Wednesday, August 29, 2012

KWK, FFEX/Added 100 MOL at $9.78/Case-Shiller/Canadian Dollar

The Case-Shiller 20 city home price index rose 2.3% in June. Along with the upwardly revised number for May, the two month gain was the strongest advance in home prices since this data series started over a decade ago. All twenty metropolitan areas showed price gains for the second consecutive month. Several areas experienced more than 4% increases in June compared to May, including Atlanta (+4.4%); Chicago (+4.6%); Detroit (+6%); and Minneapolis (+4.8%).

For the Savings Class, who are having to cope with abnormally low interest rates over an extended period of time, the fourth anniversary of a near zero federal rate is coming up this December. The near zero federal funds rate started mid-December 2008:  FRB: FOMC Minutes, December 15-16, 2008

S & P revised its debt rating outlook for Quicksilver resources from negative to positive. TEXT-S&P I own 3 unsecured senior bonds. S & P kept both its CCC+ rating on those bonds and its 5 recovery rating. A 5 recovery rating is S & P's estimate that the senior unsecured bond owners would recover 10-30% after a default which is far from comforting.

The Lottery Ticket Frozen Food Express has done well since reporting a profit for the second quarter. Frozen Food Express Industries, Inc. Announces Profit in Second Quarter 2012 Financial Results (Nasdaq:FFEX)  On the day prior to that earnings release, the stock closed at $1.07. FFEX Historical Prices The stock closed at $2.39 yesterday. The volume was unusually heavy at 564,020 shares compared to an average daily volume of 67,872. FFEX: $2.39 +0.26 (+12.21%); Bought 100 FFEX at $1.4-Lottery Ticket

Two of my Canadian bond funds were ex dividend yesterday for their monthly distributions. iShares 1-5 Year Laddered Government Bond Index Fund (CLF-TOR) (own 700 shares); and iShares 1-5 Year Laddered Corporate Bond Index Fund (CBO-TOR) (300 shares). Another Canadian ETF, which is weighted in bonds, was ex dividend on 8/24/12 for its monthly distribution. Diversified Monthly Income (XTR) Distributions - iShares Canada ETFs (own 500 shares).

Generally, I will not convert my USDs into CADs unless I can buy at least C1.05 for each USD. (a USD will now buy less than 1 CAD: USD/CAD) The initial step in the Canadian Dollar (CAD) Strategy is to wait for a favorable exchange rate before buying any CADs with my USDs. I will then use those CADs to buy income producing securities on the Toronto stock exchange that increase my CADs which are then plowed back into more Canadian income producing securities. I will use the same strategy for AUDs provided I am able to buy at least 1.05 AUDs with each USD. (a USD will now buy around .963 AUDs: USDAUD) For now, I am just concentrating on increasing my CADs by collecting dividends paid in CADs and harvesting a few gains paid in CADs when I sell a position). One wild card is whether Quebec will eventually vote to succeed from Canada. Reuters

The Federal Reserve has turned into a money making machine for our destitute Uncle Sam. In 2011, the Federal Reserve returned to the treasury a $76.9 billion profit Forbes The Federal Reserve reported that it realized a profit of $47.5 billion for the first half of 2012. Federal Reserve Quarterly Financial Report for the Q/E June 30, 2012  The RB had an idea. Why not let Uncle Ben do his thing for another ten years and maybe he will be able to create a budget surplus, assuming the GOP is successful in throwing the middle class and the poor under the train with their spending cuts, for their own good to be sure, and that more tax cuts for the Koch brothers and other billionaire "Job Creators" actually  creates jobs this time around. 

1. Bought 100 MOL at $9.78 Yesterday-Roth IRA Gold is starting to show some life again as investors grow more confident about more central bank money creation.

One of the less desirable "principal protected" notes is the Citigroup Funding Inc. 2.00% Min Coupon for Gold (MOL). The reason for adding 100 shares will be discussed near the end of this section.

This unsecured senior note has a $10 par value and matures on 11/26/2014. The coupon is the greater of 2% or up to 19%, based on the price of gold.

Gold's Starting Value For MOL's Current Annual Period= $1,742.5
Greater than 2% of Starting Value=$1,777.35 (1.02 x. Starting Value)
Maximum Level= $2073.57 (1.19 x. Starting Value)
End Date= 11/19/12

The relevant gold price is the P.M. London fix. There has not been a Maximum Level Violation during the current annual coupon period. If there is a single close above $2,073.57 per ounce on or before 11/19/12, this security will pay its minimum 2% coupon. The minimum coupon will also be paid for any close below $1,777.35 per ounce. Any close between $1,777.35 and 2073.57, with no Maximum Level Violation, will increase the coupon by the percentage gain over the Starting Value of $1,742.5 (e.g. a close at 1942.5 on 11/19/12 would increase the coupon to 11.48%, computed by dividing 200 by $1742.5)

The 8/24/12 London P.M. gold price fix was $1,667. Past Historical London Fix

The fix yesterday was at $1,668. LBMA | Gold Fixings

This note is less desirable due to its low permissible percentage gain. This low number of just 19% will more likely result in a Maximum Level Violation during a coupon year compared to one with a 30% or 35% maximum gain. MTY is a similar note to MOL with a 3% annual coupon and a 35% maximum. Final Pricing Supplement I own 200 of MTY.

