Tuesday, June 26, 2012

Bank Of America Calls for Redemption All of its TPs That I Own/ Bought 1 Telefonica Emisions 5.877% Senior Note Maturing 7/16/19 at $91.067/Zions Equity Preferred Stocks/MKZ Ends Annual Period-Paying 3% Minimum Coupon/

The VIX rose 2.27 or 12.53% yesterday to close at 20.38 The S & P 500 index declined 21.3 or 1.6% to close at 1313.72. The double short ETF for the S & P 500 rose 56 cents or 3.44% to close at $16.84. Left Brain has bought 200 shares of SDS as a palliative for the Old Geezer who is prone to anxiety attacks. It is sort of like sticking a pacifier in the Old Goat's mouth to quiet him down and to achieve some peace and quiet for the LB as it works 24/7 on its myriad trading rules for the Unstable VIX Pattern. LB noted that the OG needs to spend more time working on matters within the purview of his limited competence. Perhaps, more games of checkers are in order. LB grows weary listening to the incessant babble here at HQ. The OG is becoming almost as bad as that Nit Wit RB which just said "go all in Lame Brain".

My main taxable account declined .67% yesterday, viewed as good compared to the S & P 500 decline of 1.6%. I did not check the other accounts, since I know that they would have fallen less than this account which carries most of my at risk assets. The ROTH IRA, which is bond heavy, was probably down less than .2%.

The exchange traded bond and preferred stock segment of the portfolio provided a positive upside (negative correlation) in yesterday's downdraft:

Exchange Traded Bond and Preferred Stock Table as of 6/25/12
I am about to lose more of these securities to redemptions, as explained below.

My general goal every year is to beat the S & P 500's percentage return in the main taxable account with less volatility and a higher yield. The last two conditions have been met every year. The dividend yield of the S & P 500 is currently hovering around 2% which is easy to beat with my esoteric combination of securities. The bond and cash allocation provide the less volatility component. The difficulty has been, and will continue to be, beating the S & P 500's return after meeting the two main conditions of less volatility and more yield. As shown in a chart copied from that account, I have been beating the S & P 500, but that may change. Item # 2 Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker (12/13/11 Post).

In his NYT's column, Paul Krugman sees similarities in Austria's banking crisis in 1931, which started a worldwide chain reaction, and the current crisis in Spain. Austria tried to help its banks in 1931, but that put the government's solvency in doubt. According to a history found at the FDIC website, FDR temporarily closed banks on 3/6/33. In 1933, 4,000 U.S. banks failed along with 1,700 S & Ls.

Krugman considers Europe's current response to Spain's banking problems as inadequate, since the EU is loaning rather than giving money to Spain's government. That is a typical argument made by liberals, the solution to virtually any problem is to shower free  and borrowed money on those who would like to have it. Spain's problem originated from reckless and improvident real estate loans made by its banks. While moral hazard is certainly an issue, the more fundamental question to ask is why should German and Dutch citizens bail out Spain's banks at no cost to Spain, which is Krugman's solution.

I would note that Germany's debt to GDP ratio is already around 80%. Germany has guarantees of €200 billion supporting the Financial Stability Fund. German and French banks have about €800 exposure to the debt of Europe's peripheral nations.  MarketWatch I would question whether Germany is in a position to provide free money to Spain, Italy and Greece.

The WSJ has a graph of government debt as a percentage of GDP for the European nations. Historically, a debt to GDP ratio over 90% starts to create serious problems for a nation. Reinhart and Rogoff - Bloomberg

I noticed that Zions called its high yielding equity preferred stock, ZBPRE, on 6/15/12, which was the first date such call right could be exercised by the bank.  That issue had an initial 11% coupon, but would have changed to a 10.22% spread to the two year treasury rate after 6/15/12. Final Prospectus Supplement (3/31/2009) That security was  issued when Zions was under some duress and in need of equity capital.

