Thursday, August 16, 2012

Vast Improvements at Vanguard Brokerage/YMLP, MBC/Earnings: SYY/Some Criteria for Reassessments of Synthetic Floaters/

Yesterday, I noticed that Vanguard brokerage had made substantial improvements in its online site, making it comparable with Fidelity and better than several other brokers that I currently use. One feature is the listing of expense ratios for CEFs, ETFs and mutual funds in the data presentation. I have not seen that feature anywhere else.

I took two snapshots of the expense ratio data for my Vanguard ETFs and Vanguard mutual bonds:

Vanguard ETFs-Owned Brokerage Account
I do not pay commission when buying Vanguard ETFs.

Owned Vanguard Mutual Funds


An interview with the manager of the Yorkville High Income MLP (YMLP) can be found in this Seeking Alpha article. I recently bought 100 shares in YMLP in two fifty share lots.  BOUGHT 50 of the ETF YMLP at 19.08Bought 50 YMLP at $19.05-Regular IRA

YMLP was ex dividend yesterday for a quarterly distribution of $.405109 per share.  Yorkville High Income MLP ETF (YMLP) Declares Second Quarterly Distribution

SunOpta, own as a LT, reported GAAP earnings of $8.1M or 12 cents per share ($.11 from continuing operations) on $283.2M in revenues, compared to 7 cents on $275.2M in the 2011 second quarter.

The August manufacturing survey for NY fell to a negative, with new orders declining to a negative 5.5 from a negative 2.7 in July. Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York

The Federal Reserve reported that industrial production in the U.S. rose .6% in July.

Who knew that the "questionable chemical" formaldehyde was in consumer products? NYT


An article in Bloomberg yesterday focuses on how Ryan's budget cuts would immediately impact seniors who receive benefits under Medicaid. That program picks up the costs for nursing homes for those senior who have come close to exhausting their assets. About a year ago, I recall a conversation with someone who believed that she was paying that cost out of her meagre social security benefits. The government was taking most of those benefits, leaving her enough cash to buy odds and ends. The amount drawn by the government from her social security monthly payment paid for less than 1/4 of the monthly nursing home bill. As in many other cases, people in the middle class have no idea how much their future well being depends on federal government programs that exist almost exclusively for both the middle class and the poor.

Maureen Dowd is not fooled by Ryan: When Cruelty Is Cute He is after all Rush Limbaugh's main guy.  Ross Doughart refers to Ryan as a moderate, an absurd and delusional opinion. Paul Ryan is a Reactionary (Not a Conservative)-An Advocate of a Gilded Age Political Philosophy

The OG handles the bill paying responsibility for his mother. She has several accounts at First Tennessee bank who has also issued her credit card. I can pay the credit card bill by an online transfer from another First Tennessee account. While moving money around last month, I mistakenly sent $3000 intended for one account to the credit card account which only had $63.46 outstanding, unfortunately an OG kind of mistake, who may soon forget to put on his pants before retrieving the morning paper. "The OG is an embarrassment to the LB", someone just said.

I tried to stop the transfer immediately after I sent the money, but was not able to do so even though all of the accounts were at First Tennessee. On the next day, I returned the $2,936.54 excess paid into the credit card account, bringing that balance back to zero from a +2,936.54 credit. That would seem easy for anyone to comprehend even at a bank.

I then noticed a finance fee of $88.09 for a cash advance. And what was that cash advance? It was none other than my mother's one day $2,936.54 cash advance to First Tennessee. The cash advance was not made by First Tennessee to my mother, as alleged by First Tennessee's Customer representative in response to my email, but was instead a one day cash from my mother to First Tennessee for which she was charged $88.09! Well, what can you say, other than the OG now has to spend even more time correcting the bank's obvious error.

Another issue arose in her checking account a few months ago. I noticed that over $300 had been withdrawn by the IRS to pay someone's taxes. Since I coordinate her tax return preparation, I knew that she had already received a tax refund. I was not able to find out whether that was an unintentional mistake in keying in the wrong account number or a fraudulent act. I was able to secure a credit for that transaction which underscores the importance of checking each line item in financial statements.

I previously recounted an episode at TD Ameritrade several years ago, where that firm kept moving over $5,000 from my account to another account unknown to me. I noticed the transfer on the same day. I complained and then the money would be returned to me. Then, the next day, it would disappear again and so on. As shown in that previous discussion, the OG is hyper vigilant and that is not sufficient to stop various bad things from happening when dealing with financial institutions (see e.g. introduction: Stocks, Bonds & Politics June 13, 2011 Post) Oddly, there has never been a mistake that inured to the benefit of anyone in my family.

