MSFT CZNC/Sold Aegon Hybrid AEH at $23.09 Bought at $4.63/Sold CEF JDD at 11.28 & Bought 50 GJT at 18.15-Roth IRA

In the Spring, I started to significantly pare my stock allocation based on evidence of a slowing U.S. economy and accelerating inflation problems in emerging markets. I am now starting to plan for a possible U.S. default caused by the irresponsible zealots and reactionaries in the U.S. House of Representatives.

While the market currently assigns no possibility to a U.S. government default, I believe that this market consensus underestimates the potential of a catastrophic outcome. I do not believe that the odds are as high as 50% that the deadline will pass without an increase in the budget limit, as suggested by one analyst in a front page story in the USATODAY.com yesterday. I would simply view the odds as significantly higher than the consensus among investors which is zero based on recent market action.

Since I have already significantly reduced my stock allocation, I started yesterday to pare stocks a tad more by selling a stock ETF, raising the cash allocation by 6 thousand with just that sale, based on my evaluation of possible scenarios, my overall cautious and conservative nature, a strong belief in better safe than sorry, and LB's constant desire to reap trading gains. "Tunnel Vision Nerd Machine", the RB had to add to that last statement about the Lame Brain. I may continue to sell one stock CEF or ETF every day counting down to August 2nd.  Except for possible Lottery Ticket adds, I will not be purchasing any stock for any reason until there is a resolution.

This is a link to the bipartisan debt limit proposal that has been rejected by many House GOP zealots already: The Washington Post An example of a negative response from one of the extremists is  Jim Jordon's opinion published in the USATODAY.com yesterday.

David Gergen in his column at CNN believes that a default is likely to be in our future.  I would not be that pessimistic.

The market reacted favorably yesterday to Europe's latest effort to deal with its sovereign debt problems.  MarketWatch   Reuters   Washington Post

A GOP puppet master, Rush Limbaugh, said on 7/20/11 that all of this talk about default was just Ivy League pranks the elite were playing on the people

All of this attention on the debt limit is taking investor's attention away from a continuation of deteriorating fundamentals, which would simply be made far worse, without question, by a default.  The CEO for Pepsico (PEP) said yesterday on the conference call that the modest pickup in consumer spending "had reversed in the past several months". Seeking Alpha Transcrip Conference Call: Opening Remarks of CEO Indra Nooyi Whirlpool's CEO told investors yesterday that demand for appliances is back to 2009 recession lows, as the company expects a 1% to 2% decline in 2011 industry shipments. (SEC Filed Press Release and Introductory Comments by CEO Jeff Fittig Earnings Call Transcript - Seeking Alpha)  Ingersoll Rand (IR) slide yesterday after reporting a lower than expected profit (Press Release), as did Safeway (SWY).  I do not own any of those stocks currently.  Some took solace in a 3.2 reading in the Philadelphia Fed's manufacturing survey, but I was not one of them.

Microsoft (own) reported robust earnings after the close yesterday. The company reported 69 cents per share on $17.37 billion in revenues (Microsoft), beating the consensus estimate of 57 to 59 cents per share, depending on the service providing the consensus estimate. I am reinvesting the dividend.

The shares fell in after hours trading, probably due to the second straight quarterly revenue decline in the division that includes Windows.  That division suffered a 1% revenue drop.  MSFT claimed that revenue would have been in line with the 2% to 4% in PC market growth, excluding the impact of last year's launch of Windows 7 and revenue deferral. A discussion of this report can be found at MarketWatch.

I decided to re-purchase the shares earlier this year, pursuant to my Large Cap Valuation Strategy, based in part on valuation and my belief that investors had become too pessimistic about the MSFT's prospects.  Item # 1 Added 30 MSFT at 24.15 (May 2011-Also Shows Snapshot of 2009 Trades); RB BOUGHT 100 MSFT at 27.08 (February 2011); ADDED 50 MSFT at 25.81 (March 2011); Added 50 MSFT at $25.55 (May 2011).  I have not sold any of those shares. (see also discussion in Item # 4  MSFT (7/5/2011 Post).

1. Earnings from Companies Bought in LOTTERY TICKET Stock Strategy: In my LT stock strategy, I own a number of stocks where the initial purchase amount is limited to no more than $300 plus any realized gains and distributions from prior purchases. The Head Trader for this strategy is Right Brain, our RB, and the cap is placed on those purchases given the identity of the HT along with the risk of the investments. I will generally not discuss earnings of companies whose stock is owned by part of this strategy, except in very brief terms. It does not matter what happens, and I am willing to hold the position for a long time.  

