Monday, July 30, 2012

Wells Fargo-GJN/Facebook/Lottery Ticket Basket Table/BOUGHT 100 of the Balanced ETF INKM at $30.05

I published a post on Saturday: Sold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters

I can confirm that Wells Fargo was the swap counterparty for GJN and furnished the trustee with the amount of its "swap termination fee."  I do not yet know how WFC arrived at the amount. They may have secured quotes from other dealers, at least three, or could have calculated their own "damages" in the event enough quotes were not received by it. GJN Prospectus at page S-24

However it was calculated, I view the sum as egregious on its face. And, I do not believe that the sum is even susceptible to a good faith calculation by anyone. The swap could easily have a negative value for WFC over the life of the agreement. If I am around in 2035, I will do a back of the envelope analysis of how WFC would have fared between now and August 2035 with the swap agreement in force. I will publish the results.

Every contract has an implied covenant that the parties will act in good faith. The Duty of Good Faith Revisited That duty can not be waived or disclaimed by a party. A breach of that covenant by one party could be a material breach of the contract warranting termination of any rights thereunder at the moment of its commission.

It was Wells Fargo (through Wachovia) that sold the GJN trust certificates to the public at a $25 par value after setting up the trust with complicated terms (48 single spaced pages, excluding an appendix), now relied upon it, to take almost $11 of that $25 from the third party beneficiaries of the trust created by it (i.e. individual investors) as a "swap termination fee" for the trustee's "default" occurring when J. P. Morgan decided to redeem the underlying TP without making a make whole payment.

Wells Fargo is not dealing with a sophisticated counterparty in an arms-lenthg negotiated swap transaction, but a third party beneficiary of a trust whose rights were defined by Wells in a complicated and very long single spaced agreement with a compliant trustee.

SEC Filings For GJN The last filing by the trustee shows the amount paid to the GJN owners. SEC

Since I did not own GJN on the redemption date, I will consequently not receive a class action notice when and if a suit is filed against WFC, the trustee and/or JPM in connection with GJN. That is why I am asking the readers to let me know if they become aware of a lawsuit. The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty; Item # 1 When Does a Capital Treatment Event Occur?; Item # 3 GJN Redemption.

I calculate that Wells Fargo took $12,152,876.4 of the total proceeds paid by J P Morgan to the trustee for the redemption of $27,700,000 in principal amount of JPM's 5.85% TP maturing on 8/1/2035. There were 1,108,000 GJN Trust Certificates with a par value of $25 per certificate. Trustee Distribution Statement The trustee paid to WFC $10.963 per certificate. Trustee Distribuiton Statement  That is how I calculated a payment of  $12,152,876.4 to Wells Fargo. It beats working for a living. I am sure that they are really sorry that they took money set aside by individual investors to pay college tuition or as retirement savings. This is really slick. 

This means that Wells Fargo took 43.87% of the principal amount of that security owned by the trust. I went to a website to calculate how much Wells Fargo will be able to earn on that money for the next 23 years at just 5%, with interest compounded annually:

Compound Interest Calculator Please remember that the total principal value of the JPM TPs was $27.7 million. I could arrive at a higher number by compounding monthly (adds almost another million) or by increasing the percentage return.

I am having an ongoing discussion with readers about this issue in the comment section of Stocks, Bonds & Politics: Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater Positions. I did not own GJN at the time of redemption, having sold my 150 share position in April 2012. I am trying to do what I can to help the individual investors who did own it at that time.

I regard myself as a financial journalist, but his blog is read by only a handful of people each day. To expose what WFC has done, a journalist with a wider readership will have to write a story. Most of the visitors to my blog each day come looking for information on a specific topic, such as the date of KO's stock split and then never come back. The public can decide whether Wells has treated the individual investors fairly.

Given what happened to the GJN owners, I do believe that it is appropriate for investors who own synthetic floaters, to reassess their positions and to read the applicable prospectuses with the GJN events in mind. Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater PositionsSold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters

That reassessment probably needs to be done with the following thought in mind. I would never assume that large financial institutions are even capable of acting in good faith. Any investor that believes to the contrary must have been asleep over the past twenty or so years.

I do not recall ever owning Wells Fargo stock. As the trustee for my late father's testamentary trust, I did buy 100 shares of WFC stock at $29.6 earlier this year. I am 100% confident that he would not want to have anything to do with this bank after the events connected with the synthetic floater GJN and its redemption. I sold the WFC shares last Friday at $34 and will never buy them back, nor will I ever have in the future any dealings with this bank.

I rarely mention a trade in family accounts that I manage, but I thought that the disposition of WFC stock deserved a brief mention. All of my discussions deal with my personal trades.

{I did mention that I had bought the ETF BOND in the trust account. (Stocks, Bonds & Politics: introduction last paragraph, the symbol was then TRXT, later changed to BOND). I also mentioned to a reader that I had bought the long treasury bond ETF TLT in that account when it was trading near $94. Other than those two mentions, I have not discussed a trade other than my own until now.}

In a paper written by Van Hoisington and Lacy Hunt, the authors argue that excessive debt in the U.S. will lead to a prolonged period of low long term interest rates.  hoisingtonmgt.pdf They argue that the 30 year treasury bond at less than 3% still holds value for investors and may even have value at a 2% yield compared to other assets. I am not buying into that thesis, but I will place a few chips on that opinion turning out to be omniscient.

