Monday, December 5, 2011

JOBS/Added 50 of the Synthetic Floater GYB at $15.56 and Sold 100 of the Synthetic Floater GJP at $23.2: ROTH IRA/Bought 50 IDG at $18.55

The November jobs report was encouraging for a number of reasons. Employment Situation Summary The unemployment rate fell to 8.6% from 9% in the previous month. The payroll data showed that private companies added 140,000 jobs. The jobs numbers for October and September were revised up by 20,000 and 52,000 respectively. There continues to be some indication that small business creation is starting to pick up, based on the continued strong growth in jobs reported by the household survey and the substantial decline in the U-6 number.  The U-6 number declined to 15.6% from 16.2%. Table A-15. Alternative measures of labor underutilization The household survey, used for the unemployment rate calculation, has been showing more robust gains in employment, 1.28 million job gains over four months. Reuters The large drop in the unemployment rate was due to a 278,000 jobs gain in the household survey coupled with a 315,000 drop in the labor force.

Alan Abelson, who was bullish on the stock market for about 15 seconds in 1982, give or take five seconds, tried his best to throw cold water on the positive developments last week. Abelson is not someone who sees the stock market glass either half full or empty, or anywhere in between, but either empty or full of raw radioactive sewage.

The EU members are discussing the possibility of funneling as much as 200 billion EUROs through the IMF to help Spain an Italy. Bloomberg The IMF could enforce the EU's budget rules pending treaty changes.

These violent whipsaw moves in the stock market are a lot of fun but are growing tiresome. I would expect a tough slog between 1250 to 1300, as sellers emerge and buyers start to go on strike.

1. Sold 100 GJP at $23.2 Last Wednesday-ROTH IRA (see Disclaimer): GJP is a Synthetic Floater traded on the stock exchange. This trust certificate pays the greater of 3% or 1.15% over the three month treasury bill on a $25 par value. GJP has a 8% maximum rate. Prospectus The underlying security is a senior bond from the electric utility Dominion Resources. Interest payments are made monthly. I have bought and sold this one several times. My last purchase was at $22.25. Bought Back Synthetic Floater GJP at 22.25-ROTH IRA March 2011 I would much prefer to buy this one below $20 per share. I have bought this security twice at below $20. Bought GJP at $17.5 April 2009 Bought 100 GJP at $18.97 October 2009 Sold 100 GJP at 22.42 February 2010 Bought 50 GJP at 20.55 July 2010 Sold: 50 GJP at 23.31 October 2010

 I just parked some cash in this security for a relatively brief period. 

Trust Certificates: New Gateway Post

This is a snapshot of my 2011 trading profits realized from GJP:

2011 ROTH IRA GJP Two Round Trips +233.91
This is a snapshot of my 2010 trading profits from GJP:

2010 ROTH IRA Two Round Trips +450.86

Given the Fed's Jihad against the saving class, which has resulted in abnormally low short term rates for an extended period of time, the applicable coupon has been the 3% minimum since I start to trade this security. I suspect that the minimum will remain the applicable rate for at least another two years given the Fed's statement earlier this year about continuing its Jihad well into 2013. This means that the trading profits realized to date has far exceeded the meager income paid by this security.     

2. Bought 50 IDG at $18.55 Last Wednesday (see Disclaimer): The coupon is 7.375% on a $25 par value. At a total cost of $18.55, the yield is close to 9.94%. Prospectus:  SEC Filing 

I used that natural volatility of the ING hybrids to trade them profitably during the Near Depression period, making several buys under $10 per share. I sold out of them due to my concerns about European financial institutions. Sold 50 of the ING Hybrid INZ at 21.21 Bought at a Total Cost of $7.82-Last ING Hybrid Owned  ING is based in the Netherlands and has both banking and insurance operations worldwide. I still have those concerns. However, the recent decline in prices for these hybrids tempted me sufficiently to re-engage with a very small nibble when the yield on IDG approached 10%. Dividends are currently treated as qualified and are paid quarterly.  

As discussed in my main Gateway post on ING HYBRIDS, these securities are called hybrids since they combine equity and bond features. For regulatory purposes, they have been treated as equity capital. One equity characteristic is that these securities have no maturity date, viewed unfavorably here at HQ. For balance sheet purposes, they are subordinated bonds. The hybrids will be the most subordinated debt on ING's balance sheet. The EC has made it clear that dividends will have to be deferred in the future whenever a European firm receives financial aid from a host government. ING did receive such aid in 2008 and paid it back. It was not compelled to defer the dividend, but would probably be forced to do it next time.