Keycorp (KEY) reported earnings of 26 cents per share for the 2nd quarter, beating expectations by 6 cents. 

Virginia Commerce (VCBI) reported 2nd quarter earnings of 24 cents per share, up from 15 cents. This beat the estimate by 10 cents.  

Umpqua Holdings (UMPQ) reported second quarter net income of 17.7 million or 15 cents per share, up from 3 cents in the year ago quarter. This was a 3 cent beat.  

Huntington Bancshares (HBAN) reported earnings of 16 cents, and raised its quarterly dividend to 4 cents from 1 cent. This beat the consensus estimate by 1 cent.  I have a $140 realized gain from a prior HBAN transaction so I can add that number to the $300 maximum.

Pacific Continental (PCBK) reported net income of $2.157 million or 12 cents per share. The consensus estimate was for 10 cents. 

2. SOLD Aegon Hybrid AEH at $23.09 Bought at $4.63 During the Dark Period Last Wednesday (see Disclaimer): The yield on this security fell below 7% at my sales price. I did not see any compelling reason for continuing to risk the unrealized gain. I have bought and sold this security in other accounts. 

I did very well trading Aegon Hybrid securities during the Near Depression, as their prices prove to be extremely volatile. (see Aegon Hybrids: Gateway Post) I bought the AEH shares in the regular IRA at $4.63 (March 2009). So that is a home run before taking into account the dividends.  Reading that post from March, I see that I was concerned about this security going even lower in price. It actually did fall some shortly after my purchase, closing at $2.97 on 3/9/11.  AEH Historical Prices Those were the days. RB just said that it wanted to buy a million at $2.97 but was squelched by the LB. 

This leaves me with 200 shares of AEB as my sole Aegon hybrid, with those shares bought during the Dark Period between $4 and $8. Snapshots of the AEB positions, held in two accounts, can be found at Item # 1, AEG and at Item # 1  Bought 50 MSPRA @ 19.57, 50 PYT at 18.06, & 50 GYB at 18.63 in the Roth IRA.  

I am also down to only 50 shares of INZ, bought at a total cost of $7.98, as my sole ING hybrid. That security is owned in the regular IRA. The purchase was made on 2/18/2009.  A snapshot of that trade can be found in Item # 9,  Bought 50 INZ @ 23 in the Roth IRA (January 2011). ING HYBRIDS: Links in one Post Neither ING nor Aegon have missed a dividend payment on their respective hybrids. Both did eliminate their common stock dividends which is always an important fact for the owners of the hybrids. 

For reasons that would not be comprehensible to any informed investor, Fidelity has now added AEB to its no trade list. That decision can not be justified, and is totally and completely idiotic, beyond belief actually. I did not believe it until I confirmed it by attempting to place an order (on Fidelity's growing list of trade prohibitions, see   Fidelity Prohibits Purchase of HBAPRF (allows purchase of functionally equivalent HBAPRD and HBAPRG); Fidelity Brokerage Extends Denial of Trading Opportunities to Synthetic Floaters and Even an Exchange Traded Junior Bond DFP; Fidelity Prohibits New Purchases of SIPs).

This is the message waiting for Fidelity customers who attempt to buy AEB:

3. Bought 50 GJT at 18.15 in the ROTH IRA on Wednesday (see Disclaimer): I previously traded this security in 2009 and made $472.45 on two 50 share positions:

GJT Roth IRA 2009 Realized Gain $472.45

Before I understood that there were complicated tax issues involved with this type of security, I had bought 100 GJT in a taxable account and flipped it for a quick profit, which takes my realized gain to over $550 for this security.  I believe that my initial purchase of GJT was in April 2009. BOUGHT VEU AND GJT at $8.3  Trimmed GJT at $13 (June 2009); Sold 50 GJT-Some Details about Managing My Two IRA Accounts (December 2009)

The impossible to understand tax issue is summarized at pages S-37 to S-40, which made the LB's eyes roll back. As a result, I will only own the synthetics in an IRA now. 

I know that some readers roll their eyeballs when I start to discuss Synthetic Floaters, a type of Exchange Traded Bond. They are among the more difficult securities to understand so I will try to simplify the discussion some.  