The OG will readily admit that his crystal ball is a bit murky. A reader once asked me why I bought the bond CEF ERC when I believed the long term secular bull market in bonds was nearing an end. In my reply, I  stated that I might be wrong and then proceeded to explain other considerations. {see comment section Stocks, Bonds & Politics: Bought 100 of the Bond CEF ERC at 15.13-March 3, 2011 Post} When the bull market in bonds ends, and it will end, the devastation will be other worldly.

Possibly, as some believe, Jeane Dixon and Nostradamus were the only humans in recorded history who could predict the future, and unfortunately those people are no longer with us. So we are left with folks like Hoisington and Hunt, and I am not going to make a crack about being hosed.

The quarterly reviews written by Van Hoisington and Lacy Hunt can be found at Economic Overview.

I have Facebook stock on my Lottery Ticket monitor list, one among 200 such companies. My consider to buy price would be below $15. Since that strategy has a $300 limit, I could buy no more than 20 shares at $15. Lottery Ticket Basket Strategy

By "consider to buy", I am not talking about an automatic buy. Instead, I will simply review the latest quarterly report, one analyst report, and major news items before making a decision whether or not to buy those 20 shares. The total amount of research time for a LT would generally be 30 minutes. For the moment, I did nothing more than glance at the earnings report, solely for the purpose of deciding whether to change my target entry price. SEC Filed Press Release The company reported a GAAP loss of 8 cents per share, with Non-GAAP earnings at 12 cents, flat with the second quarter of 2011. I am more likely to lower the target entry price for Facebook shares, rather than to raise it. In response to this report, Facebook shares declined $3.14 last Friday to close at $23.71, representing a 37.6% decline from its recent $38 IPO price. Was the IPO priced rationally, or was it a product of Wall Street hype to separate individual investors from their money for the usual purpose of enriching others including the Masters of Disaster?

1. Bought 100 of the Balanced ETF INKM at $30.05 Last Thursday (see Disclaimer): SPDR SSgA Income Allocation ETF (INKM) is a new balanced ETF that owns other SPDR ETFs.

On the day of my purchase, I took a snapshot of the allocation:

AS of 7/25/2012/Percentages Will Change

The total expense ratio is .7%. With competition in the ETF space, that fee may drift down some in the years ahead, as the underlying funds reduce fees to stay competitive. 

The largest equity ETF in this basket is the SPDR S&P Dividend ETF which attempts to replicate the S & P Dividend Aristocrats Index, a relatively small list of companies that have a long track record of raising dividends. The selection includes about 60 companies out of the S & P 1500.  That ETF is weighted at 18.66% which is the largest ETF weighting in this fund. 

The largest bond weighting is for the SPDR Barclays Capital Long Term Corporate Bond ETF | State Street Global Advisors (SSgA).  The weighting was 13.14% as of 7/25/12.

The third, fourth and fifth largest weightings as of 7/25/12 are bond ETFs:   JNK - SPDR Barclays Capital High Yield Bond ETF (which I own); TLO - SPDR Barclays Capital Long Term Treasury ETF;  IPE - SPDR Barclays Capital TIPS ETF.  

I am comfortable adding fund of funds, geared toward income generation, at the moment, given their broad breath of assets.

Friday's Closing Price: INKM: 30.24 +0.23 (+0.75%)

2. Lottery Ticket Basket Table as of 7/27/12: This strategy is explained in  Lottery Ticket Basket Strategy (see trade snapshots at the end of that post) and its predecessor post, Lottery Ticket Purchases: Links in One Post. The RB is in charge of implementing this particular strategy which has two significant capital limits: (1) the purchase can not exceed $300 plus any prior profit in the stock and (2) the total amount invested can not exceed the realized gain, a limitation added in the second year of this strategy.

In 2009 and most of 2010, the RB could almost do no wrong in the selections. The Nitwit was practically minting money. The last year has been mired with several duds and a few successes. The most recent add, 30 shares of TEX, occurred last week and the stock is up about 33% in the two days since my purchase (TEX: 19.15 +0.92-Friday close). Bought 30 TEX at $14.43-LT Category (permitted to go over $300 due to prior trading profits)

Some of the duds, so far at least, include Metalico, Ferro, O2Micro, ING, Thompson Creek and Grupo Financiero. However, given the amounts devoted to each stock, I am not concerned about unrealized losses. I can hold the losers indefinitely. And, I have unrealized gains too. Occasionally, even the losers come around, which was the case recently with PLXT, which had been in the red for almost a year before doubling my money on a takeover. Sold 70 PLXT at $6.66-Bought 70 PLXT at $3.37-a LT Ask me if I care, one way or the other?

Please note the name of this strategy. It is a form of entertainment for the RB which has somehow netted Headknocker almost $11,000 in realized gains to date. RB is proud of that accomplishment given the severe capital restraints placed on it by our Great Leader Headknocker:

The last table was posted in Lottery Ticket Basket Strategy Table As of 5/1/2012.

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