Monday, December 31, 2012

Update for Regional Bank and Lottery Ticket Basket Strategies/Added Regional Bank Basket: 40 KEY at $7.87, 30 FFBC at $14.24, 120 MNRK at $8.65 / Lottery Ticket Buys: 30 SMS at $9.26, 50 STKL at $5.85 & 30 QLGC at $8.83

This update is published on the last Monday of each month. The tables contain prices from last Friday's close. 

Before getting to the subject matter of this post, I would simply note a favorable article about LeapFrog published by Seeking Alpha. I left several comments to that article. I recently bought 100 shares in my "Flyers" basket strategy. Item # 2 Bought 100 LF at $7.86

In spite of mostly positive economic news last week, the market declined as Washington's political elite dithered on the fiscal cliff.

Last Friday's Close (12/28/12)
S & P 500: 1,402.43 -15.67 (-1.10%)
DJI: 12,938.11 -158.20 (-1.21%)
Investment Grade Bond ETF: LQD: 121.63 +0.27 (+0.22%)
Long Treasury Bond ETF: TLT: 123.31 +0.70 (+0.57%)
Junk Bond ETF: JNK: 40.55 -0.11 (-0.27%)
"Preferred" Stock ETF: PGX: 14.64 +0.01 (+0.07%)(includes senior bonds, european hybrids and other types of junior bonds in addition to traditional equity preferred stocks, see Introduction to Stocks, Bonds & Politics: Preferred "Stock" Funds and Item # 3 Preferred Stock ETFs: Bought 200 PGX at 13.53)

1. Update: Current Holdings in the Regional Bank Basket:

The strategy is explained in this Gateway Post: 

The following table does not include shares purchased with dividends. The purchase and sell prices do not include commissions. However, when a position is sold, the trade snapshot appearing in the foregoing post will contain any reinvested dividends and include commissions costs. This portfolio experienced a decline of .6% last Friday.

Regional Bank Basket as of 12/28/12

Realized Gains in this Basket Strategy 2009-2012: $9,921.43 plus dividends-snapshots at Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST.

A. On 11/26/12, People's United Financial (PBCT) announced that it had completed purchasing the entire 18 million shares under its share repurchase authorization. The weighted average price for those repurchased shares was $12.08. The Board authorized a new program to purchase up to 10% of PBCT's outstanding shares or 33.6M shares.

This announcement contains several noteworthy items.

First, the company actually bought all of the shares in the prior authorization announced in October 2011. Many companies may announce a share buyback but fail to complete it or even make any significant purchases under the authorization. And, very few banks are buying back their shares in this kind of volume. Some banks, like Bank of America, are not even allowed by their regulator to use their capital to buy back shares or pay more than a 1 cent per share quarterly dividend.

Second, the buyback was completed at a decent weighted average cost. I never view it as helpful for a company to buy back shares when the stock is selling at a relatively high P/E.

Third, the new repurchase program,  the fast completion of the prior one, and the existing common stock dividend tells me that this bank has capital to return to its shareholders through shrinking the share base and paying a decent common share dividend.

PBCT also sold $500M in 10 year notes with a 3.65% coupon. Pricing Term Sheet

I own 100 shares as part of my regional bank basket. Bought 100 PBCT at $11.47 (June 2012)

Last Friday's Close: PBCT: 11.97 -0.10 (-0.83%)

B. Financial Institutions (FISI-own) announced a 14% increase in its quarterly dividend to 16 cents per share. This bank did reduce its quarterly rate from 15 cents to 10 cents in the 2008 4th quarter, raised it to 12 cents in the 2011 2nd quarter, raised it again to 13 cents in the 2011 4th quarter and to 14 cents in the 2012 second quarter.  Financial Institutions Dividend History 

Bought 50 FISI at $15.55 (4/17/12)

Last Friday's Close: FISI: 18.50 -0.07 (-0.38%)

C. Added 30 FFBC at $14.24 (Regional Bank Basket Strategy)(see Disclaimer): First Financial Bancorp is a regional bank headquartered in Cincinnati, Ohio. This purchase was an average down:

2012 Add 30 FFBC at $14.24
After hitting $17.86 on 9/14/12, the shares of First Financial Bancorp have been in a waterfall type slide. First Financial Bancorp. Stock Chart

I would attribute that decline to several factors: (1) concerns generally applicable to regional banks in general involving net interest margin compression; (2) a lackluster third quarter earnings report; (3) valuation at the $17+ price; and (4) the payment of a $.28 per share dividend.

Prior to the share price slide, I did manage to trim my stake by selling 50 shares at $17.51 (Item # 3 : September 2012 Post) I did not want to buy anymore shares at over $17 so I quit reinvesting the dividend. I changed back to reinvestment due to the slide.

I still own shares bought at higher prices than my last add at $14.24: Item # 3 Added 50 FFBC at $15.95 (August 2012); ADDED 50 FFBC at $14.87 (December 2011).

This bank is paying out all of its net income in dividends until the end of 2013, unless there is a material change in its capital position. The quarterly dividend now consists of two parts: a fixed dividend of 15 cents per share and a variable dividend equal to the difference between 15 cents and the net income per share. The last quarterly dividend was $.28 per share.

At the fixed rate of 15 cents per share, the dividend yield would be about 4.2% at a total cost of $14.24. The variable dividend would juice the yield, for up to another year, to around 8.4%.

This is a summary of some key items from the last earnings report:

Net Income Per Share: $.28 up from $.27 in 9/30/11 Q.
Net Interest Margin: 4.21% (declined from 4.49% 6/30/12; 4.55% 9/30/11)
NPL Ratio: 2.41%
Coverage Ratio: 99.6%
Annualized Charge-offs to Loans= .71%
Tangible Equity to Tangible Assets: 9.99%
Tangible Book Value Per share= $10.47
Total Risk Based Capital Ratio: 18.21% (10+% well capitalized)
Tier 1 Capital Ratio: 16.93% (well capitalized 6%)
Return on Average Assets: 1.05%

SEC Filed Press Release 3Q12 Earnings

Last Friday's Close: FFBC: 14.49 -0.04 (-0.28%)

D. Added 40 KEY at $7.87 (Regional Bank Basket Strategy)(see Disclaimer): KeyCorp is a large regional bank headquartered in Cleveland, Ohio. This purchase was an average down:

My last add was the purchase of 70 shares at $8.77 (October 2012). The original purchase was made as part of the Lottery Ticket strategy. Item # 3 Bought 30 KEY at 8.75 (January 2011). Given the progress KeyCorp has made since the Near Depression, I removed the stock from the LT category and gave it a promotion to the regional bank basket strategy, which has no limit on the amount devoted to a purchase. Still, there are a lot of negatives as I discussed in the October 2012 post. Basically, I mentioned in that post that I am more optimistic about this bank over the next five to ten years than the next 0-24 months. A long term chart shows the destruction in value during the recent Near Depression: KEY Interactive Chart

I have nothing to add to my discussion in Item # 1 Added 70 KEY at $8.77 (October 2012), except that the price has declined about 10% since that purchase and is at least in theory a better long term buy now. This purchase brings me up to 140 shares, and I will be reinvesting the dividend.

Last Friday's Close: KEY: 8.35 -0.07 (-0.83%)

E. Bought 120 Monarch Financial (MNRK) at $8.65 (Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST)(disclaimer): I neglected to discuss this one in a weekly post. Since I always discuss adds to my regional bank basket, I decided to place a brief discussion of this purchase in this update. I did not buy 120. Instead I bought 100 and subsequently received 20 stock split shares (6 for 5). The cost number above is adjusted for that stock split. Personally, I think that it just asinine to have a stock split for shares selling at less than $10 but this small Virginia bank did it anyway. It is irrelevant since my slice of this business does not change based on stock splits. The stock did go ex dividend since my purchase for a 5 cent quarterly dividend. I have a small capital loss on the shares. So anyone can show up the OG by buying at a lower price.

Monarch is a bank holding company headquartered in Chesapeake, Virginia. It has two wholly owned banks. The first is known as Monarch Bank with 11 branches in the Hampton Roads area. The other is a division of Monarch Bank, OBX Bank, operating in the Outer Banks of North Carolina with 2 branches. The location of those branches can be found at page 5 of the following investor presentation.

SEC Investor Presentation November 2012: Investor Presentation

As noted in that Investor Presentation, Monarch participated in "TARP in December 2008 as an abundance of caution" and repaid the government in full in December 2009.

