Thursday, September 22, 2011

Build America Bond CEFs/Bought 50 AF at $8.9/GIS/Update on Liberty Media and its Bondholders/BAC Debt Downgrade/Sold Remaining Shares of EXC at $44.44/Bought 100 NSSC at 2.56 as LT

The market found no comfort in the Federal Reserve's downbeat assessment of the U.S. economy. FRB: Press Release--Federal Reserve issues FOMC statement--September 21, 2011 Operation twist was expected by most observers, whereby the FED would buy longer dated treasuries and sell those maturing within three years. FRB: Maturity Extension Program FAQs That operation did cause the long treasury bond to rally. Possibly, mortgage rates will fall further, prompting some buyers to purchase their first home. The 10 year treasury note closed at a 1.868% yield. The 30 year had a more robust rally, gaining 4 1/32 to close at a 3.013% yield.  The Jihad against the savings class continues. I would view it as unlikely that the 10 year note, purchased at a price to yield 1.87%, will provide a positive real rate of return over its life, and that would be before taxes. These kind of rates are not signs of a healthy economy, but of a diseased one.

This is a link to a WSJ article that shows how the FED changed its August 2011 statement with the one released yesterday.

The ^VIX rose 13.57% yesterday to close at 37.32. The Russell 2000 VOLATILITY index rose 8.94% to 45.33.

WSJ article asks rhetorically whether the Hewlett-Packard Board of Directors is the worst one ever. I would have to say that the HP Board is thoroughly incompetent and is probably the worst non-corrupt Board ever. HP rallied yesterday on leaked news that the Board may fire the idiot Leo Apotheker. WSJ

Moody's downgraded Bank of America debt yesterdayBloomberg As part of that downgrade, the TPs were reduced to the junk rating of Ba1 from Baa3. Bank of America | Investor Relations | Fixed Income Investor Relations  Moody's had rated the TPs Baa3. Fitch is now the only major rating service that gives BAC TPs an investment grade.  I currently own 50 CPP, 50 KRBPRD and 100 KRBPRE, among the TPs. CPP was bought a day before the downgrade, Bought Back 50 CPP at $21.35, and closed yesterday at $21.4. CPP Stock Quote The other two TPs were originally issued by MBNA Capital, later acquired by BAC: MBNA Capital D 8.125% TruPs, KRB.PD Stock Quote MBNA Capital E 8.10% TOPrS Series E, KRB.PE Stock Quote  Overall, my exchange traded bond portfolio had a positive gain during the market's rout yesterday which is viewed as a plus. 

1. Bought 50 AF at $8.9 Last Monday (Regional Bank Stocks' basket strategy)(see Disclaimer): I always view it as a victory when I profitably sell a position at a higher price, then buy it back at a significantly lower price. I previously bought and sold Astoria Financial, a thrift headquartered in Long Island, at lower prices than my re-entry at $8.9. Bought: 100 AF @ 13.08 Bought  50 AF @ 12.08 Sold 50 AF at $14.09 Sold 101 AF at 14.89 My last sale was at $14.89 last January. The stock has fallen over 40% since that time. As a result, the dividend yield has risen to about 5.9% at Monday's closing price,  Astoria Financial, and almost 6.5% based on yesterday's closing price of $8.03. The stock went ex dividend on 8/11. 

This is a link to the bank's 85 branch locations:  Astoria Federal Savings Branches

Many regional banks have taken a drubbing over the past several months. The ETF with the most similarity to my basket is probably the SPDR KBW Regional Banking ETF (interactive chart), which hit a high of $27.53 in January and is now trading slightly close to $20 to $21.   

The main reason for the decline, arguably overdone already, is the continued decline in housing prices, the foreclosure mess, the stagnant economy, and the heightened risk of another recession.  Those issues do not impact the regional banks in a uniform fashion. 

