Friday, September 30, 2011

Eastman Kodak (EK) Bonds-Own 2013 Senior Bond

Kodak (EK) shares plunged almost 54% today on news reports that it has hired a law firm that advises firms in financial distress. EK said today that it had no intention, "as we sit here today", to file for bankruptcy.  The bonds are also trading at levels suggesting many investors believe that a default will occur.  It remains unclear why EK has hired the Jones Day law firm, however. Another report late Friday claimed that Kodak was simply considering its options.  NYT 

I own two EK 2013 senior bonds. I now expect to take a significant percentage loss on them given the size of the secured debt. Possibly, if a bankruptcy filing is made, it would facilitate the sale of EK's patent portfolio and other assets, providing me with something for my small loan north of zero. I would not be surprised with a recovery in a range between 20 to 30 cents on the dollar. Hopefully, I am being too pessimistic. I did not anticipate that EK would survive much past 2013 but I am surprised that it has been brought to the brink so quickly. I would be pleasantly surprised to receive the regularly scheduled interest payment due in November. 

The 2013 bond fell briefly to below 20 before recovering slightly later on Friday.  That bond was trading close to 100 earlier in the year. (see also my recent 9/29/11 Post Moody's Cuts EK Bonds Further into Junk).  As a result of these developments, I am raising my risk rating to 10+ from 9. Personal Risk Ratings For Junk Bonds

Bill Gates' foundation was reported to be the ninth largest holder of EK common stock.

RB Bought 1 Eastman Kodak Bond Maturing 2013 (1/28/11 Post)(RB is my Right Brain)



EK (8/18/11 Post, containing discussion of one firm's value estimate of EK's image patents)

FINRA Information on 2013 Bond: FINRA

Addendum: After the market closed, EK issued a press release stating that it had no intention of filing for bankruptcy. The firm acknowledged in that release that it has hired the Jones Day law firm, saying that firm was just one of the advisors EK has employed in its exploration of "all options."  EK claimed to be committed to meeting "all of its obligations". Kodak Press Release The bond prices on Monday will be the tell on how investors view that commitment.

A very negative Citigroup report on Kodak is summarized in Tiernan Ray's Barrons blog (10/6/11 Post). While the pricing of the 2013 Kodak bond has improved  since cratering into the 20s, I remain pessimistic.

Added 10/12/11: As noted in this Bloomberg article, Kodak's creditors have been busy hiring law firms. The second lien creditors will likely demand that the proceeds from any patent sale be used to pay them back. That article notes that there is about $750M of second lien debt. The last filed  SEC Form 10-Q lists two secured note issues, one maturing in 2018 and the other in 2019. (note 4 at page 10). The first lien debt would be the secured bank credit facility and EK just drew $160M on it. september 23, 2011 8-k The creditors do not appear to have much, if any, confidence in Kodak's management, and I would not criticize them for having that opinion. Kodak has paid the 2013 senior unsecured bond down to $250M.

Added 10/21/11: A recent article in the NYT discusses EK's troubles.

Added 11/3/2011: My discussion of EK's third quarter report can be found at Stocks, Bonds & Politics: Eastman Kodak Bonds: Update on Third Quarter Earnings Report

Eastman Kodak Bankruptcy (January 2012)

Added 6/9/12: Eastman Kodak lost its infringement case against APPLE and RIMM in a decision by an ITC administrative law judge. EK (5/22/12 Post) EK is appealing that decision to the full commission. The value of the senior unsecured bonds were cut in half after that ALJ ruling and are now trading between 10 to 15 cents on the dollar. As noted in that 5/22/12 post, EK reported an awful 2012 first quarter.  

Added 8/20/12: Eastman Kodak lost its infringement case against Apple and RIMM as the ITC affirmed the ALJ's decision. (last paragraph, introduction section in EK;  WSJNYT)

Michael Lewis' New Book-Boomerang/ Added 50 NBB at $19.55 in the ROTH IRA/Bought 50 GSPRD at $18.6/Sold 2 Edison Mission 2017 Bonds at 64

The government's third estimate of 2nd quarter GDP was released yesterday. According to the last estimate, real GDP grew 1.3% in the last quarter.  www.esa.doc.gov.pdf

I downloaded Michael Lewis' new book Boomerang: Travels in the New Third World into my Kindle and started to read it Wednesday night. The opening section must have given the Old Geezer nightmares since he was up and down all night. In his prior book, The Big Short: Inside the Doomsday Machine, Lewis focused on the motley group of hedge fund managers who made fortunes betting against subprime mortgages. One of those managers, Kyle Bass from Dallas, was left out of the "The Big Short" book. Maybe Lewis thought he was crazy after interviewing him. What can you say about an investor who buys 20 million nickels? And, after all, he was buying gold and credit default swaps on Greek government debt in 2008 too.  The doomsday scenario presented by Bass is a plausible one, which is what gave the OG bad dreams last Thursday night.

I found this recent interview of Bass by David Faber:  CNBC He thinks the European banks need a trillion dollars.

The latest Lewis book is reviewed in this NYT article.

The deleveraging process by governments is fraught with peril and is nowhere near over.  The possibility still exists for a catastrophic outcome.

The treasury auctioned $29 billion in 7 year treasury notes yesterday to yield 1.496%. The coupon for that note is 1.375% and the original issue discount (OID) provides the remainder of that yield. www.treasurydirect.gov.pdf

I would just point out that the government reported earlier this month that CPI had increased 3.8% over the past year before "seasonal adjustments". Consumer Price Index Summary

Jeffrey Gundlach says the U.S. is already in a recession and there will be big losses coming out of Europe.

On Wednesday night, I turned off the Red Sox-Oriole game during a rain delay, thinking that Boston would win and salvage a playoff birth, notwithstanding a late season decline that left them tied with the Tampa Bay Rays going into the last game of the season. Earlier in September, one estimate gave the Red Sox a 99.6% chance of making the playoff. Red Sox Beat Math in Impossible Collapse - ABC News As a corollary, the odds of Tampa making the playoffs hovered close to zero in early September, no chance at all really.  A graph of the odds can be found at the NYT.