First, all of the exchange traded synthetic floaters are in trust certificate legal form. The investor does not buy the bond directly.  Instead a certificate is purchased representing a beneficial interest in a bond owned by a Grantor Trust. That trust is formed by a brokerage company, who buys the bonds and then deposits them into the trust.  The trust is administered by an independent trustee.  For GJT, that trustee is the Bank of New York. 

Second, for synthetic floaters, the bonds owned by the trust are fixed coupon bonds.  The trustee will collect the interest payments made by the issuer of the bond. For GJT, that bond is a senior bond issued by Allstate that matures on 4/1/2036 (Prospectus: www.sec.gov) The Allstate bond has a 5.95% fixed coupon and is rated A3 by Moody's. FINRA The owner of GJT is exposed to the credit risk of Allstate.

Third, the owner of GJT is unlikely to ever receive the fixed coupon amount of that Allstate bond. Instead, when this security was created, the trustee entered into a swap agreement with Wachovia, now part of Wells Fargo.  For as long as that agreement remains in force, the trustee will "swap" the interest received from Allstate for an amount due the owners of GJT. That amount is .8% above the 3 month treasury bill rate based on a $25 par value, paid monthly. There is no minimum coupon, which is the case with several other synthetic floaters, but there is a maximum coupon of 8%. 

The problem with having no minimum is shown by what has happened in the past three years. The T bill rate is now near zero. As a result, this security is paying a .8% spread over nothing. The bright side is that the security was bought at a discount to its $25 par value and eventually the FED will end its Jihad against savers. 

The maximum yield at a total cost would be hit when the 3 month T Bill rate exceeds 7.2% during the relevant computation period. Based on a total cost of $18.15, the 8% cap, and the $25 par value, the yield would be around 11% at that maximum coupon level. In addition, assuming Allstate survives to pay off the bond at maturity, I would receive a profit representing the difference between my cost and the $25 par value. I doubt that I would have to hold this security that long to receive something close to par value. When the T Bill rate returns to normal levels or higher, investors will likely bid up this security, provided the underlying Allstate bond is still rated high. This is not going to occur anytime soon, for sure, and may take several years. Since I will never need the funds in the ROTH IRA, I can wait.  The security was trading at between $22 to $25 in 2006, when the 3 month treasury bills were auctioned mostly in the 4% to 5% range. 

Historical treasury rates can be downloaded from the Federal Reserve: FRB: H.15 Release--Selected Interest Rates--Historical Data

4. Sold 100 JDD at 11.28 Last Wednesday-Roth IRA (see Disclaimer): This one was apparently not included in my last CEF table which was an oversight. Stocks & Politics: CEF TABLE (July 2011 Post) " Yet more proof that the OG is becoming senile, the Old Goat barely knows what he owns", the LB added with evident satisfaction.  

I had traded this CEF a few times, and owned only 100 shares in the ROTH.  Bought 300 JDD at $10.95 (September 2010); Sold 300 JDD at 11.44 (December 2010); Bought 100 JDD in Roth at 8.4 (August 2009);/Added to CEF JDD at $9.45 (October 2009); Sold 70 of 170 of JDD (February 2010). 

I had been taking the quarterly dividends in cash.  Given the high dividend, I realized a good total return on the shares bought at a total cost of $8.48 and $9.56:

100 JDD Roth IRA-Shares Purchased in 2009

The first position in that snapshot was part of a 130 share position, with the other shares sold some time ago. 

This is a link to the sponsor's web page: JDD - Nuveen Diversified Dividend and Income Fund  The quarterly distributions over the past two years certainly added to the total return: JDD Historical Distributions

5. Citizens & Northern (CZNC)(own: Regional Bank Stocks' basket strategy):   CZNC reported net income for the 2nd quarter of $5.697 million or 47 cents per share, up from 45 cents per share in the 2nd quarter of 2010.  As of 6/31/2011, the tangible equity to tangible assets ratio was 10.9%; the total risk-based capital ratio was 19.09%; NPAs to total assets was .75%; and the tangible book value was at $11.64 per share.   SEC Filing  The last quarterly dividend was 14 cents per share. The shares are currently trading at over $16. Bought 50 CZNC at 11.77 Added 50 CZNC at 10.46

100 Shares of CZNC: Average total Cost Per Share =$11.27

Citizens & Northern closed at $17.05 in trading yesterday.