Added another 100 GYB in Regular IRA at $11 (April 2009 Post); Bought 50 GYB at $11  (April 2009 Post); Sold 50 GYB at $15 (September 2009 Post);  Pared Trades in Roth: Sold 100 PYT at 19.25 & Bought 100 GYB at 18.98 (October 2010) Sold 70 PYT at 18.66 and Bought 70 GYB at 18.49 in Regular IRA (March 2010 Post);  Sold 50 GJS @ 16.20 & 100 GYB @ 19.9 (October 2010 Post) Sold 100 GYB @ 19.4 (October 2010 Post)

As of October 2010, the total capital gains realized from trading the 3 GS synthetic floaters  (GJS, PYT and GYB), was $2,411.49. About 1/2 of that total came from two of the trades:

100 GYB Shares 2010 Realized +671.71 Regular IRA on $1109 Investment

100 PYT 2010 Sale Roth IRA +$685.02 on $1233 Investment

I started to invest in the Synthetic Floaters in the Spring of 2009 and will own them only in my IRAs. Fidelity no longer allows their customers to buy them.

I bought the 100 shares sold last Friday in two 50 share lots:   Bought 50 GYB at 18.63 in the Roth IRA (1/24/2011 Post); and last October at $19.07.

Floaters: Links in One Post

4. Added 50 ARCC in Regular IRA at $16.9 in Regular IRA Last Friday (see Disclaimer):  I now own again 150 shares of this Business Development Corporation.  The other shares were bought at lower prices: Bought 50 of the BDC ARCC at 16.17 and at $16.3  I basically bought back the 50 shares sold a few days ago at at $17.7. (5/4/2011 Post). I have nothing to add to my prior discussions, except to note that this company missed earnings expectations for the first quarter: Reuters The 10-Q for the last quarter can be found at  www.sec.gov. As of 3/31/2011, the net asset value per share is shown at $15.45, up from $14.92 at the end of December 2010 (page 2). 

A recent favorable article about this BDC can be found at Investopedia.

The current quarterly dividend is 35 cent per quarter which gives me about a 8.28% yield at a total cost of $16.9.

I would also incorporate my generally negative comments about BDCs in general made in this recent Post: Item # 3 Bought Shares in BDCs in IRAs: 50 AINV at 10.8 and 50 PSEC at 11.2

A recent article found at Seeking Alpha, written by Nicholas Marshi, discusses ARCC and four other BDCs.

Ares Capital declined with the market yesterday, falling 38 cents to close at $16.45.