Tuesday, July 31, 2012

MORE on GYC/AGY/KO/Bought Back 200 FOFI at $7.02/Earnings: CNA (own TC JZV only),SUSQ, UBSI FISI PBNY VLY

I write this blog in a stream of consciousness mode. I think a great deal faster than I can type.  I will add the links where I think it would be helpful before I start to type (e.g. an earning report link) or after I finish the subject.

I am frequently making comments based on my memory. I have trouble remembering what I had for dinner last night. That is one reason for writing this blog. I can search my own blog for my prior analysis which I have probably forgotten over time. Sometimes, I wonder if another person wrote the post, but there is just me.

When discussing an earnings report, I will be looking at the report in a separate window while typing. I would urge readers to check the information with the original source material, since my memory is not what it used to be and my typing skills would not be described as competent by a secretary.

I was the only boy in a 9th grade typing class in Huntsville, Alabama and the teacher gave me a C+. I was surprised by that grade, fully expecting a "D" or an "F". I must have charmed the teacher, or maybe she just felt sorry for the only boy in the class who could not cut it. While my skills have improved over the years, I am prone to making typing errors that are not caught at the time of a post's publication, usually at 5:30 A.M. each business day. Sometimes, I catch an error and correct the text, but I am sure that there are numerous typing errors that have never been caught, particularly when typing numbers from earnings reports.

I am in no way a bond expert.  I did not start to buy bonds in the bond market until 2010.  For example, I could not make a calculation of a make whole payment if my life depended on it. I am basically guessing that the sum of all scheduled payments (principal and interest) for a fixed coupon bond maturing in 2034 or 2036 would be a significant sum, well in excess of par value at the current time, even after the discounting to present value.

In the Synthetic Floater GYC, the underlying bond has a make whole provision that can be found in  Sold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters. The make whole payment would include the greater of par value or the sum of the present values of all "Remaining Scheduled Payments", discounted to the date of redemption on a semi-annual basis at the "Treasury Rate" plus .2%. The term Remaining Scheduled Payments is a defined term in this prospectus that includes principal and all remaining interest payments. So as I understand it, the discount would be applied both to the underlying bond's $1,000 par value and all of the remaining interest payments:

Defined Terms: Remaining Scheduled Payments 
While I can not do this calculation, software would be needed with the correct inputs on the discount rate, I understand that a larger number will be generated by a lower discount rate, and a smaller number by a larger discount rate. If I am discounting a 2035 bond payment to present value using a 3% Treasury rate, I am going to generate a larger make whole payment compared to a 6% rate. So to know the net present value I would need to know the discount rate, the principal amount and the total amount of interest payments remaining until maturity. I am assuming that would be a large number based on the time to maturity (23 years, a lot of interest payments) and the low discount rate due to the Fed's Jihad Against the Savings Class. This is why institutions will buy the underlying AT & T 2034 bond with a 6.45% coupon at a premium of 29% to par value at yesterday's close. That is my understanding. If anyone disagrees, please leave me a comment. I am learning about these provisions, just like everyone else.

With the egregious events surrounding the GJN, any investor willing to buy or to hold synthetic floaters needs to evaluate the likelihood of the underlying bond issuer avoiding a make whole payment and to make a guess at least of whether that make whole payment would likely exceed the "swap termination fee" computed by the insatiably greedy Masters of Disaster-Dickheads In Extremis-Slick Assholes Extraordinaire-Rapacious Greed Mongers-(just kidding really, truly), Rapers of Individual Investors (figuratively speaking of course).

Each investor will need to reach their own conclusion after careful research after the hosing of GJN owners.

In an interview with Barrons, Doug Kass mentioned that he owned the double short for the U.S. treasury, TBT. He was also negative on Goldman Sachs, a potential value trap, and American Express.

It is possible that the European Masters of Disaster are worse than their American counterparts. It was after all the AIG's London Financial Product's Unit that almost blew up the  world's financial system. (NYT article in its Reckoning series)

Reuters has reported that three major European banking institutions were knee deep in the Libor rate fixing scandal.

One of the small banks in my regional bank basket, Berkshire Bank (BHLB), became the first U.S. bank to file suit against those allegedly involved in the LIBOR rigging.  Reuters A copy of Berkshire's complaint can be found at the  WSJ.com. This is a class action lawsuit.