And the Tampa Bay Rays were sure to lose too on Wednesday night too. David Price, a former Vanderbilt ace who I started to watch in his freshman year, was pounded in the Rays' game with the Yankees who were leading 7-0 when I turned off the TV to start reading "Boomerang".  Well, what can I say, I sure missed something, as the Rays beat the Yankees 8 to 7 in miraculous fashion and the Red Sox managed to revive some kind of ancient curse, losing to the Orioles, in what some are calling the most epic collapse in sports' history. SI.com

I wonder whether the Yankees deliberately lost that game.

RB just said the OG needs to stick with watching sporting events rather than reading scary books.

1. Bought 50 GSPRD at $18.6 Last Tuesday (see Disclaimer): Most of the positive and negative comments recently made about a similar security issued by Morgan Stanley are applicable to GSPRD, a floating rate preferred stock issued by Goldman Sachs.  Bought 50 MSPRA at $16.6  Those issues are also summarized generally in Advantages and Disadvantages of Equity Preferred Floating Rate Securities.

GSPRD pays non-cumulative qualified dividends at the greater of 4% or .67% above the 3 month LIBOR rate on a $25 par value. Prospectus As with other equity preferred stocks, GSPRD has no maturity and is senior only to common stock. An equity preferred stock will be junior to all debt issued by the company.  In the event of a GS bankruptcy, GSPRD would be a worthless piece of paper.

Since the FED is likely to keep short term rates low for at least two more years, I would anticipate that the applicable coupon for this security will be the 4% minimum for more than two years. The 3 month LIBOR rate would have to rise above 3.33% to trigger a better coupon than the 4% minimum.

As previously discussed, this kind of security is volatile and particularly vulnerable to downside movement in times of market stress, particularly during periods like the Near Depression when the viability and solvency of financial institutions were matters of legitimate concern.

More recently, with the escalation of concerns about Europe and the economy, this security has fallen from a close at $23 on May 11, 2011 to a close of $18.45 last Tuesday, when I made my purchase.  GS.PD Stock Charts There is also some headline risk associated with GS bonds and preferred stocks.

This security pays quarterly dividends. The last ex dividend date was on 7/22/11.

Provided that GS survives, I would anticipate being able to sell this security at a decent profit at some point.  That point may be a few weeks or several years. In the meantime, I would expect volatile movement up and down. This security closed at $10.37 on 3/5/2009.

Once GS credit concerns are no longer an issue, and the FED ends its Jihad against savers with the 3 month LIBOR rising to a range between 3% to 5%, I would expect this security to be selling between $22 to $25. In 2007, there were trades above $26.  I would not anticipate, however, that the 3 month LIBOR will exceed 3% for at least two more years.

Goldman Sachs Group Inc. Dep. Shs Pfd. Series D closed at $18.57 in trading yesterday.

I previously bought and sold this security at higher prices. Bought 50 GSPRD at 21.58 in January 2011  Sold 50 GSPRD @ 22.72 April 2011  So I view the repurchase of this security at close to $3 per share less than my last purchase as a win.

{It is possible for the LIBOR rates to be unanchored from the treasury bill rates, which happened in the Fall of 2008 for a brief period. This can be caused by the banks no longer trusting each other to pay back short term loans. If that happens again, the Libor float provision could become the applicable rate, even with treasury bills near zero, but the credit concerns would be acute in that scenario and the price for non-cumulative equity preferred stocks issued by large financial institutions would likely be in a world of hurt).

Floaters: Links in One Post
GOLDMAN SACHS FLOATERS (October 2009)
Goldman Sachs Synthetic Floaters and Floating Rate Non-Cumulative Preferred (April 2009)
2. Added 50 of NBB at $19.55 in the ROTH IRA Last Tuesday (see Disclaimer): NBB is a bond closed end fund that invests in taxable municipal bonds issued under the Build America Bond program.  This program expired at the end of last year.  This CEF is set to liquidate on or about 6/30/2020, unless there are new issuances of BABs, or similar U.S. Treasury subsidized  municipal bonds, within a twenty month period ending on or before 2014. NBB - Nuveen Build America Bond Fund Since the program was not extended, it is possible that this term provision may come into play which would turn this CEF into a term bond fund.  I recently discussed this fund at Build America Bond CEFs (September 22, 2011 Post). The fund does use leverage. Dividends are paid monthly at the current rate of $.117 per share.  NBB Distributions The credit quality is weighted in bonds rated "A" or better:  NBB Holdings (11.2% AAA; 50.4% AA; 32.8% A as of 8/31/11).

CEFA Page for NBB.

The last SEC filed shareholder report is the Annual Report for the period ending in March 2011: SEC  Information relating to the fund's borrowing can be found in note 8 at page 40 of that report.

A later filed Form N-Q shows the holdings as of 6/30/11: SEC

Nuveen Build America Bond Fund closed at $19.67 yesterday. 

3. Sold 2 Edison Mission 7% Senior Bonds Maturing in 2017 Last Wednesday (Junk Bond Ladder Strategy)(see Disclaimer):  I also manage money for family members. My personal accounts are at the same brokerage firms.  A few weeks ago, while attempting to buy 2 Edison Mission 2016 bonds in my mother's account, I did not realize that I was actually in my ROTH account and instead bought those two bonds in my ROTH rather than my mother's taxable account. I said then that the Lord had intervened to punish the Old Geezer. Added 2 Edison Mission 7.75% Bonds Maturing 6/15/2016 @ 86.12 in Roth That mistake left me with 5 Edison Mission bonds, at least two more than my comfort level. I elected on Wednesday to sell at a loss the 2 bonds maturing in 2017 and to keep the 3 bonds maturing in 2016. Bought 1 Edison Mission 7% Senior Bond Maturing 5/15/2017 at 80.361 in IRA Bought 1 Edison Mission 7% Senior Bond Maturing on 5/15/2017

I have increased my risk rating for EM bonds to 8 from a prior rating of 6+. Personal Risk Ratings For Junk Bonds Since I started to purchase these bonds, the earnings reports have been unfavorable, the EPA went ahead and adopted more stringent pollution regulations impacting EM's coal fired plants, and Moody's lowered the rating on the EM senior bonds with a negative outlook.  Moody's; Item # 3 Edison Mission Bonds on EPA regulations

Fitch rates the EM bonds at CCC which is probably closer to my opinion now.

