Tuesday, November 29, 2011

SOLD 250 STLPRA at 10.2/AGY Holdings/Exchange Traded Bond and Preferred Stock Table/ Europe in Recession/Rotten Service from AT & T/ Added 30 AA at $8.97/Travails of Bank of America/

The market enjoyed a strong rally yesterday based on inchoate reports that Europe was actually going to do something to solve its problems. Generally, the idea seems to be that the sovereign democratic member nations would cede some of their sovereignty to the EU. The EU would be vested with the authority to enforce its budget rules.  Hopefully, assuming this actually occurs at some point in the future, that change will convince the European Central Bank to be more energetic in buying sovereign debt.

It is interesting to see how humans assume that a multitude of events will occur in the future before anything concrete has actually happened. There is a reason why the phrase "talk is cheap" has longevity as a truism.

It is conceivable that the EU members will all agree to the material changes being discussed now, and that the ECB will then act forcibly to buy sovereign debt.  It is likewise entirely possible that nothing will happen other than a continuation of ineffective actions.

Italy auctioned 12 year notes yesterday at a 7.2% yield, 2.7% higher than the previous auction.

What will happen to the EU budget targets in the event of a recession in Europe, which appears to be happening now? The OECD said yesterday that Europe is already in a mild recession which could become worse with a failure to effectively address their accelerating sovereign debt and banking problems.  CNBC The OECD predicts real GDP contraction in Europe for the current quarter and the first quarter of 2012. (Page 3:  www.oecd.org .pdf)

The U.S. markets were also responding positively to robust retail sales reports. Reuters Bloomberg NYT I would question the longevity of any surge in consumer spending for the reasons discussed in yesterday's post and many prior posts.

Most young people that I know have never even had a land line phone. Being an Old Geezer, I have kept a land line phone service, originally provided by BellSouth and now by AT & T who acquired BellSouth. The service from AT & T is crummy, but I have put up with it until yesterday out of simple inertia.

For the past month, I have not had phone service for about two weeks. This might be tolerable in some beleaguered third world country undergoing a civil war, with each side blowing up the telephone infrastructure periodically.

Over one week ago, my land line started to crackle so bad that no one could be understood on the phone so I called AT & T  for a repair. I was told that AT & T could fix the phone in four days. After five days and no repair, I called back and found out that there was no repair ticket outstanding.  To say that this is just bad service does not do AT & T justice. If I asked for yet another repair ticket, the wait would have been several days even if the company responded to it.

The prior repair, to fix a no dial tone, lasted about two weeks before the phone need the repair for crackling, but it took AT & T several days to repair the no dial tone.  The only way for a consumer to deal with this kind of in your face bad service is simply to cancel the service, which I did yesterday, after being a good customer for 30 years at my current residence.

I would consider continuing with AT & T, provided that company paid me at least a $1,000 a year to put up with them and offered me free phone service for life.

1. Added 30 Alcoa at $8.97 Last Wednesday (see Disclaimer): This purchase was made with cash flow. I will continue to buy stocks with incoming cash flow from my investments irrespective of my views about the big picture issues.  There are several reasons for following this trading rule even when I have a negative forecast for the stock market as now. 

First, my opinion about the macro issues may turn out to be wrong. The natural tendency is to assume a continuation for negative conditions for too long into the future. (see discussion at Stock Rallies and Quantitative Easing: March 2009 Post) By continuing to invest during a market decline, I may be buying at advantageous prices since the decline may turn out to be temporary. A temporary decline in this context means one lasting less than six months. 

Second, even if the market decline continues for more than six months, I may be comfortable with my purchase price for a long term hold, meaning more than five years in this context. If I have a reasonable chance to double my money in five years, at any point during that time period, then I have made a good investment even if the security continues to decline after my purchase.  

Third, by averaging down, I may be presented with trading opportunities at a later time, when the price shoots above my highest cost shares purchased first, an opportunity created by the natural wave volatility during an Unstable Vix Pattern.  I could then use that pop to sell the highest cost shares using FIFO accounting, and then keep the lower cost shares, thereby reducing my cost basis in the remaining shares. This may produce over time some trading profits and a low cost basis in a security, which could prove advantageous when the next long term secular bull market emerges, depending of course on my security selection.  

At one point earlier in the year, I had over a $1000 unrealized profit in my Alcoa shares. Now, I have about a $500 unrealized loss. I was waiting for the shares to cross $20 before selling them, and the price topped out at $18+:  AA Interactive Chart So, that proved to be a trading mistake. 

When I discussed the disappointing third quarter earnings report, I mentioned then that I might buy 50 shares on a slide to $9.  Item # 3  Alcoa Disappoints-Points to Slowdown (10/13/2011 Post). Please note that I bought 30 shares rather than 50.  I only had enough cash flow to buy 30. And, I am anticipating a lower price, so maybe I will buy 50 when and if the price sinks below $8 or $7.5, depending on my mood. 