You generally do not see articles about chicanery committed by large Canadian and Australian banks. Perhaps there is something in the NYC and London water supply. The authorities need to check it out.

AGY announced that it had initiated a process to sell its "continuous filament mat (CFM) business". This would include a plant in Huntingdon, PA. that make up the "CFM business, including the wound products and conductive roving business".  SEC Filed Press  Release I own one second lien senior bond, maturing in 2014, currently rated at "CC" by S & P and at 10+ in my personal risk rating system, the highest risk in that rating system. AGY Holding I hope (pray?) that a lot of money is raised by selling that operation.

I am writing this post as an unpaid journalist. The primary focus of this journalism is how one individual investor is coping on a daily basis with a dangerous market and the Fed's Jihad Against the Saving Class.  On political issues, I am acting more as a columnist rather than a journalist.

The Coca-Cola Company declared its first dividend payable following the 2 for 1 stock split. Prior to that split, the company had paid 51 cents per share. The next quarterly dividend will be $.255 per share, which is of course equivalent to the 51 cents paid on the pre-split shares. The record date for the stock split shares was 7/27/12 and KO anticipates distributing those shares on or about 8/10/12. Stocks, Bonds & Politics: KO STOCK SPLIT Coca Cola rose $1.11 yesterday to close at $81.12.  My average cost per share is $50.83:

132+ Shares Average Cost Per share $50.83
When the shares split, my average cost will be $25.44 on twice the number of shares (264 rather than 132).

1. CNA Financial (own TC JZV): CNA Financial reported operating net income for the second quarter of $152 million or 56 cents per share. Book value per share was repoted at $45.34.

The company beat the consensus estimate by 3 cents.

I own 150 shares of JZV with an average cost per share of $19.20:


The underlying security is a senior CNA bond maturing in 2023. FINRA

It would be advantageous for the owner of the call warrant to redeem the trust certificates at their par value plus accrued interest, take possession of the bonds, and then sell them at a guaranteed and significant profit in the bond market. That call right will cap the appreciation of JZV.

As previously noted, the call right reserved by the trust creator is a known adverse feature, and one of the ways financial institutions take advantage of individual investors for their own benefit. Until that call right is exercised, the risk of loss from a default is borne by the owner of the trust certificates, while gains in the underlying securities above par value can be captured by the creator of the trust by simply exercising that call warrant.

Trust Certificates: New Gateway Post (also contains snapshots of trades)

Anyone considering the purchase of a TC needs to understand that call warrant and how it will impact the price for the security. In short, it would not be rational now for the TC JZV to sell at more than the $25 par value plus accrued interest, since the owner of the call warrant could redeem those certificates for that amount, take possession of the bonds, and sell them for a risk free return in the bond market. It is what it is. Just another way for brokerage companies to shift risk to individual investors (i.e. the risk of default of the underlying bond issuer), while keeping upside profit potential to themselves. Nonetheless, recognizing their rapacious greed for what it is, I have been successful booking over $24,000 in gains in trust certificates plus interest payments.

JZV is a fixed coupon trust certificate. It is not a synthetic floater with a swap agreement. It is the swap agreement which gave Wells Fargo an opportunity to royally screw the GJN owners, the beneficiaries of the trust created by Wells Fargo/Wachovia.

2. SUSQ (own TP SUSPRA and common as a LT): Susquehanna Bancshares reported second quarter net income of $37.8 million or 20 cents per share, up from 9 cents in the year ago quarter.

The capital ratios are good:

SUSQ Capital Ratios as of 6/30/12
I have traded the stock as a LT and currently own just 30 shares. Bought 50 SUSQ at $5.85-Sold 50 SUSQ @ 7.5Bought SUSQ at 8.75 (brief mention in introduction-5/16/11 Post)

I am anticipating that the TP SUSPRA will likely be called on or after 12/12/12. I will may sell my shares before that date if I can realize a gain on the shares bought at over the $25 par value. SUSQ can continue to treat this TP as Tier 1 equity capital, since it had less than $15 billion in assets as of 12/31/09. That does have a benefit to the bank since this "bond" can be included in equity capital and the interest payments are deductible to the bank. I discussed that specific issue in Item #2, ¶¶ 2 & 3 at Bought 50 SUSPRA at $25.25 ROTH IRA The problem is that the high coupon and overall better financial position will lead the bank to redeem this TP notwithstanding those advantages. 