The total loss realized on these two bonds was $381.11 excluding interest payments received. I expect defaults and losses in this strategy. For it to be successful, most issuers will need to survive long enough to pay par value.

Thursday, September 29, 2011

Moody's Cuts EK Bonds Further into Junk/ Bought: 50 LXPPRD at $23.8 & 200 WIW at $12.63/Sold 137+ Duke Energy at $19.925

Reuters reported that Best Buy has cut holiday hiring about in half from last year, in response to a consumer slowdown in spending.

Martin Feldstein believes that Greece's situation is hopeless and that country must be allowed to default on its dead with a least a 50% cut in the principal value.  Maybe he is right. I suspect that he is from the perspective of the Greek people. The problem is whether his recommendation, if adopted, would be the spark that lights a conflagration, quickly spilling into the already vulnerable Spanish and Italian government bonds.

Durable goods orders fell .1% in August.

The treasury sold $35 billion in five year notes at a yield of 1.015% (www.treasurydirect.gov.pdf), a record low yield for an auction. Historical data can be downloaded from the FRB website.  The five year treasury note data starts in 1962.  In 1981-1982,  five year note auctions producing yields over 14% were common, and some auctions exceeded 15% and even 16% in 1981.

Shiller said in an interview that real housing prices may not hit bottom for years.

An author of this column appearing in Forbes has the "same" growing fears about European governments and banks, as he did in 2008 about the U.S. banking system which almost collapsed back then.  A successful outcome of that issue will simply avoid a financial meltdown. It will not restore growth.

Earlier this morning, the German lower house of Parliament approved giving enhanced powers to the the European Financial Stability Facility, a bailout fund, one additional necessary step toward a resolution of this problem, at least on a temporary basis for the next year or so.

Moody's cut Eastman Kodak's debt ratings further into junk yesterday. The outlook remains negative. The senior unsecured 2013 bond was reduced from Caa2 to Caa3. I had already increased my risk ratings.  EK 9/27/11 Post  This bond, which matures in November 2013, has plummeted in value this week (FINRA) after EK announced that it had drawn $160 million on its credit facility.  I would question EK's ability to survive to November 2013 unless it receives a huge cash infusion from the sale of its image patents and/or a huge settlement in its pending ITC case against RIMM and Apple. If that does not occur, then EK will have to have an unexpected return to profitability from its operations. The market price of EK's common shares and its bonds (FINRA) suggests a lack of confidence in any favorable outcome. Until I have more clarity about the potential revenues from those patents, I intend to hold onto my two 2013 bonds.  I would not buy more.

Fitch also cut EK's issuer default rating by two notches to a level indicating a default of some kind "appears" probable.

Added 9/30/11 Update on Eastman Kodak Bonds: Eastman Kodak (EK) Bonds-Own 2013 Senior Bond

If EK has the right to buy back the 2013 bond under its bond indentures, which I have not checked, I would hope that it buying that bond now at 50 cents on the dollar.

FactCheck.org published an article examining Rick Perry's claim that the poverty rate has hit an all time high under the Obama administration. That claim is false. What is interesting is that Perry's claim is demonstrably false.  PolitiFact examines Perry's assertion that he never advocated abolishing social security as a federal program and move it "back to the states".

I discussed yesterday whether a TP issued by Susquehanna needed to be phased out as TIER 1 capital. Bought 50 SUSPRA at $25.25 ROTH IRA




There are two primary benefits to a bank in keeping a TP that will so qualify. First, unlike equity preferred stock, the interest paid in connection with a TP is tax deductible, so the actual cost is reduced by the tax savings. And, the capital rules allow the grandfathered TP to be treated as Tier 1 equity capital, in effect classifying a bond as equity. I believe SUSPRA falls under the grandfather provision in the Dodd-Frank law, permitting its continued use as Tier 1 equity capital.  While SUSQ may call that the underlying bond due to its high interest rate, sometime on or after 12/12/2012, there are reasons for keeping it too which is the only point that I am making here.  My purchases have been sufficiently close to par value that I am not concerned about an early call.

1. BOUGHT 200 WIW at $12.63 Last Monday (see Disclaimer):  WIW is a bond CEF that invests primarily in U.S. government inflation protected securities. Dividends are paid monthly at the current rate of $.0335, which is not much. WIW - Historical Distributions  The only positive comment about that rate is that the 10 year TIP was auctioned with virtually no coupon yield at all. I would not call a coupon yield of .078% a yield. (auction results at www.treasurydirect.gov.pdf) Might as well call it zero. Assuming no cut in WIW's current monthly dividend, which is an assumption that I would not make, the yield is around 3.18% which is better than zero.     

Another advantage is that this bond CEF is selling at greater than a 10% discount to its net asset value per share. On 9/26/11, the day of my purchase, the net asset value per share was $14.23. WIW closed at $12.63, creating a discount to net asset value at that time of -11.24.  Morningstar shows the 3 year average discount at -7.86.

My last transaction was to sell 300 shares at $12.85.  Sold 300 WIW at 12.85 August 4, 2011 Post  Those shares were bought in mid-July  at $12.47. I will treat this bond CEF as functionally equivalent to another one, IMF, and will frequently move into and out of one or the other.



2011 Realized Gains WIW +$212.45
2011 Realized Gain IMF $146.82

2010 Realized Gains WIW $266.07

2010 Realized Gain IMF +$215.77
Total: $841.11. That number dwarfs the $155.6 in dividends received during the foregoing time frames.  The dividends do of course add to the total return from this trading activity. 