For its prior annual coupon period, MOL suffered a Maximum Level Violation and consequently paid out its minimum 2% coupon. That violation was suffered in June 2011 and the annual period ended in November 2011. Item # 2 MOL

Provided Citigroup Funding survives to pay par value at maturity, the worst outcome would be to receive three more 2% annual coupon on a $10 par value unsecured senior note. The note is guaranteed by Citigroup as provided in the prospectus. MOL Prospectus

I still own 100 shares in a satellite taxable account after selling 100 for a small profit: Bought 200 MOL at 9.95-Sold 100 MOL @ 10.3 November 2010

Since this note has at a minimum three 2% annual coupons between now and November 2014, the minimum annualized yield is close to 3% at a total cost of $10. My minimum yield is juiced slightly by buying the note at a small discount to its $10 par value.

This is a link to two fixed coupon Citigroup senior bonds maturing in 2014:
FINRA Information: 5.125%

As shown by the recent trading activity on those fixed coupon bonds, their YTM is less than 2%.

So why fool with MOL with its 2% minimum coupon and a 19% maximum limit? I pick up more yield than the fixed coupon Citigroup senior notes and at least have the potential to earn anywhere from the 2% minimum coupon to 19%. While the future is uncertain, there is at least a reasonable possibility that gold will be above $1,777.35 on 11/19/12 which would trigger an increase in the minimum 2% coupon. I will also make a small profit at maturity assuming Citigroup pays off the note.

I am now past my comfort level in these Citigroup Funding "principal protected" notes maturing in 2014. I currently own $10,000 in principal amount. Why is the OG uncomfortable? It must be remembered that the OG is naturally riddled with anxiety and in need of a constant infusion of chill pills. And, it does not help that the OG knows that "principal protected" does not mean safe. It only means that I will receive $1,000 per note provided Citigroup survives to pay the note at maturity, just like any other unsecured senior note.

Item # 5  Exchange Traded Bonds: New Gateway Post
Item # 1 Principal Protected Notes
Item # 2 Principal Protected Notes

In addition now to MOL's $2,000 principal amount, I also own the following Citigroup Funding senior unsecured notes maturing in 2014, each with $10 par values and 3% minimum coupons:

Bought 100 MKN at 9.85-Linked to Commodity Index (DJ-UBS Commodity Futures)
100 MKZ bought at 9.96-Linked to Commodity Index
Bought 100 MKZ at 9.91 in the Roth IRA-Linked to Commodity Index
Bought 100 MOU at $10.12-Linked to Russell 2000
Bought 100 MBC at 9.84-Linked to Russell 2000
Bought 100 MBC at 9.78-Linked to Russell 2000
Bought 100 MTY at $10.03-Linked to Gold (London P.M. Gold Fix)
Bought 100 MTY at 10.49-Linked to Gold

In each case, the investor needs to review the prospectus, and calculate the Starting Value for the current annual coupon period and the Maximum Level, as shown above for MOL. It is also important to monitor the health of Citigroup which requires a review of both its quarterly earnings report and major news events. 


  1. There has been some strange price action on the principal protected note MYP. This one is tied to the S&P with a 3% minimum, 32% reversion threshold, and April 24 annual set date. I bought this a couple of years ago at just a little over the $10 par price and happily collected my ~10% coupon in 2011 and my 3% coupon this year. Yesterday I noticed that the price shot up above $12! It's had huge bid/ask spreads. I went ahead and entered a $12 sell limit order today and to my shock it printed. The note actually closed at $13! Who would actually buy this for 30% above par! I plan to rebuy it when it comes back to earth.

  2. Bruno: I know about MYP. Two readers contacted me last night about it. One of them owned it and sold it too. You did the right thing unloading it at that premium and unjustifiable price.

    I am going to discuss MYP tomorrow. The transactions over the past two days are without question bizarre and unjustifiable. My maximum buy price would be $10.4. You only have two more annual payments before maturity and no one knows whether or not both of them will be the 3% minimum.

    I wish I had MYP shares to sell at $12-$13 today or yesterday, but I don't think that I have ever owned this one.