I own 80 shares in the ROTH IRA: Bought 50 SUSPRA at $25.25 ROTH IRA;   Bought 50 AFE and 30 SUSPRA in Roth IRA (June 2010). This one currently has a 9.375% coupon. Final Prospectus Supplement Needless to say, I would be please to receive that coupon without losing anything on the shares. 

Susquehanna Bancshares rose 1 cent in trading yesterday to close at $10.54.

Susquehanna Capital I 9.375% Cap Secs. Series I (SUS.PA) closed at $26.24 yesterday.


3. UBSI (own: Regional Bank Basket Strategy)United Bankshares reported second quarter net income of 21 million or 42 cents per share, up from 40 cents in the 2011 second quarter. 

The consensus estimate was for 43 cents per share.

The capital ratios are good: 

UBSI Capital Ratios as of 6/30/12
As of 6/30/12, the net interest margin was 3.76%; the efficiency ratio was 54.5%; NPLs to total loans were at 1.23%; and the return on average assets for the quarter was 1.00%. 

I have been keeping the UBSI position due primarily to the dividend yield at my cost, which is close to 7% and to the historic growth of that dividend. Bought 50 of UBSI (November 2009).

UBSI continued to increase its dividend during the last two major banking crises. United Bankshares, Inc. - Dividend History The current quarterly dividend is 31 cents per share.

United Bankshares closed at $23.34 yesterday.

4. VLY (Own: Regional Bank Basket Strategy): Valley National Bancorp reported second quarter net income of $32.8 million or 17 cents per share, down from 21 cents in the year ago quarter (almost 20M more shares outstanding).

The consensus estimate, with 11 analysts contributing, was for 18 cents. The market reacted negatively to this report, sending the share price down 6.22% on a market up day.

The  capital ratios are okay:

VLY Capital Ratios as of 6/30/12 
As of 6/30/12, the net interest margin was 3.47%; the adjusted efficiency ratio was 62.63%; non-accrual loans as a percentage of total loans stood at 1.1% (total accruing past due and non-accruing 1.38%); and the annualized return on assets was .84% during the quarter.

Valley has been a major disappointment but I am keeping it for now. The dividend yield is good but the payout ratio is uncomfortably high. A dividend cut is certainly a possibility, particularly if there is not a significant improvement in earnings. The quarterly dividend is currently $.1625 per share and VLY's last quarterly E.P.S. number was just 17 cents.

Most of these banks provide historic dividend and stock split information, which is always useful to peruse. I am always interested in banks that managed to navigate a banking crisis without cutting the dividend.

Historical information about VLY cash and stock dividends can be found at Shareholder and stock NYSE VLY information - Valley National Bank.

I would note three comments made by the CEO during the earnings call. First, unlike many banks, VLY has faced "minimal requests" for mortgage repurchases sold to Fannie and Freddie. And, based on an "initial" review of the proposed Basel Three capital requirements, VLY believes that it "currently" meets the enhanced 2019 well capitalized regulatory capital ratios.  Lastly, while not giving any guarantees, the bank will do whatever it can to maintain the dividend.  Earnings Call Transcript

Valley National Bancorp continued its decline in trading yesterday, falling 16 cents to close at $9.44.

5. Bridge Bancorp (own: Regional Bank Basket Strategy)Bridge Bancorp reported second quarter net income of $3.1 million or 36 cents per share, compared to $2.5 million or 38 cents per share in the 2011 second quarter. BDGE sold shares last December which accounts for the lower E.P.S. number SEC Filed Press Release 

One analyst estimated earnings at 35 cents. Bridge is a small bank with 21 branches in Suffolk County, Long Island.

Bridge is a bank with comforting loan losses and a reserve already established for non-performing loans ("coverage ratio"):  



As of 6/30/12, the net interest margin was at 3.67% (down from 4.07% as of the 2011 2nd quarter); the efficiency ratio was at 60.1%; and the return on average assets was .87%.

The capital ratios are good:


I recently pared my position by selling 50 shares: Sold 50 BDGE at $23.5 (7/3/12 Post).

Bridge Bancorp declined 30 cents in trading yesterday to close at $19.91.