Monarch Bank was formed in 1998, and the holding company started to pay dividends in 2010:

Annual Rate:
2010: $.14
2011: $.16
2012: $.19

Near Depression Stats and Recovery: P. 26, Form 10-K as of 12/31
Net Income Per Share/NPA Ratio
2011: $.93  .85%
2010: $.77 1.3%
2009: $.67  1.4%
2008: $.21 1.35%
2007: $.66 .08%

Last Earnings Report 2012 Third Quarter:
SEC Filed Press Release:  Press Release
SEC Form 10-Q: MNRK.2012.9.30-10Q
Net Income Per Share: $.56, up 93%
Net Interest Margin: 4.3%
Efficiency Ratio (Bank Only): 52.6%
NPA Ratio: .48%
Coverage Ratio: 265.16%
Return on Average Assets: 1.43%
Net Charge Offs to Average Loans: .12%

Capital Ratios as of 9/30/12:

Last Friday's Close: MNRK: 8.22 +0.01 (+0.12%)

2. Update: Current Holdings in the Lottery Ticket Basket Strategy: Right Brain (RB) is in charge of the Lottery Ticket Basket Strategy, one designed for its entertainment, while the serious work is done by Left Brain (LB) here at HQ (home in Brentwood, TN). The strategy is explained in this post:

Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

The preceding post contains snapshots of all trades where the gain or loss exceeded $30.

This basket declined $65.53 last Friday:

Lottery Ticket Basket as of 12/28/12

This strategy would be strangled at birth, given the small odd lots, without today's low online commissions.

Rules: Left Brain Has Boatloads of Rules-"stinking Lame Brain Rules, a voice was heard to say
Maximum Purchase Limit $300 plus any prior realized gains for each security
Total Amount of All Purchases Still Owned May Not Exceed Total Realized Gains Now
Total Realized Gains: $11,588.03
Approach: A deeply contrarian value approach. Expect a number of failures!
Holding Period: Can be until the OG is no more-particularly given the small size of each position.
Formed After Losing and Rarely Winning Anything at Powerball.    

A. Bought 30 Sims Metal Management (SMS) at $9.26 (see Disclaimer): Sims Metal Management is the largest public company in the metal and electronics recycling business, with operations at over 270 locations in more than 20 countries. While the company has its headquarters in NYC, SMS is an Australian company whose ordinary shares are traded on the Australian stock exchange: SGM.AX: 8.91 -0.02 (-0.22%) : SIMS METAL MANAGEMENT Sims files its reports with the SEC using the forms applicable to foreign companies (e.g. Form 20-F is the Annual Report rather than Form 10-K used for a U.S. domiciled company). I bought the ADR traded on the NYSE.

Company Website: Sims Metal Management Global

Sims Metal Management Profile Page at Reuters
Sims Metal Management Key Developments Page at Reuters

After hitting a high over $39 in June 2008, the stock price slid to below $8 in December of that year. Since 2008, the stock has traded mostly in a channel between $10 and $20. SMS Interactive Chart The current 52 week range is between $8.27 to $16.7

This Lottery Ticket selection is based on the usual statistical criteria along with a smashed stock price. For a patient investor, willing to hold for up to five years, there is a realistic potential for a double with sustained worldwide economic growth.

Closing Price on Day of Purchase (12/7/12): SMS: 9.33 -0.03 (-0.32%)
Key Statistics Based on 12/7/12 Closing Price of $9.33/Earnings Reports to 6/30/12
Price to Book: .21
Price to Sales: .78

ANNUAL REPORT 2012 F/Y:  20-F The company is did report earnings of AUD$192.1 for the F/Y ending 6/30/11 (diluted AUD $.938 per share), up from AUD$126.7M in the 2010 F/Y (AUD $.649 per share).  A loss was reported in the 2012 F/Y after goodwill impairment charges of $557.4M and AUD57.5M. (page 37; F-29)

The company has been paying dividends in Australian dollars, see page F-54.

Part of the potential is reflected in the earnings, reported in Australian Dollars for the following fiscal years ending 6/30: 2008 AUD $3.03 per diluted share; 2007 AUD $1.905 per diluted share; and 2006 AUD $1.646 per diluted share, see page F-2 of 2008 Annual Report: FORM 20-F)

This stock was selected using a Morningstar screen.

SMS is currently rated five stars by Morningstar with a fair value estimate of $16 per share and a consider to buy price at $9.6 or less. As noted in the Morningstar report, Sims Metal Management was created by the 2008 merger of Australia's Sims Group and the U.S. company formerly known as Metal Management.

Subsequent to my purchase, the stock was hit some after Sims Metal Management guided its F/Y 2013 EBITDA down 20% from its previous range of $110-$120M.

Last Friday's Close: SMS: 9.50 -0.24 (-2.46%)

B. Bought 30 QLGC at $8.83 (see Disclaimer): I would not profess to understand much, if anything, about QLogic's products. For a LT selection, it is unnecessary to have that comprehension. With a maximum purchase limit of $300, I am not concerned about my ignorance. Basically, the company develops and manufactures storage networking infrastructure components.

The products are described in the firm's 2012 F/Y Annual Report at page 24: Form 10-K

This selection was made using primarily statistical criteria that became more appealing after the market smashed the stock price.

During the Bubble Years, QLGC a split adjusted high of $203.25 in 2000 before coming back to earth from La La Land. (Page 10 10-k, YF historical prices are wrong). The price had moved from a low of $3.49 in the previous year.  Irrational pricing decisions are the norm rather than the exception.

After I bought these shares on 12/7/12, a SA contributor published an article on QLogic: 72% Upside . . .  Left Brain of course launched into a lecture about the lessons to be learned from Qlogic's history and has, as expected, received almost no favorable responses.

A portion of LB's lecture in the Qlogic series is captured with this snapshot:

Excerpt From LB's Lecture Series on the Madness of Crowds

Of course, our LB is not even capable of talking about such matters except in the professorial mode.  LB has sort of taken its show on the road so to speak.

Over the past five years, the stock has traded mostly in a $12 to $18 channel range. The stock was trading at over $17 earlier this year before starting a waterfall type decline in March 2012: QLogic Corporation Stock Chart The recent pricing is below the February-March 2009 lows: QLGC Historical Prices So, the stock price of less than $9 per share certainly qualifies as smashed, one of the usual criteria underlying a LT selection, looking at the chart and historical prices.

QLogic Profile at Reuters

QLogic Key Developments Page at Reuters

Key Statistics Based on $8.83 Price-Earnings ReportsThrough 4/1/12
Price to Book: 1.16
Price to Sales: 1.57
Cash Per Share: $5.44
Debt: Zero
Forward P/E 4/1/14=5.77

I highlighted the statistical criteria viewed as most important. The company is profitable and has net cash equal to 62.7% of the $8.83 market price.

For the F/Y ending in March 2014, the current consensus estimate is for an E.P.S. of $.84. QLGC Analyst Estimates

During the last conference call, the company gave a warnings about the current quarter. QLogic's CEO Discusses Q2 Results (10/25/12)

The company reported GAAP net income for its fiscal second quarter of $11.8M, or 13 cents per diluted shares, on revenues of $117.9M. Press Release Cash, cash equivalents and marketable securities were reported at $484.416M as of 9/30/12. No long term debt is shown on the balance sheet.

Form 10-Q for the Q/E 9/30/12

Form 10-K for the fiscal year ending 4/1/12

Before purchasing this stock, I did review analyst reports published by Zacks and S & P.  Understandably, the analysts had neutral ratings on the stock. S & P gave it three stars with a 12 month target price of $11.

FCF Yield Analysis:

Qlogic Market Value as of 12//21/12 (two weeks after purchase):
Minus Debt-None
Plus Cash $484.416M
Enterprise Value=422.404M

Source for Cash and Debt Numbers: Form 10-Q

FCF Numbers for Years Ending September 30th
2012: 116.6M
2011: 183.33M
2010: 146.98M

FCF Yield
Divide 148.97M Average Annualized FCF By $422.404M Enterprise Value=35.268% FCF Yield

I used the FCF numbers from YCharts:

QLogic Corporation Free Cash Flow (QLGC)

See Free Cash Flow Yields on FCF Calculation

If I had some comprehension of the products, which I do not, I would have bought this one in the The $500 to $1,000 Flyers Basket Strategy, which would have allowed a 100 share purchase at $8.83.

Last Friday's Close: QLGC: 9.55 -0.08 (-0.83%)

C. Bought 50 STKL at $5.85 (Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post)(see Disclaimer): I have bought and sold this Canadian company many times.  While LB did provide some input into the Qlogic selection, mostly to show the irrationality of Right Brains who took Qlogic's price to over a 200 P/E and $200 per share in 2000, LB refused to do anything to help the RB, who runs the LT strategy, on this purchase, saying something about giving RB some rope.

This company was initially purchased outside the purchase limitations of the LT Strategy and was demoted to LT status after making a dive toward zero.

My first two entries occurred pre-LT from 2007 and both exceeded the LT $300 Maximum plus any prior realized gains for this security:

2007 STKL Two 100 Share Lots Realized Gain=$807.93
The last sell on 11/1/2007 was a total cost of $14.5497 per share.

RB was then allowed to buy 100 shares, purchased at $1.85 in 2008. Buy of Sunopta at $1.65: Highly Speculative (December 2008). As RB barely recalls, the decline had something to do with strawberries, but why sweat the details when it is all about the future anyway. But don't quote the RB on that strawberry angle. Those 100 shares were sold at $4.06 (September 2008), a few months later RB was quick to add which goes to show who is the real star here at HQ, certainly not the Lame Brain.

