Thursday, June 16, 2011

NFIB Reports Job Creation Decline Among Small Businesses/CPI/NY FED Manufacturing Survey/Bought 1 Vulcan Materials 7.5% Senior Bond Maturing 6/15/2021 at 99.874 in Regular IRA/Added 40 STLPRA at 10.14 in Regular IRA

Fortunately, the cicada invasion is just about over here at HQ.  It was not so much the shrill sound of the mating call that was causing consternation.  It was the LB's insistence that the OG leave HQ and go outside to gather up those critters in buckets for later consumption.

As previously noted, LB is always pursuing ways to cut down expenses here at HQ, and to eliminate the noise and nuisance problems created by having other staff members around. Having the OG running around outside corralling cicadas all day would accomplish both worthwhile objectives.

And, it would be in the OG's best interest to get some exercise and sun anyway, besides a little sweat never hurt anyone, as LB noted after hearing the OG mention that the temperature outside was in the 90s. LB was just thinking about the OG's best interests, recognizing that a steady diet of cicadas would help the OG lose weight and lower his cholesterol, compared to a steady diet of cheeseburgers and fries, or other assorted meat and potato dishes. 

LB explained to the OG that the cicadas were rich in protein and were vegetarians. When properly prepared, they had a nut like flavor and could be used in a number of tempting dishes such as El Chirper Tacos, Cica-Delicious Pizza, and Soft-Shelled Cicadas, LB noted referring to a cookbook previously provided to staff, prepared by researchers at the University of Maryland who no doubt also had the OG's best interests in mind, just like the LB:   cicadarecipes.PDF 

The LB does not want to brag on how it considers all of the angles, but noted that revenue could also be generated for Headknocker, by selling tickets to those who would find amusement in watching the OG chase those bugs all day. LB thought that $2 a day for one person or $5 per family, would be a fair price. The customers could come and go as they pleased, bring their lawn chairs and grills, and HK could provide all of the protein needed for nourishment free of charge. 

The LB further recommended that the OG no longer be dunked head first into a vat of phosphatidylserine, that particular therapy has had untoward consequences on the OG's brain circuity, to such a worrisome extent that the OG believes that his opinions are better than those promulgated by LB, which have of course the force of fiats. The OG has even started to argue with the LB about investments and doing his own research.

Headknocker responded that the OG was starting to make sense, for a change, based on recent developments, and possibly there may be a pearl of wisdom hidden in his babble somewhere, if you looked hard and long enough.  

The ^VIX rose 17.14% yesterday to close at 21.39.  That kind of movement is inconsistent with the formation of a Stable VIX Pattern, and is consistent with the continuation of the Unstable VIX Pattern in effect since August 2007. Item # 1 Current Status of the Vix Asset Allocation Model (6/13/11 Post).

The National Association of Independent Businesses reported on Tuesday that more small businesses were  planning to shrink their payrolls over the next three months than add new jobs over the next three months.  NFIB  Small businesses employ about 1/2 of the private payrolls. A graph of this survey made by the NFIB, which shows a persistent weakness in job creation, can be found at the NYT. The numbers in this survey remain dramatically lower than at anytime during earlier recessions since 1986, when this data series started to be collected by the NFIB. There are several news articles about this survey, including ones at the NYT and Reuters.

The government reported a .2% increase in CPI for May.  The core inflation rate accelerated to .3%.  Over the past year, inflation rose 3.6% before seasonal adjustment, while the core inflation rate increased 1.5% for the year ending in May 2011.  Consumer Price Index Summary The government also reported that real average hourly earnings (adjusted for inflation) fell 1.6% over the past year, seasonally adjusted. Real Earnings (see Table A-1. Current and real (constant 1982-1984 dollars) earnings for all employees on private nonfarm payrolls, seasonally adjusted)

Cash inflation, which excludes the hypothetical owner equivalent's rent, is up 4.2% over the past year.  cpi 

The NY FED released its manufacturing survey yesterday, and the results showed a sharp slowdown.  The index fell  20 points to -7.8%. Any number below zero indicates contraction. Empire State Manufacturing Survey  

I view it as important to examine my portfolio on a day like yesterday, when the S & P 500 average fell 1.74%.  I want to answer two questions. Did my portfolio go down more or less than the market averages? And, what assets rose in value, showing negative correlation with the major market averages.  In one account, I own mostly double short stock ETFs, and yesterday was a plus day for that account.  The main taxable account declined by -.58% compared to the -1.74% decline of the S & P, or about 1/3rd of the S & P 500 decline.

Most of the dampening of the volatility was due to a sizable increase in the cash allocation. The decline was also cushioned by the receipt of dividends and interest yesterday, see Item # 3 below.   Several asset classes increased in value, including the Canadian bond ETFs (CBO:CA; CLF:CA; XRB:CA; and ZCM:CA); several individual bonds (both junk and investment grade); all of the stock double shorts (up 3% to 4%);  several of the "principal protected" senior notes  (e.g. MOU, MBC, MKZ); a very limited number of stocks and preferred stocks, and a few of my CEFs like GGN and PSY.  Several asset classes showed positive correlation with the down movement in stock prices but did not fall as much such as the recent purchase of CEW which fell .82%.   The bond heavy Regular IRA was up $25.53, while there was a de minimis decline in the bond heavy ROTH IRA, basically a scratch day for the IRAs.   

1. Bought 1 Vulcan Material 7.5% Senior Bond Maturing on 6/15/2021 at 99.874 in Regular IRA on Tuesday (Junk Bond Ladder Strategy)(see Disclaimer): Senior unsecured debt issues from Vulcan Materials (VMC) was recently demoted by the rating agencies to junk. This 2021 bond was recently issued by VMC and my purchase was near par value. 