6. FISI (own: Regional Bank Basket Strategy): Financial Institutions reported second quarter net income of $6.7 million or 46 cents per share, up from 39 cents in the year ago quarter. 

The consensus estimate was for 43 cents per share.

The capital ratios are okay:


As of 6/30/12, the net interest margin was 3.89%; the efficiency ratio was 60.41%; NPLs were .7% of total loans; the coverage ratio was 213% (anything over 100% is comforting); and the return on average assets was 1.08% for the quarter.

Financial Institutions closed at $16.96 yesterday.

7. PBNY (ownRegional Bank Basket Strategy) Provident New York Bancorp reported second quarter net income of $6.2 million or 17 cents per share, up from 5 cents in the year ago quarter.

The estimate was for 14 cents per share (3 analysts contributing)

As of 6/30/12, the net interest margin was 3.59%; the adjusted efficiency ratio was 65.53%; tangible book value per share was at $7.35; NPLs as a percentage of total loans was at 2.4%; the coverage ratio was 62%; tangible capital as a percentage of tangible assets was at 9.33%; the Tier 1 bank only leverage ratio was at 8.41%; and the return on average assets was .8%.

Provident New York Bancorp fell 23 cents to close at $8.13 yesterday. My purchase was a recent add to this basket strategy. Bought 100 PBNY at $7.4

8. Bought Back 200 FOFI at $7.02 (see Disclaimer): FOFI is an unusual stock CEF. I check CEF net assets values per share usually once a day for issues that I own, and once a week for those on my monitor list.

This fund reports its net asset value weekly. As of 7/20/12, I noted that it was then selling at -23.61 discount to its net asset value of $9.19, based on a closing market price that day of $7.02. That seemed steep to me so I bought the shares back.

I have explained this fund in an earlier post: Item # 2  Bought 200 FOFI at $6.77-Sold 200 FOFI at $7.31:

2012 FOFI 200 Shares +$92.06
The fund is unusual because it has invested a large percentage of its capital with five hedge funds: Bay Pond Partners, Wolf Creek Investors, J. Caird Partners, Iguazu Master Investors, and North River Investors:

FOFI Hedge Fund Investments as of 3/31/12 (subject to change of course)

The most important one by weight is Bay Pond Partners. The compensation arrangements for those hedge funds are described  at page 34 of the First Opportunity Fund's last shareholder report.

The decision to invest in hedge funds led to the delisting of the fund's shares, which thereafter started trading on the pink sheet exchange. FOFI First Opportunity Fund

FOFI Page at the Closed-End Fund Association.

Sponsor's webpage: First Opportunity

Holdings as of 3/31/12:  Holdings About 18% of the holdings are in small banks/S & Ls.

Last SEC Filed Shareholder Report: First Opportunity Fund for the period ending 3/31/12

It is hard to see much downside risk at the moment when the discount is almost 24%.

As of 7/27/12, the fund reported a net asset value per share of $9.19, unchanged from a week ago. So FOFI missed the market rally last week, which is not a good sign.

First Opportunity Fund closed at $7.05 yesterday. 

Monday, July 30, 2012

Wells Fargo-GJN-Securities Act of 1933

I thought that I would add a comment on the GJN situation and then leave it alone for at least a few days. I am really angry about what WFC did to the GJN individual investors. 

I did not take a course in securities law and have never had any trial work in that area. In short, I am simply aware that there is a Securities Act of 1933, and I have read stories in the press about companies charged with violating that Act. 

In connection with the egregious actions related to the redemption of GJN, another area of research is whether that Act was violated by failing to place a clear warning in bold type at the start of a long and complicated prospectus. While I have never done any research on the subject myself, it would seem relevant to me that this product is being sold to individual investors. If an adequate warning had been placed in bold and large type at the beginning of the prospectus, WFC/Wachovia would  not have been able to sell those certificates to the public at $25. The deal would not have gotten off the ground. There may be a statute of limitations issue, but I seriously doubt that the average individual investor could have reasonably foreseen the events that led up to their loss of capital until WFC took their money in mid-July 2012. On that issue, it is relevant that GJN was trading near $25 up to the time of its delisting. 

Please keep in mind that the trustee's notice was dated 7/17/12 and the security was delisted prior to that notice.

