Thursday, August 4, 2011

MTY/Sold 300 WIW at 12.85-Bought 100 IGI at 20.69/Bought 1 First Tennessee Capital II 6.3% Maturing 4/15/2034 at 95.5

I am glad to read that the Social Security Administration is going to step up reviews of continuing eligibility for disability benefits. Historically, these reviews found that around 12% of the recipients did not qualify for benefits. Over 10.4 million people are receiving disability benefits claiming to be totally disabled from performing gainful employment. Unfortunately, there is a significant number of people who are able to work but who prefer to paid not to work.

The ISM services index for July slipped to 52.7%. The consensus estimate was for a slight rise to 53.5. The new orders component declined 1.9 to 51.7. Employment fell to 52.5 from 54.1 in June.

Yesterday there was a tug of war in the market. The formation of a head and shoulders pattern seemed to be completed when the market pierced the neckline around 1250 on the S & P 500.  The Barrons technician acknowledges the break below the 200 day moving average and the neckline (see chart in his column), but is not yet convinced that this last decline will be the last straw in the cyclical bull market starting back in March 2009.  The break below the neckline of the head and shoulders pattern brought in more sellers early yesterday. Another group of investors used that level as a trigger to buy, and those investors were able to overcome the sellers later in the trading day. Possibly, the market may continue to rally today. If so, I will consider adding to a double short ETF position as a hedge, having sold three of them on Tuesday. I am certainly not convinced that stocks are cheap in the context of a deteriorating economy. Martin Feldstein, a republican economist, believes that there is a 50% chance of another recession. Bloomberg While that may be too pessimistic, recent data seems to support at least a one in three chance.

I see no reason to disagree with the historical evidence that points to a slow recovery from a recession caused by a severe financial crisis. Sometimes the past is prologue, and this time is not different. The recovery from such an event takes much longer than a recovery from a normal business cycle recession. Unemployment will generally remain elevated for five years.  There will also be a prolonged period of belt tightening which places a drag on growth. Kenneth Rogoff As previously discussed, most of the growth over the past thirty years has originated from consumers and governments in the developed world spending borrowed money at accelerating rates. What Will Produce Growth after the Age of Leverage? The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets Underlying Cause of the Current Long Term Bear Market is Too Much Debt This is no longer an option.

1. MTY (own: exchange traded bond)MTY, the unsecured senior note issued by Citigroup Funding paid its 3% minimum annual coupon on 8/3/11. MTY Reversion to 3% Minimum Coupon Today No doubt, those who owned this note were disappointed in that payment since this unusual security came close to paying over 30%.  For anyone unfamiliar with this so-called "principal protected" note, it will make an annual interest payment at the greater of 3% or up to 35%, based on the percentage increase in the price of gold during the note's annual period. Final Pricing Supplement There is a catch.  If P.M. London gold fix exceeds 35% on just one day during the annual period, then the owner of MTY receives the minimum 3% coupon irrespective of gold's percentage gain.  This is called the "maximum level reversion" here at HQ.

For anyone venturing into this type of security, it is important to make a note of the "starting value". That number is necessary to compute the number that triggers the maximum level reversion.   The starting date for the current annual coupon value is July 27, 2011.  On that day, the London P.M. gold fix was at $1625. Kitco Inc. - Past Historical London Fix This places the maximum level for the current coupon period at $2,193.75. (multiply 1.35 x. $1625).  I would hazard a guess that there will be plenty of things to worry about when and if gold exceeds $2000 an ounce.

Assuming Citigroup survives to pay the interest on the note and the $10 par value in 2014, the worst that can happen is a 3% annual interest payment. If Citigroup is seized by the FDIC before the note is paid off, I am screwed.

2. Sold 300 WIW at $12.85 and Added 100 IGI at 20.69 Last Tuesday (see Disclaimer):  I am in a trading mode for bond closed end funds. I have bought and sold WIW, which owns primarily U.S. government inflation protected bonds, repeatedly over the past year or so.  This last round trip started in mid-July with a 300 shares purchase at 12.47 (July 11, 2011 Post). That last linked post has snapshots of my trading profits for WIW and IMF, a similar bond fund. 

I stayed around long enough to collect one monthly dividend payment.  

I substituted for WIW the higher yielding investment grade bond CEF IGI and the security mentioned in Item # 3 below. All of these securities will pay non-qualified distributions taxed at my highest marginal rate since all of the trades discussed in this post have occurred in a taxable account. I also own 100 shares of IGI in the ROTH IRA as a result of a recent purchase.  Bought 100 IGI at 20.7 in Roth IRA

I have traded IGI a number of times.  Added 100 of the CEF IGI at 19.78 (February 2010); Bought 100 CEF IGI at $19.89 in IRA (February 2010); Sold 100 IGI at 21.26 In IRA (June 2010); Sold:100 IGI @ 20.75 (November 2010); Added 100 IGI at 19.65 (March 2011); Sold 100 IGI @ 20.76 (May 2011). 

As previously discussed, this bond fund liquidates in 2024 and currently pays monthly dividends at the rate of 10.45 cents per share which gives me roughly a 6% yield.  

Last Filed SEC Shareholder Report:
Morningstar Page: Unrated
Sponsor's web page: IGI Details

On Tuesday, IGI closed at $20.79 and had as of 8/3 a net asset value per share of $20.79, creating then a discount to net asset value of -4.46.

3. Bought 1  First Tennessee Capital II 6.3% at $95.5 Maturing on 4/15/2034 at 95.5 Last Tuesday (see Disclaimer): This security is a trust preferred (TP) traded in the bond market. I believe that it is the only TP currently outstanding issued by First Tennessee, now known as First Horizon National (FHN). It is the largest bank operating in Tennessee. FHN is viewed by some as a potential takeover target due to its presence in the greater Nashville and Memphis markets. 

This is a typical trust preferred security, explained in more detail at Trust Preferred Securities: Links in One Post and at Regular Preferred and Trust Preferred

Interest payments are made quarterly and can be deferred for up to five years. Any deferred amount will accrue interest at the coupon rate. This TP has a typical "stopper" provision which would not allow the bank to make a cash distribution on a junior security while deferring interest payments to the TP owners.  The junior bond owned by the Delaware Trust First Capital II may be redeemed by FHN now. 


FTN is sufficiently large enough that it will have to phase out the use of this TP as TIER 1 capital. The bank acknowledges that requirement at page 13 of its last filed Annual Report.  This does not mean, by itself, that FHN will redeem the bond when it can no longer be used as part of its TIER 1 capital.  Other banks with more than 15 billion in assets have started to redeem TPs.  

I am not including this bond in my junk bond ladder category since it is rated investment grade by two of the three rating agencies.  According to FINRA, the bond is currently rated Baa3 by Moody's, BBB- by Fitch,  and B+ by S & P.  

This is a link to the Reuters' Profile page and to its Key Developments page. This is a link to the Morningstar page on FHN.

My confirmation states that the current yield at my cost is 6.542% and the YTM is 6.616%.  Maybe there is truth to the cliche that Beggars Can't Be Choosy.

I added to a common stock position also on Tuesday which I will briefly discuss in the next post. 

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