2009 STKL 100 Shares +$224.04
Then there was another quickie, which was less profitable. Bought 50 STKL at 5.25-Sold 50 STKL at 6.64-LT Category

2012 STKL 50 Shares +$56.1

Total Non-LT Transactions: $807.93
Total LT Transactions: $280.14
Net Realized Gain of $1,088.07
No Dividends Have Been Paid

Headknocker is fine with what RB is doing, at least when the Nit Wit is playing with the house's money doing that vision, hopium thing or whatever it is doing now. HK does not want to know and is just happy the RB is out of the serious business end of HQ's storied trading operation.

Now, if anyone is expecting a discussion about this stock, you may be disappointed. The Old Geezer decided to help the RB out by referencing some numbers and providing a link to the last earnings report and transcript of the earnings call.

RB noted that the OG can be helpful sometimes, when compos mentis of course and relatively free of those old age issues and senior moments, but one has to take into account those brain misfire problems.

The OG tries, to be sure, but what can he do really when most of brain synapses are no longer functional, just one of those self-evident propositions like life, liberty and pursuit of happiness that Tommy Jefferson wrote about many years ago, RB noted showing off its scholarship. RB diagnosed the issue by looking at some Brain pictures.

SEC Filed Press Release 3rd Q: SunOpta
Earnings Call Transcript: Earnings Call Transcript - Seeking Alpha
Reuters Profile Page: SunOpta
Reuters Key Developments Page: SunOpta
Company Website: SunOpta - Home

STKL Key Statistics (as of 12/21/12)
Forward P/E: 11.73
P/S ratio: .34
PEG .38
PB Ratio: 1.2

Long Term Chart Reveals a Lack of Consistency: STKL Interactive Chart

A research report was published at Seeking Alpha on STKL after my purchase. That author also delves into the value of STKL's interest in two companies Opta Minerals and Mascoma, that are far beyond the scope of my discussion involving a LT purchase. I left a number of comments to that article. I would just add that STKL has had ownership stakes in those businesses since I started to buy the stock in 2007.

OptaMinerals is also traded on the Toronto stock exchange: OPM (TO)
Link to Third quarter results for Opta: ‎
Opta Website: Opta Minerals

STKL has a 66.2% stake in Opta. This stake is clearly non-strategic. Based on last Friday's close of $2.5 CAD for OPM shares, STKL's stake is worth about USD $30.0223M  (Market Cap at TSX shown at CAD $45.199M x .662= CAD $29.9217M or roughly USD $30.0223M at last Friday's exchange rate). With 65.98M STKL shares outstanding, the OPM stake is worth around 45 cents per STKL share.

Mascoma is a private company that acquired SunOpta Bio Process Inc. in 2010. ‎ Sunopta now owns an 18.65% stake in that private company. SunOpta Inc.: Form 10-Q at page 17

Last Friday's Close: STKL: 5.59 +0.03 (+0.54%)

D. A Few News Items on LT Names:  

1. LSI Logic (LSI).Tiernan Ray summarized a Wunderlich Securities report on LSI Logic.  Tech Trader Daily - That firm initiated a coverage with a buy rating and a $9 buy target, arguing that LSI should benefit from "its early entry into the NAND flash based storage market as well as its chips for wireless base stations. LSI's products are explained in its last filed Annual Report at pages 2-5, Form 10-K

Last Friday's Close: LSI: 6.92 +0.01 (+0.14%)

FCF 12 months ending 9/30/12=$241.66
YCharts: LSI Corporation Free Cash Flow (LSI)

Market Cap at $6.92 Price=$3.83B From YF
Plus Debt of = Zero
Sub-total= $3.83B
Minus Cash of $643.027M
Total Ent Val=$3.186973

FCF of $241.66M divided by EV of $3.186973= 7.58% FCF Yield

Debt and Cash Taken From Last SEC Filed 10-Q: Form 10-Q

LSI Key Statistics

2. Tetra Technologies (TTI): This stock is now trading above its 200 and 50 day SMAs, closing last Friday at $7.4. TTI Interactive Chart The fifty two week low was hit on 10/31/12 at $5.35.

The current consensus estimate is for a $.60 E.P.S. in 2012 and $.82 in 2013, a 36.67% growth rate.

Key Statistics as of 12/28/12 at $7.4 price
Forward P/E 9.02
P/S .69
P/B 1.05
PEG 5 YR EST= .44
TTI Key Statistics

TTI owns through subsidiaries a large chunk of the partnership units of  Compressco Partners, L.P. (see
Compresso Investor Presentation at page 15).

Bought as Lottery Tickets: 50 SIMG at $4.33 and 50 TTI at $5.98

Thursday, December 27, 2012

Floyd Norris NYT: Bear Market In Bonds

Stock and Bond bull and bear markets start and end at extremes. The seasons come and go, nothing lasts forever. 

For whatever it is worth, Floyd Norris stated in his column tonight that the long term bull market in bonds is kaput.   

He stated in his column that a "new bear market almost certainly has begun" in bonds.  NYT 

Without question, bonds were at one extreme when the long term bond bull market started in 1982. The 30 year treasury bond was yielding 14% to 15.25% in 1981-82. It is now yielding less than 3%. That should cause any bond bull concern. 

The TIPs have gone into La La Land. As Norris points out, the treasury just auctioned a 4 year and 4 month TIP with a negative current yield of -1.496%. .pdf I have sold out of TIPs. 

The death phase of a stock or bond bull market is reflected both in price and enthusiasm with myriad arguments used to justify extreme prices. This time is different, but it is never really different. 

A stock market novice could have picked the end of the 1982-2000 stock bull market by simply looking at the Shiller PE Ratio.

The last two years of that bull move was fluff. From my viewpoint, the bull market ended in October 1997 and the rest was insanity. Item # 3 Dating the Start of the Current Long Term Secular Bear Market (May 2010 Post)

The yield on treasury securities is equally insane now.  Anyone buying at today's prices is virtually guaranteed a negative real rate of return before taxes. 

The Federal Reserve could easily lose control over the long rates sometime in 2013, notwithstanding a continuation of zero percent federal funds and massive purchases of treasury securities with newly created money which may actually add fuel to a steepening yield curve. The likelihood of that happening would increase with a continued recovery in U.S. home prices, plus an acceleration of new home construction and automobile sales. 

When the worm turns against bond owners, and it will turn, it will likely turn with a vengeance. 

When a long treasury is yielding 3%, the damage to a holder with a rise to 5% would be devastating. 

See generally:
Impact of Rising Rates Starting at Page 8:‎ .pdf

My current thinking is that the long term bull market in bonds will soon be over. I am not likely to own any bond fund by the end of 2014. I will continue to own individual bonds and floaters whose coupons rise with short term rates. I will probably shorten my weighted average maturity some of individual bonds. 

Depending on how 2013 develops, I may start to trim or even eliminate my modest CEF leveraged bond fund positions next year. 

I am just super cautious on bonds now. We may be fine for another year, maybe two, but I would not bet on it. I would keep a close eye on the yield spread between short and long term bonds. The Federal Reserve can keep control over the short term rates and start to lose its influence over the longer term rates even with QE4.  A widening spread would be just one signal. 

I also discuss this topic at Income Investing Message Board - Msg: 28628964, and in a subsequent post published today at the same site: Income Investing Message Board - Msg: 28630078

Wednesday, December 26, 2012

Bought 50 GSPRD at $20.6/Bought 50 FCG at $15.84/Paired Trade: Sold 100 GDO at $20.79 and Bought 100 BTZ at $13.83/Sold All of the Mutual Fund VASGX/Terex Bond Redempton

Big Picture Synopsis:

Short Term: Slightly Bearish
Intermediate and Long Term Bullish 

Short Term: Neutral
Intermediate Term: Slightly Bearish
Long Term: Extraordinarily Bearish

I am just waiting to see whether Congress can resolve the fiscal cliff matter before deciding whether to change the short term stock outlook. I am assuming maximum dysfunction until proven otherwise. Guilty until proven innocent.

LB could solve the entire matter in an instant, on a fair basis, without breaking into a sweat, that would address the long term fiscal issues faced by the U.S.

Resource Capital declared its quarterly on both is preferred and stock. The quarterly dividend on the preferred stock RSOPRB, which I own, is $.515625.  

According to a summary of a Sterne, Agee & Leach report on regional banks, Barrons, that firm added Berkshire Hills (BHLB), which is owned, as one of its 9 best picks for 2013. Of the remaining ones, I do not currently have a position, but have bought and sold ONB. Another one mention, PNC Financial Services, is too large for my approach.