Sponsor's web page: WIW

SEC Filed Shareholder Report for Period ending June 2011: www.sec.gov

Cascade Investment (a/k/a Bill Gates) reported owning 13.1% of this fund in a Schedule 13D filing dated 8/16/11.

Western Asset/Claymore Inflation-Linked Opportunities & Income Fund closed yesterday at $12.58.  The net asset value per share, as of yesterday's close, was $14.21, creating a discount to net asset value of -11.54.  IMF closed yesterday at a -10.12% discount.  

2. Bought Back 50 LXPPRD at $23.8 Last Monday (see Disclaimer): LXPPRD is a cumulative preferred stock issued by Lexington Realty Trust  (LXP) that pays a 7.55% coupon on a $25 par value. Prospectus Dividends are paid quarterly with the next distribution date on 10/17.  

LXPPRD was ex dividend yesterday. Lexington Realty Trust 7.75% Cum. Redeem. Pfd. Series D, LXP.PD Stock Quote  The quarterly penny rate is $.471875 per share. Lexington Realty Trust Announces Quarterly Dividends At that rate and at a constant total cost of $23.8 per share, the yield is approximately 7.93%.

Generally, REITS will pay cumulative dividends, but any deferred dividend does not earn anything, unlike the trust preferred that would generally require the accrual of interest on the deferred interest amount at the coupon rate of the TP.

As you would expect, Lexington can not defer paying the dividend on its preferred stocks unless it eliminates its common dividend. To maintain its REIT's tax status, the company has to pay out at least 90% of its income as dividends. During the Near Depression, a few REITs did eliminate their common stock dividends and defer their cumulative preferred dividends. LXPPRD did not defer its preferred stock dividends. It did reduce its common share dividend. I believe that part of that dividend was in stock for several quarters, but the company is now paying an all cash dividend again.

REITs do not pay qualified dividends, though occasionally I might see a $1 or so per year so treated on a 1099.  

The largest prior realized gain came from 50 shares sold in the ROTH IRA:

2010 ROTH IRA Realized Gain 50 Shares LXPPRD $807.03

Other gains were much smaller, also on 50 share odd lots:

2009 Taxable Account Realized Gain on 50 shares= $98.99 
2011 Realized Gain 50 LXPPRD= $40.57


Total=$946.59.  With any purchase near par value, I do not anticipate making much, if anything, on the shares. This kind of security is purchased for its generation of cash flow, compared to the zero cash flow produced by a money market fund used to finance this purchase. 



Company Property Portfolio: Lexington Realty Trust - Property Portfolio



3. Sold All of Duke Energy Last Monday (see Disclaimer): I decided to harvest my long term capital gain in Duke Energy shares, selling 137 last Monday at $19.925.



$622.39 LONG TERM AND $13.69 SHORT TERM=$638.28

Duke was one of the stock positions sold in 2007 as I pared my stock allocation:

2007 DUK 250+ Shares +$147.57



S & P has a $19 target price.  Morningstar has a two star rating on this stock with a fair value estimate of $17.

Duke Energy closed yesterday at $19.88 yesterday. 

Wednesday, September 28, 2011

Bought 50 SUSPRA at $25.25 ROTH IRA/Sold 100 BAF at $14.3/The EU is Running Out of Time

I would not make the assumption that Europe will successfully resolve its sovereign debt problems. While the market has had a decent rally over the past two trading days, based on the hope of more meaningful actions by the EU, the longer term problems associated with too much debt would still remain even with a successful resolution of those problems.  The market seemed to realize that point as the rally yesterday faded into the close.  NYT

The debt deleveraging process will likely restrain growth in Europe and the U.S. for several more years. GDP growth in developed markets will not be supported by fiscal stimulus, but will instead be retarded by government austerity and anemic private demand.

And, it remains to be seen whether a shock and awe bailout program will actually be implemented in Europe. Time is running out.  The market will not wait much longer before the sovereign debt of many EU nations is trashed, and short term funding for several European banks, particularly those heavy into PIIGS sovereign debt, dries up in a flight from risk.  That later risk, a liquidity event, has already started to develop, as money market funds refuse to roll over maturing short term obligations originating from several European banks.  Bloomberg reported a few days ago that U.S. money market funds had cut exposure to European banks to the lowest level since Fitch started to compile such a survey in 2006.  It would be reasonable to predict a continuation of that liquidation until the EU does something to guarantee those short term loans.  It does not matter whether that is a rational fear or not. The fear exists and is influencing conduct on a global scale. Words will not calm it.

I previously predicted that the long term stock bear market will last another two years. I would also anticipate the volatility associated with an Unstable Vix Pattern to continue into 2012. This pattern is a dangerous one for most individual investors, particularly those facing situational risks requiring the liquidation of stocks to meet necessary expenses. 

The sale of new homes fell 2.3% in August. The average price for those homes fell 8.7% from July. doc.gov /new_residential_sales.pdf

Both the 20 and 10 city Case Shiller home price indexes rose .9% in July, compared to June.  However, on an annual basis, the 20 metropolitan index shows a 4.1% decline. Minneapolis leads the decliners with a 9.1% decrease in home prices year-over-year. (PDF)

The Greek Parliament did approve yesterday a new property tax, a necessary step for Greece to receive the next tranche in bailout funds.  NYT

1. Sold 100 BAF at $14.3 on Monday (see Disclaimer):  I have ended up with too many leveraged closed end funds that invest in municipal bonds. I decided to unload my lowest yielding one, BAF, and to plow the proceeds into anther municipal bond CEF.  I realized a few bucks on the BAF shares and one dividend payment.  Bought Municipal Bond CEFs: 200 NMO at 13.03, 200 MUE at $12.89 and 100 BAF at $13.89

BlackRock Municipal Income Investment QualityTrust (BAF) closed at $14.27 yesterday. 

