Thursday, May 5, 2011

Sold Remaining SIVBO at $25/Bought 50 GJN at 21.95/Sold DRE at 15.31/Sold 150 CHW at 9.04

There is a discussion of bank loan funds at Morningstar: A Bank-Loan Fund Buyer's Guide I do not own any of those funds.

After the release of the April ISM report on the service sector at 9 a.m. yesterday morning, the market quickly went into retreat mode. That index was reported at 52.8, lower than the consensus estimate of 57.8,  and a significant decline from the 57.3 number from March. There was a huge decline in the new order component, which fell from 64.1 in March to 52.7 in April. Part of the market decline was also attributed to a weaker than expected jobs report from ADP.

Intel was ex dividend yesterday and bucked the downtrend by rising 45 cents to close at $23.5.  I started to buy the common shortly after Lehman's failure in 2008 (see Snapshot of Intel Purchases with Cash Flow).  While the OG is a philosopher, not a tech nerd, the enthusiasm for Intel shares yesterday was based on its new 3-D design for transistors, which will apparently lead to less power consumption and help Intel take on ARM Holdings in the handheld computer space. (see video explanation at VentureBeat) I have not sold any Intel shares purchased since I started to buy the shares again in October 2008. This news will probably result in the raising of my long term price target since this technology appears to give Intel a several year lead assuming the company is successful in implementing large scale manufacturing and the chip actually works as promised. Generally, I have stayed away from technology stocks until they become value plays with dividends which explains why I did not own any Intel shares, for example from 1999 to October 2008.

1. SOLD Remaining 50 Shares of the TP SIVBO-Roth IRA- at $25 (see Disclaimer): All 150 shares of this TP were purchased by me for $19 and change back in 2009. I started to sell the position shortly after the last ex interest date, disposing of 100 shares in two fifty share lots:  Item # 2  Sold 50 of Remaining 100 SIVBO at 24.9 (see snapshot in that post) Item # 3 Sold 50 of the 150 SIVBO at 24.65 (see snapshot in that post). The remaining 50 shares were purchased in the ROTH IRA at about the same time:

SIVBO 2009 ROTH IRA Purchase

This TP has a 2033 maturity, a $25 par value, and a 7% coupon.  I simply believe that the interest rate risk on this kind of junior bond with a long maturity is not worth the risk now.  Part of that risk is losing a significant gain by continuing to hold this kind of security when rates start to rise, and eventually that will happen.  I suspect that the long term secular bull market in bonds, which started in 1982, is already over, though that is still not apparent based on the continuing strength of bond prices. I am not currently concerned about the credit risk of SVB Financial Group, the issuer of the junior bond owned by the Delaware Trust SVB Capital II (SIVBO) created by it.

As previously noted on many occasions, ad nauseam,  a trust "preferred stock" is not a traditional preferred stock.  The TP represents a beneficial interest in a junior bond owned by a trust, both the bond and the TP will have the same maturity date, and the TP's distributions will be taxed as interest. A traditional preferred stock is junior to all bonds in the capital structure, its distributions are classified as dividends, and there is no maturity date associated with them.  Neither the TP nor the equity preferred stock owner has an equity interest in the business. Trust Preferred Securities: Links in One Post Regular Preferred and Trust Preferred 

The perpetual nature of equity preferred stock is one of its undesirable equity characteristics and will make the fixed coupon equity preferred stocks extremely susceptible to diminution in value during periods of rising interest rates. I doubt that many buyers of those securities appreciate that risk now since they have yet to live through a long term bear market in bonds caused by rising inflation. The OG remembers.  

Since the TP is more senior to a traditional preferred stock, given its tie to a junior bond, and has a maturity date, the interest rate risk will be less than the perpetual equity preferred stock from the same issuer.  But, given the long maturity dates of the TPs, that interest rate risk would still be pronounced and would likely lead to a significant loss in value even with no change in the credit risk profile of the issuer. The TPs have long maturity dates in order to qualify as Tier 1 equity capital.  The LB also thought that it was ludicrous to allow banks to use bonds as part of the equity capital and was thankful to Senator Collins and others who have put an end to that practice for banks with over 15 billion in assets. 