The cover story in this week's Barrons has the headline "Europe on Sale". The author argues that the European stock market could "rally as much as 20% in 2013". Focus for a moment on the quoted phrase. What exactly does it mean? It really has no substance at all. The market may rally 1% or 15% or 20%. I would agree, however, with the general thrust of the argument that the European stock market has a large number of undervalued companies that could be bought by investors who are capable of thinking long term and who have somehow learned patience which is not a natural condition for our OG. Any investment now may not pay off in 2013, and there is certainly no way now to know, with any decree of certainty, whether the European market will be either positive or negative next year, let alone the amount of any gain or loss. Value investors can not think in those terms. The European market may take off next year, so maybe I need to increase my position in those equities now just in case Barron's upper target proves close to prescient. As the future turns into the past, I can make more decisions with later acquired information.

I own a few European companies. I also have a position in the ETF ADRU which currently owns 85 ADRs of European companies. I am not likely to add more to that one.

Instead, since I can buy Vanguard ETFs without paying a commission at Vanguard, I will simply keep ADRU and start to add the Vanguard MSCI Europe ETF (VGK) in small pieces. The expense ratio is .14%. Through 9/30/12, the annual average 5 year performance of that ETF is -5.46. Fine, that is precisely the point. I did not own it over that period and can add to it now.

As to ADRU, I briefly mention two purchases made in 2009 at $15.12 and $19.81, ADDED TO ADRU (August 7, 2009). I have been reinvesting the dividends and have not paid much, if any, attention to it. It has not been able to gather much assets.

ADRU Sponsor's page: ADRU | BLDRS Europe Select ADR Index Fund
List of Holdings: ADRU - BLDRS Europe Select ADR Index Fund Holdings


I discovered recently that Vanguard has several low cost ETFs that trade on the Toronto stock. Vanguard Canada Individual- ETFs

MSCI Canada Index ETF has a .09% expense ratio and owns 100 Canadian stocks.

FTSE Canadian High Dividend Yield Index ETF (VDY) has a .3% expense ratio and owns 82 stocks.

FTSE Canadian Capped REIT Index ETF (VRE) has a .35% expense ratio and 19 holdings.

Canadian Short-Term Corporate Bond Index ETF (VSC) has a .15% expense ratio and owns 80 bonds.


1. Bought 50 GSPRD at $20.6 (see Disclaimer):

Security Description: The Goldman Sachs Group Inc. Depository Preferred Shares Series D (GS.PD) is a floating rate equity preferred stock, with a minimum coupon, that pays non-cumulative, qualified dividends at the greater of 4% or .67% above the three month Libor rate on a $25 par value.


I generally describe the advantages and disadvantages of equity preferred floaters in Advantages and Disadvantages of Equity Preferred Floating Rate Securities

One of advantages is that some deflation/low inflation and inflation protection is built into just one security. The deflation/low inflation part involves the minimum coupon, in effect now of course, while the inflation component is the LIBOR float.

The qualified dividend is another advantage. It remains to be seen, however, whether this favorable 15% tax cap will continue, particularly for the wealthy. I am working under the assumption that most "well off" investors are about to lose this advantage. The question is the dividing point in annual taxable income.

Short term rates are likely to remain artificially low for several more years. The Federal Reserve adopted its 0% to .25% federal funds rate in December 2008. Central bank monetary policy will keep the 3 month LIBOR rate at artificially low levels for an "extended period".

Prior Trades: I have traded this one lightly:

Bought 50 GSPRD at 21.58 (January 2011)-Sold 50 GSPRD @ 22.72 (April 2011)(paid too much)

Bought 50 GSPRD at $18.6 (September 2011)-Sold 50 GSPRD at $20.47 (March 2012)

Bought Back GSPRD at $18.9 (July 2012)- Sold 50 GSPRD at $20.47 (March 2012)(might as well held onto it, no harm-no foul)

Floaters: Links in One Post

Total Realized Gains Excluding Dividends=$168.13 (at least that number is green; snapshots are at the end of the Gateway Post, Advantages and Disadvantages of Equity Preferred Floating Rate Securities)

Rationale: (1) Income is Better Than Cash Earning Nothing/Some appreciation Potential Possibly to $22 with Risks (see below)/Deflation-Low Inflation-Problematic Inflation Scenarios Embodied in One Security.

I also discuss this security in a recent Silicon Investor comment.

Income Investing Message Board - Msg: 28617257

At a total cost of $20.6, the dividend yield at the 4% coupon is about 4.85%. The LIBOR float provision will activate when the 3 month LIBOR rate is over 3.33% during the relevant computation period. At a 5% LIBOR, the rate would be approximately 6.88%. This security was also bought in order to balance the interest rate risk of the senior fixed rate coupon bond, KWN, maturing in 2042 which was recently bought.

Risks: (1) Highly Volatile/Heightened Risk/Non-Cumulative: I started to invest in some of these securities during the Near Depression when they could be purchased at greater than 50% discounts to their $25 par values. The downside risk is zero as shown by what happened to those unfortunate souls who owned LEHPRG, a Lehman equity preferred floater, that is now worthless of course.

An equity preferred stock is only superior to common stock. It will be junior in the capital structure to all bonds. Given that low priority, the non-cumulative dividends paid by most of them, and the highly leveraged balance sheets of financial institutions issuing them, there will be no recovery in a bankruptcy for an owner of an equity preferred stock. Investors realized that would be the likely outcome and will behave irrationally when there is a whiff of a possible financial collapse. (a 75% chance of bankruptcy when a rational number would be less than 10%).

BAC equity preferred stocks, for example, could have been bought for less than $10 even in 2009. I bought ZBPRA, a Zions equity preferred floater for $7.8. Bought 100 ZBPRA at $7.8 (May 2009)(see snapshot in Gateway Post on this topic) None of those equity preferred floaters missed a dividend payment. (METPRA for less than $8, rational or irrational?, AEB for less than $5, rational or irrational?)

Periodically, these stocks will hit an air pocket and just fall as if a bankruptcy filing was imminent. I am just used to it.

I discuss an example from August 2011:  Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities I was able to buy Santander's floater at $13 during that one. A few weeks later, yet another downdraft, and I picked up HBAPRG at $16.18 (HSBC's US operation). Bought 50 HBAPRG at $16.8

I also discuss this issue in a recent post at Silicon Investor: Income Investing Message Board - Msg: 28625725

One of my earlier discussions about embracing their volatility in a trading strategy is discussed  in a May 2009 post. Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock

So, volatility and risk are just known hazards. Know what you are buying, its history and characteristics. 

2. Paired Trade: Sold 100 GDO at $20.79 and Bought 100 BTZ at $13.83 (see disclaimer): Both GDO and BTZ are leveraged closed end bond funds. I still own 120 shares of GDO in the ROTH IRA. I have elected to keep those shares for their tax free income generation in the ROTH IRA.   

Security Description for BTZ: Blackrock recently reorganization its four credit allocation funds with BTZ as the surviving fund. One of those funds which no longer exists had the symbol PSY.  I owned 215.573 shares that were converted into 172.808 shares of  BTZ.  This add brings me up to 272.808. I am no longer reinvesting the dividend.

BlackRock Credit Allocation Income Trust IV (BTZ) is a leveraged closed end bond and preferred fund. The percent of leverage will generally be over 30%. Dividends are paid monthly.

The fund is weighted in investment grade issues, but the fund does have significant in junk rated securities (primarily BB and B)

I took this snapshot from the fund's site that shows the credit quality breakdown as of 9/28/12:

BTZ Credit Quality as of 9/28/12 Subject to Change

The baseline allocation is 50% for investment grade; 30% high yield and 20% in capital securities (TPs and equity preferred stocks), but that breakdown is more of a guideline.

Sponsor's webpage: BTZ : Fund Profile
BTZ Page at Morningstar (rated two stars; average 3 year discount 10.52%)

BTZ Page at the CEFA
GDO Page at the CEFA

Prior Trades: I sold out of BTZ earlier this year. With bond CEFs, I am pleased to receive any profit and simply to harvest the dividend.

2012 BTZ Sold 388.058 Shares +$279.19
Hopefully I will not own any leveraged closed end funds when rates start to rise with a vengeance. Anyone holding this kind of fund will suffer the infamous triple whammy.

Rationale: (1) Fast Profit on GDO: The purchase of GDO was made during a downdraft of bond CEFs during a few days in November. I bought 100 shares on 11/15/12:

2012 GDO 100 Shares +$173.05 (+two monthly dividends)

The sequence of events that led me to buy GDO are discussed in this post: Item # 2 Bought 100 Shares of GDO at $18.9 For no reason, the price for this bond CEF had fallen $.65 when I purchased shares from the prior day's close. I knew by checking bond prices that virtually all or all of that decline was causing an expansion of the discount to net asset value. Over the next month, this security went ex dividend twice for its monthly distribution and rose from $18.9 to a close at $20.91 last Friday, 12/21/12.

GDO has been reducing its distributions some. GDO The current monthly dividend is $.12 per share.

