Tuesday, July 10, 2012

Sold 2 Cincinnati Bell Senior Subordinated Bonds at $97/SOLD 30 UMPQ at $13.33

It did not take long for Paul Krugman to write about the Vanity Fair article on Mitt's 2010 tax return. NYT Krugman highlights the areas of concern and points out important differences between Mitt and his father George. I discuss briefly the Vanity Fair piece in yesterday's post.

In American politics, statements made by politicians would frequently provide the basis for a fraud suit when made by a business to a consumer in a commercial transaction. Lying is routine and far more common than truth telling which is rare among politicians, almost to the point where it would be reasonable to assume that an accurate assertion was accidental.

Fraud will become more prevalent during campaigns, when deceiving the American public is turned into a Madison Avenue art form. Deception works on millions of gullible and uninformed Americans, particularly those who already fervent members of one political tribe or the other and are easily manipulated by those seeking to gain or hold political power.

While both political tribes are guilty as charged, the republicans, the alleged conservative  party, have a preternatural gift for shamelessness in their misrepresentations.

In a NYT article published last Saturday, light is shined on the claim made by Romney and other Republicans that Obamacare cuts approximately $500 million from Medicare, a transparent effort to scare seniors currently on Medicare. The shamelessness comes from the fact that the GOP representatives voted en masse for the same 10 year $500 million in Medicare savings twice since 2010.

Another aspect of the GOP's shamelessness on this matter is that they voted en masse to end traditional medicare for those under 55 and to replace it with vouchers for the purchase of private insurance. That plan would more than double the insurance costs for the intended victims of that plan. GOP's Plan To Bankrupt the Middle Class

The following table is an estimate made by the Kaiser Foundation on additional premium costs per year in 2022 under the GOP's Path to Prosperity compared to traditional Medicare:

www.kff.org/medicare/.pdf. In the House 235 GOP members voted for this plan. ABC News The CBO came up with a similar estimate. PolitiFact

The misleading part is the suggestion that existing traditional Medicare benefits are being cut. The current crop of fraudulent GOP ads assert that Obamacare will "gut", "rob" and "raid" benefits. Most of the projected 10 year in cuts come from the projected growth in Medicare costs and would impact primarily healthcare providers.

Other savings would come from decreased federal support for Medicare Advantage policies, offered by private insurance companies, which offer features like gym memberships that are not available under traditional Medicare. (see also PolitiFact New JerseyPolitiFact | Did President Barack Obama "steal" $500 billion from Medicare?)

I have previously discussed how the Democrats are attempting to scare seniors by stating that Ryan's plan will end traditional Medicare. The purpose of that claim is to cause seniors who are already receiving Medicare to become concerned about losing those benefits with a GOP victory this November. The GOP plan would only apply to those becoming eligible for Medicare in 2022. FactCheck.org

I believe that the Democrats could get a lot of mileage out of truthful statements on this issue, showing the public graphs like the one above and juxtaposing those higher premium payments against data showing the typical net worth of a middle class family. Fed Discouraging Survey of Family Finances

For a kicker, the ad could point out that the same GOP plan reduces taxes on the super rich. Without question, the GOP plan would bankrupt most members of the middle class within a few years after retirement, and most viewers would then understand this issue clearly and correctly. If the Democrats want to win in November, that kind of ad needs to be aired in a continuous loop until everyone who watches TV has seen it and most could repeat the narrator's comments verbatim.

China's annual consumer inflation fell to 2.2% in June, down from a 3% reading in May. China is one country where a more accommodative monetary policies could actually spur growth. I seriously doubt that the ECB's recent reduction in its key interest rate to .75% from 1% would have any meaningful impact, nor would more quantitative easing by the Fed or the Bank of England.


I have never had a position in securities issued by Patriot Coal (PCX). I did notice last night that this company filed for bankruptcy. Patriot Coal Files for Chapter 11 Reorganization The coal industry is in a world of hurt due in large part to low natural gas prices and the closure of coal plants in the U.S. in response to the E.P.A.s new emissions requirements. I have discussed those new emissions requirements primarily in connection with Edison Mission which will be shutting some of its plants. {Sold 2 Edison Mission 7.75% Senior Bonds Maturing in 2016 at 73.25Edison Mission Bonds; and see also Reuters article on how emission rules will impact U.S. coal capacity}. I am aware of a PCX 2018 bond, which I have never owned and have no intention of buying. That bond was actively traded yesterday in a 30-35 price range.

