Tuesday, August 30, 2011

Added 100 of the TP STLPRA at $9.87/Sold 300 WIN at 12.31/Bought 40 CWH in the Roth IRA at 19.86/Lehmann's Article in Forbes re: AEB, GSPRA and OSM

In his NYT column discussing the rampant idiocy at Hewlett Packard (own common), James Stewart quotes a former Hewlett Packard director who said he "didn't know there was such a thing as corporate suicide" but now HP is showing the world that there is. It is impossible to read Stewart's column or many similar ones and comprehend why anyone would hire Apotheker to do anything requiring judgment. Another recent article highlighting the dysfunction at HP can be found at the WSJ.

The Barrons' interview with Steven Romick, manager of the FPA Crescent Fund (FPACX), is worth a read. I would agree with his opinion about large caps. I currently own Microsoft and Wal-Mart which he mentions. His fund has a lot of cash and is rated five stars by Morningstar.  This is a link to that fund's last SEC filed annual report: www.sec.gov This fund will short stocks, with a list found at page 21. I do not agree with most of those.

The Commerce Department reported yesterday that personal consumption expenditures rose .8% in July, while personal income and disposable personal income increased .3%. Real disposable income decreased .1%. The personal consumption price index rose .4% and .2% excluding food and energy. Personal savings as a percent of disposable personal income was 5% in July, down from 5.5% in June. News Release: Personal Income and Outlays, June 2011 All of the inflation numbers are worrisome, but the FED keeps saying that the bulge is just temporary.

A chart of the historical savings rate can be found at Personal Saving Rate (PSAVERT) - FRED - St. Louis Fed Generally, the savings rate fluctuated mostly between 7.5% to 10% between 1959 to 1985. During the Age of Leverage, the savings rate plummeted, falling into a range mostly between 2.5% to 5% during the past two decades.    (monthly data since 1959  research.stlouisfed) The last monthly reading over 7.5% was in December 1993 at 7.8%. The rate has not been consistently over 7.5% since 1986.  I date the start of the Age of Leverage, for both the U.S. government and the U.S. consumer as the mid-1980s. What Will Produce Growth after the Age of Leverage? (September 2009 Post) Prior to Reagan's presidency, the entire debt of the U.S., accumulated since the founding of the nation, was 909 billion dollars. United States public debt The deficits now are running at over a trillion a year.

1. Richard Lehmann's Recommendation of Floaters-OSM, AEB and GSPRA: In his Forbes' column, Richard Lehmann recommends three floaters that I own. They are GSPRA, OSM and AEB. I would not agree with his assertion that the "inflation protection is free".

For example, the Aegon hybrid AEB pays the greater of 4% or .875% above the 3 month LIBOR rate on a $25 par value. The current yield at the 4% minimum is around 5.4% at a total cost of $18.5 per share. Aegon also has several fixed rate coupon hybrids, with the same basic terms as AEB except for the coupon rate. AEF, for example has a 7.25% coupon on a $25 par value and would have a current yield of  7.58% at a total cost of $23.9 per share.  So, I could buy a similar security from the same issuer, at the same level of priority, and receive about 2.18% more in current yield. That is what I am in effect paying for the imperfect inflation protection of AEB.

I have owned AEB for over two years now, having bought my position in the $4 to $8 range during the dark period, and it has always sold at a yield discount to the other Aegon hybrids, many of which I have owned at times over the past 2-3 years. So, for that entire period, I have in effect been paying  2-3% for owning AEB compared to the fixed coupon AEGON hybrids AEF, and AEH, AEV,  and AED since making my purchases of AEB. Aegon Hybrids: Gateway Post So the inflation protection provided by the float is in no sense free. (snapshots of my AEB purchases can be found in Item # 1  AEG and in Item # 1 Bought 50 MSPRA @ 19.57, and I still own those shares)

The inflation protection for AEB is imperfect since the tie to inflation is indirect. Normally, the short term rates would float up with rising inflation but that is not the case now due to the Fed's Jihad against the Saving Class. With CPI running at over a 3% annual rate now, you would not expect to see the Fed holding the federal funds rate at zero. So, the float is not working now due to the intervention by the Fed.

I also own OSM and PFK whose coupon is directly tied to CPI. Both OSM and PFK pay interest monthly.  I discussed PFK yesterday, which was acquired mostly in 2009 at a large discount to its par value (see snapshots in yesterday's post at Item # 3 PFK).  Bought 100 OSM at 15.75-Regular IRA (june 2010 Post); Sold 50 of 150 OSM at 21.06 Bought 50 ISM in IRA at $11.85 (August 2009 Post). My average cost for the remaining OSM shares is less than $16 per share:

GSPRA is also owned, but it suffers from the same problem as AEB.  GSPRA pays the greater of 3.75% or .75% above the 3 month LIBOR rate on a $25 par value. Unlike AEB, GSPRA pays non-cumulative qualified dividends. Advantages and Disadvantages of Equity Preferred Floating Rate Securities I will generally prefer the Synthetic Floaters GYB and PYT, based on price and yield, and their higher priority to the GS equity preferred non-cumulative floaters. Importantly, GSPRA and AEB have no maturity date, whereas both GYB and PYT mature in 2034 at $25. And GYB and PYT have a .85% float over 3 month LIBOR, though with a lower minimum. But, it is important to calculate the yield at your cost. Analysis of Prior Question about Goldman Sach's Floaters (October 2009 Post). I am very light on GS bonds and preferred stocks now due to the headline risk.