The discount to net asset value had been eliminated altogether when I elected to sell the shares. Most of my realized gain was due to that shrinkage. So, basically, I took advantage of a temporary aberration in pricing to reap a quick 10.38% total return in slightly over a month.

(2) Rationale for the Pared Trade: GDO and BTZ have a similar yield and credit quality characteristics. Both pay monthly dividends. BTZ was, however, selling at close to a 10% discount to net asset value while GDO had eliminated its discount since purchase. Possibly, BTZ has more room to run on price by simply narrowing the discount by half.

This rationale is a relative discount trade for similar bond CEFs. The trade was made with the following data in hand.

When making these trades, I only have the prior day's closing net asset value. I can check to see how bond ETFs are doing just to form an idea of how the fund may be performing.

12/21/12 ETF Closing Prices
Investment Grade Bond: LQD: 121.24 +0.21 (+0.17%)
Junk Bond: JNK: 40.88 -0.09 (-0.22%)
Preferred Stock: PGX: 14.61 -0.04 (-0.27%)
TLT: Long Treasury: TLT: 122.25 +1.32 (+1.09%) 

GDO Data Prior to the Date Sold:
Closing Net Asset Value Per Share=$20.8
Closing Market Price=$20.73
Discount: -.34%

GDO Data on Date Sold (12/21/12)
Closing Net Asset Value Per Share= $20.83
Closing Market Price: $20.91
Premium to Net Asset Value= +.38%

BTZ Data Prior To Sale:
Closing Net Asset Value Per Share= $15.28
Market Price=$13.85
Discount= -9.42%

BTZ Data on Date Sold (12/21/12)
Closing Net Asset Value Per Share=$15.32
Market Price=$13.83
Discount: -9.73

So I was correct in surmising that the discount was widening on 12/21/12.

3. Sold All of the Stock Mutual Fund VASGX (see Disclaimer):

2012 VASGX Sold 198+ Shares Realized Gain $995.5

During the summer months, I decided to liquidate one mutual fund to capture a long term capital gain this year, when I at least know that the maximum rate is 15%.

I chose the Vanguard Life Strategy Growth Fund primarily due to its low level of income generation. I had two other Vanguard funds with greater long term profits which I decided to keep due to their higher income generation. I took snapshots of those funds, Equity Income and Star, in two previous posts: Item # 3 Vanguard Star and Life Strategy Growth Funds; Item # 5 Stock Funds Table (snapshot of Vanguard Equity Income and Permanent Portfolio).

I elected to keep several funds with much larger unrealized gains such as the Permanent Portfolio and Matthews Pacific Tiger, since those funds fit into niches in my overall asset allocation. I have a few funds that were sold down in 2007 to 100 share lots which I am keeping since I have already realized gains on them (e.g. SSEMX at 100 shares) After evaluating all of them, I decided to jettison the low yielding Vanguard Life Strategy fund.

After the latest example of dysfunction in the political system, I did not see any reason to wait a few more days before yearend.

I intend to reinvest the proceeds into a Vanguard ETF that reflects my totally involuntary, God given, natural, contrarian instincts.

(4) Bought 50 FCG at $15.84 (see Disclaimer): This is a starter position in what may turn out to be a super cycle for natural gas demand. Only time will tell. By buying 50 shares of this ETF now, and possibly more later, I will at least focus some attention on how this cycle is unfolding in subsequent months and years.

2012 Bought 50 FCG at $15.84

Security Description: First Trust ISE-Revere Natural Gas Index Fund (FCG) is an ETF that owns natural gas energy producers. This energy sector is out of favor currently given the low natural gas prices.

The disfavor is manifested by FCG's chart: First Trust ISE-Revere Natural ETF Chart In June 2008, this ETF traded over $31 per share. It has just about been cut in half since hitting that high.

Natural gas producers pay almost nothing in dividends. The dividend yield will not contribute to total return potential as shown by this fund's distribution history. Dividends

The net expense ratio is currently .6%

Sponsor's web page: First Trust ISE-Revere Natural Gas Index Fund (FCG)

FCG Holdings


(1) Super Cycle for Gas Demand Emerging: When playing super cycles, I could care less what happens to a stock next year or the year after. Instead I am looking way out into the future. No one will be able to time when, or even whether, natural gas demand will cause a substantial non-temporary rise in price. I do not know, nor does anyone else who is not a divine being. I am going to admit up front that the Lord has not given me any guidance on this one, possibly draining the well of divine stock advice after sending me a sign about reinvesting the GE dividends. Stocks, Bonds & Politics: GE (introductory section near snapshot of GE buys)

The article in a UK trade journal intrigued the LB so it proceeded to read it: GE bets on 25-year gas super-cycle - Gas to Power Journal UK The main guy at GE Power was predicting a 25 year natural gas super cycle. LB is always interested in super cycles, such as the one recently discussed in connection with the parabolic rise of middle class consumers in emerging markets or the super cycle that led to the long term bull market starting in 1982. The next article read had the following title and was even more intriguing: Gas-fired CCPPs will dominate US power market – Siemens VP product sales - Gas to Power Journal UK That guy was saying that the competitive advantage of large coal fired plants was being eroded by the economics of low cost gas generation.

Back in the day when LB knew something about energy production from natural gas turbines, approximately 30 years ago, gas fired turbines were used by electric utilities over short term cycles to meet peak demand (e.g. the hottest part of a summer day). When that demand fell off, they would be turned off. The power cost from those units was high cost. Power produced by large coal and nuclear units was much cheaper, due to economies of scale, and those units were used to provide what is known as the base load requirements. Base Load and Peaking PowerSmartPlanet Those units would be running 24/7 except when shutdown for periodic maintenance. The guy from Siemens was saying that the cost advantage of coal generation was eroding in favor of the natural gas fired units. Coal units are only used to meet base load. So will the natural gas fired units be the new base load, running 24/7, burning up all of that natural gas to produce energy instead of coal?

It just appears to me that there may be no other choice. Nuclear plants take an incredibly long time to build, and utilities are not exactly beating down the door to build new ones in the U.S.

Yet, the Obama administration has clearly embarked on an environmental policy to shut down a significant number of coal generating stations by making it uneconomical to retrofit those plants with pollution devices to meet new clean air standards promulgated by the EPA.

I am not going to repeat my discussion about those EPA rules, contained in the comment section of this seekingalpha article:  Seeking Alpha The author of that article was recommending an Illinois Basin coal producer, so I took issue with that recommendation based on what was happening with the EPA.

In my capacity as an investor, it is irrelevant whether I agree or disagree with the EPA policy. The relevant consideration starts with a very simple question that trial lawyers always want to know: "what are the facts". Once an investor has a grip on the relevant facts, the issue then is simply how to respond. Knowing about the direction and potential impacts of EPA's new emissions rules, which have already resulted in plant shutdowns, I would not be in the market for a coal stock. The product is in abundance and the demand is about to fall.

I suspect that the estimate made by a consultant group will be close to what will happen. America is about to lose 20% of its coal fired generation, though the matter is still being litigated and anything is still possible. I discuss those legal issues in the comment section to the aforementioned SA article.

I have also started to discuss long term super cycles, natural gas and coal in the comment section to this Seeking Alpha article.

I will cite the following here:

Reuters Article Containing Consultant Estimate of 20% Closure Rate: Reuters

EPA Explanation of its Cross Border Emission Rules:  Basic Information | Air Transport | US EPA

A three judge panel of the U.S. Appellate Court for the District of Columbia Court of Appeals affirmed the EPA's greenhouse gas rules. About a week ago, the full Circuit voted to deny a petition for a rehearing en banc, filed by industry groups, of that decision. Unless the Supreme Court grants a petition for review and later reverses the Appellate Court's decision, those EPA rules will become the law of the land.

Interview with Obama in 2008 relating to his views about coal: YouTube

An article in the New York Law journal, written by a Columbia law professor, describes pending EPA regulations and how they could negatively impact electric utilities operating when and if adopted by the EPA. A link will not work. If you are interested, it can be found using these search words:  obama reelection EPA regulations Gerrard. The selection would be the PDF version available at the Arnold and Porter website.

Another way to play this theme would be with natural gas infrastructure plays (pipelines, storage and processing). Most of those firms are MLPs but there are several ETNs that incorporate those type of companies.

Risks: The normal risks for stocks in a sector, particularly one such as natural gas producers where current prices do not reflect optimism about the future or a foreseeable rebalancing of supply/demand in favor of demand and higher prices.

Future Buys: With a starter position, I have seen something to perk my interest and simply want to monitor more closely what is happening in the months and years ahead. I will likely average down on up to 150 more shares. With more proof of the super cycle leading to higher prices, I would likely become more aggressive and branch out into other securities.

I am likely to average down on the ETN AMJ recently bought in an IRA.

