Wednesday, August 8, 2012

Closed End Portfolio as of 8/7/12/Romney's Tax Plan/ARCC/Bought 50 YMLP at $19.05-Regular IRA

Added: I have a lot of adds to this post made on the day of publication. The reason is that I must not be making my points clear to a few people. So I will make this statement which I hope is clear. The conduct of actual people between 6/12/12 and 7/12/12 should be sufficient to create a jury question on the adequacy of the WFC risk disclosure. If real people show by their conduct a lack of comprehension about the risk, then the risk was never disclosed to them in a manner consistent with the duty to disclose. Please keep that thought in mind when reading this post and others on the GJN situation. There are also a large number of other legal and factual issues unrelated to the risk warning adequacy contained in the prospectus )

I published a second post yesterday in case anyone is interested in the topic: J P Morgan-Make Whole-Redemption of 2035 Trust Preferred/Those Who Wish To Defend Wells Fargo In Connection with GJN Need to Specifically Address the Facts

I have one new reader from Asia who is most ardent in his defense of Wells Fargo on the GJN situation    (see Anonymous Comments in GJN-Wells Fargo-New York Times).

I have many differences with him, based on the facts and his understanding of what is actually in the GJN Prospectus.

He believes, for example, that the trading activity between June 11th and July 12th in GJN proves nothing. Maybe those sellers had it all figured out, he says, and were not selling just to realize a significant profit after searching the financial sites and finding no news under GJN. I searched the financial sites and did a Google search, and found nothing.  If I had owned GJN, I would have sold it then.

But, then I wonder, why didn't those sellers, who had it all figured out after reading the prospectus, and knew what was about to happen to the GJN owners, fail to back up the truck and short the stock, realizing a gift of $11 per share in a few days or weeks. Maybe there is something seriously and obviously wrong with his argument.

Boy, those sellers between 6/11 and 7/12  must have become really, really, really, really, really, really stupid (negative IQs would be the only explanation), immediately after being so very, very, very, very, very, very, very, very smart.  I thought that I would add more than just one "really" and "very" to hopefully make my point which I thought was crystal clear already. Is that an obvious point, or has the OG lost his ability to form a coherent thought? I am not ruling out the later possibility.

I doubt that there was a single investor during that one month period, buyer or seller, who understood the risk as shown by both the long and short trading history. And there is a reason why that would happen. The risks were not adequately disclosed to anyone, buyer or seller.

As Norris pointed out in his column, short sales were negligible and actually went down before GJN was delisted.

(his reply on this issue, read after the publication of this post, was that it may have been too difficult or costly to short. Costly? For a brief holding period and a $11 per share potential gain. As WFC pointed out to Norris, there was $2 million of GJN held in accounts at that firm and that would seem like one of many places where shares could be used for short selling. Please also note how Norris responded correctly to the argument that GJN owners could receive a bonus if interest rates were high and the swap agreement had value to them and could be added to the redemption proceeds This is a really obvious point that Norris is making.  Why would JPM redeem the 5.85% long term debt when it would cost it more to refinance with interest rates being high. NO WAY! The structure of that provision (+ or - from proceeds received by an early redemption by JPM) would come into play when the swap agreement had value to WFC, not a plus value to the third party beneficiaries, who clearly did not even contemplate how they would be hosed under it)

(added: it had to be marginal, at best, for JPM to redeem a 5.85% junior bond with liberal rights to defer interest payments, maturing in 2035, even in today's abnormally low interest rate environment.)

(added: what about those purchasers at near par value after 6/11, did they understand the risks as disclosed by WFC? Did the owners of GJN as of 6/12, who kept their shares, did they understand the risks as disclosed by WFC? Did those experts at Wells Fargo Advisors who had their clients in GJN at the time of redemption understand the risks? Did other professionals who had their clients in GJN at the redemption date understand the risks? )

It does no good to explain over and over again that the long and short trading history proves that any warning contained in the prospectus failed to adequately convey the risks to anybody. I can say that a hundred times. If it does not gel on the first or second repeat, it is never going to gel.

I will publish comments from those who go out of their way to defend the Masters of Disaster, irrespective of their logic, understanding of the facts or of the prospectus, or their repetitive specious arguments, at least up to a point. I will then have no choice but to cut them off from any further posts on that subject. I try very hard to be patient. If such a reader wants to try another topic, I will publish those germane remarks until I reach the point where I am obviously wasting my time responding to them.