The price to sales, price to book and PEG ratios are less than 1 at the $9 price. AA Key Statistics The P/B ratio at that price is .64 and the five year estimated PEG is .28. The share price has returned to 1992 levels.  AA Interactive Chart I have bought AA shares as low as at $5.6 in March 2009.

Aluminum prices have been falling: Aluminum Prices, London Metal Exchange (LME)

Alcoa did cut its quarterly dividend to just 3 cents per share from 17 cents during the Near Depression period. Alcoa: Invest: Financial Information: Dividend History I am not anticipating a raise in that dividend anytime soon.  I am reinvesting it to buy additional shares.

Alcoa rose 51 cents or 5.7% in yesterday's rally to close at $9.46.

Barrons published a positive article on Alcoa yesterday.

2. Bank of America (own TPs and equity preferred floaters): Without question, Ken Lewis destroyed shareholder value with his boneheaded acquisition of the diseased Countrywide Financial. The common share price is now near where it was in 1986: BAC Interactive Chart. It would be difficult for someone to intentionally accomplish that result. It is just amazing that shareholders pay these Masters of Disaster large sums of money to vaporize shareholders' capital.

My main concern is that BAC remains sufficiently solvent to continue paying distributions on its non-cumulative equity preferred floaters and its trust preferred issues. I recently sold 100 KRBPRE, a TP originally issued by MBNA that was acquired by BAC. Sold 100 KRBPRE at $25.13-ROTH IRA I still own two equity preferred floaters and three different TPs.

These securities will be extremely sensitive to concerns about BAC's solvency. During the Near Depression period, prices for BAC's $25 par value equity and trust preferred securities fell into the single digits even though every distribution was made by the bank. My best buy of BAC TPs was the TC MJH at $7.51 in March 2009, later sold near its $25 par value. (see snapshots at Trust Certificates: New Gateway Post). The yield at that March 2009 price was close to 25%.

Recently, there was a news story in the WSJ that BAC has been operating under a memorandum of understanding since 2009 with its regulators. The WSJ claimed that the regulators recently met with the Board and wanted to see more progress in the bank's compliance with that informal order. The regulators also refused to allow BAC to raise its one cent quarterly dividend.

While BAC claimed to have adequate capital in its second quarter conference call, it has been selling assets recently, including most of its stake in the China Construction Bank, to raise capital.

Since the story about the informal enforcement action appeared in the WSJ, both the equity preferred floaters and the trust preferred securities that I own have lost value. This should not be surprising to any investor that owns those securities under the circumstances.

3. Sold 250 of 450 of STLPRA at 10.2 Yesterday (see Disclaimer): STLPRA is a TP. I reduced my position by selling at $10.2. Trust Preferred Securities: Links in One Post Prospectus: www.sec.gov Interest payments are made quarterly. The coupon is 8.375% on a 10 dollar par value.  My first purchases of this security were below $9 per share: Bought 50 of the TP STLPRA at $8.99 Added 50 STLPRA at 8.69 Bought 100 STLPRA at 8.87 Of the shares sold yesterday, 100 was owned in a taxable account and the other 150 shares were held in the regular IRA.

I would consider buying those shares back below $9 again.  I still own 200 in the Roth IRA bought at slightly over $10 per share.

Sterling Bancorp Trust I 8.375% Cum. Trust Pfd closed at $10.2 yesterday on 550 shares.

4. Exchange Traded Bond and Preferred Stock Table: This table includes trust certificates, baby bonds, "principle protected" senior bonds, trust preferred and equity preferred securities. All of these securities are traded on the stock exchange. I took these snapshots yesterday morning after selling 250 of STLPRA. I have to take two snapshots to include all of them:

Yesterday, I bought a new junk bond that I will discuss in the next post.  I also bought back a stock CEF.

5. AGY Holdings (own 1 bond:  FINRA): I noticed yesterday, when checking the current price of this bond, that Moody's had downgraded its rating from B3 to Caa3 with a negative outlook on 11/18.  Moody's  I had the same reaction after reviewing AGY's latest disappointing earnings report, and raised my risk rating to 10 from the original 9+.  Item # 4 Earnings: AGY Holdings (11/16/11 Post). I also pointed out some disconcerting language in AGY's earnings release.   I do not have much, if any, confidence in this company at the present time. (see also:  AGY HOLDING 2014 BOND PLUNGE IN PRICE)

I will make another common stock purchase with cash flow this week. Most of the cash flow is received at the end and the beginning of each month. 


  1. Amazing, your experience with AT&T. Here in the Netherlands and elsewhere in Europe it has become quite common to switch from land line to phone via internet, and you even can keep your existing number. Is that an option in the US? Many providers over here also offer 'triple play', i.e. internet, phone and television in one package.

  2. Frequently, you can keep the same number. My cable company, Comcast, provides TV, phone and internet service. I have TV and internet with that company. If I elected to go with Comcast for phone, I could keep the same phone number. I have Verizon Wireless, which is good, so I do not need to go with another phone carrier. I was keeping the land line out of convenience.