Subsequent Posts:

J P Morgan-Make Whole Payment-Redemption of Its 2035 Trust Preferred/Those Who Wish To Defend Wells Fargo In Connection with GJN Need to Specifically Address the Facts (8/7/12 Post)

District Court Decision in Turkle Trust v. Wells Fargo (N.D. Cal)/Summary of Argument: JPM Potential Obligation to Pay Make Whole for its Recent 2035 TP Redemption/Other JPM Capital Trust Preferred Securities: Language on Make Whole Payment and Capital Treatment Event (8/13/12)

GJN-Wells Fargo-New York Times (8/2/12 Post)

Legal Claims: GJN-Wells Fargo. I am retired.

GJN-JPM-Make Whole Payment (8/6/12 Post)

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

Wells Fargo-GJN/Facebook/Lottery Ticket Basket Table/BOUGHT 100 of the Balanced ETF INKM at $30.05

I published a post on Saturday: Sold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters

I can confirm that Wells Fargo was the swap counterparty for GJN and furnished the trustee with the amount of its "swap termination fee."  I do not yet know how WFC arrived at the amount. They may have secured quotes from other dealers, at least three, or could have calculated their own "damages" in the event enough quotes were not received by it. GJN Prospectus at page S-24

However it was calculated, I view the sum as egregious on its face. And, I do not believe that the sum is even susceptible to a good faith calculation by anyone. The swap could easily have a negative value for WFC over the life of the agreement. If I am around in 2035, I will do a back of the envelope analysis of how WFC would have fared between now and August 2035 with the swap agreement in force. I will publish the results.

Every contract has an implied covenant that the parties will act in good faith. The Duty of Good Faith Revisited That duty can not be waived or disclaimed by a party. A breach of that covenant by one party could be a material breach of the contract warranting termination of any rights thereunder at the moment of its commission.

It was Wells Fargo (through Wachovia) that sold the GJN trust certificates to the public at a $25 par value after setting up the trust with complicated terms (48 single spaced pages, excluding an appendix), now relied upon it, to take almost $11 of that $25 from the third party beneficiaries of the trust created by it (i.e. individual investors) as a "swap termination fee" for the trustee's "default" occurring when J. P. Morgan decided to redeem the underlying TP without making a make whole payment.

Wells Fargo is not dealing with a sophisticated counterparty in an arms-lenthg negotiated swap transaction, but a third party beneficiary of a trust whose rights were defined by Wells in a complicated and very long single spaced agreement with a compliant trustee.

SEC Filings For GJN The last filing by the trustee shows the amount paid to the GJN owners. SEC

Since I did not own GJN on the redemption date, I will consequently not receive a class action notice when and if a suit is filed against WFC, the trustee and/or JPM in connection with GJN. That is why I am asking the readers to let me know if they become aware of a lawsuit. The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty; Item # 1 When Does a Capital Treatment Event Occur?; Item # 3 GJN Redemption.

I calculate that Wells Fargo took $12,152,876.4 of the total proceeds paid by J P Morgan to the trustee for the redemption of $27,700,000 in principal amount of JPM's 5.85% TP maturing on 8/1/2035. There were 1,108,000 GJN Trust Certificates with a par value of $25 per certificate. Trustee Distribution Statement The trustee paid to WFC $10.963 per certificate. Trustee Distribuiton Statement  That is how I calculated a payment of  $12,152,876.4 to Wells Fargo. It beats working for a living. I am sure that they are really sorry that they took money set aside by individual investors to pay college tuition or as retirement savings. This is really slick. 

This means that Wells Fargo took 43.87% of the principal amount of that security owned by the trust. I went to a website to calculate how much Wells Fargo will be able to earn on that money for the next 23 years at just 5%, with interest compounded annually:



Compound Interest Calculator Please remember that the total principal value of the JPM TPs was $27.7 million. I could arrive at a higher number by compounding monthly (adds almost another million) or by increasing the percentage return.

I am having an ongoing discussion with readers about this issue in the comment section of Stocks, Bonds & Politics: Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater Positions. I did not own GJN at the time of redemption, having sold my 150 share position in April 2012. I am trying to do what I can to help the individual investors who did own it at that time.

I regard myself as a financial journalist, but his blog is read by only a handful of people each day. To expose what WFC has done, a journalist with a wider readership will have to write a story. Most of the visitors to my blog each day come looking for information on a specific topic, such as the date of KO's stock split and then never come back. The public can decide whether Wells has treated the individual investors fairly.

