Monday, September 17, 2012

Decline In Long Treasury Bond Prices-Rise in Yields/Bought 50 of the Stock ETF SOIL at $13.96/Sold 50 FFBC at $17.51-A Pare/Added 50 FMER at $15.2/Sold 1 J.C. Penney 7.95% Senior Bond Maturing in 2017 at 105

Floyd Norris discusses in his NYT column a questionable legal tactic, used by Bain funds, to convert ordinary income into capital gains. That questionable tactic saved the Bain partners and employees about $210 million in income taxes and another $28 million in Medicare taxes. Romney's use of the carried interest loophole to lower his tax bill is well known. The charge made by Norris is something new and several tax experts question its legality.

In an ABC interview, Romney said that "middle income is $200,000 to $250,000 and less".  Transcript ABC News Is he just out of touch with reality? That definition would include 96% of households. The census bureau reported last week that the median household income was $50,054 in 2011 (page 5, Figure 1 Using the government's statistics, no informed person would call income in the $200,000 to $250,000 range as "middle income".

CPI rose .6% in August with the core CPI rising just .1%. Gasoline prices surged 9% las month. Consumer Price Index Summary


Given the terms outlined by the WSJ, Mayor Rahm Emanuel of Chicago largely caved into the teacher's union. The teacher's union house of delegates was apparently not satisfied and voted to continue the strike. Bloomberg The average Chicago teacher salary is $71,000, WSJ, plus another 15,000 a year in retirement benefits. The city offered the teachers a 3% raise in the first year, 2% in each of the next two years, with an option to extend by mutual agreement for a 4th year with another 3% raise.


The long treasury bond fell in price, and rose in yield after the Federal Reserve's Thursday announcement. Last Friday, the ETF for the long treasury had a bad day: TLT: 118.30 -3.23 (-2.66%) Part of the sell-off may be due to the Fed's decision to buy only mortgage backed securities in QE3. Traders may be dumping U.S. treasuries in response to that development. And, without the Fed buying this paper, there may not be enough natural buyers wanting to buy the boatloads of debt being issued by our destitute Uncle Sam.

Another negative for the long bond has been the decline in the dollar. The Dollar Index topped out on 7/24/12 at 84.02 and closed last Friday at 78.04. DXY Index Chart A decline in that index would indicate dollar weakness against a basket of six currencies weighted in the EURO. The Dollar Index is now below its 50 and 200 day moving averages indicating USD weakness (80.9 is 200 Day SMA as of 9/14/12) Q/E is widely perceived to be a negative for the USD, which is one reason why gold and other commodities have started to rise again. This decline would also make other USD price assets, such as the treasury bond, to look more unattractive to some foreign owners, particularly non-government owners who were just renting the long bond for a trade.

Lastly, some traders may be selling the U.S. treasury bonds to lock in profits and to redeploy the proceeds into other asset classes perceived to benefit from QE3.

The decline in the 30 year treasury bond has taken the yield back over 3%, with a close last Friday at 3.09%. The close on 7/25/12 was at 2.455%. I have zero interest in this security.

The decline in long treasury prices also had an adverse impact on long dated municipal paper, with the long taxable municipal bond falling more than the long tax free {compare: BAB: 29.10 -0.66 (-2.22%) : PowerShares Build America Bond with MLN: 19.96 -0.11 (-0.53%)}


News reports have linked a foreigner, who pleaded no contest to bank fraud in 2010, to the film that has spawned protests against the U.S. in several Muslim countries. The man behind anti-Islamic filmU.S. News. Another report suggested that the attack against the U.S. Consulate in Libya may have been planned by, or in concert with al Qaeda to coincide with the anniversary of 9/11. WSJ

A possible culprit behind the attacks is a gang of thugs called Ansar al-Sharia, who operate openly in Benghazi and whose leader said a few months ago that his fighters could level a foreign embassy. (see discussion at NYTCBS News Video and Peter Bergen pointed out that the film was originally uploaded to YouTube in July and went unnoticed until it was translated by someone into Arabic and then broadcast on an Egyptian religious television station. CNN

Bergen also points out that the burning of the Koran by a self-stlyed Florida preacher, Terry Jones, went unnoticed until Hamid Karzai, an alleged ally, made a speech calling for Jone's arrest. Violence ensued that resulted in the deaths of seven United Nations employees. Jones has also hanged Obama in effigy. The Smoking Gun

Over the weekend, Afghan security forces murdered 6 members of the coalition forces. NYT There have now been over 50 murders of coalition soldiers by our  Afghan "allies" this year.