1. Sysco (own common: Common Stock Dividend Growth Strategy): Sysco has a lot of E.P.S. numbers for its fiscal 4th quarter. The GAAP E.P.S. number was 53 cents on a 5.9% increase in sales to $11.05B. Their next number is 55 cents which excludes primarily costs related to a "multi-employer pension plan (MEPP) withdrawal".  The third number was 62 cents a share which excludes more items such as business transformation expenses and COLI (corporate-owned life insurance

The consensus estimate was for 54 cents on revenues of $11.04B.

Buy of SYYat $19.46 March 2009

On the day of the earnings release (8/13), the shares rose $1.3 or 4.51% to close at $30.14.

Stock Quote: Sysco Corp (SYY)

With the usual caveat that the OG knows nothing about technical analysis, the recent chart action looks good: SYY Interactive Chart

SYY: 30.65 +0.20 (+0.66%) 

2. Reassessment of Synthetic Floater Positions: After Wells Fargo drilled the owners of GJN for over $12+ million dollars, it is important for every individual investor to reassess their synthetic floater positions. 

There are only a few synthetic floaters that trade in the stock market. I have a list at Synthetic Floater.

The float in this securities will generally be a small spread over a short term rate, with the floats tied to either the 3 month treasury bill or the 3 month LIBOR rate. The treasury bill rate is near zero and the 3 month Libor is not much better. 

For those synthetic floaters with minimum coupons, the range is generally 3% to 3.5% on a $25 par value. 

Each individual needs to make their own assessment based on a review of the prospectus. 

The entire category of exchange traded bonds is no longer important in my allocation. I have lost a boatload of issues to redemptions and others to profit taking. Synthetic floaters have always been for me a minor category within the broad spectrum of Exchange Traded Bonds. They are now irrelevant to me. I own only 150 GYB, 50 GJR and 50 GJT., all held in the ROTH IRA

{Yesterday's closing prices: GYB $16.88 GJT  $15.14 GJR  $17.58

I am involved in a very large number of securities worldwide, admittedly spread a mile wide and an inch deep. 

At most, I can provide a framework for individuals to perform their own risk analysis.

Recently, I have gone into great detail about two securities, JBK and GYC, that shows considerations that I deem as relevant. Sold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters;  Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater Positions I have also discussed GYB and PYT in Item # 3  GJN Redemption and in the comment section of Wells Fargo-GJN-Securities Act of 1933.

One of those considerations is whether the yield of the security is worth the trouble given the likelihood of at least two more years of abnormally low rates. I have zero interest in GJK, PYV and GJI with their low minimum coupons and prices above par value. I have never owned GJI. I did buy GJK and PYV, but no longer own them.  BOUGHT 100 GJK IN ROTH at $19.83 April 2009Buy of PYV at $18.05 December 2008Sold PYV at $23.3 August 2009Sold 100 GJK at $24.6 September 2009

GJK: Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2004-9 for J.P. Morgan Chase

GJI: Synthetic Fixed-Income Securities Inc. Fltg. Rate STRATS for IBM

PYV: Merrill Lynch Depositor Inc. PPLUS Floating Rate Trust Series JPM-1 for JP Morgan Chase & Co 

Synthetic floaters are tempting to individual investors. Like Equity Preferred Floating Rate Securities with minimum coupons, these securities provide a measure of protection against deflation with the minimum coupon and at least some inflation protection with the float. 

When evaluating the security, it is important to remember that the brokerage firms that structured the transaction are more interested in lining their pockets than protecting the small investor who invest in these products.

These are the considerations that are relevant to my evaluation.

A. The severe damage to GJN shareholders caused by the WFC "swap termination" fee was due to the long maturity. I have argued that no good faith determination could have been made, and I believe that is a fair and justifiable opinion for the reasons given in The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty. Nonetheless, the GJN owners are currently out over $12+ million dollars and will have to fight Wells Fargo to get their money back.

The underlying security was a JPM TP maturing on August 1, 2035. The brokerage company would be able to cause at most minimum injury to the investor with a maturity in 2013 or 2014 even with a bad faith estimate of its "swap termination fee". The maturity issue is very important in this evaluation.  

B.  The next major issue is whether the underlying issuer can redeem the bond. If there is no right to an early redemption, which is the case for GJK maturing in 2014, then there can be no swap termination fee associated with an issuer optional redemption of the underlying security.  

C. This point is critical in light of what happened to the GJN owners. Is there a make whole provision in the underlying bond prospectus? If you do not know what that means, you need to find out. Generally speaking, it is a penalty associated with an early redemption and makes it unlikely that the bond will be called until it is close to maturity. When applicable, it requires the issuer to pay the bond owner the principal amount of the bond and all remaining interest payments discounted to present value.

If that provision exists, the investor will have to make an educated guess as to whether the issuer would likely pay it in order to redeem the bond early. And, if paid, whether the make whole payment would likely exceed what the greedy brokerage firm will demand in a swap termination fee. 