I am also curious where its states in the GJN prospectus, in clear terms, that WFC would deduct any losses for hedge transactions from redemption proceeds and that WFC was entering such transactions in order to guarantee itself a profit while passing the only possible risk of loss to those investors who bought the $25 par value certificate from it?

Another issue is whether the value of the swap termination agreement between WFC and the trustee can be determined in good faith and whether a good faith estimate, even if possible, is even close to what WFC took from the owners of GJN. The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty That indeterminable value is the number that can be added to, or subtracted from the redemption proceeds as noted in my first post on this subject. Item # 3  My answer is no.  (see preceding link and Item # 3 GJN Redeemed-Payment to Swap Counterparty From Proceeds? I wrote that post in the wee hours of the morning, from around midnight to 3:00 A.M. as I tried to grapple with news about the termination payment) I also have linked the make whole provision to the swap termination fee calculation.


Goldman Sachs upgraded the LSI to buy yesterday and reiterated its $9 price target. LSI rose 3.87% to close at $7.52. I was asked about this "dud" by a reader in the comment section of my July 12, 2012 post. LSI was then selling at around $5.89. I bought 40 shares as a Lottery Ticket at $7.28-LT Category. If I had not already exhausted the maximum $300 limit for a LT, I would have bought at $5.89.  I am not being critical of the reader or myself. It is important to remember that investors are not entitled to immediate gratification after buying a stock, and no one can hit the absolute bottom or highs except by luck.

I have also noted many times that I have no qualification to pick a technology stock. The most recent statement was made in OG's Qualifications and Lack of Qualifications. I would say in my defense that I was not buying technology stocks during the Nasdaq bubble years. Instead, I started to buy stocks like Intel and Microsoft during the Near Depression period when their valuations look appealing to me for the first time in well over a decade.

KKR Financial Holdings (KFN) was ex dividend yesterday. I own 150 shares/"units".

I previously made the point that preferred stock funds are losing significant numbers of their trust preferred securities to redemptions. Preferred "Stock" Funds (in post introduction). This same point was made by a columnist in this week's Barrons. The Trust Preferred Security is in reality a junior bond that pays interest. As such, the TP has a higher priority in the capital structure than traditional equity preferred stock.

SENOMYX (own 300 shares) announced its second quarter results and more importantly updated investors on the development of a new product, regulatory approvals on other products and a commercialization update. This is a highly speculative stock. I call it a non-lottery ticket lottery ticket.

*********** provides an analysis of Romney's tax welfare program for the rich. According to the Tax Policy Center analysis, there would have to be a $365 billion per year substantial reduction in popular tax benefits plans to pay for Romney's tax cuts that primarily benefit the wealthy. This would require a reduction in such popular tax benefits as the mortgage interest deduction, the child tax credit and other tax benefits that benefit the poor and the middle class, charitable contributions, and the exclusion for employer provided health insurance. Romney claims the report is biased because it fails to consider the economic stimulus resulting from giving more tax benefits to the Job Creators. Maybe I have heard that argument about the Bush tax cuts.  For Romney and other GOP TBs, the Bush tax cuts did not contribute to the deficit, notwithstanding all credible evidence to the contrary.  

PolitiFact rated as "mostly true" Obama's statement that Romney's plan would grant more tax breaks to millionaires while increasing the middle class family tax burden by $2,000.



That is nothing compared to the GOP plan for Medicare that would cost about twice as much in premiums compared to traditional medicare while giving more tax cuts to the Job Creators. GOP's Plan To Bankrupt the Middle Class; Ryan_Letter.pdf; see chart at page 3's radical plans for Medicare - CBS News. It is just amazing to me that any middle class person, who is younger than 55, would vote for any GOP politicians that voted for this plan. Implementation would, without any doubt, either bankrupt them or require them to work until they die:
Kaiser Foundation/Congressional Budget Office Estimate of 2022 Beneficiary Cost Under GOP's "Path to Prosperity"   
Whose path to prosperity are they promoting in reality?

The GOP is counting on the middle class voters to remain uninformed about this issue. This huge premium raise would occur  in conjunction with more tax breaks for the Job Creators (i.e. the supper wealthy funding their campaigns). Wow!!

In a long excerpt of Craig Unger's new book about Karl Rove, published in the current issue of Vanity Fair, the power of the reactionary forces in America is laid bare. Two of the most extreme reactionaries are the Koch brothers, who are pouring $400 million in their PACs and other "conservative" organizations like the NRA, to influence the upcoming election. Their idea is to spend more secretly, as now permitted by the Supreme Court, to shape America more to their liking. The GOP's Movement Toward An AYN RAND Vision for America

As noted in a  NYT article yesterday,  Americans for Prosperity, one of  the Koch brothers Super Pacs, is now launching a $25 million negative ad campaign against Obama.