Given what happened to the GJN owners, I do believe that it is appropriate for investors who own synthetic floaters, to reassess their positions and to read the applicable prospectuses with the GJN events in mind. Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater PositionsSold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters

That reassessment probably needs to be done with the following thought in mind. I would never assume that large financial institutions are even capable of acting in good faith. Any investor that believes to the contrary must have been asleep over the past twenty or so years.

I do not recall ever owning Wells Fargo stock. As the trustee for my late father's testamentary trust, I did buy 100 shares of WFC stock at $29.6 earlier this year. I am 100% confident that he would not want to have anything to do with this bank after the events connected with the synthetic floater GJN and its redemption. I sold the WFC shares last Friday at $34 and will never buy them back, nor will I ever have in the future any dealings with this bank.

I rarely mention a trade in family accounts that I manage, but I thought that the disposition of WFC stock deserved a brief mention. All of my discussions deal with my personal trades.

{I did mention that I had bought the ETF BOND in the trust account. (Stocks, Bonds & Politics: introduction last paragraph, the symbol was then TRXT, later changed to BOND). I also mentioned to a reader that I had bought the long treasury bond ETF TLT in that account when it was trading near $94. Other than those two mentions, I have not discussed a trade other than my own until now.}

In a paper written by Van Hoisington and Lacy Hunt, the authors argue that excessive debt in the U.S. will lead to a prolonged period of low long term interest rates.  hoisingtonmgt.pdf They argue that the 30 year treasury bond at less than 3% still holds value for investors and may even have value at a 2% yield compared to other assets. I am not buying into that thesis, but I will place a few chips on that opinion turning out to be omniscient.

The OG will readily admit that his crystal ball is a bit murky. A reader once asked me why I bought the bond CEF ERC when I believed the long term secular bull market in bonds was nearing an end. In my reply, I  stated that I might be wrong and then proceeded to explain other considerations. {see comment section Stocks, Bonds & Politics: Bought 100 of the Bond CEF ERC at 15.13-March 3, 2011 Post} When the bull market in bonds ends, and it will end, the devastation will be other worldly.

Possibly, as some believe, Jeane Dixon and Nostradamus were the only humans in recorded history who could predict the future, and unfortunately those people are no longer with us. So we are left with folks like Hoisington and Hunt, and I am not going to make a crack about being hosed.

The quarterly reviews written by Van Hoisington and Lacy Hunt can be found at Economic Overview.

I have Facebook stock on my Lottery Ticket monitor list, one among 200 such companies. My consider to buy price would be below $15. Since that strategy has a $300 limit, I could buy no more than 20 shares at $15. Lottery Ticket Basket Strategy

By "consider to buy", I am not talking about an automatic buy. Instead, I will simply review the latest quarterly report, one analyst report, and major news items before making a decision whether or not to buy those 20 shares. The total amount of research time for a LT would generally be 30 minutes. For the moment, I did nothing more than glance at the earnings report, solely for the purpose of deciding whether to change my target entry price. SEC Filed Press Release The company reported a GAAP loss of 8 cents per share, with Non-GAAP earnings at 12 cents, flat with the second quarter of 2011. I am more likely to lower the target entry price for Facebook shares, rather than to raise it. In response to this report, Facebook shares declined $3.14 last Friday to close at $23.71, representing a 37.6% decline from its recent $38 IPO price. Was the IPO priced rationally, or was it a product of Wall Street hype to separate individual investors from their money for the usual purpose of enriching others including the Masters of Disaster?

1. Bought 100 of the Balanced ETF INKM at $30.05 Last Thursday (see Disclaimer): SPDR SSgA Income Allocation ETF (INKM) is a new balanced ETF that owns other SPDR ETFs.

On the day of my purchase, I took a snapshot of the allocation:

AS of 7/25/2012/Percentages Will Change


The total expense ratio is .7%. With competition in the ETF space, that fee may drift down some in the years ahead, as the underlying funds reduce fees to stay competitive. 

The largest equity ETF in this basket is the SPDR S&P Dividend ETF which attempts to replicate the S & P Dividend Aristocrats Index, a relatively small list of companies that have a long track record of raising dividends. The selection includes about 60 companies out of the S & P 1500.  That ETF is weighted at 18.66% which is the largest ETF weighting in this fund. 