1. Bought 50 SOIL at $13.96 Last Wednesday ($500 to $1,000 Flyers Basket Strategy)(see Disclaimer): I believe that Global X Fertilizers/Potash ETF is the purest ETF play on fertilizer stocks. The Market Vectors-Agribusiness ETF (MOO) contains several fertilizer and potash companies as part of a much broader exposure to agribusiness stocks like Deere, Monsanto, Archer-Daniels, and Kubota. Market Vectors® Agribusiness ETF - MOO. For this relatively small investment, I wanted a more concentrated portfolio focusing just on the fertilizer/potash stocks.

A good article on the investment case for this sector was published by back in December. 

I downloaded the holdings of SOIL as of 9/11/12 into Excel and then took the following snapshot: 

SOIL ETF Holdings as of 9/11/2012
The drought this summer was the worse one experienced in the Midwest since 1956. In many cases, farmers will recognize that fertilizer used in in 2012 will still be in the soil in 2013 due to the drought impacted 2012 growth.  Impact of the Drought on Next Years Fertilizer Rates (University of Missouri publication). That could have a negative impact on 2013 sales. On the positive side, the drought has caused a rise in crop prices, and farmers may want to increase their fertilizer use to increase their production.

The stock prices of major potash/fertilizer companies have suffered in 2012 for a variety of reasons, some of which may be related to the drought.

The Potash Corporation of Saskatchewan Chart shows a decline in the 2011 range bound trade ($50 to $60) to $40 to $45 in 2012. The Mosaic Company two year chart shows more improvement this year, but that stock is still down from its 2011 highs of over $85. YARA INTERNATIONAL (YAR.OL)  has a similar chart pattern  On the other hand, CF Industries Holdings and Agrium have much better looking charts, as does the Australian company NUFARM (NUF.AX).

Quote: Global X Fertilizers/Potash ETF
Friday's Close: SOIL: 14.29 +0.08 (+0.56%)

2. Bought 50 Shares of FirstMerit at $15.2 Last Thursday (Regional Bank Basket Strategy)(see Disclaimer):  FirstMerit Corporation announced that it would be acquiring Citizens Republic Bancorp (CRBC) in an all stock transaction valued at $912M based on the average FMER stock price over a ten day period ending 9/12/12. Each share of CRBC would be converted into 1.37 FMER shares.

The FMER stock was over 11% last Thursday when I elected to buy back the 50 shares previously sold at $17.3 (March 2012 Post).

The shares closed at $15.22 last Thursday, down 11.25% for the day.This brings me back to 130 shares bought in the market plus almost 7 shares acquired with reinvested dividends.

Citizens has 219 branches in Michigan, Ohio and Wisconsin. It is the largest bank holding company headquartered in Michigan. FMER currently has no branches in Michigan. This acquisition seems to me to be a sensible way for FMER to expand geographically.

At the time of this announcement I was generally aware of Citizens Bancorp and the problems encountered by this bank during the Near Depression period. A five year chart highlights the existence of those serious problems. CRBC Chart On 7/5/11, the stock underwent a 1 for 10 reverse split.  The stock was trading over 160 in 2007, adjusted for that reverse split, and the merger with FMER values CRBC at $22.5 based on the ten day average price of FMER stock.

The last filed Annual Report shows the horror in Item # 6 at page 30: Form 10-K (e.g. net losses of $533+M in 2009; 405+M in 2008, etc.)