I am not likely to buy an ETN issued by UBS. ETRACS Alerian Natural Gas MLP Index - UBS Investment Bank

There are some CEFs that own MLPs (e.g., NTG-Tortoise MLP FundJMF - Nuveen Energy MLP Total Return Fund)
Cautionary Article on CEF MLPs
Positive Article on CEF MLPs

Another choice could be FSNGX (Fidelity Select Natural Gas)

For mutual funds, the purest choice for pipelines, storage and processing that I could find was the  MLPAX Oppenheimer SteelPath MLP Alpha A Fund (holdings all MLPs: Top 25) I quit looking at that one after seeing the load and expense fees. I have never paid a load and never will under any circumstances.

5. Terex Bond Redemption: I received the proceeds today from Terex's redemption of its 8% subordinated bond maturing in 2018:

Bought: 1 Terex 8% Senior Subordinated Bond Maturing on 11/15/2017 at 96.947 (August 2011).

Politics and ETC:

1. Republican Senators From Idaho: One thing is clear to me about Idaho. The citizens of that fair state are "social  conservatives" who choose like minded individuals to represent them in Congress. When making these selections, it would be important also to select a strong proponent of "family values" and "traditional marriage, not to mention a strait laced responsible person.

So, I am not sure what is happening in Idaho anymore. Senator Mike Crapo (R), sort of sounds like an appropriate name for him to the RB, was arrested after running a red light in D.C. and low and behold. Guess what? He was drunk. Okay, everyone makes mistakes, LB was even known to make one about 40 years ago. I glad that he did not kill someone.

But what about this other guy, Senator Craig (R), whose reputation for practicing what he preaches is also well known. I am not not going to mention his issue, well maybe I will just a bit. Do you remember that public bathroom incident? Larry Craig scandal - Wikipedia

2. When Prophecy Fails: This is the title of a recent OP ED piece from Paul Krugman. It is also the tile of a book published by three social psychologist that focused on how True Believers react when facts undermine their prophecy. The psychologists joined a cult that was predicting the end of the world as of a certain date. The purpose was to observe what would happen when the world did not actually end. Guess what?  True Believers are not going to change their belief just because of an indisputable fact.

Those who actually pay any attention to a Rush Limbaugh or Glen Beck have no interest in gathering accurate information. Instead, they are only seeking validation of their core beliefs formed with little or no accurate information.

When I confront a person, invariably a member of a particular political tribe, with a balanced account   of what actually has already happened, the reaction will be like I am trying to put worms in their head.

A recent example was an exchange with a True Believer who knows what caused the Near Depression. Knows it for a fact. It was all about the Democrats (of course) support for Fannie and Freddie and the Community Reinvestment Act, the standard line of the deaf, dumb, and blind set. So I try to present this gentleman with a more balanced account of what actually happened and all of the forces that coalesced to create the Near Depression. I provided links to multiple sources. Of course he did not read any of it. Why bother with anything that resembles facts. He had no idea about the SEC Rule change from 2004 that allowed investment banks to increase their leverage and how that increased leverage played a role in the collapse of several institutions and the near collapse of others such as Citigroup. This is just one of many example. He even said that I was lying and had some purpose for making those comments other than "truth telling". In short, he was a typical True Believer. Facts will never matter to them, information is tailored to conform to pre-existing beliefs, balance is out of the question.

Some of the beginner references that I gave this TB, where he could start his truth finding expedition, include the following;

A. The excellent series from 2008 from the NYT called "The Reckoning".  I recommended that he start with the articles on the 2004 SEC Rule change, Merrill Lynch, AIG and Citigroup. The Reckoning - Series - The New York Times

One SEC commissioner who approved that rule change made a prophetic remark in 2004:

"If anything goes wrong, it is going to be an awfully big mess"

US SEC Clears New Net-Capital Rules For Brokerages - 04/28/2004

I cited that comment thinking that it might perk his interest some on his truth seeking mission, but you know, he already knew the truth. The problem with this point for all TBs was that the GOP representatives voted for that rule change and they already know that the Democrats "own" what happened

B. Just to Show the TB that it was not all about the CRA and the GSEs, I cited voluminous material on mortgage fraud, and the large contributions made by private mortgage banks financed by private investment banks. Just a huge amount of material. Did he read any of it?  No way, all of that was caused by Alan Greenspan, a republican sometimes confused as a democrat. I recall what Rick Perry wanted to do with Bernanke, the TBs have little love for central bankers and some may even know what a central banker does. Rick Perry On Ben Bernanke: ABC News ("we would treat him pretty ugly down in Texas")

It is futile to have a fact based discussion with a TB. Unfortunately, there are tens of millions of TBs in the U.S. which is just one of many explanations for how the U.S. ends up in wars like Vietnam and Iraq.

LB will frequently explore the TB mind with this kind of thought experiment. 

Wednesday, December 19, 2012

Bought Roth IRA: 50 KWN at $24.85. 50 GJS at $13.77, and 50 of the ETN AMJ at $37.89/Added 100 of the Buy-Write Stock CEF EXG @ $8.98-Regular IRA/Bought 100 LF at $7.86

Big Picture Synopsis


Stable Vix Pattern (a bullish cyclical pattern)
Short Term: Slightly Bearish
Intermediate and Long Term: Bullish


Short Term: Neutral
Intermediate Term: Slightly Bearish
Long Term: Extremely Bearish

So now we have QE4, yet another MBS and treasury buying binge.  Maybe this one will work some magic.  In addition to the purchase of $40B in mortgage backed securities per month, authorized last September, the Federal Reserve committed itself to buying $45 billion in treasuries and to pay with those purchases with new money. This may solve our budget problems. The Fed can print money to buy all of the government's debt and then incinerate that paper in a giant bonfire and pep rally attended by the grateful multitudes relieved to have that burden lifted off their shoulders. The Fed also stated that it will continue its Jihad Against the Saving Class until unemployment fell below 6.5%.

The Fed's balance sheet will soon exceed $3 trillion dollars. FRB: Recent balance sheet trends - Credit and Liquidity Programs and the Balance Sheet


A positive discussion on New York Community Bank can be found at the Motley Fool website. I recently added 50 shares to my position. Item # 1 Bought 50 NYCB at $12.94-Regular IRA (currently own 200 shares) I will always discuss some of the negative items about my long positions too. Sometimes, I can be long a stock and a reader might infer from my discussion that I have a short position. How many times have I slammed FNFG, for example, that is mentioned in that article? I do not short stocks.

I am not in a position to calculate the daily Shiller P/E ratio. This sites claims to have the number, Shiller PE Ratio, and I will visit it once a week to see the number.

Singapore stocks offer an attractive dividend yield in today's low yield world. I own iShares MSCI Singapore (Free) Index Fund (EWS) The stock was ex dividend for a $.34627 per share semi-annual distribution last Tuesday. Distributions The total distribution for 2012 was $.54233. Assuming an average total cost of $12.96, that works out to be roughly a 4.18% yield. Bought 100 EWS at $12.96

Annaly Capital Management announced a $.45 per share quarterly dividend.  The prior quarterly dividend was $50 per share. The dividends have been trending down since hitting a high of $75 per share in the 2009 4th quarter. Annaly Capital Management, Inc. : Dividends I own just 100 shares in the ROTH and will be reinvesting that dividend for so long as the shares trade below net asset value per share. YF has the book value per share at $16.6 as of 9/30/12. NLY Key Statistics

ARMOUR Residential REIT  declared a 8 cent per share monthly dividend for the next three months. I own both the common and a cumulative preferred stock..

GE went ex dividend for its $.19 per share dividend on Thursday (own 514+)

General American Investors declared a year-end special dividend of $.6 per share, of which $.53 is a long term capital gain distribution. This is in addition to the earlier distribution of $1.4 which went ex dividend on 11/14/12. I own 100 shares and will be reinvesting those dividends. General American Investors Company Declares Year-End Dividends and Distributions on Common and Preferred Stock This brings me up to $2 per share. This CEF only makes annual distributions. General American Investors: Two-Year Dividend & Distribution Summary The fund follows a buy and hold approach and is known for a low turnover ratio, averaging 22.3% over the past five years. General American Investors: Portfolio Strategy

Treasury Direct

The treasury sold two year notes last Monday at a .245% yield.

When interest rates were high, I had an account at treasury direct that allowed me to buy treasuries at auction. I let that account expire when the treasury shifted from a paper system to internet accounts. I mentioned in a October 2008 post that I would not be renewing any of my treasury securities at maturity. I did lock in some longer term CD rates with the proceeds from one of the online only banks. When yields rise back to a normal level, I would most likely open a new account which can be done online. It is easy to buy securities at auction by just entering a non-competitive bid and you will receive the "high yield" price that everyone else receives, but you would of course not be influencing the price which will be determined by the competitive bids by large institutions and governments.



Bloomberg reported earlier this week that a division chief for the California Highway Patrol recently "retired" at age 53, receiving an annual pension of $174,888 from California plus a check for $280,259 in accrued leave and vacation time.