2. Bought 50 SUSPRA at $25.25 (see Disclaimer): SUSPRA is a trust preferred security that was issued by Susquehanna Capital I, a Delaware Trust.  It currently has a 9.375% coupon on a $25 par value. The proceeds realized from the sell of this TP were used to buy a junior bond issued by Susquehanna Financial (SUSQ) with the same terms as the TP. As with other bank TPs, interest may be deferred provided no payments are being made on a Junior Security. A junior security in this context would be common stock and equity preferred stock. The bond owned by the trust will be junior to other non-TP debt securities but will be senior to common and traditional preferred stock.  

The security can not be called prior to December 2012 unless there is a capital treatment or tax event.  A capital treatment event would be a law that no longer permits the TP to be included in TIER 1 capital.  Quantum Online (QO) maintains that SUSPRA is subject to call now due to the Dodd-Frank law. Many owners of other TPs have learned about that nit after a bank called a TP early that had been selling above par value.  However, I believe that QO is wrong about that assessment as applied to SUSPRA for the following reason. 

Financial institutions with less than $15 billion in assets as of 12/31/2009 can continue to include TPs issued prior to 5/19/2010 as Tier 1 capital.  (section 171(b)(4)(C) of Dodd-Frank Act at page 153: docs.house.gov .pdf) (see also: Stocks & Politics: Trust Preferred Securities & Financial Reform; page 5 www.paulhastings.com/.pdfJones Walker) As of 12/31/2009, the SUSQ reported $13.689.558 billion in assets. Susquehanna Bancshares Inc--2010 Form 10-K at page 33.  SUSPRA was issued before 5/19/2010. So, it appears to me that this security may still be treated as Tier 1 capital. Consequently, I would disagree with the note at Quantum Online that maintains otherwise.  

Even if I am correct, the TP can still be called on or after 12/12/2012. Given the high rate, a call at par value plus accrued interest is certainly a possibly after that date, assuming no significant deterioration in SUSQ's financial position.  

At a total cost of $25.25, the yield is around 9.28%. Susquehanna Capital I 9.375% Cap Secs. Series I, SUS.PA Stock Quote Since this security was purchased in a ROTH IRA, that is in effect a tax free yield.  Interest is paid quarterly and the security went ex interest in early September for the current quarter's payment. 

This is a link to the prospectus: Final Prospectus Supplement

This last purchase brings me up to 80 shares in the ROTH IRA. I bought just 30 shares in June 2010 at $25.1:  Bought  30 SUSPRA in Roth IRA at $25.1 

SUSPRA does have a few unusual terms. The rate will change from a fixed coupon to a floating rate after 12/12/2037. The floating rate is 5.455% above the three month LIBOR rate. Most TPs allow for a deferral for up to five years. SUSPRA's payments can be deferred for up to 10 years. However, after 5 years in deferral, an alternated payment mechanism is triggered and SUSQ has to make a reasonable able to sell securities to raise funds to make the payments. (see prospectus, starting at p. S-28) Any deferred payment does accrue interest at the coupon rate. If a deferral ever occurs, it would likely result in a severe decline in price for SUSPRA, making those kind of provisions meaningless to many investors as a practical matter.

SUSPRA is currently rated Ba2 by Moody's and BB- by S & P. 

Form 10-Q for the Q/E 6/2011

SUSQ is in the process of acquiring Tower Bancorp for $343 million. Tower shareholders have the option of receiving 3.4696 in SUSQ shares or $28 in cash, with $88 million in the aggregate consideration being paid in cash. (page 41,  Form 10-Q) The bank earned just 9 cents per share for the Q/E 6/11. A smaller all stock acquisition of Abington Bancorp is also pending. The capital ratios can be found at page 54 of the last filed Form 10-Q.

If I can sell this security at some point for a $1 or more profit on the shares, I would view it as a successful investment. The primary purpose for purchasing it is to generate cash flow into the ROTH IRA.

Susquehanna Capital I 9.375% Cap Secs. Series I (SUS.PA) closed at $25.62 in trading yesterday.

I hope to finish discussing my trades from last Monday in the next post. 

Tuesday, September 27, 2011

Gold and Silver Bullion Exchange Traded Securities/1900-1921 DJIA/MFA/EK/Bought 50 MSPRA at $16.6

The recent downward spiral in gold and silver prices is a fairly typical response to a parabolic move up. The quick and steep decline last week also indicates to me that hedge funds were largely responsible for driving gold recently above $1,900. I made my first sale of gold and silver coins at that time. See Snapshots at Recent Gold and Silver Sales.  I did not sell much, since the primary reason for owning this stuff is to have an insurance policy for Financial Armageddon, or at least one involving a collapse of the major currencies including the USD.

The Barrons' technical analyst maintains that the recent gold price decline is just a correction in an ongoing bull market.  Marc Faber, who has close to 25% of his portfolio in gold, believes that the price is close to bottoming in the $1500 per ounce area, but could fall to $1,000 to $1,200 if the $1,500 level does not hold. CNBC No one really has a clue.

Gold and silver continued to tumble yesterday. MarketWatch The CME raised margin requirements for gold by 21% and silver by 16% after the market closed last Friday.

Many investors probably do not realize that GLD and SLV are organized as Grantor Trusts. (page 36 spdrgold/GLD .pdf and at page 32 of SLV /silver.pdf).  GLD is in effect a Trust Certificate representing an undivided interest in and ownership of that Grantor Trust which owns the gold. The gold is held in London. USA "GLD" - Frequently Asked Questions - SPDR Gold Shares I have never bought either GLD or SLV.

I am content to own the bullion and to store the metal in bank safety deposit boxes. When I am finished selling my junk silver coins, I may reinvest the proceeds in SLV when and if the price falls to below $10.  A more likely scenario would simply to buy more rolls of American Silver Eagles, the one ounce silver dollar coin produced by our government's mint. I am partial to the design.  My last purchases were made when silver was selling at less than $7 per ounce. (see snapshot at Sold Some Junk Silver Coins Yesterday, rolls (20 one ounce silver dollars) bought at $140 each).

