Thursday, May 24, 2012

Partial Redemption SCEDN/Added 50 of the Synthetic Floater GYB at $16.5-Roth IRA/Bought 40 LSI at $7.28-LT Category/MBC-3% Coupon for Third Annual Coupon Period/

After plunging yesterday morning, the market turned around at approximately 12.28 E.S.T. when the S & P 500 hit 1296.55. That confirms the importance of 1295 as a support level. (see discussion in 5/21/12 Post) I would now be more than a little concerned about the market piercing that level to the downside.

A Pakistani doctor, who helped the CIA find Osama bin Laden, has been imprisoned for treason by Pakistan. That action speaks volumes about Pakistan's true sympathies.

I noticed yesterday that Southern California Edison announced the partial redemption of its Series A preferred stock. SCE will redeem 750,000 out of 4 million outstanding shares. I own 50 shares. This preferred stock is traded under the symbol SCEDN. Par value is $100. SCEDN is an equity preferred floater that pays qualified dividends at a 1.45% spread over the highest of the 3 month LIBOR, the 10 year treasury note or the 30 year treasury bond. Prospectus Supplement At the present time, the 30 year treasury provides the highest yield at approximately 2.81% as of 5/23/12, WSJ.

I bought 50 shares at $84 (October 2009 Post). Fidelity will segregate the shares subject to call from the remaining shares:

This would allow me to sell the 41 shares that are not subject to redemption. I intend to keep them. The dividends paid by SCEDN have been classified as qualified dividends.

Southern California Edison Co Series A PFD closed at $99.55 yesterday.

Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Floaters: Links in One Post

TD Ameritrade will not segregate shares in the same way. I noticed earlier this week that the Trust Preferred ABWPRA (ABW.PA) was subject to a partial call. Fidelity segregated the shares subject to call in the same manner as shown above for SCEDN.

Ameritrade, on the other hand, placed all of the shares under a "do not sell" restriction.

ABWPRA Do No Sell 50 Shares-Only 7 Subject To Call
While this may not be material, it would be important to anyone wishing to sell a security subject to a partial redemption.

Many years ago, I sold my entire position of a REIT preferred stock without knowing that it had been subject to a partial call. There was no notation in my account of the call and I had not yet noticed it. I had to buy back the shares subject to the call. So, there is a reason to place a restriction on the shares subject to the partial call. There is no reason to place a restriction on all of the shares.

I noted in an earlier post that PJR was called by the call warrant owner.

I could have sold that security yesterday at $25.8, but so no reason to incur a brokerage commission. I will receive one more semi-annual interest payment. Trust Certificate PJR Called

1. BOUGHT 40 LSI at $7.28 Last Monday (Lottery Ticket Basket Strategy)(see Disclaimer): I view this purchase to be the replacement for 70 shares of PLX Technology that I recently sold. Sold 70 PLXT at $6.66-Bought 70 PLXT at $3.37-a LT.

For LT purchases, it is not necessary that I actually understand the products made by a company. During the OG's lucid moments, he has at best an inadequate comprehension of LSI's products.  

Profile page at Reuters
Key Developments page at Reuters

During the Crazy Period of the Nasdaq Bubble, LSI stock traded over $70 per share for a brief period. LSI Interactive Chart I was aware of this company back then and do recall referring to that price action as nutty at the time. 

My first purchase of LSI stock was made last Monday. By classifying this purchase as a Lottery Ticket, I could not buy more than $300. The LB  will play a hand of blackjack for more money. 

LSI is expected to earn 78 cents per share this year and 85 cents in 2013. Assuming those consensus estimates prove to be prescient, then the P/E at a $7.28 price is around 8.56 based on the 2013 forward estimate. According to YF, the five year estimated P.E.G. is .54.

LSI also has a lot of cash and no debt long term debt. Cash was around $623.07 million, or $1.10 per share as of 3/31/12. 

As with most other Lottery Ticket selections, this purchase was made primarily on statistical data, primarily the forward P/E, the one year P.E.G. and the cash per share. 

I did review the recent quarterly report, Form 10-Q, and the SEC filed News Release announcing earnings for LSI's first quarter.  