The NRA is just heartbroken about what happened in Newton.


1. Added 100 of the Buy-Write Stock CEF EXG at $8.78-Regular IRA (see Disclaimer): This purchase was a average down on the share price. I am slightly ahead when adding back the dividend. 

Company Description: The Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG) is a buy-write closed end fund that invests in stocks worldwide.

Morningstar Page-rated 4 stars. The average 3 year discount is 8.9%. Dividend is heavilysupported by a return of capital.

Sponsor's Webpage: Tax-Managed Global Diversified Equity Income Fund | Eaton Vance. The fund needs to do substantially better in the next five than in the past five, as shown by the performance numbers. While I am not impressed at all with the five year performance, I will give some allowances to a period that included the Near Depression, and I am generally comfortable with the current security selections.

Dividend History: Tax-Managed Global Diversified Equity Income Fund The quarterly dividend history shows a series of reductions, starting at $.3825 per share and ending at $.244 per share with the last distribution. The Fund is changing its distribution option to monthly payments in 2013. That is one reason that I decided to increase my stake. Eaton Vance Equity Option Closed-End Funds Approve Change To Monthly Distributions

SEC Form N-Q for the Period Ending 10/31/12 (List of Holdings): Eaton Vance Tax-Managed Global Diversified Equity Income Fund. This report shows that value of the fund's holdings at $1.35+B and the cost at  $1.017B 

Data: Day of Purchase 12/12/12:
Net Asset Value Per Share: $10.26
Closing Market Price: $8.78
Discount: -14.42%

Top Ten Holdings as of 10/31/12

Net Asset Value per share= $10.36
Closing Market Price= $8.89

Trading History:

Added 100 EXG at $8.91 (August 2012)
Bought 100 of the CEF EXG at 10.61 in Regular IRA

I am reinvesting the dividends. I own now 325.781 shares in the regular IRA (and another 100 somewhere) My average total cost per share is currently $9.28 for the regular IRA shares. The 25.781 shares were bought with $218.43 in dividends, giving me a slight total positive return. Those reinvested dividends have an average total cost of $8.464, so this option is contributing so far to the total return since I have a profit on those shares.


1. Another Total Return Potential of 10%: The tax accounting issue connected with a return of capital issue is not relevant in an IRA. I therefore look at this CEF as potential total return vehicle. I would be pleased with a 10% annualized total return in an IRA.

For this one, I can achieve a 10% total return and lose some money on the shares. The dividend yield is about 11.11% based on the last quarterly payment and at a total cost of $8.78.

I can achieve that 10% annualized return through several ways: (1) a continued rise in the stock markets with the discount remaining about the same; (2) a rising stock market and a narrowing discount (the best option) or (3) a sufficient narrowing of the discount and/or increase in net asset value sufficient to earn a 10% annualized return even with a small loss on the shares.

Risks: There are a number of normal risks attached to CEFs that use a buy-write strategy and invest in stocks worldwide. The buy-write strategy may not add to returns and even subtract from them. There are the normal risks associated with stocks. There is a risk relating to the market increasing the discount to net asset value causing an unrealized loss even the net asset value per share is stable or rising. There is a currency risk connected to owning foreign securities. Anyone unfamiliar with these risks needs to review the prospectus. 

2. Bought 100 LF at $7.86 ($500 to $1,000 Flyers Basket Strategy)(See Disclaimer): Placing this purchase in the Flyers strategy is judgment call that it currently has less risk than the typical Lottery Ticket selection. 

Company Description: LeapFrog Enterprises develops and markets technology based learning platforms primarily designed as content and learning toys primarily for infants and for children through age 9.

LeapFrog Enterprises Profile Page at Reuters

LeapFrog Enterprises Key Developments

I am generally familiar with the products.

Link to LF's website:  LeapFrog

Their best product for the current season is a tablet for kids called the LeapPad2, which has no internet connection ability but has cameras, video recorders 4GB  memory and a library available consisting of games, eBooks for kids, music and more. LeapPad2 Learning Tablet My purchase was based mostly on this product. The tablet costs $99 and then the parents have to start shelling out money for lots more programs. A bundle of programs for learning to read is currently on sale for $169.96, etc. and so on. Good for LF, bad for parents. Remember the old saw, it is not about selling razors but razor blades.

Prior Trades: Possibly a trade many years ago in a non-Fidelity taxable account, but to difficult to locate.

Recent Earnings Release: See Discussion below in the Rationale section.


(1) Establishing a Possible Price Target of $10 Within 12 Months: Needless to say, a 25% increase in the stock price within 12 months would be highly satisfactory in today's low yield world. With Leapfrog, none of that return can be achieved with a dividend since LF does not pay one.

I say possible price rise. You can not put odds on something like this goal. It is at most a reasonable possibility, in a situation where I see more potential upside at the $7.86 than downside risk.

Probably the most influential article that convinced me to buy just a 100 shares was written by Jack Hough and published in The LeapPad was launched in August. According to Hough, some retailers are struggling to keep up with demand with both Amazon and WMT online stores out of stock when Barron's published Hough's article on 12/13/12. After the launch of this product, the 2012 third quarter sales rose 28%, compared to the 2011 3rd quarter, and LF raised its guidance for both 2012 sales and earnings. Hough further noted that Credit Suisse had named LF as one of the top 17 stocks to own for the "Long Run" in its annual Stock Section List.

LeapFrog's Competition Heats Up

Risks: (1) A Pattern of Erratic Earnings: When I reviewed the five chart, I see a lot of up and down movement with the current price being about where it was five years ago. Leapfrog Enterprises Inc Common Stock Chart | LF Interactive Chart This kind of movement can be ideal for traders, since some of that movement up and down has been fast and significant. The chart looks like one for the S & P 500 during a long term bear market, where there are numerous peaks and valleys, a lot of noise but no progress for a long term holder. This kind of chart tells me right away that the earnings numbers are likely to be all over the place.

One of the up moves started from a $2.85 share price on 8/8/12 and petered out at $11.42 on 8/30/12. Catching a move like that one is a trader's dream. That was probably too much-too fast, bringing out the profit takers in droves and consequently driving the price back below $8 by mid-December. So, what can you say, not for the faint of heart.

My reading of the chart proved to be correct after looking at the net income (loss) and E.P.S numbers:

5 year LF Net Income
It would be fair to say that LF has not shown any long term ability to increase earnings in anything resembling a consistent fashion. It is not General Mills or Coca Cola, so any earnings estimate needs to be taken with a good dose of caution and skepticism. I do not fear anyone taking issue with that statement.

3. Bought 50 AMJ at $37.89-Roth IRA (see disclaimer): I have an unusually high level of cash reserves in my ROTH IRA, earning nothing of course in a Vanguard Money Market Account, whose current yield is .03%, Taxable Money Market Funds - V (Alphabetically) In case anyone has difficulty seeing that number, there is a period before the zero. 

2012 ROTH IRA Bought 50 AMJ at $37.89
Company Description: JPMorgan Alerian MLP ETN is, as indicated by its name, an exchange traded note (ETN). I generally shy away from ETN's since that form of ownership exposes me to the issuer's credit risk, in addition to the numerous risks associated with the securities owned by this fund. ETN's are unsecured senior notes. I am reasonably comfortable with the JPM credit risk so I bought 50 shares.

I would simply explain the credit risk as follows. If JPM went bankrupt, I am screwed. The Lehman unsecured senior note owners did not exactly recoup their investment in those notes.

This ETN will track several types of MLPs involved in various aspects of the energy business, including pipelines, production and storage, gathering and processing.

From the sponsor's webpage, I took the following snapshot of the top ten holdings in the Alerian MLP index:

Top Ten Holdings
JPMorgan Alerian MLP Index ETN Underlying Index

This page also shows the historic performance of this index. The three year annualized return is 18.05% which actually worries me some as a new owner. 

Morningstar Page on AMJ (rated 5 stars). I believe that page is available to non-subscribers. As a subscriber, I have access to the analyst report  which provides basic details about the legal structure and the fund.

Closing Price on Day of Purchase (12/14/12): AMJ: $37.87 -0.06 (-0.16%) 

With both MLP ETN and ETFs, I can avoid the K-1 hassle.

I discuss the tax disadvantages of MLP ETFs in several earlier posts that led me to discard most of them. Basically, the MLP ETF had to organize as a regular C corporation which requires it to accrue tax liabilities that will cause it to underperform the index.

While the ETN avoids that particular issue, it has its own baggage with the credit risk issue. So, I sometimes refer to this predicament as picking your poison.

Since I prepare my own tax returns, I am going to avoid the poison connected with owning MLPs directly, which involves imputing K-1 data into my tax return. I have been there and done that.

