Tuesday, April 17, 2012

Bond Market: Operated for the Benefit of Dealers and Not Really a Market/Citigroup/Bought 50 FISI at $15.55/TurboTax Form 8949 Problem-Fidelity Not Yet Corrected/

I did check over the weekend to determine whether anyone had corrected the error made on IRS Form 8949 in connection with the TurboTax download of transactions made at Fidelity. There has been no correction. All non-covered transactions, where the cost basis was reportedly not made to the IRS, were placed on the IRS Form 8949 where there was a "x" mark indicating that the cost basis was reported to the IRS.  I performed the test by pretending to open a new tax return in TurboTax and then downloading the Fidelity transactions.

It took me 13 tedious hours to correct the download for my Fidelity transactions. Fidelity and TurboTax Problems-Form 8949 More on IRS Form 8949, Fidelity and TurboTax

Since this is a new form for taxpayers, I suspect that the IRS has already received a very large number of tax returns with transactions reported on the wrong 8949 Form.

Spain's ten year government bonds rose above 6% yesterday. ES 10Y The cost of insuring Spain's debt against default has risen to record levels. Yesterday, the cost to insure $10 million rose to $523,000 annually. The cost to insure Italian government debt rose to $440,000. These credit default swap contracts have five year durations.

Citigroup's long term stock chart shows a stock price now hovering near 1986 levels. C Interactive Chart On a split adjusted basis, the recent high was over $550 per share, and the stock is now trading in the $33 to $35 range. The Masters of Disaster, the most overpaid doofuses in the history of civilization, can do a great deal of damage in a relatively short period of time. I do not own the common shares, but do own 8 thousand in principal amount of Citigroup Funding's exchange traded "principal protected" notes, all of which mature in 2014.  One of those notes, MKN, was discussed in yesterday's post. (see also: Bought 100 MKZ at 9.96Bought 100 MOU at $10.12Bought 100 MBC at 9.84Bought 100 MBC at 9.78Bought 100 MTY at 10.49Bought 100 MTY at $10.03Bought 200 MOL at 9.95 (later sold 100 @ 10.3); Item # 2 Principal Protected Notes

As a owners of those notes, I will review quarterly earnings reports. Citigroup reported adjusted earnings per share of $1.11 per share for the 1st quarter. The Basil 1 Tier 1 capital ratio was 14.2% and the Tier 1 common ratio was 12.4%. Citigroup rose 59 cents in trading yesterday to close at $34

The OG still has a few functioning brain cells. The recently adopted modification of the Lottery Ticket Strategy was implemented last weekend. The first blackjack hand was played with a black chip ($100), representing part of the $176.98 profit realized from the LT selection Terex in 2012. Lottery Ticket Strategy: New Gateway Post I won that hand with an Ace and a nine, just barely since the dealer had 19. The OG managed to win $425 in two hours, and thought that it would be best to quit and head back to HQ. On the next trip, the first hand will be played with a black chip representing part of the $708.86 profit realized in 2012 from the LT GRTPRF.

The OG does believe that life is unfair in many ways. One example of the many inequities is that gambling losses can only be offset against gambling winnings when the taxpayer itemizes. Tax Topics - Topic 419 Gambling Income and Losses I do not have enough deductions to itemize.

So, if I lose $425 on the next gambling trip, I will still owe taxes on the prior winnings of $425 even though my net would in reality be zero. No sane person would view the practical result as income under this hypothetical.

While I understand that our destitute Uncle Sam is in need of mucho revenue, perhaps this inequity is one that can be corrected when the GOP closes the tax loopholes for the energy industry.  And since I am lobbying for this tax code change, I would like to also request a change allowing me to deduct expenses relating to the gambling trip, including a mileage allowance of 55.5 cents per mile, the 2012 rate for business travel, irs.gov.pdf The nearest casinos are about 170 miles from HQ.  Lastly, if I still have net income, I would request that Congress allow me use any such loss as an offset on my Schedule D.