The author of this article at Seeking Alpha argues that LSI is one firm likely to benefit from the emergence of solid state drives. One of LSI's products is a drive controller that handles access to the flash memory chips which store data. While I am not certain, I believe that LSI became a major player in this area when it acquired SandForce, see page 10 of Form 10-Q for the Q/E 4/1/2012 LSI used part of its cash to complete that acquisition. The acquisition was completed in January 2012 for approximately $328 million in cash, net of cash assumed, and the assumption of approximately $48 million of unvested equity awards held by SandForce employees.

Cramer interviewed the CEO of LSI yesterday. The SandForce acquisition is discussed in that interview.

LSI closed at $6.93 yesterday.

2. MBC Ends Its Third Annual Coupon with the Minimum 3% Interest Payment (own 200 shares): MBC is a senior unsecured note issued by Citigroup Funding and guaranteed by Citigroup as provided in the Final Pricing Supplement. This bond matures on June 9, 2014 at a $10 par value. MBC is an exchange traded bond.

Interest is paid annually at the greater of 3% or up to 30%, based on the performance of the Russell 2000 during the relevant coupon period. Again, as explained many times in prior posts, a single close in the Russell 2000 index above that 30% maximum level triggers a reversion back to the minimum 3% coupon, and it no longer matters where the index closes after a Maximum Level Violation.

For the Third Annual Coupon Period, the one that just ended, the Starting Value of the Russell 2000 Index was 829.06. The ending value was 764.63. ^RUT Historical Prices There was no Maximum Level Violation during the Coupon Period. However, whenever the index falls below the Starting Value as of the closing date, which happened during this period, the minimum coupon will become the applicable rate, so the owners of MBC will soon receive $30 in interest for every 100 shares owned by them. I will receive $60. That payment is scheduled to be made on May 29th. The ex interest date was yesterday.

Bought 100 MBC at 9.78

Bought 100 MBC at 9.84

Citigroup Financial Inc. 3.00% Min Coupon Princ Protected Nts for Russell 2000 Index  (MBC) closed at $10.33 yesterday.

3. Added 50 GYB at $16.5 Last Monday (see Disclaimer): GYB is a Synthetic Floater in the Trust Certificate legal form of ownership. It is categorized by me as an Exchange Traded Bond. This security pays the greater of 3.25% or .85% over 3 month LIBOR on a $25 par value. This security has a maximum rate of 8.25%. Interest payments are made quarterly.

The underlying bond, owned by this trust, is a fixed coupon Trust Preferred issued by Goldman Sachs Capital. The underlying bond owned by that trust is a Goldman Sachs 6.345% junior bond maturing in 2034. When the legal layers are removed, GYB represents an undivided beneficial ownership in a GS junior bond and a swap agreement with UBS that creates the coupon provisions of GYB. If the swap agreement is terminated for any reason, the TC GYB will pay the fixed rate coupon of the underlying TP.

GYB Prospectus:

{A swap agreement connected with the TC JBK was in fact terminated when the swap counterparty, Lehman, went bankrupt, and that TC was transformed from a synthetic floater to a fixed coupon TC}

Given the abnormally low 3 month LIBOR rates, the GYB coupon is currently the minimum 3.25%.

When an investor buys GYB, it is possible to compute the minimum and maximum current yields over the life of the security. At a total cost of $16.5 per share, the minimum current yield would be about 4.92%, and the maximum current yield would be 12.5%. The maximum yield would be hit when the 3 month LIBOR hits 7.4%.

This brings me up to 150 shares of GYB in the ROTH IRA. I bought 100 shares at $17.2 last March.

I have traded GYB on several occasions. The largest percentage gain resulted from a 100 share purchase at $10.95  (April 2009), later sold at $18.09 (May 2010):

2010 Regular IRA GYB +$774.42  
Other trades were less profitable than the first round trip and include the following: Bought 50 GYB @19.07 (October 2010); Bought 50 GYB at 18.63 in the Roth IRA (January 2011); Sold 100 GYB at 19.7 in Roth IRA (May 2011); Bought 50 GYB at 16.95 in Roth IRA (August 2011); Added 50 of the Synthetic Floater GYB at $15.56: ROTH IRA (December 2011); Sold 100 GYB at $17.07 (January 2012).

Floaters: Links in One Post

Due to complex tax issues associated with the swap agreement, I will own the synthetic floaters only in retirement accounts.

The last ex interest date was 5/12/12.

Corporate Asset Backed Corp. CABCO Series 2004-101 Trust Goldman Sachs Capital I Float. Rate Call Ctfs (GYB) fell 46 cents in trading yesterday to close at $16.34. GYB Interactive Chart  

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