For anyone who supports the Koch brothers agenda, I would recommend buying consumer products made by some of their companies, including the brand names Brawny paper towels, Angel Soft, Quilted Northern, Dixie Brand Products, Lycra, and Stainmaster Carpet. Koch Industries, Inc. By purchasing these products, we can all help David and Charles, and their boy Karl Rove, reshape America to conform to their vision. ( see The New Yorker article) There is an IPhone App that helps consumers to identify products that they can purchase to further the Koch brother's vision. Forbes

The Koch brothers would like to see their tax obligations reduced and environmental regulations eliminated or rendered impotent, in order to increase their profits, and would not mind terribly seeing the adoption of GOP's plans for the middle class and poor. When you are already among the richest Americans, I can see a need to become even richer.


There is a breed of lawyers who have a talent for creating legal imbroglios that last for years, generating generous legal fees for them well into the six figures. This is done, not for the benefit of the client, but for the lawyer. Many of these disputes could be settled in a mutually beneficial manner with less than $10,000 in legal fees that salvage an existing business relationship.

There is a saying among lawyers that they will represent a client with the highest ethical standards until the client runs out of money.

There are many people who are easy prey for this breed. Everything done by the lawyer is geared toward creating conflict. In to their expertise at enhancing conflict, client expectations of ultimate victory are encouraged, while the arguments of the other side are belittled or dismissed as poor and unworthy of much consideration. While the ultimate  outcome may end up being favorable, an equally possible outcome is a ruined profitable commercial relationship and a mountain of legal bills, possibly even another loss where the other side wins on a counterclaim. Either way the clear winner is the attorney who will feel bad with the latter result.

About 25 years ago, I was involved in a complex commercial negotiation with a difficult, tough, and very rich individual representing what I would call the "aggrieved party". I did not like the guy but found him a colorful and an extremely intelligent person.

I would meet him and his attorney, frequently at restaurants, and talk for one or two hours. LB can with considerable difficulty be a soothing and comfortable presence in this setting, giving at least the appearance of being non-treatening  (remember the line by Walter White in Breaking Bad when trying to soothe the concerns of his wife, "I am not in danger. I am the danger") So, I talk through his lawyer to him. After about 100 or so hours of talk therapy and new contract negotiations, a multi-million dispute is settled without a lawsuit. That settlement turned out to be mutually beneficial for both sides who are still doing business with one another twenty five years later.  

I am now aware that this gentleman is involved in another complex commercial dispute, one of many over the intervening years, on a similar type of issue, that will likely be in litigation for several years, with an uncertain outcome to him, but with a most certain favorable outcome to his attorney. It looks like about a $500,000 legal bill is on the way. He can afford it, and there is a certain amount of justice in the world.

If he had employed his current attorney in that earlier matter, I would never have been able to reach a reasonable and rational settlement with him. It would have been impossible.  For one thing, his current attorney would not have allowed the sit down talk therapy sessions with the LB.

There are matters, of course, that are unlikely to be resolved without expensive litigation. The GJN situation is an example. WFC took the GJN investors' money and will not voluntarily give it back.  Their attitude would be sue us. From their perspective and knowing all about the typical class action lawyer, they will be able to keep most of the money anyway in a paltry settlement which at least gives the class action lawyers a nice pay day after doing as little work as possible. That is the system at work.

Occasionally, you will see the plaintiffs' lawyers  take the company to the mat, and actually try the case. That is very rare, almost non-existent.  The only example which comes to mind is a class action suit against BankAtlantic that resulted in a plaintiffs' jury verdict, but the federal judge than vacated that verdict and entered judgment for the bank which was later upheld on appeal.  While I do not know why the plaintiffs' attorneys took that case to trial, one reason may have been the bank's refusal to settle the case for any money.



I previously discussed the bank's CEO Alan Levan in the context of the bank's lawsuit against the financial analyst Dick Bove. Item # 1 Dick Bove-BankAtlantic I discussed in that post the need for courts to be more vigilant in dismissing quickly meritless lawsuits filed to intimidate and to punish individuals for exercising their First Amendment rights.