I bought one of the floaters referenced above on Monday which I will discuss in an upcoming post. I am not interested in PFK at its current price.

 Floaters: Links in One Post

2. Bought 100 STLPRA at $9.87 Last Friday (see Disclaimer): I own 350 shares of this TP in IRAs and added 100 in a taxable account last Friday at $9.87.  Par value is $10 and I had not seen this security trade below its par value in months. STLPRA is a trust preferred (TP) stock sold by a Delaware Trust, Sterling Bancorp Trust I, to finance the purchase of  junior bonds issued by Sterling Bancorp.   The TP represents an undivided beneficial interest in those bonds owed by the trust. Both the TP and the underlying bond have a 8.375% coupon and mature on 3/31/2032 at $10. Interest is payable quarterly. The next ex interest date is 9/13. Sterling Bancorp Trust I 8.375% Cum. Trust Pfd. Secs., STL.PA 

This is a typical bank TP. Distributions are cumulative. In the event an interest payment is deferred, the deferred payment will accrue interest at the coupon rate. Deferral of interest payments can legally be made for up to five years provided non-activation of the stopper clause. The stopper clause is typical. (see page 34 of the Prospectus). It is activated by the payment on a junior security which would include common stock and equity preferred stock. STL does not have any equity preferred stock but is paying a dividend on its common stock.

STL did participate in TARP but has redeemed the government's cumulative equity preferred stock last April. (page 29: www.sec.gov) Any equity preferred stock is junior in priority to the STL junior bond owned by Sterling Bancorp Trust I.  

The underlying bond is callable now by STL. Sterling will be able to continue using this TP as part of its TIER 1 capital which has certain advantages. The bank can treat a bond as equity capital for regulatory purposes and deduct the interest payments made to the trust for the benefit of the TP owners. Under financial reform, banks with more than 15 billion in assets as of 12/31/2009 will have to phase out the use of their TPs as equity capital.    

Prospectus: www.sec.gov 

I have bought and sold the common stock as part of my Regional Bank Stocks' basket strategy, and no longer have a position. Bought 50 STL at 6.58 Sold STL at 10.5

I have also taken some profits on the TP: Bought 50 of the TP STLPRA at $8.99 (November 2009); Added 50 STLPRA @ 8.69 (December 2009); Sold 50 STLPRA at $9.4 (December 2009); Bought 100 STLPRA at 8.87 (January 2010); Sold 100 of the TP STLPRA at 10.25 (February 2010); Sold 100 STLPRA at 10.47 (June 2010). 

I do not view that a purchase at or near par value as having much upside potential, a run toward $10.5 will usually provoke me to pare the position some. All bank TPs have the potential to become worthless in the event of an FDIC seizure. Regular Preferred and Trust Preferred (January 2009 Post). 

Most of my shares are held in the ROTH IRA. When held in that type of account for a U.S. taxpayer, I view this kind of security as in effect a tax free bond, since the interest is not taxed when received or distributed to me, which is likely to be never, assuming of course no change in the current laws governing this type of IRA.

With a $7 brokerage commission paid in a satellite taxable account where this purchase was made, my current yield and YTM are both slightly more than the coupon of 8.375%. 

The current consensus estimate is for an E.P.S. of 51 cents in 2011 and 76 cents in 2012. 

Trust Preferred Securities: Links in One Post

Sterling Bancorp Trust I 8.375% closed at $10.13 in trading yesterday, up 11 cents.

3. Sold 300 WIN at 12.31 Yesterday (See disclaimer): When I bought 3 Windstream senior bonds, I mentioned that I would be selling the common stock and just go with the bonds.Bought 2 Windstream 7% Senior Bonds Maturing on 3/15/2019  Bought 1 Windstream 7.75% Senior Bond Maturing 10/15/2020 The WIN common dividend does have a slightly higher yield, and the dividends are taxed at the qualified dividend rate. The common dividend, of course, can be reduced or even eliminated which is not an option for the senior bond.  Most of my profit from the common shares originates from a 50 share purchase made at $6.36, and my last purchase was earlier this month at $12. I am content with having received the dividend without losing anything on the shares, and my profit on the shares was close to $200.

Windstream closed at $12.34 yesterday, up 2.32% for the day.

I had a number of other trades on Monday that I will discuss in the upcoming posts. I had one other trade last week, made in the ROTH IRA, where I bought just 40 shares of CWH (see Disclaimer), a REIT, at $19.86, giving me about a 10% yield at that price. CommonWealth REIT, CWH  This stock rose 91 cents in trading yesterday to close at $20.76.  I have nothing to add to my recent prior discussion of that company.  Added 30 CWH at 24.08 (July 15, 2011 Post).  This is a link to the last filed SEC Form 10-Q.

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