Tuesday, April 10, 2012

More on IRS Form 8949, Fidelity and TurboTax/No More Dealings With Schwab Bond Desk Here at HQ/Bought 50 MTOR at $7.62/Collapse in Price of 2nd Lien Reddy Ice Bond

The best case scenario for 2012 is a mild and temporary recession in Europe, U.S. GDP growth of around 2.5%, and growth in China near 7.5%. The U.S. growth would not be anticipated to make much of a dent in unemployment. The unemployment rates in Europe would likely increase, causing social unrest in countries like Spain and Greece where the rate is at high levels particularly among young adults. For adults under 25, the unemployment rate is over 50% in both Greece and Spain. The unemployment rate in Spain hit 23.6% in February, IBT, consistent with depressionary conditions.

I mentioned in an earlier post that one likely stock market scenario for 2012 would be a repeat of 2011, where first quarter gains evaporate in the face of hard economic news rather than hoped for results. From October 3, 2011 to April 5, 2012, the S & P 500 rose 27%. Caution has caused me to take profits and to raise net cash after redeploying some of the proceeds.

In the ROTH IRA, I will not maintain a cash balance for an extended period, and it will generally not be a high cash balance even over the near term. Before last week's purchase of 300 of the bond CEF WIW, I had about 13 thousand in cash in that account.

The main taxable account is now sitting on the largest cash balance since March 2009. This may be overly cautious, but I prefer being overly cautious to crashing and burning. I would not mind seeing a significant market correction so that I can deploy some of that cash more opportunistically. Most of my adds in the coming weeks will likely be of the insignificant variety.

I will frequently acquire positions in small lots, average down and then sell higher cost lots on pops. I keep on my desktop now a notepad that identifies prices where I will buy shares previously sold, unless I note a significant change in the fundamentals. For example, I recently sold 50 FMER at $17.3, and that notepad has my buy back range at $15.15 to $15.6. I have started with this notepad because I keep forgetting what I am supposed to do. Consequently, as with a prior buy of FMER shares noted in the preceding linked post, I made a mistake in buying the shares back.

The Reddy Ice  2015 2nd lien bond collapsed in price yesterday, trading mostly in the 10-12 range on heavy volume, as investor's make an effort to price in a likely recovery in bankruptcy. Reddy Ice-Bankruptcy I noted earlier that S & P estimated a likely recovery for the owners of this at 0% to 10%, Item # 2 REDDY ICE I had raised my risk rating on this bond to 10+, the highest risk of default, from 9+ back in August 2011 after reviewing an earnings report. Item # 1 Reddy Ice  Although I have had a few bankruptcies in my Junk Bond Ladder Strategy, all of those bankruptcies have been with de minimis bond positions.

1. More On Fidelity and Turbo Tax Problems: It took 13 hours of tedious labor to correct the Form 8949 errors in the TurboTax download of transactions from Fidelity. Fidelity and TurboTax Problems-Form 8949 Although I did not inform the IRS of this issue, I believe that it is now known to them.

I did not have this problem with downloads from other brokers. In their paper 1099s, those brokers segregated transactions on different pages where the cost basis was reported to the IRS from those not reported. Apparently those brokers got the TurboTax memo on the proper format.

Fidelity, on the other hand, grouped the transactions on the same page and only delineated the reporting status with a "N" or a "P". The letter "N" means that the cost basis was not provided to the IRS whereas "P" means that Fidelity did provide the cost basis. I had to inquire to be make sure what those letters meant in this context:

MEANING OF "N" AND "P": Fidelity EMail to the OG on 4/2/2012
This is a snapshot of one page from my Fidelity 1099 showing these confusing groupings in the same column starting with "cost or other basis . . ." :

The end result is that several hundred transactions were reported on the wrong 8949 Form by TurboTax. I would seriously doubt that many Fidelity customers who use TurboTax will catch this problem When I made Fidelity aware of it, I was not provided with an apology or an acknowledgment of a mistake, or even an offer of three free trades which is what another broker gave me once after repeatedly transferring almost 6 grand of my money to someone unknown to me.

Stocks, Bonds & Politics (June 13, 2011 Post):

A brokerage customer who repeatedly complains about the return of their money under these circumstances would likely be tagged as difficult, a characterization made only with a dash of hyperbole.

2. HQ Will No Longer Deal with the Schwab Bond Desk: I will no longer trade bonds at Charles Schwab. I discussed in a recent post an effort to sell 2 RRD 2029 bonds in a trust account at that firm. Problems With Schwab Bond Trading

Schwab is not set up for online bond sells. I kept telling the broker that there was a dealer willing to accept those two bonds at 81.55. In all prior occasions when calling a bond desk, the broker and I would be looking at the same order book. The Schwab broker would not look at the order book or put a limit order to sell two bonds at 81.55. It is my opinion that a limit order at 81.55 would have been filled within one minute.