    Many users of the IPhone in my area have trouble with AT & T. Connection speeds are slow for data and there are frequent problems with the phone service. After Verizon got the IPhone, several people that I know said that they planned to switch from AT & T to Verizon as soon as their contract runs out.

    This area is affluent and everyone has fast internet and smart phones so it is surprising that there would be so many service issues where customers are well off and congregated in a relatively small geographic area.

  3. I was wondering why you like the BAC floaters. They have had 2 huge lifts in price due to Buffet and the pref buyback. The latter turned out to be not relevant for the low priced floaters but at the higher fixed. I would not be surprised to see the floaters trading pre buyback announcement levels. Thanks much!

  4. Ferp: I do not like the equity preferred floaters as an asset class, and have repeatedly said so. I will frequently mention that non-cumulative equity preferred issues from financial institutions are a disfavored asset class for me. Some of the earlier references can be found in the May 2, 2009 post, "Trading Rules for Disfavored Asset Class" and the May 13, 2009 Post "Embracing Volatility As a Risk Management Tool...". I also discuss the disadvantages of these securities in the 9/25/2009 Gateway Post "Advantages and Disadvantages of Equity Preferred Floating Rate Securities". That post contains snapshots of every trade that I have made where the realized profit or loss is greater than $30. I started to invest in them in the Fall of 2009. Many of those posts are linked in my Table of Contents Gateway Post.

    Currently, I have insignificant positions in BMLPRH (50 shares) and BMLPRJ (100 shares). A position in the neighborhood of $10,000 would be material for me, if the security went to zero. As shown in the snapshots, I have taken small positions in BAC equity preferred floaters and have traded them profitably before my last re-entry where I am sitting on a small unrealized loss.

    These securities will be volatile in price, both up and down, that have historically presented me with trading opportunities.

    The dividends are treated as qualified under current tax law, which has an advantage compared to an interest payment made by a trust preferred which would be taxed at my highest marginal rate. TPs are in effect junior bonds.

    The equity preferred floaters do combine in one security some protection against both deflation and inflation.

    While these securities from BAC did pop on the announcement of a possible exchange offer, I believe that the decline recently has more to do with concerns about BAC's financial condition. During the Near Depression period, I do recall buying one or two of these floaters at less than $10.

    I have not seen any announcement containing the terms of an exchange offer yet from BAC, where it offers to exchange common shares for preferred shares. When and if made, I would expect that the value of the common shares would be significantly less than the $25 par value. BAC would try to redeem them on the cheap.

    The trust preferred issues are a different species of security, higher in priority than the equity preferred, with cumulative distributions. Their distributions are taxed at interest.

  5. I only infrequently visit your site, so sorry for this delayed response but your troubles with AT&T moved me to action. I had a similar problem with deteriorating phone service and had to repeat my complaints until they finally sent a repairman who could trouble shoot and fix, what he said was a short where my line connected to their system was the cause. But the point of my comment is that I complained to the Public Utility Commission (here in California) and that got amazing results. But if your anger has died down now, you probably don't want to rile yourself up again, by involving the regulators.

    As an aside, for such a diligent stock researcher, I'm surprised you misstated the history of AT&T. Bell South was the aggressively financially managed regional Bell ("Baby Bell"). They purchased PacBell (west coast) and ruined a less aggressive, more customer friendly utility. That combination then bought AT&T and changed the name of the combined business to AT&T, because of its broader geographical name connotation. This was an ironic re-assembling of the government mandated monopoly break-up of the bell system.

  6. SBC Communications (formerly known as Southwestern Bell until 1995) acquired Pacific Telesis (PacTel ) on 4/1/1997. SBC then acquired AT & T, which was then primarily a long distance company in November 2005 for about 16 billion. SBC then changed its name to AT & T.

    SBC Communication, renamed AT & T, then acquired BellSouth on 3/5/2006 for approximately $86 billion (1.325 shares of ATT for each BellSouth share).

    BellSouth did not acquire PacTel. You need to check your facts again. And BLS was not aggressively managed. Some would claim with reason that SBC Communications was the aggressive BabyBell. The executive in charge of SBC during that acquisition binge was Ed Whitacre.

    This history can be found at Wikipedia under "AT & T". You can look at Wikipedia for this history of "Pacific Bell".

    Without doing any research, I also remember that it was AT & T (the combo of PacTel, SBC and At & t) that acquired Bell South. BellSouth was the last big component added to that combo with PacTel being the first. So you are mistaken.

    Sometimes I discuss the history of AT & T when buying a bond originally issued by SBC Communications or by AT & T when it was just a long distance company.

    I was not angry about the service from AT & T. I simply discontinued the service. Eventually, it would have been repaired but it was just not worth the trouble, nor the expense of keeping a land line when I use wireless 99% of the time