I have a small position in ZBPRC, another high yielding equity preferred stock, that may be redeemed on or after 9/15/13. That security pays 9.5% on a $25 par value. It would be reasonable to expect that issue to be called at the first opportunity. Bought 30 ZBPRC at 18.4 (November 2009); ADDED TO ZBPRC AT 23.75 (July 2010);  Added 50 ZBPRC @ 25.3 (November 2010);  Sold 30 of 150 ZBPRC @ 26.47 (February 2011); Sold 120 ZBPRC at 26.91 (May 2011) Bought 40 ZBPRC at $25.21 (December 2011).

Effective 1/1/12, Tennessee has repealed its gift tax and will phase out the state inheritance tax. Summary During the phase out period, the tax exemption will be raised through 2015 before the tax disappears altogether. The exemption for 2014 is $2 million and $5 million in 2015.

1. MKZ Ends Annual Period Yesterday (own 100 shares): MKZ is a "principal protected" senior unsecured note issued by Citigroup Funding and guaranteed by Citigroup as provided in the prospectus. Pricing Supplement The unsecured senior note matures has a $10 par value and matures on 7/11/2014.

This notes pays the greater of 3% or up to 31% in one annual interest payment. The owner can receive more than 3% depending on the movement of the DJ-UBS commodity index during the annual coupon period, provided that index does not have a close about 131% of its starting value. A close above that 131% causes a reversion to the 3% minimum, and it no longer matters thereafter how much the index gains during the applicable coupon period. I call that event, which causes the reversion to the 3% minimum coupon, a Maximum Level Violation. It is what it is. 

The most recent annual period ended yesterday with no gain in the commodity index. The starting value on 6/23/11 was 155.967 and the closing value was far lower at 130.56.  Chart The maximum level for the current coupon period is therefore 171.033. (1.31 x 130.56=171.0336). A close above that Maximum Level at anytime on or before 6/24/13 (annual period closing date) will cause a Maximum Level Violation and a reversion to the 3% minimum coupon, irrespective of the percentage gain in the DJ-UBS index at the annual closing date.

Based on my current view of my Citigroup Funding "principal protected" notes, all of which mature in 2014 at $10, I am content with their minimum coupons in the current abnormally low interest rate environment and view the possibility of more as a bonus. My main concern with them is the credit risk associated with Citigroup, and I am not that concerned about its survival until these notes are paid off in full.

A fixed coupon Citigroup note maturing in May 2014, which has a 5.125% coupon, was selling at close to 104 yesterday, giving it a YTM of less than 3%. The buyer of that price has no upside in the coupon and will face a loss at maturity. From my perspective, my buy of 100 MKZ at less than par value, with its 3% minimum coupon and the possibly of more, is clearly superior to that fixed coupon bond selling at above par value.

As noted in Item # 5, Exchange Traded Bonds: New Gateway Post, I have hit on 18% and 25% in two consecutive years on MKN, which is also based on the DJ-UBS commodity index, but the last year paid the minimum 3%. MKN Ends Its Annual Period With Minimum Coupon Payment My largest hit was one annual period for MOU at 27.93%. MOU Ends Second Annual Coupon Period With a 27.93% Gain

I currently own $8,000 in principal amount of these Citigroup Funding "principal protected" senior unsecured notes traded on the stock exchange. (200 MBC; 100 MOU; 100 MOL; 200 MTY; 100 MKN and 100 MKZ) The coupons of both MOL and MTY are linked to the price of gold, and neither have hit during my ownership, though MTY did hit in the coupon period prior to my purchase.

Citigroup Funding Inc. Min Coupon PPN on Dow-Jones-UBS Commodity Index (DJUBS)  (MKZ) closed at $10.29 yesterday on 200 shares in volume. Limit orders have to be used with exchange traded "principal protected" notes.

2. Bought 1 Telefonica Emisiones, S.A.U. 5.877% Senior Note Maturing 7/15/2019 at 91.067 Last Friday (see Disclaimer): Telefonica Emisiones is a wholly owned subsidiary of Telefonica, S.A. which guarantees the note as provided in the prospectus. Telefonia is a telecommunications company headquartered in Spain.