It is not surprising to me that the order book with the 81.55 was invisible to him. Instead, he insisted on putting the order out to bid. Two hours later, he came back with a 78 price.  Based on my conversation with him, I suspect that this broker follows the same routine for every small individual investor who calls to sell bonds.

I would prefer never to deal with a broker for a myriad of reasons, none of which cast a positive light on them. Fortunately, for retail investors, markets are moving toward greater transparency where brokers are becoming increasingly irrelevant. The online bond market is still in its infancy however.

I have had a prior dealing with another Schwab bond broker. In that case, we both saw the same bid and ask prices. In that case, there was no bidder willing to accept a small lot. I asked him to enter a limit order slightly below the best bid and it was snapped up quickly. 

Admittedly, that is not much money involved in the 2029 RRD bonds incident, given the difference in price for just two bonds. I am more concerned about the principle, as well as trustworthiness and competency. 

I sent the Schwab  customer representative a snapshot of the order book at the time that 78 price was quoted to me. Here is a copy of their response which made matters far worse from my  perspective, since it would have been far better to admit to a mistake with insignificant financial consequences:

Excerpt from Reply by Schwab Customer Representative
I am in no way questioning their assertion that the two bonds were placed "out to bid" and 78 was the best bid made in response.

There is a fundamental difference in placing the order out to bid and hitting an existing bid.

This is a copy of the Order Book taken at the time of the 78 quote given to me by the  Schwab bond broker:

The Schwab customer representative was told by the Schwab bond desk, after disclosing this snapshot to them, that "there was no way to see if that was only in-house or if they were reflecting it to the market".


I believe that the foregoing was the published bids and asks from all dealers at the time of the snapshot, and would have been available to any dealer willing to look at it.

Could anyone seriously maintain that one dealer would be allowed by his clients to maintain a private order book, refusing to publish the bids and asks prices to the market? For what purpose, the only one that occurs to me is to screw all of their clients by insuring a non-market price or that orders would not be filled due to a lack of participants! That would seem to require an abundance of extremely stupid institutional clients and a dealer wanting to invite class action lawsuits by the boatload from its clients.

On the day after this incident, the best bid for most of the day was the same dealer willing to buy my two bonds at 81.55. Eventually, that order was apparently filled and was no longer available at some point during the day of April 5th. The best bid was less than 81.55, with a higher minimum quantity, when I last checked on Thursday.

Whenever I have gone to a broker that did not generate this order book, that non-originating broker would have all of the quotes mentioned by me. I have never ran into an example where the quote was invisible to such a broker. It would of course be invisible to anyone who refused to look. 

There was a large number of trades reported by Finra for April 2, 2012, all of which were consistent with the prices reflected in this order book snapshot. FINRA (search bond activity just for April 2nd)

And, for that 78 price, I would be charged the broker assisted commission!

Each investor has to form their own opinions. I only need one example of this type to reach a conclusion, particularly where there is such a steadfast refusal to admit error. 

I do not think that the Schwab bond desk was prepared for a customer armed with bid and ask quotes, and who had the audacity to make a snapshot to send back to them. I would have accepted an apology for an error, a mistake or a temporary lapse in competency, but I will not accept the response given based on what I know.

I will change my mind only when Schwab shows the order book online and allows their customers to sell bonds online.

{Added: I checked this morning and there was a dealer willing to accept my 2 bonds at 80}

3. Bought 50 Shares of Meritor (MTOR) at $7.62 (see Disclaimer): This is not a serious purchase. I have over $200 in unrealized gains in two Meritor bonds. Bought 1 ArvinMeritor 10.625% Senior Bond Maturing on 3/15/2018 at 96 Bought 1 ArvinMeritor 8.125% Senior Bond Maturing 9/15/2015 at 93.5 And those two bonds will generate close to $200 per year in income. The common stock seemed undervalued to me, but I do not want to risk much given MTOR's issues and my monetary exposure to the bonds.  I may sell one of those two bonds at some point.

The common stock popped in late March after Meritor reaffirmed guidance for its 2012 fiscal year ending this September. SEC Filed Press Release The company expects revenues of approximately $4.8 billion and adjusted earnings per share of $1.08 to $1.39.  Admittedly, that is a wide range which an investor would never see with a consumer staples company like Coca Cola or General Mills. Still, even at the low end of that estimate, the P/E at a $7.62 total cost would be about 7.05 and 5.48 at the high end. Either way, that looks relatively cheap and cheaper given the consensus estimate of $1.63 for FY 2013. MTOR Analyst Estimates

Some of the ratios found at YF's Key Statistics Page:

Price to Sales= .15
Forward P/E F/Y 2013=4.67
PEG Ratio 5 Year Estimated= .12

A five year chart shows a stock on a roller coaster ride: MTOR Interactive Chart Investors apparently did not have much confidence when pricing shares at less than 50 cents back in March 2009.

Profile page at Reuters
Form 10-Q for the Q/E 12/31/2011

Some of the negatives include MTOR's leverage, cyclicality of earnings, retirement benefit liabilities, and environmental and asbestos related liabilities. (see generally 10-Q starting at page 16).

