Monday, August 6, 2012

GJN-JPM-Make Whole Payment/Bought Back GOV at $21.78 Roth IRA/Regional Bank Basket Table as of 8/3/12/Sold 100 WIN at $10.12/Bought 100 of the Bond CEF CSI at $19.54-ROTH IRA/Earnings: X, BC

I would like to emphasize for the legal beagles interested in representing GJN owners that there was $500 million in principal of the J P Morgan Chase Capital XVII securities  (TP) {Trust Preferred (TP)}; J.P. Morgan Chase Announces Redemption of Approximately $9.0 Billion in Aggregate Amount of Outstanding Trust Preferred Capital Securities

All of those TPs were redeemed at par value plus accrued interest. The GJN owners, as third party beneficiaries of a trust created by Wells Fargo/Wachovia, had an undivided beneficial interest in $27.7 million of that TP. The GJN $25 par value certificates were sold by Wells Fargo/Wachovia to the mom and pop investors, the widows and orphans crowd.

Wells Fargo, which had no ownership interest directly or indirectly in this TP, took $12,172,820.40 of the principal amount of the redemption proceeds paid by JPM to the trust ($27.7M principal amount). WFC directed the Trustee at U.S. Bank to pay that amount to it rather than to the beneficial owners of the bond. I came up with that calculation as described in The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty. It is a simple calculation, just multiply the number of GJN Trust Certificates by the amount per TC paid by the Trustee to WFC.

No owner of the JPM TP received a make whole payment. This would be a substantial sum well in excess of par value. It would be calculated, generally speaking, by taking the principal amount and all interest payments until 8/1/2035, and discounting those amounts to present value.

I certainly regard the make whole payment issue as worthwhile area for legal analysis. I do not have an opinion on it, since I have not done any legal research and will not do any. I am retired. Instead, I am offering a conceptual analysis of the legal issue in need of further research.

The following is just a thumbnail description of the legal issues:

Did JPM redeem those TPs within 90 days after a Capital Treatment Event as defined in the prospectusGJN-Wells Fargo/More on When Does A Capital Treatment Event Occur; Item # 1 When Does a Capital Treatment Event Occur? That is it in a nutshell.

If that did not happen, then JPM owed the make whole payment. It is just that simple.

While it is just my opinion, I believe that JPM's attorneys had to be very concerned with the timing issue. It would have caused me significant consternation if I was representing the bank.

A key legal issue is the standard for JPM's "reasonable determination" of when the Capital Treatment Event occurs and whether JPM can have multiple bites at the apple when arguably they missed the first such deadline which started to run when the President signed the Dodd–Frank law on July 21, 2010. Please note that the alleged capital treatment event, which JPM is now using as a trigger to start the ninety days running, is the publication of some proposed rules by the Federal Reserve in mid-June that seemed to implement what Congress has already codified in section 171 of Dodd-Frank. JPM will have to phase out the use of TPs as Tier 1 equity capital starting 1/1/13 and ending three years thereafter under that law.

Would a court, using an objective standard rather than a subjective one, conclude, as a matter of law, that the reasonable determination date started on July 21, 2010. This issue would probably be appropriate for a summary judgment, one way or the other, and could therefore be litigated on the cheap. Most of the legal costs would be upfront legal research and then brief writing. For the former owners of this TP, the downside is limited. The upside is that JPM would be required to write a huge check.

While this issue is of course relevant to the GJN owners, among others, the dollar value of the issue skyrockets when other owners of the JPM TP are included in the calculation. The amount of the make whole payment will be juiced due to the abnormally treasury rate now in effect that must be used in the discounting to present value. A low discount rate will increase the amount owed under the make whole calculation (i.e. decreasing a future amount by a smaller sum will increase the final number)

If a class action lawsuit is brought, and JPM loses on this issue, it can thank WFC, since it was WFC's hosing of the GJN owners that focused my attention on the foregoing. At most, the foregoing was no more than an amorphous thought that had not gelled in what is left of the OG's mush of a mind.

One rule of contract construction which would be applicable is that ambiguities in this agreement should be construed against the drafter (contra proferentem). The TP was a JPM creation.


Prior to the release of the Labor department's report on employment, ADP estimated that private sector employment had increased by 163,000 in July on an adjusted basis. Small businesses continue to far exceed large ones in hiring. adpemploymentreport.pdf

The Labor Department reported a 163,000 job increase for July. The consensus estimate was for 100,000. Private payrolls increased by 172,000, more than the consensus estimate of 110,000 according to a  Bloomberg survey. The average hourly wage edged up 2 cents to $23.52. The average workweek was unchanged at 34.5. There were revisions to the May and June numbers that largely offset one another. Employment Situation Summary The U-6 number edged up to 15 from 14.9.