I do not currently see why an underlying issuer would redeem a long term bond with a make whole provision for several years. The long term bonds, which are the underlying security in synthetic floaters, have coupons generally in the 5% to 7% range, which would not appear to be worthwhile redemption candidates when they are subject to make whole provisions (e.g. GJP 2035 Maturity 5.95% coupon; GYC 2034 Maturity 6.45% coupon)

D. Once it has been determined that the underlying security has a make whole payment provision, the next step is to figure out how the issuer can avoid paying it. The first part of this analysis is to ascertain whether the bond is a senior bond or a trust preferred security. 

A trust preferred security may contain several exceptions to a make whole payment.

Two of the outs relate to the trust structure of the security and are usually called "tax events" or "investment company events". Sometimes the "investment company event" may not be mentioned by that name or may even be absent. While it is conceivable that one of those events may occur, neither have ever occurred to my knowledge. So I view the use of those events, as an escape hatch to avoid the make whole payment, to be remote.

The third type of event is no longer remote. It is called a Capital Treatment Event. Trust preferred securities were issued in order to qualify as Tier 1 equity. A capital treatment event simply means a reasonable determination that the security will no longer qualify as a result of some law or regulatory change. That change has occurred with the passage of the Dodd-Frank law which requires institutions with $15B or more in assets, as of 12/31/2009, to phase out the use of these securities as Tier 1 equity. 

I have noted that the 2034 Goldman Sachs TP does not contain an escape hatch for capital treatment event and that is important in my analysis. 

As it turned out, the JPM 2035 TP did contain such an escape hatch. The legal question is whether JPM legally utilized that provision to escape the make whole payment. That is another issue, separate and apart from the risk analysis that needs to be made for the synthetics that still exist. JPM obviously believes that it has no obligation to make this payment and successful litigation against it will be the only likely means to obtain a make whole payment. Summary of Argument: JPM Potential Obligation to Pay Make Whole for its Recent 2035 TP RedemptionTurkle Trust v. Wells Fargo

E. Lastly, and this is almost impossible for individuals to analyze, is whether there are other circumstances which may arise, other than a redemption by the underlying bond issuer, where the insatiably greedy brokerage company will demand a swap termination fee. What if that issuer went bankrupt, for example, and the trust received twenty cents on the dollar in a bankruptcy reorganization. Would the swap counterparty take all of it as a swap termination fee? I do not know, and these other scenarios are not worth trying to figure out based on my limited stake in this area.

3. MBC (own 200 shares): I noticed in an earlier post that I did not calculate the Maximum Level for the current period when last discussing this post. I have to make that calculation in order to properly keep track of MBC's value. I am not going to discuss this security again and have instead made a snapshot of my prior discussion:

Starting Value Russell 2000 on May 21, 2012= 764.64  Historical Prices
Maximum Level 4th Annual Coupon Period= 994.032
Closing Date= May 21, 2013

If there is not a single close on or prior to 5/21/13 over 994.03 in the Russell 2000, MBC will pay the greater of 3% or the percentage rise in the Russell 2000 over the 764.64 Starting Value. A single close above the Maximum Level will cause a reversion to the 3% minimum coupon.

Final Pricing Supplement

Quote: Citigroup Financial Inc. 3.00% Min Coupon Princ Protected Nts for Russell 2000 Index

MBC is an unsecured senior note issued by Citigroup Funding, and guaranteed by Citigroup as provided in the prospectus, and matures in 2014 at a $10 par value. Both of my 100 share purchases were made below par value.

4. Cash Flow: I will frequently take a snapshot of income flow into my main taxable account for a single day to illustrate my most fundamental investment strategy. By far, the most important investment strategy has been, and will continue to be the generation of a constant stream of income. That stream will be reinvested in more income producing securities generating a compounding impact over time. This stream will be produced by a very large, disparate and frequently esoteric selection of securities.

A lot of focus is placed on selecting securities that pay monthly distributions. The following table shows monthly distributions from two GMAC bonds, three closed end funds and a senior bond (ISM) whose interest payments are linked to a float over CPI.

Cash flow is received on a continuing basis and will be invested even in the darkest of times such as the recent Near Depression, no matter what I think about the danger. Returns on those investments made from Lehman's failure in September 2008 through March 2009 turned out to be phenomenal given the huge market recovery starting in March 2009:
Cash Flow 8/15/2012 Main Taxable Account
This snapshot also includes the semi-annual interest payment made by the TC PJA, which is a fixed coupon Trust Certificate. Those securities will generally pay their distributions about three days after the ex distribution date. The snapshot also shows a reinvested dividend paid by First Niagara. I have FNFG in two separate taxable accounts. I am hoping to work my way into profit territory with the smaller position in the main taxable account, whereupon those shares will be jettisoned by me without a moment's hesitation. 

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