Another possibility for me is to buy an exchange traded fund for platinum or a mixed precious metal fund. I am going to avoid the precious metal Exchange Traded Notes offered by UBS and Barclays. An ETN is  an unsecured senior note. iPath ETNs  (ETNs offered by Barclays); ETRACS, Exchange Traded Notes (ETNs) - UBS Investment Bank (ETNs offered by UBS)  An owner of that kind of security is subject to the credit risk of the issuer on top of the potential principal loss due to fluctuations in the metal price. I try to avoid piling on unnecessary risks when buying a security.

If I decide to gain exposure to the metal with an exchange traded security, I would prefer the grantor trust security compared to the ETN. Besides GLD and SLV, there are a number of offerings by outfit called ETF Securities that are in the grantor trust form of ownership. ETF Securities  I have elected for now to monitor for a potential small purchase two of their offerings: Physical Platinum-PPLT Precious Metal Basket-GLTR This is a link to that sponsor's FAQ's for ETPs. I have no interest in adding to my gold bullion position.

Many would view truth telling to be a conservative value. Unfortunately, self proclaimed conservative politicians are more than liberal with their factual assertions about just about everything. This is a link to an article at FactCheck.org that examines the falsehoods spoken by the GOP candidates at the recent Fox news debate.

The Shiller P/E10  for the European market is 11.9, as of last week, moving closer to the bottom of 10.3 times hit in February 2009.

MFA Financial (MFA), a Mortgage REIT, declared its regularly quarterly dividend of $.25 per share. MFA Financial Inc., MFA Stock Quote  I own only 100 shares in the ROTH IRA.  If the FED is successful with Operation Twist, bringing mortgage rates down further, this will lead to more refinancings which will have an adverse impact on mortgage REITs' spreads. (see generally, Barrons and 8/29/11 Post Stocks & Politics)

PIMCO is forecasting negative 1 to 2% growth in Europe over the next 12 months.  Bloomberg

In an intelligent and well informed article, Mark Kiesel of PIMCO provides a number of factual reasons supporting higher than normal cash balances and a wait and see approach by investors.  PIMCO

WSJ column points out that investors are losing faith in the mantra "stocks for the long term". The article contains a chart of the DJIA since 2000. A more appropriate time period would be October 1997 to the present. As noted many times in this blog, stocks experience prolonged periods of going nowhere. The Roller Coaster Ride of the Long Term Secular Bear Market  Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets (March 2009); 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009). Those periods include 1900-1921; October 1929 to 1950; 1966 to August 1982; and October 1997 to present. Given an individuals limited life span and even narrower period of significant wealth accumulation, a buy and hold approach advocated by Professor Siegel and most financial advisors is not a viable strategy, once the investor has identified the onset of one of these long term bear cycles.  The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets

The DJIA fluctuated between 50 to 100 from 1900 to around 1921. The DJIA hit 63.9 in 1921Dow Jones Industrial Average (1920 - 1940 Daily), below where it was in 1905.  Dow Jones Industrial Average (1900 - 1920 Daily) and near a closing high for 1901.


I am raising the risk rating on my two 2013 Eastman Kodak bonds to 9Personal Risk Ratings For Junk Bonds  Yesterday, Kodak announced that it was drawing $160 million from its credit facility. SEC Filing Kodak has been burning cash in its operations. Both the EK bonds and common stock tanked in response to this development. The best hope for receiving par value for the 2013 bonds is probably some positive development relating to EK's image patents, either through a victory in EK's ITC case against Apple and RIMM which causes those companies to settle EK's claims for a huge amount or the sale of those patents raising a similar or larger amount (e.g. 2+ billion dollars).  I would not count on EK surviving until 2014 without such a development which is a change from my prior opinion. An article in today's WSJ goes into more details about EK's problems.

The rally yesterday afternoon appeared to be triggered by a CNBC report that Europe was considering a very detailed TARP like bailout plan.  I will believe it when such a plan actually comes into being.

J P Morgan claimed yesterday that Apple has significantly cut back on its component orders for its IPAD. Bloomberg (see also: MSN Money)

I have been moving into and out of double short stock ETFs as a hedge. I managed to sell one late last Thursday and  bought another at yesterday's close. LB, our acting Head Trader here at HQ, claims that these purchases are not rule violations (last ¶ 8/31/11 post), even though other staff members distinctly remember one of LB's stinking rules that permitted such purchases only when the VIX was under 20. Trading and Asset Allocation in Stable and Unstable VIX Pattern  More on VIX AND ASSET ALLOCATION LB responded that a recent rule modification permitted such purchases in small amounts, even though the VIX is well over 30, which modification passed by unanimous vote (1-0) after giving appropriate notice.

Besides LB could not help but note that the rest of staff, just a bunch of worthless nitwits and dunderheads, whose only purpose is to create noise and other distractions that the LB has to overcome, and messes for the LB to clean up, do not understand the Stock Stud's trading rulebook for an Unstable Vix Pattern within the context of a long term secular bear market anyhow.

1. Bought 100 MSPRA at $16.6 on Monday (see Disclaimer): I had a number of trades yesterday. Due to time constraints, it will take at least two more posts to describe them. Today, I will just mention MSPRA, a floating rate equity preferred stock issued by Morgan Stanley.

MSPRA pays non-cumulative qualified dividends at the greater of 4% or .7% above the 3 month LIBOR rate on a $25 par value. www.sec.gov Given the Fed's Jihad against the savings class, the minimum rate is likely to be the applicable rate for at least two more years.  That realistic forecast about the future is one reason MSPRA has been sliding in price since hitting $21.46. MS.PA Stock Charts  The other main reason is the Morgan Stanley's perceived credit risk in the current economic climate.  Those kind of assessments are frequently based on emotion and fear even though there will often be some factual basis underlying those concerns. Some of those concerns are reflected in the huge decline in the common stock price. The common hit $30.99 last February. After a good rally in yesterday's trading, the MS common closed at $14.61.  MS Stock Charts

I have no idea whether MS will survive based on certainty.  I am certain that the placement on my hand on a blazing red stove burner will produce a burn.  I do not have that kind of certainty when evaluating MS's prospects or its ability to survive.