Alan Abelson, quoting and channeling David Rosenberg as usual, tried to throw cold water on this job's report, disagreeing with the market's rosy assessment.

It was the tag team of Abelson and Rosenberg who warned investors to stay away from stocks in the issue , just as the market was about to take off on one's of its largest rallies in history.  Wrong Way Rosenberg/ David Levy's Predicts a 2011 Recession (September 2010 Post); Barrons's & David Rosenberg (September 2009); Item # 1 Abelson (August 2009)

The Barron's article was published on March 9, 2009.  Oddly, it was in the context of a jobs report too:  The S & P 500 closed last Friday at 1,390.99. On 3/9/2009, it was at 676.53.  The historic rally started on 3/10/2009. Historical Prices | S&P

I do remember a time when Abelson was bullish. That bullishness lasted about 30 seconds thirty or so years ago.  


Gray Television (own 1 senior 2nd lien) reported second quarter net income of $9.815 million or 17 cents per share on revenues of $94.691 million. Bought 1 Gray Television 10.5% Second Lien Bond Maturing 6/29/2015 at 95

It is not hard to understand why the city of Stockton, California filed for bankruptcy after reading a   Bloomberg article. The unions will claim that no responsibility for that failure.  The last police chief worked for eight months and will receive a pension of $204,000 per year.  According to Bloomberg, he is the third of four police chiefs who lasted less than 3 years on the job and retired with an average of 92% of their final salaries.

1. U.S. Steel (own 1 senior unsecured bond maturing in 2022Junk Bond Ladder Basket Strategy): United States Steel reported net income of $101M or 62 cents per share for the second quarter on net sales of $5.017B. The company is discussing with the union a new labor agreement covering most of its domestic operations since the current one expires 9/1/12.

The average estimate was for 49 cents per share.

The earnings report is discussed in a Bloomberg article.

As of 6/30/12, the company had $565M in cash and cash equivalents and LT debt of $3.8B.

2. Brunswick (own 1 senior unsecured bond maturing in 2023Junk Bond Ladder Basket Strategy):    BC reported a 20% increase in second quarter net earnings to 90 cents per share on a 1% decline in revenues.  SEC Filed Press Release Cash and marketable securities totaled $508.9M.

The company also announced that it would purchase the remaining $71.5M of 11.25% notes maturing in 2013 at 110.15% of their par value. Before this debt retirement, long term debt stood at $668.2M as of 6/30/12. The 10-Q for the Q/E 3/31/12 shows the maturity schedules for the debt at page 26. I view it as important to look at this information since it is relevant to refinancing risk.

I believe that the last ratings actions were to upgrade the debt: TEXT-S&P (April 2012)

3. Bought 100 Cutwater Income Fund (CSI) at $19.54 Last Tuesday-ROTH IRA (see Disclaimer): CSI is an investment grade bond fund that is not currently using leverage. I have owned this fund in the past when it was known as the Rivus Bond fund and have traded small positions for profits:

2010 ROTH IRA CSI 100 Shares +$96.07
2010 Taxable Account CSI 100 Shares $54.07
When a symbol and/or name changes after I sell a security, Fidelity's computers will change the historical transaction record to reflect those changes. When I bought and sold the foregoing positions, the symbol was BDF (not CSI) and the name of the fund was then Rivus (not Cutwater).  Bought 100 BDF at 17.2 May 2010;  Added 100 BDF in the Roth at 17.1 May 2010 If you go back far enough, I owned shares when the fund was known at the 1838 Bond Debenture Trading Fund, not that this name dates my age at all.

During 2010, Rivus acquired the assets of another investment grade bond fund, called  Hartford Income, which increased the amount of its assets.  BDF Acquisition of HSF I had owned HSF.

Admittedly, I would have been better off just keeping the 100 shares bought in the ROTH at $17.1, and sometimes our LB can not leave well enough alone.   Having said that, I am not disposed to keeping a bond fund for too long now. My memory is still seared with what happened to bond owners in the 1965 to 1982 period.