This is a link to the prospectus:  SEC Filed Prospectus As noted in that prospectus, Vulcan is the largest aggregate company in the U.S. with "319 aggregate facilities, located in attractive population-growth markets". (page S-1). The company is also a major producer of asphalt mix and ready-mixed concrete. 

The Near Depression has taken a toll on VMC's earnings and sales, as reflected in the chart at page S-9. The company reported net earnings of $470 million in 2006 and $451 million in 2007. (page S-23) A map of its aggregate facilities can be found at page S-27. 

The last filed Form 10-Q was for the Q/E 3/2011. Form 10-Q  Long term debt was shown at $2.427596 billion. Note 11 contains a discussion of that debt. The weighted average interest rate on the long term debt was 7.07%, see page 31, which includes information on the rating downgrades). 

The maturity schedules of the debt can be found by perusing the information provided by FINRA

This is the link to the FINRA information on the 2021 bond:   FINRA - Investor Information The first coupon date will be 12/15/2011. The bond pays interest semi-annually. 

The consensus estimate is for a loss of 75 cents per share this year and a loss of 15 cents in 2012.  That may prove optimistic if the U.S. is entering a non-temporary slowdown which is what the OG suspects is in fact the case. 

Due primarily to bond calls, I am sitting on an usually high amount of cash in my retirement accounts earning nothing. If there is a significant decline in the value of this bond, meaning a greater than 10% decline in value, I would consider including it in a ROTH IRA Conversion. I prefer to own bonds in the IRAs for reasons discussed in prior posts.  

2. Added 40 STLPRA at 10.14 on Tuesday (see disclaimer):  STLPRA is a Trust Preferred security, in effect a junior bond issue from Sterling Bank (STL) that is currently callable at its $10 par value.   This brings me up to 350 shares of STLPRA in the retirement accounts, with 200 shares owned in the ROTH IRA and 150 in the regular IRA.  

I recently sold 100 shares owned in a taxable account.  Sold 100 STLPRA at 10.47 I prefer to own this type of security in the retirement accounts for the usual reasons.  I am not taxed on the interest payments made into the IRAs, whereas I pay the highest marginal tax rate on interest income paid into a taxable account.  When held in the ROTH IRA, and assuming no change in current law, I view a taxable bond to be equivalent to a tax free bond, since I will not pay on tax when the interest is received, nor when the interest is distributed to me.  The OG is currently over 59 1/2 years old.  And, if there is ever a deferral of the interest, that will not have an adverse tax consequence for me when the security is held in a retirement account.   

This TP has a 8.375% coupon on a $10 par value and matures on 3/31/2032. Interest is paid quarterly. Prospectus It is a typical bank TP. While Sterling can call it now, this bank could still use the TP as Tier 1 equity capital since it had less than 15 billion in assets on the relevant date, which was 12/31/2009. Trust Preferred Securities & Financial Reform 

Sterling repaid TARP in April 2011, see page 38 Form 10 Q for the Q/E 3/2011.  That is relevant to the owner of a TP. The junior bond owned by the Delaware Trust created by the bank is senior to the government's cumulative equity preferred stock.  In order to defer payment on the bond, the bank would first have to defer paying dividends to the U.S. government. With that repayment, the stopper provision in the TP prospectus, prohibiting a deferral of interest payments, would be activated only by continued payment of common stock dividends. STL is paying common stock dividends.

Anyone investing in a TP must understand the stopper provision, which can be found at page 35 of the prospectus.  Without activation of the stopper clause, deferral of interest payment could lawfully be made for up to five years, with the deferred payments accruing interest at the coupon rate.

Sterling Bancorp Trust I  (STL.PA) closed at $10.19 yesterday and went ex interest for its quarterly distribution on 6/13/11.

Trust Preferred Securities: Links in One Post
Regular Preferred and Trust Preferred

3. Snapshot of Interest Payments into One Account on 6/15/11: This is a snapshot of the interest payments received into one account on 6/15/11. The snapshot does not include the interest payments made by the TC PJR, UZV (about to be called) and OSM which were grouped with the dividend payments though properly classified as interest: 

The three GMAC notes pay interest monthly and the amounts shown are for just 1 bond.  The Prudential senior bond is a holdover from the short term investment grade bonds bought in 2007 as part of my shift out of stocks.  Interest is paid monthly on two senior Prudential bonds.  

OSM is a CPI floater, and I am down to owning just 100 shares after hitting a high of 300.  I may have ended up with my higher cost shares on this one:

100 OSM Average Cost Per Share $15.93

Interest is paid monthly based on an obtuse calculation which I explain in several posts. Item # 1  OSM  (December 2010 Post). Prospectus:  The penny rate is set to rise in the coming months, and will increase to $.118 cents per share for the September monthly distribution. 

PJR also paid me interest on the 15th, and I recently took some profits in my position.  I am now down to 150 shares, split between a taxable account and the ROTH IRA with the ROTH now having 100 shares. This TC contains a senior Unum bond, FINRA. The TC has a 7.4% coupon, while the underlying bond has a lower coupon at 6.75%, thereby making the TC more vulnerable to a call by the call warrant owner for reasons explained in prior post.  This is a snapshot of the shares currently held in the taxable account: 

PJR Average Total Cost Per Share= $16.88/7.4% Coupon on a $25 Par Value/Maturity 2028 


I sold one security on Wednesday which I will mention in the next post. 

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