I do believe that it is likely, as in more probable than not, that MS will survive.  I also believe that MS would not survive for very long if it had to eliminate its common stock dividend and non-cumulative equity preferred dividends in order "to preserve capital."

MS kept current on the MSPRA dividend during the Near Depression period. For an investment bank like MS or GS, it would not be advisable to take any action which would send their customers running. As with other non-cumulative equity preferred stocks, the only way to eliminate the MSPRA dividend would be to eliminate the common stock dividend also. MS is currently paying a common stock dividend.  So far investment banks, the more likely scenario is that everyone gets paid until a bankruptcy filing and then everyone gets stiffed, which is what happened with Lehman which had a floating rate non-cumulative equity preferred stock that is now worthless of course.  I did manage to get out of that piece of garbage at a profit:
2006 Lehman Floating Rate Preferred Realized Gain

2007 Lehman Floating Rate Preferred Realized Gain $91.96


Those snapshots capture my entire trading history in that security which became worthless after Lehman filed for bankruptcy in September 2009. I may not be so fortunate next time. The OG got spooked with Lehmann in December 2007, and I do not now recall what caused the OG to become nervous. The memory of what happened to Lehman is still with investors and will impact the pricing of similar securities issued by MS and GS for a long time.  The fear of a security going to zero is a powerful one.

Fortunately, for MSPRA, I realized gains from trading this security in 2009-2010:

2010 Realized Gain MSPRA (2 trades) +$962.97
The largest gain originated from the 100 share purchase made in 2009: Bought 100 MSPRA at $12.88 May 2009  Sold 100 MSPRA at 18.5 July 2010 I also had a small trade in my ROTH IRA this year:

2011 Roth IRA Realized Gain 50 Shares MSPRA $58.47 

Sold 50 MSPRA at 21.03 in Roth IRA March 2011.

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Floaters: Links in One Post

Assuming MS survives and continues to pay the MSPRA dividend, this security has some value in my portfolio. It can provide some benefits in both deflation and inflation scenarios.  The LIBOR float could prove beneficial in a period of rising inflation, when central banks are not artificially keeping short rates low. The more normal scenario would be for short rates to rise as inflation increases. A zero federal funds rate with inflation running at 3% is not normal.

At a total cost of $16.6 and at the 4% rate, the yield would be approximately 6%. This would be the minimum yield at my cost, assuming MS continues to pay the dividend. Unlike the Synthetic Floaters, traded on the stock exchanges, MSPRA has no cap on the dividend. If the 3 month LIBOR rate is 20%, and MS has not called the security, then the dividend yield would rise to over 31%, at the $16.6 cost, on an annualized basis. In more normal times, a five percent LIBOR is not that unusual, and the yield would be 8.58% with the same assumptions at that rate. Unfortunately, it is not likely that the 3 month LIBOR rate will rise sufficiently to trigger the float provision anytime soon, or within the next two years.

LIBOR Rates History (Historical)

This kind of security issued by a financial institution is subject to volatility and a strong downside bias in times of market stress, particularly those times as now where the solvency and viability of financial institutions are being questioned by so many investors. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities August 2011.

MSPRA closed at $8.25 on 3/6/09. 

Monday, September 26, 2011

Sold Remaining PJS at 25.15-Roth IRA/Travelport/Pakistan's Aggression Against the U.S./Bought 50 FNLC at $12.79

Admiral Mullen, the outgoing Chairman of the Joint Chiefs of Staff, asserted publicly that Pakistan's spy agency played a direct role in attacking the U.S. embassy in Kabul, and in prior terror attacks against the U.S. and coalition forces. NYT  CBS disclosed some of the evidence supporting Mullen's claims. CBS News

Pakistan denied the truth of the factual statements made by Admiral Mullen. WSJ  If Mullen's assertions are true,  Pakistan has committed acts of war against the U.S. Many believe Pakistan provided a safe haven for Osama Bin Laden and other terrorists, and there is considerable factual support and circumstantial evidence for those opinions.

I would agree with the comments made by Dick Bove and Brian Westbury that Operation Twist will harm the financial system.  By lowering the long term interest rates, bank net interest margins will deteriorate further and many banks will probably respond by making fewer mortgage loans. Bove's comments can be found in Randall Forsyth's column in Barrons.  Westbury's analysis can be found in his interview at Morningstar. For those who able to refinance their mortgages at the current abnormally low rates, their balance sheets will improve but that kind of benefit will be offset by the harm caused by this Fed policy.  Operation twist needs to be abandoned immediately.

The PMI index for both Europe and China fell below 50. Markit reported that the September PMI index for Europe fell to 49.2 in September, the lowest reading since July 2009.www.markit.com.pdf HSBC reported that its survey of Chinese manufacturing showed a decline to 49.4. MSN Money Any number below 50 indicates contraction.  

The NYT reported that its ad revenue declined will decline about 8% in the third quarter, more than its previous forecast.

FedEx cut its earnings estimate for its fiscal year ending in May 2012 due to slowing worldwide growth.  The new estimate is for an E.P.S. between $6.25 to $6.75, down from the prior forecast of $6.35 to $6.85.  SEC Filed Press Release 

Freddie MAC reported last Thursday that the average 30 year mortgage rate was 4.09%.  The 15 year rate was 3.29%. Primary Mortgage Market Survey (PMMS) - Freddie Mac 

Former Fed Governor Mark Olson said in an interview that the FED has "nearly" exhausted its bullets to revive the economy. YF Daily Ticker 

A TIP, with 9 years and 10 months remaining in the term, was auctioned last Thursday with a coupon yield of .078%:  www.treasurydirect.gov.pdf

I bought some Canadian dollars late last week after the USD experienced a robust rally. Canadian Dollar (CAD) Strategy I will not buy CADs unless 1 USD buys at least 1.03 CADs.