Investors need to be careful about owning MLPs directly in an IRA for the reasons discussed in this publication from the National Association of Publicly Traded Partnerships and in this informative Seeking Alpha article. If the IRA receives more than $1,000 per year in UBTI (unrelated taxable business income), the amount above that limit will be subject to tax. If you go over that limit, it is my understanding that you will receive a Form 990 from the brokerage. Seeking AlphaInstructions for Form 990-T (2011)

Those who are familiar with the tax issues claim that there is no UBTI issue when the investor owns a MLP ETF or MLP ETN in an IRA. (e.g. Barrons.comSeeking AlphaMLPs and Retirement AccountsSeeking Alpha) I would not research that issue myself using original source documents. It would give me a headache.

I am certainly no tax expert. (see Stocks, Bonds & Politics: OG's Qualifications and Lack of Qualifications) My knowledge is limited to what I read in articles written by others.

I did discuss the UBTI issue when I bought 150 shares of KFN earlier this year in an IRA. Added 50 KFN at $8.81-Regular IRA I no longer own it.

Rationale: (1) Income with Some Capital Gains Potential:  Given the dividend yield, currently near 5%, I can achieve a 10% total return by 5% capital appreciation and possibly less with distribution increases.

Risks: (1) Income May be Devoured by a Loss on the Shares:  Since this ETN has already had a decent run, a correction in price is a possibility and it would not take much of a correction to wipe out a 5% dividend. Hopefully, any such correction would be temporary with upside momentum resuming after a correction runs its course.

(2) JPM Default Risk Discussed Above

(3)  Normal Risks associated with the securities tracked by the index that are discussed thoroughly in the prospectus. There may be added risks coming from Congress in future years due to changes in the tax code as the government attempts to raise more money.

4. Bought 50 KWN at $24.85-Roth IRA (see Disclaimer): I am just trying to earn some kind return on my cash with this one.

Security and Company Description: Kennedy-Wilson Holdings (KW), through its subsidiaries, operates as a "real estate investment services company" in the U.S., Japan, the UK and Ireland.

I bought an exchange traded baby bond recently issued by KW:   Kennedy-Wilson Holdings Inc. 7.75% Senior Notes due 2042, KWN

Company website: Home - Kennedy Wilson

Kennedy Wilson Holdings Profile Page at Reuters

Kennedy Wilson Holdings Key Developments Page at Reuters

KW has a 8.875% senior note maturing in 2019 which trades in the bond market at a premium to its par value: FINRA

According to FINRA, linked above, the senior unsecured notes are rated at B2 by Moody's and BB- by S & P.

I was not that familiar with this company but knew that several of the Royce mutual and closed end funds had significant stakes in KW: KW Major Holders Of the Royce funds mentioned in that link, I own shares in the CEF Royce Micro-Cap Trust (RMT) which shows KW as its largest holding at 2% as of 11/30/12.

Recent Earnings Release:  KW reported a GAAP loss of $6.2M for the 2012 third quarter, compared to a $6.2 million loss for 2011.  Adjusted EBITDA for the quarter rose 94% to $17.5. As of 9/30/12, the company and its partners owned 14.6 million rentable square feet of real estate, including 13,950 apartments and 24 commercial properties. KW and its partners also owned as of that time $2B in loans secured by real estate.

As of 9/30/12, the balance sheet shows $126.804M in cash and liabilities that included $249.425M in senior debt; $30.748M in Mortgage loans; and $40 in a junior subordinated debenture. The 2019 senior note had a principal balance of $200M. The junior debentures mature in 2037.

Q3 2012 Earning Release
KW-09.30.12-10Q (debt discussed at pp. 14-15; 46-47.

Trading History: None, new issue

Rationale: (1) It Is Entirely About the TAX FREE Income Generation in the ROTH IRA: Of course, this is not a tax free bond. It becomes a tax free bond when purchased in the ROTH IRA. If I can collect several interest payments and sell at over par value, I will be satisfied.

Risks: (1) The interest rate risk would be in my view the dominant risk. As rates rise for long term maturities, the value of this bond will start to go down. It would not be difficult to imagine the pain when and if interest rates rose to 10% for new bonds with a similar credit profile. If I still hold the bond when rates are at 10%, I also incur the risk of lost opportunity, the ability to receive a higher return with the capital devoted the KWN bond.

The second main risk is credit risk. This is how I look at this risk factor.  I am okay with the credit risk now. However, let's say just for illustration that I had to hold this bond for 30 years. A lot can happen in 30 years. As the future time span increases, so does the credit risk.

5. Bought 50 GJS at $13.77 (see Disclaimer): GJS has as its underlying security a 6.125% senior bond issued by Goldman Sachs maturing in 2033. GJS has a $25 par value and matures in 2033 too. So, with those two facts in hand, an investor does not need to be particularly insightful to conclude that GJS has some issues of the serious variety. Please note that I purchased just 50 shares, and would receive $11.23 per TC more in 2033, assuming GS or its successor survives to pay the trustee who will then pay me $25 per TC. Assuming redemption, I have a nice long term profit built into the purchase.

2012 ROTH IRA Bought 50 at $13.77

The issue is lightly traded and limit orders need to be used. There is usually a wide bid/ask spread.

I also brought this security to the attention of individual investors at Silicon Investor: Income Investing Message Board - Msg: 28614980

Security Description: Everyone already knows about GS, so I will limit this discussion to this odd and esoteric security.

For anyone subject to migraines and unfamiliar with this topic, I disclaim in advance any responsibility for giving you a headache by giving this warning ahead of time: this will make your head hurt.

The name Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2006-2 for Goldman Sachs Group Secs (GJS) does not suggest that this is going to be like reading a children's book about Jack and Jill. The LB is not intimated by such matters and would would certainly prefer reading the prospectus for this security than a romance novel.

While it is just my opinion, I would not buy one of these securities in a non-retirement account due to the tax issues relating to the swap agreement.

GJS is a SYNTHETIC FLOATER in the Trust Certificate form of ownership. This security will make monthly interest payments at a .9% spread over the 3 month treasury bill up to a maximum coupon of 7.5% on a $25 par value.

The GJS TC represents a beneficial interest in a 6.125% senior bond issued by Goldman Sachs that matures on 2/15/2033 that is owned by a grantor trust administered by an independent bank trustee.

Prospectus for

Prospectus for Underlying Senior Bond:
FINRA Information Underlying Bond: FINRA

Just take it one step at a time here.

The trustee will collect the coupon payments on the 2033 senior bond from Goldman Sachs and swap it with a brokerage company for the payment due the owners of GJS.

There is no way for GS to avoid the make whole payment for an optional redemption so the GJN situation is not applicable.

Prior Trading History: 

Bought 100 GJS at 12.25 (July 2009)-SOLD GJS at 13.06 (August 2009)

Bought 100 GJS AT $13 (October 2009)-Sold 100 GJS at 15.6 in the Roth IRA (November 2009)

Bought: 50 GJS at 14.6 (August 2010)-Sold:  50 GJS @ 16.20 (October 2010)

Bought 50 GJS at 16.9 in Roth IRA July 2011Added 50 of the Synthetic Floater GJS at 13.25-Roth IRA (December 2011)-Sold 100 GJS at $14.9 and Bought Back 100 of GYB at 17.2-Roth IRA (March 2012)

Snapshots of Prior Trades at the End of Stocks, Bonds & Politics: Trust Certificates: New Gateway Post

Rationale: This security provides some inflation protection due to the LIBOR float and significant appreciation potential given its current discount when and if three month treasury bills return to normal levels consistent with a sustainable economic expansion.

Risks: These securities are just hard to understand. There is no reasonable prospect for a decent interest payment for several years. However, when there is one on the horizon, this security is not going to be at its current level. It was selling at over $21 in 2007. GJS Stock Chart Of course, there is a risk of a GS default but there is not really much, if any, interest rate risk due to the .9% float over the three month treasury bill. Eventually, the Federal Reserve will end its financial repression and the artificially low short term rate monetary policy. The federal funds rate will determine the three month treasury bill rate.

While I am just guessing, a rise from the current level to 5% would take GJS over $20.

3-Month Treasury Constant Maturity Rate (DGS3MO) - FRED - St. Louis Fed

Politics and Etc:

1. Government Share of the Medicare Burden: For the usual reasons, many people believe that they actually pay for their Medicare benefits through the lifetime payroll withholding and the premiums.  The Kaiser Foundation, which is a very good authority on this type of issue, lays out the split between the taxpayers and the government at page 2,

2. SEC Rule 604: Many investors do not know, or do not know why, "All or Non" orders are not displayed to other market participants. There is a rule that allows brokers dealers to keep those order invisible, which is also the case with odd lot orders. Code of Federal Regulations

An investor can confirm whether a broker is displaying that order by simply trying one out when the bid/ask spread is more than a penny. Fidelity and TD Ameritrade allow me enter a AON order on 100 shares or more. Vanguard requires at least one more share in the order over 100. As I recall Schwab requires 200. It varies.

But, to see for yourself on your next buy order, enter a AON order slightly above the best displayed bid, complete the request and then check whether the order is displayed or not.