While SVB Financial now has over 15 billion in assets, it had less than 15 billion as of 12/31/2009, barely, and consequently can continue to use its TP as part of Tier 1 equity capital: Pages 12-13 2010 Form 10-K

2. Bought 50 GJN at $21.95 in the ROTH IRA Last Friday (see Disclaimer): Another reason for explaining a TP again is that a J P Morgan Trust Preferred is the underlying security owned by the Grantor Trust GJN. GJN is a Trust Certificate with a $25 par value. The TC matures on the same day as the underlying bond which is 8/1/2035.

GJN is what I call a Synthetic Floater. A buyer of this Trust Certificate does not receive the fixed coupon rate of the underlying bond as long as the "swap agreement" is in effect.  Instead, the trustee will collect the fixed coupon payments made by J P Morgan at 5.85% and swap that amount with a brokerage company for an amount payable to the owners of GJN. That amount will be the greater of 3% or 1% over the 3 month treasury bill rate, but not greater than 8%. So, right now, the swap counterparty is making decent money with no risk. Since the 3 month treasury bill is hugging zero due to the 3+ year Jihad Against Savers, the brokerage firm receives 5.85% annually from the trustee and pays the trustee for the benefit of the GJN owners 3%, keeping the spread for itself.  That is sweet, since owners of GJN bear the risk of default for the bonds owned by the trust. When and if the 3 month T Bill rises above 4.85% during the pertinent computation period, the swap counterparty will have to dig into its pocket some to make a net payment to the trust.  It is what it is. 

If you are a Fidelity customer, you can no longer buy Synthetic Floaters.  I have done very well with them over the past two years. 

I have traded GJN on two prior occasions. My first foray into GJN resulted in a $61.48 profit.  I almost doubled my money before the quarterly interest payments on my next round trip: 

GJN Regular IRA +$460.53 on $635.50 Investment
I would not anticipate much, if any, appreciation, in the shares until there is a rise in short term rates coupled with a market consensus that they are rising much higher.

With synthetic floaters, I can calculate my maximum and minimum current yields based on my cost. The current yield now is the minimum yield which is 3.41% based on a total cost of $21.95.  Using that same cost number, the maximum yield is reached when the 3 month T Bill hits 7% during the relevant computation period, and that yield would be 9.11% (.08% x. $25 par value=$2 annually per certificate divided by $21.95 total cost=9.11%). So if an investor was able to hold this kind of security until maturity, the coupon rate will fluctuate all over between 3.41% and 9.11%. And, based on prior history, it would be reasonable to expect both the highest and lowest yields for considerable periods. The first increase from the minimum would occur when the 3 month T Bill exceeds 2%. 

My last extended discussion of GJN was in a 2009 post: Bought 50 GJN at $12 (March 25, 2009 Post). (see also Sold  50 GJN at 22.08 in the Regular IRA)

This is a link to FINRA information about the underlying fixed coupon TP: FINRA  It is currently rated A2 by Moody's and BBB+ by S & P, so it is firmly in investment grade territory. Since credit risk is shouldered by the owners of the TC GJN, the credit risk of J P Morgan is a relevant consideration.  I would argue that there is more interest rate risk in buying the fixed coupon TP in the bond market near its par value than the synthetic floater.  The current yield spread favors the bond by over 2.5%.  
3. Sold 50 DRE at $15.31 in Roth IRA Last Friday (see Disclaimer): I am not likely to keep individual common stocks in a retirement account for very long. Duke Realty (DRE) common shares were the only common stock owned in a retirement account, and I recently bought those shares @ 13.45. (Feb 2011 Post).  I received one quarterly dividend. This is a link to the 1st quarter's earnings report:  Investor Release

4. Sold 150 of the CEF CHW at 9.04 in Roth IRA Last Friday (see Disclaimer): I am paring my lower yielding securities in my stock allocation. While CHW does pay monthly dividends, the yield is not that attractive to me for a retirement account. Based on the current monthly distribution rate of 5 cents per share, the yield at $9.04 is around 6.6%. On a 150 shares, the dividend would generate $90 over a year. RB wanted to warn readers to turn away otherwise they are about to hear some typical tunnel vision Nerd Think.  LB ignored RB's babble and then noted that the profit on the shares equaled $111.1, more than a full year of dividend distributions. By waiting for a stock market correction, and the odds of that occurring are increasing by the day according to LB, after crunching a few trillion variables and alternate scenarios, the Stock Stud could then repurchase the shares at a lower price than the last purchase. And LB noted for good measure that several monthly dividend payments were received since these shares were purchased in October 2010.   

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