Bank of America Merrill Lynch lowered its forecasts of U.S. growth for 2011-2013. The new forecasts call for anemic growth extending into 2013:  1.6% in 2011; 1.8% in 2012; and 1.4% in 2013. That may prove to be overly optimistic. WSJ

Silver declined 26.3% last week. Gold declined 9.6%.

The DJIA declined 6.4% last week, the worst loss since October 2008.

The  ^VIX closed at 41.25 last Friday, rising from the 30.98 close on Friday 9/16/11.

The VIX has been in the Unstable VIX Pattern since the formation of a Trigger Event in August 2007. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Vix Asset Allocation Model Explained Simply Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming (July 2011).

Goldman Sach's stock fell 11% last week to close at $95.18. GS Stock Quote  Morgan Stanley fell 16.5% last week. Earlier in the year, MS stock traded over $30.   MS Stock Charts

1. Travelport (own bonds):  I received a notice on Thursday that S & P downgraded, again, my two Travelport Limited (Travelport) senior bonds, taking the rating all the way down to the letter "C".  While I do not have access to the report, the downgrade is related to what S & P characterizes as a default by the parent, known as Travelport Holdings Limited (Travelport Holdings). That default involves what S & P believes is a forced recapitalization of the PIK notes that are obligations of the parent. The proposed terms of the restructuring are summarized in this SEC Filing.

The proceeds of those notes were not used in Travelport's business. Instead, the proceeds from the sale of those notes were used to pay a dividend to the shareholders of the parent, one of the many private equity firms that serve no useful purpose in society other than to create this kind of problem, to undermine viable businesses with boatloads of debt, and to contribute to U.S. unemployment by sacking employees to cut costs. If all the owners of the PIK do not accept the recapitalization plan, then Travelport Holdings will file a prepackaged bankruptcy petition. SEC Filing on Consensual Plan for Bankruptcy And who knows what will happen then?

A change in control of Travelport can trigger a call at par value of Travelport's debt. Item # 2 Travelport (9/19/11 Post); see page 37-38 of Travelport's recently filed Form 10-Q discussing these issues). Needless to say, if that happens, it would not be a positive development for the unsecured senior debt holders.  

Headknocker ordered an investigation into which Head Trader bought the Travelport bonds. RB replied that it was the "Nerd Machine" while LB retorted that "it had to to be either the RB or the Old Geezer since the LB has never ever made a mistake. Since it is inconceivable that the LB erred, ipso facto, res ipsa loquitur, it would have been impossible for the LB to be responsible for the purchase of those bonds and that kind of error could only have been made with either the RB or the OG, or some unholy amalgam of the two, acting as the HT".     

2. Sold Remaining Shares of the TC PJS at 25.15-Roth IRA (see Disclaimer): I had success trading this TC during the Dark Period, acquiring some shares at $7.2. The underlying bond was originally issued by First American that later split into two separate firms. The company known now as First American is involved in issuing title insurance policies. The company is known now as CoreLogic. As explained in two prior posts, the split left the First American 2028 senior bond, the underlying security in the TC PJS, with CoreLogic. Item # 4 PJS and Item # 3 TC PJS.  Prior to the split, the bond had a low investment grade rating and is now rated as junk. 

Since I am de-risking in my IRAs I decided to sell the remaining shares of PJS, which were held in an IRA, at near break-even, making a small profit on the shares plus some interest. Added: PJS at 24.72  I no longer have a position in PJS. Bought PJS at 7.2-October 2008 Bought 50 PJS at 17.95 August 2009 Bought 50 PJS at $17.8 in Roth August 2009 Sold ALL PJS at 24.75 & 24.65 April 2010 Bought 50 PJS at 23.73 Sold PJS at 25.45 Bought 50 of the TC PJS at 24.84 Bought 50 PJS @ 24.6 Sold 100 PJS @ 25.2

Merrill Lynch Depositor Inc. PreferredPLUS 7.55% closed at $25.08 last Friday.

I now have snapshots of most of my recent TC trades at the end of Trust Certificates: New Gateway Post.

So far, as part of this de-risking process, I have sold all of my European hybrids owned in the IRAs, and two TCs containing junk rated bonds as their underlying security.

3. Bought 50 FNLC at $12.79 Last Week (Regional Bank Stocks' basket strategy)(see Disclaimer): Before the carnage hit late last week, I had placed a day limit order to buy 50 shares of FNLC at $12.79. On the day that order was filled, the market blew through that limit order on the way down to a new 52 week low for this stock. This brings me up to 100 shares, with the previous 50 bought at $13.6.  Due to the price decline, I changed my reinvestment option from payment in cash to the purchase of additional shares. The quarterly dividend is currently 19.5 cents per share, The First Bancorp Declares Dividend, the same rate as paid for the last 12 quarters. Assuming a continuation of that rate, the dividend yield would be approximately 6.1% at a total cost of $12.79. The stock is trading lower than that price as of Friday's close. First Bancorp Inc., FNLC Stock Quote

I discussed this bank's first quarter report in this post: Item # 3 FNLC  SEC Filed Press Release for 1st Quarter 2011 Earnings

I discussed FNLC's second quarter earnings report in Item # 9 FNLC  SEC Filed Press Release for 2nd Quarter 2011 Earnings

The bank recently repurchased $12.5 million of the government's preferred stock. This SEC filing shows how that repurchase impacted FNLC's capital ratios.

First Bancorp recovered some in trading last Friday, closing at $12.77, up 57 cents.

This strategy has a long term horizon. Fortunately, I took some profits before the bank sector hit the skids again. Item # 3 Realized Gains Regional Banks This give me the option to buy shares at lower prices since I am currently close to $10,000 dollars below the $40,000 minimum exposure to this strategy, as I did a lot of selling earlier this year. (the range is $40,000 to $50,000: Item # 1 Stocks & Politics) I will move temporarily above and below that range.