The problems appear to be in the past, based on the last earnings report, and already reflected in the CRBC stock price. Excluding a tax benefit, CRBC reported net income of 50 cents per share for the second quarter. SEC Filed Press Release. As of 6/30/12, the net interest margin was 3.6%; the efficiency ratio was 65.99%;  NPLs were 1.69% of total loans +ORAA; the coverage ratio was 161.53% for NPLs; the total capital ratio was 15.96%; and the tangible common book value was $17.84.

While CRBC appears to have turned itself around, it still comes with baggage. The most serious problem is that this bank still has government preferred stock on its balance sheet and has deferred paying the dividends on that preferred stocks and its subordinated debentures since the first quarter of 2010. The bank sold the government $300M in preferred stock, FORM S-3, and FMER will need to pay the government back after the merger As of 6/30/12, the deferred obligations, which FMER will have to pay after the merger's completion, was $39.9M in deferred dividends to the government and $12.4M in deferred interest payments on the subordinated debentures:

FMER intends to issue debt and preferred stock to pay off the foregoing.

CRBC has $853+M in long term debt. (see page 24 Form 10-Q)

So the total cost is considerably more than the $912M figure used in FMER's press release. If I add the $300M cost to redeem the government's preferred, plus the deferred interest and dividend payments (only to 6/30/12), the total rises to $1.2643 Billion. I was pleased that FMER did not make the same mistake as First Niagara (FNFG), who agreed to pay cash for its acquisition of HSBC branches that caused FNFG to raise the necessary cash in a variety of highly unattractive ways.

Based on what I know about CRBC, the total amount being paid for 219 branches does not appear out of line.

The slide in FMER stock last Thursday did wipe out most of my unrealized profit in the shares. I still have a profit, based entirely on a 30 share buy at $11.35.  My highest cost remaining lot was purchased at $16.18, and I may dispose of it when and if I can sell those shares at over $17.

An informed article discussing this merger was published by Seeking Alpha.

S & P revised FMER's debt outlook from stable to negative: TEXT-S&P

Friday's Close: FMER: 15.22 -0.01 (-0.07%)

3. Sold 50 of 155+ of FFBC at $17.512 Last Thursday (Regional Bank Basket Strategy)(see Disclaimer): This pare lowered my average cost per share from $16.06 to $15.62 while making a small profit on the shares plus dividends. This is a fairly typical trading technique when using FIFO accounting. I would not buy back the shares unless I could lower my average cost per share and there was no material adverse news driving the price down.

As previously noted, FFBC is paying a fixed quarterly dividend and a variable dividend. The bank intends to continue the variable rate until the end of 2013, unless there is a material change in its capital position. First Financial The variable dividend is based on the difference between its fixed dividend per share, currently 15 cents, and the quarterly net income per share.  When Fidelity reinvests the dividend, there are two separate entries, one for the fixed rate dividend and the other for the variable dividend, as shown in this snapshot taken shortly after I sold the 50 shares last Thursday (the snapshot would not include the 50 shares sold):

Remaining Shares After 50 Share Sale 9/13/12
Since the realized gain was less than $30, I will not include it in the totals shown in the REGIONAL BANK BASKET STRATEGY GATEWAY POST. A link to this post will be made in the 2009 Post  Regional Bank Stocks which contains links to all buys and sells made pursuant to this strategy.

My most recent add was discussed in Item $ 3 Added 50 FFBC at $15.95 (8/3/12 Post).  The shares sold last Thursday were bought in November 2010. Bought 50 FFBC @ 16.85 November 2010

I changed my dividend option to payment in cash.

Friday's Close:FFBC: 17.86 +0.40 (+2.29%)

4. Sold 1 J.C. Penney 7.95% Senior Bond Maturing in 2017 at 105 (Junk Bond Ladder Strategy)(see Disclaimer): This bond was bought about three months ago. Bought 1 J.C. Penney 7.95% Senior Bond Maturing on 4/1/17 at Total Cost of $97.5 If I had confidence in JCP's turnaround strategy, I may have held out for another 2 more points. 

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