The legality of a potential deferral of the dividend is a complicated topic, and the fear of a deferral has at times caused major downdrafts in these securities.  This topic was a favorite one back in the summer of 2009, receiving a lot of interest from overseas particularly in the Netherlands. (see e.g., Pay Back Dutch Government=Buying Junior Security=MandatoryPayment Event/Bond Investing Process  Summary of Arguments To Stop EC from Causing Deferral of Payments on the Aegon Hybrids  More on ING and AEGON Stoppers.

The issues are whether the repurchase of, or payment on securities issued by ING to the Dutch government back in 2008 constitute mandatory payment events, and the number of mandatory payments triggered by any such event.

ING has repurchased securities issued to the Dutch state, with the last repurchase completed in May 2011. Background to ING’s State aid arrangement with the Dutch Government | ING  The next scheduled payment may be made in May 2012 according to the foregoing linked press release. {After a period of time, links to ING press releases will no longer work. This is a link to the SEC Filed Release indicating an intention to repurchase those securities in May 2012. SEC Form 6-k} Since those securities are Junior Securities in my opinion within the meaning of the hybrids' prospectuses, their repurchase, or making a distribution on them, will trigger 4 mandatory quarterly payments on the ING hybrids after each such Mandatory Payment Event. Other names for this kind of clause include "dividend pusher" and "dividend stopper".  This analysis assumes of course ING is not in bankruptcy or receivership. 

I view the U.S. traded ING hybrids to be functionally equivalent so the main consideration in choosing one involves the yield at my cost. Most of the ING hybrids that I previously owned just went ex dividend, but IDG has an ex date for its quarterly distribution later this month. 

I have mostly bought and sold IND and INZ. I have periodically bought and sold ISF and IGK. BUY OF ISF at $4.6 February 2009  Bought 50 INZ at 6.52 February 2009 Buy of 50 INZ at 7.82 February 2009. Those kind of buy prices highlight more than anything the potential downside risk. 

I have bought and sold IDG at higher prices. Bought IDG at 18,33 in Regular IRA December 2009Sold IDG at 21.73 April 2010; Bought 50 of the ING Hybrid IDG at 23.96 March 2011-Sold 50 IDG at 24.63 May 2011. In effect, I just bought back the 50 shares at $18.55 sold a few months ago at $24.63. 

ING's SEC filed Press Release announcing third quarter results can be found at Form 6-K.

ING Groep N.V. 7.375% Perpetual Hybrid Capital Sec. closed last Friday at $19.06. 

3. United Refining (own 1 senior secured bond: FINRA): UF recently filed its earning report. SEC Filed Press Release, see also SEC Filed Annual Report for the F/Y ending August 31, 2011: Form 10-K The discussion of the long term debt starts at page 50.

4. Added 50 GYB at $15.56 Last Friday-Roth IRA (see Disclaimer): Based on what I know now, I viewed GYB to be a much better value than the GJP sold in the same account. GYB will be hyper sensitive to concerns about the creditworthiness of Goldman Sachs.

GYB is a trust certificate. The underlying bond is a trust preferred issue from Goldman Sachs Capital I maturing on 2/15/2034 with a 6.345% fixed rate coupon. (Underlying Bond: FINRA) In effect, the underlying security is a junior bond from GS. That rate will not be received by the owners of GYB unless the swap agreement terminates.

Trust Preferred Securities: Links in One Post

GYB is a synthetic floater that pays the greater of 3.25% or .85% above the three month Libor rate on a $25 par value. As with other exchange traded synthetic floaters, there is a maximum coupon. For GYB, the maximum is 8.25%:  Prospectus

GYB was selling at a much larger discount to its $25 par compared to GJP, which was sold, and GYB has a slightly better minimum rate. The float provisions are roughly equal, historically speaking. I would anticipate (guess!) that a float of .85% over the three month LIBOR will be close to a float of 1.15% over the three month treasury bill. If I had to pick one over the other, I would go long term with the .85% spread over the 3 month Libor rather than 1.15% over the 3 month treasury bill, but it could be close.

I am not going to explain synthetic floaters in this post. SYNTHETIC FLOATER

The owners of GYB will be entitled to receive $25 per trust certificate on 2/15/2034, assuming GS survives of course. If GS goes bankrupt, I would expect this security to be worthless.