The common stock of Telefonica SA is traded in the U.S. under the symbol TEF. As with many European telecoms, the price of TEF shares have plummeted due to the financial crisis and investor perceptions about the pace of the eurozone's recovery. Telefonica is the largest carrier in Spain, and that country is suffering from extraordinarily high unemployment, as well as serious sovereign debt and banking problems.

TER has significant operations in Latin America. Overall, it has operations in 25 countries. About Telefónica It has a 9.7% stake in China Unicom and a 10.5% interest in Telecom Italia. (page 6 telefonicas_profile.pdf)

Telefonica SA Profile Page at Reuters
Key Developments page at Reuters

Earlier this year, this bond was trading at over 105.

FINRA on 2019 Note.

According to FINRA, this bond is currently rated investment grade. S & P rates it at BBB; Fitch at BBB+ and Moody's at Baa2.

Moody's recently downgraded its rating to Baa2 from Baa1. Reuters.com I reviewed that Moody's report, dated 6/20/12, which is available to TD Ameritrade and Schwab customers. That report noted that TEF is the leading operator in Brazil, Argentina, Chile and Peru, and has substantial operations in Columbia, Ecuador, El Savadore, Guatemala, Mexico, Panama, Uruguay and Venezuela. Altogether, the company had 206.2 million customers in Latin Americas as of 3/31/12.

SEC Filed Annual Report Form 20-F TEF's ownership interests in other companies is detailed at page 16 of that report.

My confirmation states that the current yield at my cost is 6.397% and the YTM is 7.376%.

The bond has a "make whole" provision. Prospectus at p. S-29

Some other bonds from this issuer include the following:

2016 6.421% coupon
2017 6.221% coupon
2020 5.134% coupon
2021 5.462% coupon

3. Bank of America Calls Trust Preferred Issues for Redemption on 7/25/12:   I received a notice from Fidelity yesterday that another one of my bonds has been called:

This is not an exchange traded bond. I bought this $1,000 par value bond in the bond market last November. Bought 1 MBNA Capital Series A 8.278% TP at 94.5 Maturing 12/1/2026 After seeing this notice, I recalled that this one could be redeemed now, but at a small premium to its par value plus accrued interest.  

I then did a Google search to find at the redemption price, since the OG had at best a vague recollection of the premium due. 

I then found a BAC press release that gave notice of its intention to redeem every trust preferred which I own, which I had not previously seen. 

The 2026 bond will be redeemed at 102.0695% of its $1,000 par value plus $12.417 in accrued interest. This one has a 8.278% coupon. So I will realized close to a $70 gain on this bond plus the interest at the coupon rate since its purchase. 

I will also lose to redemption the exchange traded TPs KRBPRE and KRBPRD. Both will be redeemed their $25 par values plus accrued interest. The accrued interest on KRBPRE will be $.39375 per share, and KRBPD has a lower amount of accrued interest at $.135417. KRBPRD will go ex dividend for its regular monthly interest payment later this month which explains the lower amount. MBNA Capital D 8.125% TruPs, KRB.PD  

I had bought back those securities due to a lack of options for income producing securities. I bought in May 50 shares of KRBPRE in the Roth IRA at $25.06. Overall I have traded small position in these two securities with small profits: SOLD 50 KRBPRE @ 25.96 November 2011; Sold 100 KRBPRE at $25.13-ROTH IRA (shortly after ex interest date); Sold 50 KRBPRD at $24.7.

Later yesterday afternoon, the suffix "CL", which means called, was placed by the symbols KRBPRE and KRBPRD in my accounts. 

Other Trust Preferred issues are included in this redemption, including three originally issued by Fleet Capital Trust and the underlying TP in the trust certificate MJH. Buy of 50 MJH at $7.51 March 2009-Sold 50 MJH at 23.6 June 2010 (snapshot at Trust Certificates: New Gateway Post) I have bought and sold one exchange traded Fleet Capital TP in the past. 

What a bummer!

As I have said, I ran out of good options to redeploy the proceeds from redemptions about two years ago. I am now faced with a series of less bad options. I bought yesterday one of those less bad options in the ROTH IRA to replace KRBPRE with a TC that had previously been sold. I hope to discuss that security in Thursday's post.  

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