The conservative values embodied in the First Amendment are frequently under attack, particularly by reactionaries and the American Taliban movement, and are in need of constant vigilant protection. (a more recent example, involving the freedom of religion, is discussed in the introductory section of Stocks, Bonds & Politics)

On more than one occasion, LB has had to raise a First Amendment objection to one of Headknocker's proposals. An example was HK's proposed $1000 tax on each utterance of the word "reform" and all derivatives thereof (e.g. "reforming") by an American politician. LB Raises First Amendment Objection to Tax on the Word "Reform" and RB Solves the Constitutional Problem

RB solved that constitutional issue by saying the politicians could use the word "baloney" as a substitute for "reform".

So rather than saying something like, "my reform proposal on taxes is to lower the tax rates of the wealthiest Americans and large corporations, in order to reduce the burgeoning budget deficits", the politician could simply substitute the word "baloney" for "reform" and avoid the tax. That would solve all of the objections of those First Amendment "liberal" fuddy-duddies out there who actually believe there is more to the Bill of Rights than the Second Amendment.

RB thought of many ways to secure support from Democrats of this modest tax proposal since they do not know what reform means either. For example, the tax could be graduated, going up in amount based on usage, so that politicians who use the word more have to pay more which seems only fair.

The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology

1. Bought 50 YMLP at $19.05-Regular IRA Last Friday (see Disclaimer): I recently purchased 50 YMLP shares in a taxable account.  BOUGHT 50 of the ETF YMLP at 19.08

YMLP is an ETF, not an ETN, that owns high yielding publicly traded master limited partnership units. Unlike other MLP funds that concentrate on infrastructure MLPs (e.g. pipelines and storage),  the Yorkville High Income MLP is focused primarily on energy producers including Linn Energy, Vanguard Natural Resources, BP Royalty Bay Royalty, Breitburn Energy, and San Juan Basin. This focus will add a "depletion" risk to the equation.

Yorkville High Income MLP ETF Holdings

The fund is new and has paid to date one quarterly dividend of $.400503. The fund estimated this entire amount will be classified as a return of capital in its IRS Form 8937. 

For me it is important that the ETF structure for MLPs avoids the tax preparation headache associated with a bundle of K-1s. As previously mentioned, the drawback is that the fund has to hold a reserve for taxes that will eat into the total return potential. Why? This is a complicated tax issue beyond the scope of this blog. Anyone interested in the issue can read the pertinent sections of the prospectus, ‎  Prospectus_2012.pdf (e.g. page 28). The issue is discussed in somewhat plainer terms in this Motley Fool  The same issue applies to another MLP ETF that I recently purchased that owns infrastructure MLPs. Item # 2 Bought 100 AMLP at $16.19

I have also referenced a recent article at the WSJ that discusses some of the advantages and disadvantages of MLP ETFs and ETNs. One important disadvantage of an Exchange Traded Note (ETN) is that it is an unsecured senior note of the issuer which exposes the owner to credit risk just like any other bond. So, if Lehman Brothers had issued an ETN MLP before going bankrupt in September 2008, the owners of such an ETN would be lucky to receive, down the road, 20 cents on the dollar, irrespective of the MLP unit valuations owned.

Stock Quote: Yorkville High Income MLP  (YMLP)

2. HCA (own two senior bonds in the Junk Bond Ladder Basket Strategy2023 and 2025)HCA reported second quarter net income of $391M or 85 cents per share, up from 43 cents in the 2011 second quarter. Revenues increased to $9.0153B from $8.02B. Same facility equivalent admissions increased by 3.9%.

The consensus estimate was for 78 cents on $8.83B.

Adjusted EBITDA increased 10.5% to $1.569B. Cash flow from operations increased to $1.46B.

As of 6/30/12, the company had $518M in cash and cash equivalents with a huge long term debt load of $25.732B.

The provision for doubtful accounts was $1.041B out of the total revenues of $9.153. Hospitals will likely be a major beneficiary of Obamacare for a simple reason. There will be far less doubtful accounts when more people have health insurance. While there are some negative factors for hospitals associated with Obamacare, a substantial reduction in doubtful accounts will be a huge plus for them.