1. Sold 2 Cincinnati Bell 8.875% Senior Subordinated Bonds Maturing in 2018 at 97 Last Friday (Junk Bond Ladder Strategy)(see Disclaimer): Whenever an investor sees the phrase "senior subordinated", the word "subordinated" is going to be more important than the word "senior". In most cases, the phrase "senior subordinated" is a Wall Street marketing euphemism for "junior bond". The senior subordinated bond will be the most junior bond in a firm's capital structure, most of the time, junior in priority to all "senior bonds". Such is the case with CBB's 2018 senior subordinated bond. 

Generally speaking, a firm may have senior secured debt, senior unsecured debt and senior subordinated debt. The senior debt, both secured and unsecured, is unsubordinated to any other obligations. The secured debt has the priority over its collateral.

Once that collateral is exhausted (e.g. sold in bankruptcy), the senior secured debt and senior unsecured debt will be at the same level of priority as to whatever is left. If the firm is liquidated in bankruptcy, then the "senior subordinated" debt would receive whatever remains, if anything, after the senior bond owners are paid. 

As a practical matter, a more common result would be for the firm to reorganize in bankruptcy with the senior subordinated debt owners receiving common stock in the reorganized firm in exchange for their debt. That could also happen even with more senior debt, such as a second lien bond, when the company is way over leveraged with more senior secured debt. This recently happened when I received 43 shares of new Reddy Ice stock for my 1 second lien bond. 

Since I have had some defaults in my junk bonds, I have resorted to trading them to book profits to offset losses resulting from defaults. I am tracking this process in Item # 5 Realized Gains Junk Bond Ladder Strategy. The goal is simply to break-even on the bonds while collecting interest payments at a much higher spread to investment grade yields with comparable maturities. 

I still own 1 CBB senior subordinated note and will probably ride that one to maturity, hoping to receive par value at maturity. 

The two bonds sold last Friday were bought in two lots. The first bond was bought in December 2010 at $94.

I will be monitoring CBB's senior debt to replace the two senior subordinated bonds sold last week. I have previously bought and sold the CBB 2020 senior debt. Bought 1 Cincinnati Bell Senior Bond Maturing in 2020 at 96.8Sold: 1 Cincinnati Bell Senior Maturing 2020 at 102.25 I am not going to buy those issues at over 100 and would prefer to buy on a non-news driven decline below 98.

2017 CBB 8.25% Senior Bond
2020 CBB 8.375% Senior Bond

Having made the foregoing statements about subordinated bonds, I did purchase one yesterday from another issuer, which still carries investment grade ratings from S & P and Moody's, yielding almost 9% and maturing in 2026, which I hope to discuss in a later post.

2. Sold 30 Umpqua at 13.33 Last Friday (Lottery Ticket Basket Strategy)(see Disclaimer): There are two basic rules governing the Lottery Ticket strategy. Each investment can not exceed $300 plus any prior profits on the stock, and the total amount of exposure to all LT selections can not exceed the realized gains from this strategy. I totaled up my exposure late last week and found that it exceeded the total in realized gains, so I had to sell something. I selected Umpqua for no particular or good reason.

This transaction resulted in a small long term capital gain:

2012 Umpqua 30 Shares LT Gain +$38.09
The shares were bought at $11.53.

As of 7/6/12, the realized gains totaled $10,700.2 and the exposure totaled $10,868.99 in 48 stocks. Lottery Ticket Basket Strategy I will have to sell one more, which I did yesterday.

3. Schwab Response on FTE 30% Withholding: I mentioned in yesterday's post that Vanguard and Fidelity withheld 15% of FTE's recent dividend to pay the foreign tax and Schwab withheld 30%. I requested an explanation and one was given yesterday morning. I replied to Schwab and took the following snapshot of their response and my reply:

Schwab Response on FTE Withholding: It is my problem-Just Spend Some Money and Fill out Some Forms Myself-Consult my Tax Advisor- Have a Nice Day
My Response to Schwab: It is their Customer Service Problem 
It would be reasonable for a customer to ask, after reading Schwab's reply, why Vanguard and Fidelity withheld 15% and Schwab wants to send its customers on an expedition to fill out forms and pay fees to receive the 15%. How does that happen? I did absolutely nothing to receive the 15% withholding rate for the dividends paid into the Fidelity and Vanguard accounts.

Admittedly, I am not a customer who accepts whatever B.S. is fed to him.

Schwab could have avoided the 30% tax by filling out for their customers "relief at source" documents. Obviously, this had already been done by both Fidelity and Vanguard which withheld only 15%.

The document referenced in the forgoing snapshots can be found at dtcc.com.pdf.

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