Sponsor's website: Cutwater Select Income Fund

Closed-End Fund Association Page on CSI

CSI Page at Morningstar (currently rated 3 stars). The Morningstar page discloses several important and basic pieces of data, including the current discount to net asset value, the average 3 year discount, fund expenses, any use of leverage, and return of capital information. For CSI, the page shows that the fund is not using leverage and its recent quarterly dividends have not been supported by a return of capital.

Last SEC Filed Shareholder Report: Cutwater Select Income Fund

I took a snapshot from that report that shows the credit quality of the funds holdings, as of 3/31/12, using the lower of S & P and Moody's ratings:

On the day prior to my purchase, the net asset value per share was $20.94 and the closing market price was $19.57, creating a 6.54% discount to net asset value at that time.

The most recent quarterly dividend was $.288. On an annualized basis, that rate would result in about a 5.9% yield at a total cost of $19.54.

Ask me if I like taking the risk associated with a bond fund for that kind of yield?

Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans & the Potential Major Correction in Bonds Down the Road (August 2010 Post); Item # 1 Management of ROTH IRA Account (July 2012)

By placing this purchase in the ROTH IRA, I at least get the maximum benefit from a fund yielding 5.9%.

The last ex dividend date was 7/24/12: Cutwater Select Income Fund, CSI Stock Quote CSI closed at $19.66 last Friday.

The 100 share purchase of CSI was the replacement for the recent disposal of 100 GYC. Sold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters

4. Bought Back 50 shares of Government Properties Income Trust at $21.78-Roth IRA (see Disclaimer): This brings me back up to 100 shares. I recently pared my position by selling 50 out of 100 shares. Sold 50 of 100 GOV at $23.45 (7/19/12 POST). The current quarterly dividend is $.42 per share ($1.68 per year). Government Properties Income Trust Announces Quarterly Common Dividend Assuming a continuation of that amount, which is in no way assured, the dividend yield at a total cost of 7.71%.

On the day before this earnings release (8/1/12), I noticed a significant decline in GOV shares on abnormally high volume. GOV Historical Prices I did not see any news to account for that action. The CEO seemed to blame the trading glitch for some of that abnormal volume.  Earnings Call Transcript - Seeking Alpha

For the 2012 second quarter, Government Properties Income Trust reported normalized funds from operations of $24.4M or 52 cents per share, compared to FFO of $21M in the 2011 quarter or 52 cents per share. There were about 6.6M more shares outstanding as of 6/30/12 compared to the year ago quarter due to a stock issuance.

This REIT owns properties that are primarily leased to government entities. I took a snapshot of GOV's recent acquisition activities that highlights this approach:

Company website: Government Properties Income Trust

Government Properties Income Trust closed at $22.01 last Friday.

5. Sold 100 Windstream at $10.12 Last Thursday-Roth IRA (see Disclaimer): In my ROTH IRA, I own few individual common stocks. Most of those holdings are REITs or BDCs. Occasionally, I may buy a high yielding common stock, like Windstream, but will generally flip it after a short holding period, clipping one or two dividend payments. That approach save me a lot of pain in 1/1/2008-2/28/09. The Roth account was impacted by the Near Depression but had returned to October 2007 levels, adjusted for subsequent contributions, by the early summer of 2009.

I clipped one $25 quarterly WIN dividend and had a realized gain of $63.27 on the shares, for a net total return of $88.27, on a total cost  of $942,  held for 63 days.

2012 ROTH IRA $63.27
 Bought 100 WIN at $9.35-ROTH IRA I still own 100 shares in a taxable account.

6. Regional Bank Basket Table as of 8/3/12 (Regional Bank Basket Strategy): For the reasons that I hope to discuss in tomorrow's post, I liquidated my 154+ position in FBSS last Friday, so the following table no longer shows this position. I am not tracking reinvested dividends in this table. The dividend yield shown in the table is not at my cost but at the closing price from last Friday. Realized gains and losses over $30 are being tracked in the main Gateway Post for this topic linked above. As of 7/19/12, the net realized gain is $9,608.93. I am also tracking in that post the annual dividend amounts. Over the life of this strategy, I would anticipate that the dividends will account for 40% to 50% of the total return, and banks are selected in part based on their dividend yields.

The last table update was from 6/19/12. Since that update, I have sold 50 shares of BDGE, 154 FBSS, 50 SYBT, 100 SBSI, and 50 FCBC, and have added 50 FFBC. The overall result was to pare the basket by several thousand dollars. As previously discussed, the dividend yield in this table, computed by Yahoo Finance, is wrong for FFBC, since it does not take into account the variable dividend in addition to the regular dividend. 

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