1. The Bond Market is Not Really A Market-Certainly Not a Transparent One Operated in a Manner Consistent with the Customers' Best Interest: I ran into another example of a bond desk refusing to enter a sell limit order for a bond, notwithstanding an active market for the bond. This is apparently a common practice among many bond brokers. The general idea is to require the customer to submit the bond out to bid where another dealer has the opportunity to nail the customer with a non-market price. Of course, the customer does not have to accept that price, but may just to sell the bonds to avoid another time consuming hassle at a later time.  I view that process to be fundamentally flawed from a customer's viewpoint, though advantageous to the dealers.

Th limitations on a customer's right to place a sell order are not consistent with a fair and open market. If bond dealers wanted to further their customers interest rather than feather their own nests, a true competitive bond could be easily created, where customers could enter buy and sell limit orders, and dealers would be prohibited from tacking on hidden markups on bid and ask prices originating from other dealers. Clearing would be much the same as for stock orders. The reason for operating the bond market in its current format has nothing to do with technology, the interests of brokerage customers and the requirements of a free market in bonds. In its current configuration, the "bond market" is not a free and open market existing for the benefit of facilitating transactions between willing buyers and sellers.

Small investors need to be on high alert with buying and selling bonds. The SEC has apparently allowed bond dealers to run this show without any meaningful oversight to protect bond customers who are certainly in need of protection under the current circumstances. At least the trades are reported to FINRA so dealers can not totally operate in the dark.

In short, bonds need to trade just like stocks. I much prefer buying bonds that are traded on the stock exchange, but I no longer find the prices and yields of those securities worthwhile.

Gateway Posts relating to exchange traded bonds include the following:
Exchange Traded Bonds
Trust Certificates: New Gateway Post
Trust Preferred Securities: Links in One Post
Aegon Hybrids: Gateway Post
Synthetic Floaters

I would be interested in knowing whether any brokers routinely allow limit sell orders for bonds.

I contacted Sunday night by email ZionsDirect, where I have no account, and inquired whether that firm permitted limit orders on bonds. I received a reply back before noon yesterday that ZD does not permit limit orders, but is working to change its system to permit them with no ETA when that will occur. I also inquired whether ZD displayed both bid and ask quotes:

So, at least that firm is making an effort.

2. Bought 50 Financial Institutions (FISI) at $15.55 last Friday (Regional Bank Basket Strategy)(see Disclaimer): Financial Institutions is a bank holding company headquartered in Warsaw, N.Y.. The bank's operating banking subsidiary is known as Five Star Bank, with 50 banking offices located in central and western New York. (Map of Locations: Five Star Bank)

This bank is discussed in an article at TheStreet titled "5 Cheap Bank Stocks".  

The current consensus estimate, generated by 3 analysts, is for 2012 earnings of $1.71 per share and $1.84 in 2013. FISI Analyst Estimates Based on the 2012 estimate and a total cost of $15.55 per share, the P/E would be about 9.36. 

Back in March 2011, the bank raised $43 million in a common share offering and redeemed the government's preferred stock issued under TARP ($37.5 million) and $16.7 million of a junior bond with a 10.2% coupon. The stock was sold at $16.35 per share. SEC Filed Press Release 

For the Q/E 12/31/2011, the bank reported net income of $5.8 million, up from $5.1 million in 4th quarter of 2010.  SEC Filed Press Release As of 12/31/2011, the net interest margin was reported at 4.07%; the efficiency ratio was 60.49%; the tangible book value per share was $13.21; the total risk based capital ratio was 13.45%; the leverage ratio was 8.63%; NPLs to total loans stood at only .48%; and the allowance for loan losses to NPLs was 329%. 

The bank is paying a 13 cent per share quarterly dividend. SEC Filed Press Release At that rate, the dividend yield would be about 3.34% at a total cost of $15.55.  

The bank is in the process of acquiring 8 branches from HSBC and First Niagara. ESEC Filed Press Release

I have set my average down price at $14.8.

In 2007, this stock was trading mostly between $18-$20, so it has recovered most of the value lost during the Near Depression period The stock did tank briefly below $4 in February 2009. FISI Interactive Chart

Financial Institutions rose 24 cents in trading yesterday to close at $15.77.

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