Tuesday, July 19, 2011

Sold Remaining 50 GSBC at $19.5/MOL/GOPs Effort to Undermine the SEC/Bought 50 FPCPRA at 25.59/NHTB/GOP Leaders Vote 5 Times for a Debt Limit Increase During Bush Presidency

Bank of America (BAC) common shares hit a new 52 week low yesterday, falling below $10 on heavy volume. I have noticed that the equity preferred and trust preferred securities have also been weak over the past several weeks as the Countrywide acquisition causes further large settlement charges. Some have estimated that this boneheaded acquisition by Ken Lewis will end up costing the bank 25 billion dollars to 37.5 billion dollars Los Angeles Times BAC shares closed yesterday at $9.72 after hitting an intraday low of $9.53.

The GOP's latest attack on the U.S. sovereign debt rating is already having an adverse impact on the pricing of  U.S. agency mortgage-backed securities. MarketWatch That weakness has caused some downdraft in Mortgage Reits that buy those securities with borrowed money. The earlier attack occurred in 1995. There would likely be few safe havens in the event of a U.S. default caused by the Crazies. Reuters Money

For future reference, this is how congressional representatives voted on the Ryan budget plan: Final Vote Results for Roll Call 277 There were 235 republicans voting for that budget and zero Democrats. Yesterday, I urged the passage of a bipartisan bill that would deny traditional medicare for all citizens in those 235 congressional districts, currently  under 55, as an experiment lasting 300 or so years.   Modern Day GOP: No Longer A Conservative Party Instead those citizens would be offered only the GOP plan. A reader pointed out that the existing residents would not likely live that long. Admittedly, I did not flesh out the entire proposal. To be fair about this recommendation, I am saying that all of the current residents of those districts currently 55 or younger, as well as  all of their lineal descendants for the next 300 years, be denied traditional medicare and be required to buy that private insurance plan with the voucher which will be increased by the CPI, rather than the actual increases in health insurance costs and premiums. The GOP says that it is a good deal for those folks, and the deal will stick regardless of where the residents of those district and their descendants live hereafter.  I am just trying to be as fair as the GOP on this issue.

Egan-Rating downgraded its rating of U.S. government debt to AA+ from AAA. WSJ.com  Sean Egan gave an interview to Barrons where he was particularly negative on European financial institutions. He finds that most of the European banks do not have enough capital to meet their anticipated losses.

Goldman Sachs downgraded its estimate of 2nd quarter U.S. GDP to 1.5% from 2%. I suspect that the final number will be closer to 1%, possibly lower.

This is a link to Cramer's discussion on the market and the debt limit negotiations: MSN Money

I do not view the potential upside to major stock indexes to be worth the potential near term downside. That is one reason why I have sold virtually all of my stock ETFs. Some individual stocks, previously sold, are coming back into my buy ranges however.

Moody's downgraded the bond rating of Sears Holding to Ba3 from Ba2. I own 100 of SSRAP, a senior bond issued by Sears Acceptance and traded on the Grey Market.  Bought 100 SSRAP at $17.25 (TC-Underlying Bond from Sears Acceptance)

Credit Suisse is under investigation by the Justice Department for alleging assisting "Job Creators" in their evasion of U.S. taxes. Earlier in the year, four Credit Suisse private bankers were indicted for helping U.S. citizens evade their tax obligations. NYT  Reuters WSJ The earlier criminal investigation of UBS focused on that firms efforts to help Job Creators evade about 300 million in taxes from 2000 to 2007, according the NYT. (see also 2009 article from USATODAY.com) HSBC has notified a number of its Job Creator clients that the IRS is seeking information about their undisclosed overseas accounts.  

Gold spurted to over $1600 per ounce.  The P.M. London Gold Fix yesterday was at $1599. Current Statistics | LBMA I would anticipate a maximum level violation on MOL today or soon. Sold 100 MOL @ 10.3 (Nov 2010); Bought 200 MOL at 9.95 (August 2010). I currently own 100 shares.  I previously calculated the maximum level at $1609.79 per ounce, Stocks & Politics (Nov 2010 Post). This one has a minimum annual coupon of 2%. The current annual period ends on 11/17/11, so I would view it as close to nil that this security can avoid a maximum level violation now.  MOL Prospectus  Gold is just too strong.

The GOP House members have blocked funding for the 2007 law that is intended to increase light bulb efficiency.  The GOP is upset that the government is attempting to lower by six billion dollars per year the consumer cost for light bulbs. NYT The British newspaper, The Guardian, noted that the Republicans claimed that the legislation was an assault on individual liberty to choose more costly, energy inefficient bulbs. This legislation, signed by President Bush in 2007, requires a 25% improvement in efficiency starting with the 100 watt bulb in January 2012.  

The House GOP Appropriations committee has slashed funding for the SEC by 222.5 million in an effort to undermine enforcement of securities laws by that agency. (see column by James Stewart  at NYT) As noted by Stewart, a provision in the Dodd-Frank law provides that the fees collected by the SEC can not exceed its budget. This reduction will cause the SEC to collect 136 million less in fees from regulated institutions. Money talks to the GOP legislators.  