After initially rising on 8/6/12, the HCA common shares turned tail and sank after it was disclosed that the U.S. Attorney's Office in Miami was investigating its cardiology practice.  Bloomberg

Bought 1 Senior 7.5% HCA Bond Maturing 12/15/2023

Bought 1 Senior 7.69% HCA Bond Maturing 6/15/2025 at 92.26

Common stock quote: HCA Holdings

I do not own the common shares. My first stock purchase, made at 16, was HCA. The company had just gone public and owned only one hospital called Park View at that time, located across from Centennial Park in Nashville. Hospital Corporation of America - Wikipedia

For youngsters interested in stocks, I recall buying 20 shares and received some stock split shares soon thereafter. While the LB sold those shares long before HCA underwent its first leveraged buyout, the first of many mistakes, I do recall that those 20 shares would have morphed into several thousand worth around $35,000 based on around a $300 initial investment. RB did the calculation many years ago hoping to teach the LB a lesson, but it never registered of course. After all, RB noted, the Nerd Machine has zero foresight.

3. SIR (own common): Select Income REIT reported second quarter normalized funds from operations of $19M or 61 cents per share.

As noted in the earnings press release, this REIT has been actively acquiring new properties.

As of 6/30/12, 95.6% of SIR's total rentable space was leased.

Bought 50 SIR at $21.86

Stock Quote: Select Income REIT (SIR)

Last Dividend Declaration: Regular Dividend of $.4 Select Income REIT Announces Its First Common Share Dividend

4. Ares Capital (own 150 shares total-100 shares in retirement accounts)Ares Capital, a BDC, declared a third quarter dividend of $.38 per share, plus an additional 5 cents, for stockholder's of record as of 9/14/12. The company reported core E.P.S. for the second quarter of $.4, up from $.33 in the year ago quarter. GAAP E.P.S. was 41 cents. Net asset value per share rose to $15.51 from $15.28 as of 6/30/11.  BDC's, like REITs, have to pay out at least 90% of net income to maintain their tax status.

Given the high dividend yield associated with BDCs, I am content to sell the shares for any profit after harvesting the yield.

Stock Quote: Ares Capital  (ARCC)

At the moment, I am slightly positive on my shares, which is considered good for a BDC holding.  I have also bought and sold one of its exchange traded senior bonds. Bought 50 of the BDC ARCC at $16.17 and 50 at $16.3 (January 2011); Bought: 50 ARY at 24.2, 50 ARCC at 16.89 (December 2010)

5. Closed End Portfolio as of 8/7/2012: I last posted this table on 3/23/2012.  I have sold since that time the entire position in JQC, SGL and BTZ, and substantially pared GDO. I also had minor pares in CSQ and BCF.

The CEF portfolio is a portfolio within a portfolio. It is a balanced world portfolio geared toward producing income. A majority of the securities pay monthly dividends, including AVK, CSQ, EOI, ERC, FAM, GDO, GDV, GGN, IGD, IGR, MMT, NBB, NBD, and PSY.

There is one add that I have not yet discussed which is included in the table.  And, after posting this table, I realized that 400 shares of ACG, currently owned as a short term trade, was inadvertently omitted from the table. Bought 400 of the Bond CEF ACG at $8.19  If I do not make the changes in this table when I add or subtract the OG is likely to forget about it. 


  1. In my opinion and being a buyer of securities like GJN, I enter into these types of instruments thinking about interest rate risk, credit risk, and general market risks. The risk of losing 40% of capital due to the security being called is not reasonably foreseeable to the buyer of this product nor is it within the spirit of what the product was represented to sellers as.

    Thanks for the education.

  2. Lute: If I could stand being around lawyers, and was still practicing, I would gladly represent the owners of GJN. I would have already finished my legal research on the potential claims against both JPM and WFC, and my complaint would be ready to go by next Friday at the latest.

    Document and deposition discovery would likely be expensive for the WFC claims only. For example, I would like to take the deposition of every Wells Fargo broker who had recommended GJN to their clients and left them in it at the time of redemption. That is just one of many examples. I believe that A G Edwards is now part of Wells Fargo Advisors.

    I know that the buyers of GJN after 6/11/12 and those who already owned it, did not understand what was about to happen to them.

    A very strong case can be made that the sellers did not understand the risk either. If they had understood it after selling their long positions, they would have turned the world upside down to find shares to short. The long and short trading history after 6/11/12 , which can not be disputed, should be sufficient to take the case to a jury on whether the prospectus adequately warned investors of the danger. That is critical. You do not want a judge taking the case away from the jury. Once the jury gets it, WFC would have to be more than a little concerned about a potentially horrendous result going far beyond a mere return of that 12+ million.

    All of these floating rate securities with minimum coupons are tempting to individual investors because they combine the deflation or low inflation protection of the minimum coupon with the inflation protection provided by the float. That is why they are bought by individuals. And for GJN, or a GYC, or a GJP, no one would be terribly concerned about the credit risk of the bond owned by the Grantor Trust.