I buying back some of the shares previously sold. (e.g. Sold 100 GYB at 19.7 in Roth IRA  Sold 100 GYB @ 19.4-Regular IRA  Sold 100 GYB at 18.09

I have bought these shares as low as $10.95:  Bought 100 GYB at $10.95 April 2009 Added another 100 GYB in Regular IRA at $11 April 2009

So far, I have have done will with GYB as shown in the snapshots found at Trust Certificates: New Gateway Post. I have never had a large position, mostly owning 100 shares for a few months.

I am averaging down from my last purchase of 50 shares. Bought 50 GYB at 16.95 in Roth IRA August 2011 More information about this floater can be found in prior posts.

This brings me up to 100 shares altogether. Due to complicated tax issues associated with the swap agreement, I will own synthetic floaters only in retirement accounts.

Based on a total cost of $15.56, the minimum current yield would be about 5.22%. The float would become the applicable rate when the three month LIBOR exceeded 2.4% during the relevant computation period. The maximum coupon of 8% would result in a current yield of 12.85% based on a total cost of $15.56.  The current yield is likely to remain at the bottom end of that range for a couple of years due to the FED's Jihad against the Savings Class that is keeping short term rates artificially low. The YTM would be higher for an investor holding the security to maturity, since the yield to maturity includes the additional yield realized by capturing the spread between $25 and the purchase cost.

For example, assume that the average coupon until February 2034 was 5%. The coupon is now 3.25% but the FED's Jihad is not likely to last for another 23 years hopefully. There will likely be periods when the maximum coupon of 8% is in effect. There will be a range of coupons between 3.25% to 8% during the remaining life of this security. With a reasonable assumption of 5% as the average, the YTM would be around 10.89% using the Morningstar Bond Calculator.

Corporate Asset Backed Corp. CABCO Series 2004-101 Trust Goldman Sachs Capital I Float. Rate Call Ctfs closed at $15.5 last Friday.


  1. I for one, don't believe the Household Survey, which is calling people and asking if they are working, anyone selling on EBay, of course, says yes. The U?E rate dropped because 486K left the workforce (not the MSM 315K widely reported) The Crestmont P/E(includes inflation) for S&P is 18, 13.7 is historical median. Cash is still king and good corporate bonds/I-Bonds for me.

  2. You may have a natural tendency toward pessimism.

    The 315,000 number is taken from Table A-1 of the government's release. The civilian labor force had an estimated 154.198 million participants in October 2011 and 153.883 million in November 2011. This numbers are at best estimates.

    The general idea is to deduce trends based on history. The household survey will generally pick up increases in new business formation prior to payroll data. The increases in employment picked up the household survey would be a forward indicator in this sense.

  3. Look at the Gallup job survey, no adjustments and FAR cheaper than Gov't, it's mostly part-time hiring.
    ($8/hr if you're lucky)

  4. Re: GYB underlying bonds holding $85-87 range, while GYB down, I bet it's tax -loss selling(to buy back in Jan?)

  5. The underlying bond in GYB has recently sold off from around 95 to 85-87. I could buy the underlying bond for 87 now which would give me a current yield of around 7.29% from the fixed coupon.

    The current yield of GYB at its minimum rate of 3.25% is slightly more than 2% below that number. Generally speaking, two percent is a decent price to pay for the inflation protection of the floater, but only if the investor believes the minimum rate will not last for years. Some of that difference in current yield would be made up with the YTM calculation, assuming both securities are held to maturity. The underlying bond is at a 13% to 15% discount to par value and GYB is hovering at close to 40%. This gives GYB more yield juice in the YTM calculation.

    The problem now appears to me mostly investor concerns about the credit risks of GS and MS. The S & P warning about a potential mass European sovereign debt downgrades could easily add to that angst. Look tomorrow to see how these underlying bonds and the floaters tied to them react to this latest news, along with the equity preferred floaters like MSPRA and GSPRA.

    The GS senior bonds would suffer with any elevation in those concerns and the GS TPs would suffer even more. The 2033 senior GS bond has fallen to slightly under par value. One synthetic is tied to it, GJS, which has no minimum and it is trading near $14 with a $25 par value.

    The floaters are also under selling pressure due to the likelihood that the minimum coupon will be payable for at least several more months, maybe well into 2013.

    However, it is possible that events will overtake the central banks, causing them to raise short term rates much sooner, which could make the floaters more appealing than now.

    If GS looks sound financially in three years, and 3 month LIBOR is at 5%, GYB is not going to be selling at 15.50.