Part of the problem is also the pressure on net interest margin caused by the prolonged Jihad by the Federal Reserve against the Saving Class. The banks have already largely received the benefit of low CD rates paid to savers, as CDs have already rolled over to the lower rates. The amount received in interest earning assets has continued to decline.

For the Q/E 6/11, Astoria reported net income of $16.845 million or 18 cents per share, up from 17 cents in the year earlier quarter. SEC Form 10-Q. As of 6/30/11, the net interest margin is low at 2.34% for the second quarter; the NPLs to total loans was high for banks in my basket at 2.79%; and the allowance for loan losses as a percent of NPLs was at 48.55% (prefer a number of 80%). The capital ratios are okay: see page 3 of SEC Filed Investor Presentation 


Astoria and other thrifts are discussed in this article at Motley Fool. I also own FFIC, NYB, and OCFC mentioned in that article.

Regional bank stocks were crushed in yesterday's market downdraft. Astoria Financial fell 55 cents to close at $8.03 yesterday, with a yield at that price of close to 6.37%. It is not hard to find regional banks yielding over 6% now. 

2. RB Bought Back 100 NSSC at $2.56 as Lottery Ticket Last Tuesday (LOTTERY TICKET strategy) (see Disclaimer): A few days ago, Napco Security Technologies (NSSC) reported earnings for its fiscal 4th quarter of 7 cents per share, up from a loss of 10 cents per share for the Q/E 6/10. Revenues were $20.697 million.  The press release pointed to some new products that were in the process of being rolled out, and that is one consideration supporting the purchase along with an improvement in earnings. Another positive is that the company is using cash flow to pay down debt.  For the F/Y ending in June 2011, the company reported revenues of $71.392 million and the market cap is around $48.5 million at a $2.56 price.  

The RB has been moving into and out of this stock for several years now, and may be going to the well one to many times.  Nonetheless, I am playing with the house's money:

2011 Realized Gain $136.76 as LT
2009 Realized Gain $77.99

2007 Realized Gain $100.28 Pre-LT


Since the Lottery Ticket strategy is reserved to the RB, it is not taken seriously by other staff members.

NAPCO Security Technologies closed yesterday at $2.41, down 13 cents. 

3. Sold Remaining Exelon Shares at $44.44 Last Tuesday (see Disclaimer): After selling shares earlier in the year, I was down to just 39+ shares, with 30 of those bought in an open market transaction @ $41 and the remaining shares were purchased with dividends. The profit on this last transaction was close to $100. As a result of this small sale, I was a net seller of stocks last Tuesday. 


Exelon closed at $43.41 yesterday, down 66 cents.

4. General Mills (own)(Common Stock Dividend Growth strategy): General Mills reported earnings for its first quarter, ending 8/29/11, in its 2012 fiscal year.  GIS reported net income of $405.6 million or 61 cents per share on $3.85 billion in net sales. Revenues grew  9%, with foreign exchange contributing 2 points of net growth. The non-GAAP E.P.S. number, which excludes the effect of mark-to-market valuations of commodity positions, was 64 cents. That was two cents better than the consensus estimate of 62 cents. I am reinvesting the GIS dividend to buy more shares.

General Mills rose 96 cents to close at $38.45.

5. Liberty Media (no longer own bonds-and will never buy one again): I sold my last trust certificate containing a Liberty Media bond last Monday. Sold 50 of the TC PIS at $24.83-Roth IRA (9/21/11 Post). Any owner of a bond has to be concerned with the perpetual efforts undertaken by John Malone to undermine the security for those bonds. Those efforts are for the sole benefit of common stock owners and are designed to enrich those owners at the expense of the bondholders. The method used to effectuate that policy is to remove assets from the corporation by distributing stock in subsidiaries to the common shareholders, leaving the bondholders with less security for their loans.