Meritor declined 18 cents in trading yesterday to close at $7.44.

I have made a note to buy another 50 shares on a decline below $6.8, provided no adverse developments occurring between then and now. 


  1. I can now confirm that N business with the Fidelity. The original 1099-B they sent me (and to the IRS) reported par basis (100%) for all my short term closed bond transactions that were bought at a premium in my taxable account, which formally was impossible to correct on my tax return. When I complained they denied any problem, refused to change anything but apparently changed their mind later and sent me a new corrected one last week with N everywhere standing for "cost not provided to IRS". Some improvement, not much though but at least I can change things manually now with clear conscience.

  2. If I may, re keeping track of things. I find alert systems offered by Fidelity (and others) way too clumsy to use. Kept loose notes before, but now use a privately devised system that works great for me. Easy to replicate.

    Its core is a Google Spreadsheet:


    with a list of position to watch. Contains buy/sell designation, target levels, current price, a flag indicating a number of times the target level was reached since it was manually cleared last time, a link to Google page, and most importantly my private notes to refresh my memory why I'm tracking that particular position.

    The beauty of the system, IMHO, is that the spreadsheet has a private script attached to it that goes through all positions automatically two times a day (early morning session and after closing) and sends me an email listing all items requiring attention, i.e. in the "triggered" state. Usually get a few position but not on days like these lots get triggered. For example here is the email Google sent me yesterday afternoon:

    sell t/a 36.9 39.46 -0.39 KMI -1% 1
    buy t/a 15.9 15.75 -0.12 JGV -0.8% 0

    new buy t/a 82.1 81.89 -0.64 KMP -0.8% 0.7

    dropped buy 24.7 #N/A #N/A ZFSVY NaN% NaN

    buy t/a 8.79 7.39 -0.13 ING -1.8% 0.2

    buy t/a 7.75 7.58 -0.14 SD -1.8% 0.4

    new buy t/a 5.55 5.5 -0.07 SYMM -1.3% 0.6

    buy t/a 6.72 5.85 -0.03 GGAL -0.5% 0

    new buy t/a 4.85 4.75 -0.1 BUSE -2.1% 0.5

    buy t/a 9.8 9.68 0.05 AA 0.5% 0.1

    Last position on each line is the 52lh on the 0 to 1 scale, other numbers after t/a are daily abs/% changes.

    For lazy, forgetful, bit disorganized person like me works great.
    BTW the last 6 positions above are Tennessee Gent last buys (last several weeks) that triggered for me i.e. trade currently below his purchase price.

    As you see my trading philosophy is "buy what he buys but at a lower price if possible). Not very elegant, leeching really, but hey hopefully will do me good. ING looks now really tempting.

  3. It is my understanding that bonds do not become "covered" securities until 2013, so there should be no cost basis reporting to the IRS now.

    Fidelity did characterize all of my bond investments, including exchange traded bonds, as non-covered, putting a "N"beside each of those transactions. There was some minor inconsistencies in how two brokerages reported one exchange traded bond, DFP.

    While Fidelity did note a "N" beside each bond sale on my paper 1099, meaning the cost basis was "not reported" to the IRS, which is correct, every single transaction from Fidelity downloaded into TurboTax was placed on the 8649 Form for those sales reported by the broker to the IRS.

    Since the number of my non-covered transactions were extremely large at this one brokerage firm, both stocks, bonds and CEFs, I had to spend 13 hours correcting the information in Turbotax as noted in the blog today.

  4. With the exception of Zurich, the stocks that you mention are owned by me are as part of my Lottery Ticket category and are view as speculative. The total exposure is kept relatively close to my realized gains, which is close to 11 thousand in that strategy. And that is for close to 50 stocks. Since I am picking stocks in that strategy that have issues, usually a number of them, I expect to see volatility and to experience some losers given the sheer number of stocks (close to 50) in that strategy and their known problems.

    Given my low exposure I am willing to wait and see and do not worry about any of them. In the snapshots of trades for this strategy, I note the losers in red and a few were sold just before they entered bankruptcy, one of those was a cement company and another was a bank. I view that as unavoidable hazard for this strategy. After all, I am not buying Coca Cola or Apple here.

    On days like today, I would expect the speculative stocks like those contained in this strategy to go down more than the market. The portfolio did okay today being down just 1.82% vs. 1.71% for the S & P 500. Normally, I would expect to see a down 3% for this kind of down day for the S & P 500. And, I would hope to see more upside movement on big up days-more beta both ways.

    The exchange traded bond portfolio, which includes equity preferred stocks, had the lowest lost today for me down .31%, with the biggest loser being a Santander floater, STDPRB.

    I also view it as important for my overall portfolio to fall less than 1/2 as much as the market on big down days. That was the case today. Limiting losses in bear markets is extremely important . Part of that better performance is due solely to the cash and bond positions.