It probably does not help in budget discussions when one side operates under delusional theories. Last year, Senator McConnell (R-KY), the GOP's Senate Minority Leader, said that there is "no evidence whatsoever that the Bush tax cuts actually diminished revenue". He added that all republicans agree with that statement. A more accurate statement would be to say that there is no credible evidence supporting McConnell's statement. The CBO estimated that tax cut accounted for a 259 billion dollar increase in the budget deficit in just one year. (see other discussions at   Tax Policy CenterPostPartisanTIME.comwww.cbo.gov 10PercentTaxCut.pdfNYTFive myths about the Bush tax cuts: tax cuts "drove revenue down sharply")

During  the Bush Presidency, McConnell, Eric Cantor and Speaker John Boehner voted 5 times to increase the debt limit, thereby increasing that limit by almost 4 trillion dollars. The main difference between then and now is that a Democrat is currently in the White House. All of those individuals also supported the Iraq invasion, adding close to a trillion to the debt,  and the Bush tax cuts for the "Job Creators".  

1. Bought 50 of FPCPRA at 25.59 in the ROTH IRA on Friday (see Disclaimer): This bond may be called at anytime at its $25 par value which is one reason for limiting my purchase to just 50 shares.  Another reason for the negligible purchase is that my current yield is slightly less than 7%.  I have previously sold this same security in the ROTH IRA. Bought 50 Shares of FPCPRA Bought 50 FPCPRA at $24.95 I have come back to it due to a lack of viable alternatives.

When owned in the ROTH IRA, a 7% tax free yield for a good credit risk is not so bad in the third year of the Federal Reserve's Jihad against the Saver Class. This security does pay interest which is another reason for holding in the ROTH IRA, since interest payments would be taxed at my highest marginal rate in a taxable account.

FPCPRA is a typical Trust Preferred security. This TP originates from FPC Capital, a Delaware Trust, who used the proceeds from the sale of trust preferred securities to purchase a junior bond issued by Florida Progress, an electric utility operating in Florida. The TP represents an undivided beneficial interest in that bond owned by the Trust. Florida Progress was later acquired by Progress Energy (PGN). And, PGN is in the process of being acquired by the even larger Duke Energy Corporation (DUK). I own the common shares of Duke Energy. Stocks & Politics: DUK If that merger is consummated, and assuming FPCPRA is not called, it will become an obligation of Duke Energy. I am not currently concerned by the credit risk of this junior bond.

FPCPRA has a 7.1% coupon, paid quarterly, on a $25 par value. The TP and the underlying bond mature on 5/15/2039. Prospectus: http://www.sec.gov

In the unlikely event this security is not redeemed before 2039, and I live that long, that would be close to 28 years of receiving about 6.9% based on my total cost. Since that is in effect a tax free rate, the money would double every 10.39 years. Estimate Compound Interest

FPC Capital I 7.10% Cumulative QUIPS Series A (FPC.PA) closed at $25.51 in trading yesterday.

Trust Preferred Securities: Links in One Post

2. Sold Remaining 50 shares of GSBC at 19.50 Last Friday (Regional Bank Stocks' basket strategy)(see Disclaimer): Due to my level of discomfort with the Crazies in Washington, I am selling some of my recently acquired stock positions. That discomfort is on top of the level of concern about the current trajectory of the U.S. economy.  I just bought those 50 shares of GSBC at $17.27.

The brings my realized capital gains (2010-2011 to date) for the regional bank basket strategy to $7,319.75. Item # 3 Realized Gains Regional Banks

Great Southern Bancorp closed at $19.08 on Monday, down 40 cents.

3. New Hampshire Thrift (NHTB)(own: Regional Bank Stocks' basket strategy): I bought 100 shares of NHTB at $9.51 (January 2010 Post):

100 NHTB +$420.1 Unrealized Gain on the Shares as of 7/16/2011
The dividend yield at my cost is over 5%. New Hampshire Thrift Bancshares. As the name suggest, this is a small savings bank operating in New Hampshire, with some operations in central Vermont. The bank currently has 28 offices. I did look at the pictures of those branches which are available by clicking the branch links found at at Locations & Hours.

My main criticism is that the quarterly dividend has not been raised since my purchase in January 2010 and still stands at 13 cents per share. Quarterly Dividend I am taking that distribution in cash. Another issue is earnings growth. As of 6/30/11, the dividend payout ratio is 40.63%.

New Hampshire Thrift reported second quarter net income of 32 cents per share, unchanged from the 2nd quarter of 2010. As of 6/30/11, NPLs to total loans was at 1.32%, and the Tier 1 core capital was at 8.46%. These small banks do not report in their press release all of the data viewed by me as important.

Part of the banks equity capital includes two TPs:   Form 10-Q at page 19. Since this bank had less than 15 billion in assets as of 12/31/2009, it can continue using those TPs as part of its equity capital. Both TPs are in the principal amount of 10 million dollars and mature in 2034. The bank still has outstanding 10 million in government preferred stock, which is supplying part of its TIER 1 capital (see page 26). The bank is currently paying just 5% in preferred dividends to the U.S. government, but the coupon rises to 9% five years after the issuance of that preferred stock.

Under the circumstances, which includes the continued presence of government money supporting TIER 1 capital, the lack of dividend growth and the unrealized long term capital gain, I am probably a weak holder of this stock at the current price and an even weaker holder at above $14 per share.

New Hampshire Thrift Bancshares (NHTB) closed yesterday at $13.59.  

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