As explained in my Post Liberty Media and its Bondholders, the most recent salvo was the plan to spin out Liberty Starz group (LSTZA) and Liberty Capital Group (LCAPA) leaving Liberty's bondholders only with the assets of Liberty Interactive Group (LINTA) to back their unsecured loans.  The main asset of LINTA is QVC which is itself very heavily in debt (debt piled upon debt, a modus operandi of an operator like Malone). Of course, transferring these companies without the holding corporation's debt makes them more valuable to the receiving shareholders, and Liberty's bondholders receive nothing in exchange for those assets.

The trustee for the bondholders claimed in a lawsuit that this last plan constituted a default under the bond indenture.  While I agree with that position, the Chancery Court in Delaware held that the spinoff was not a default (delawarebusinesslitigation.com.pdf), and the Delaware Supreme Court affirmed that lower court decision yesterday. Liberty plans to divest those major assets on Friday. WSJ

The Delaware Supreme Court's decision can be found at courts.delaware.gov/opinions As a practical matter, this decision weakens what I view as an already very weak provision in a bond indenture. In effect, the decision renders the protection found in the Liberty Indenture meaningless for all practical purposes.

I do not agree with the Delaware Supreme Court decision, but my opinion is irrelevant. The Delaware Supreme Court made its decision, and it is the law. That is that, it is what it is.  It would be interesting to read an Indenture for any new bond that Liberty would want to float in the future.

I will not buy any debt from this moment forward that has been issued by any corporation headed by John Malone which is the only way to sensibly deal with this problem. Malone's long history of disadvantaging bondholders in favor of stockholders, summarized in the court's decision, can not be rationally disputed by any informed investor, notwithstanding any court decision that finds that long history of disaggregation fails to show a disaggregation  plan.  

6. Build America Bond (BAB) CEFs: I own two Build America Bond CEFs, BBN and NBB, and noticed last night that both of those funds experienced a significant rise in their net asset values per share yesterday. At first, I thought that the WSJ had made a mistake, and maybe that will turn out to be the case. The NAV per share information for BAB CEFs can be found in the WSJ Closed-End Funds section under "other domestic taxable funds". A BAB is a taxable municipal bond.  Both of these funds are weighted in long term bonds.  The Nuveen fund, NBB, has an average maturity of 28.81 years, Nuveen Build America Bond Fund. Due to the Federal Reserve's announcement yesterday, the 30 year treasury bond rose over 4 points in price and fell in yield, as noted above.  So, based on that move, it would not be surprising to see BABs move up a lot too.

The WSJ page shows the NAV information as of last Friday's close and at yesterday's close.

BBN: $21.61 as of 9/16/11 $22.64 as of 9/21/11 Discount -12.01
NBB: $20.95 as of 9/16/11 $21.76 as of 9/21/11 Discount - 8.55

The Closed End Fund Association has the same NAV information for 9/21:
CEFA Page for NBB
CEFA Page for BBN

Both of these funds pay monthly dividends and use leverage.

My last purchase was 100 shares of BBN: Bought 100 of the Bond CEF BBN at 18.15 (7/29/11 Post). I am positive with the earlier purchases of NBB. Bought Back 50 NBB @18.4 (12/10/2010 Post); Sold 50 NBB @ 19.24 (12/3/2010 Post);  Bought: 50 NBB @ 18.4 (11/18/2010 Post); Bought: 50 NBB @ 19 (11/16/10 Post);  /Bough 50 NBB at 19.67 (6/29/2010 Post).  I have also bought and sold GBAB, another CEF investing in BABs: Bought 100 of the Bond CEF GBAB at 18.2 (3/11 Post); Sold 100 of the Bond CEF GBAB at 18.84 (5/12/11 Post)

BlackRock Build America Bond Trust, BBN closed yesterday at $19.92, up 1 cent.
Nuveen Build America Bond Fund, NBB closed at $19.9 yesterday, up 1 cent.

Given the market rout yesterday, anything rising in value is showing negative correlation characteristics.

Tomorrow, I will publish a complete redo my Gateway Post on Trust Certificates which will take several hours to accomplish today. 

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