The largest bond weighting is for the SPDR Barclays Capital Long Term Corporate Bond ETF | State Street Global Advisors (SSgA).  The weighting was 13.14% as of 7/25/12.

The third, fourth and fifth largest weightings as of 7/25/12 are bond ETFs:   JNK - SPDR Barclays Capital High Yield Bond ETF (which I own); TLO - SPDR Barclays Capital Long Term Treasury ETF;  IPE - SPDR Barclays Capital TIPS ETF.  

I am comfortable adding fund of funds, geared toward income generation, at the moment, given their broad breath of assets.

Friday's Closing Price: INKM: 30.24 +0.23 (+0.75%)

2. Lottery Ticket Basket Table as of 7/27/12: This strategy is explained in  Lottery Ticket Basket Strategy (see trade snapshots at the end of that post) and its predecessor post, Lottery Ticket Purchases: Links in One Post. The RB is in charge of implementing this particular strategy which has two significant capital limits: (1) the purchase can not exceed $300 plus any prior profit in the stock and (2) the total amount invested can not exceed the realized gain, a limitation added in the second year of this strategy.

In 2009 and most of 2010, the RB could almost do no wrong in the selections. The Nitwit was practically minting money. The last year has been mired with several duds and a few successes. The most recent add, 30 shares of TEX, occurred last week and the stock is up about 33% in the two days since my purchase (TEX: 19.15 +0.92-Friday close). Bought 30 TEX at $14.43-LT Category (permitted to go over $300 due to prior trading profits)

Some of the duds, so far at least, include Metalico, Ferro, O2Micro, ING, Thompson Creek and Grupo Financiero. However, given the amounts devoted to each stock, I am not concerned about unrealized losses. I can hold the losers indefinitely. And, I have unrealized gains too. Occasionally, even the losers come around, which was the case recently with PLXT, which had been in the red for almost a year before doubling my money on a takeover. Sold 70 PLXT at $6.66-Bought 70 PLXT at $3.37-a LT Ask me if I care, one way or the other?

Please note the name of this strategy. It is a form of entertainment for the RB which has somehow netted Headknocker almost $11,000 in realized gains to date. RB is proud of that accomplishment given the severe capital restraints placed on it by our Great Leader Headknocker:

The last table was posted in Lottery Ticket Basket Strategy Table As of 5/1/2012.

Saturday, July 28, 2012

Sold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters

This is another rare Saturday special. I am not going to start working on posts early Saturday morning. The egregious events connected with the Synthetic Floater GJN have caused me to reassess my extremely small exposure to them. I will note in Monday's post that the trustee for GJN is claiming that Wells Fargo gave it the number for its termination fee. While I did not own GJN at the time of redemption, I am doing what I can to help those folks.

1. Sold 100 GYC at $22.22 Last Friday-Roth IRA (see Disclaimer): In light of the egregious events connected with the liquidation of GJN, I have been reassessing my small positions in synthetic floaters. Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater PositionsThe Egregious Swap Termination Fee Paid to the GJN Swap Counterparty The comment section of that post has material relevant to my ongoing evaluation process.

I am now down to 150 shares of GYB, 50 shares of GJR and 50 shares of GJT. All of those securities have $25 par values and all are currently trading below $17.52.

The GJN swap counterparty took almost $11 as its swap termination fee leaving the GJN owners with $14.6857 per certificate sold by WFC/Wachovia at $25 to public shareholders. 

I decided to liquidate my 100 share position in GYC primarily to harvest a profit and to eventually invest the proceeds into a higher yielding security. GYC was purchased in two 50 share lots, and my realized gain was :

2012 Roth IRA GYC 100 Shares +$357.45
Bought 50 GYC at $15.5 May 2009Added 50 GYC at $21.60 in Roth IRA February 2011

I am keeping 150 shares in a family members account, where the unrealized profit for those remaining shares  is less than $100 after trading the security. Each investor needs to make their own informed decisions after evaluating the risks. The screwing of the GJN TC owners is now a known risk.

GYC is a  Synthetic Floater in the Trust Certificate legal form of ownership that pays the greater of 3.25% or .65% above the 3 month LIBOR rate, up to a maximum of 8%, on a $25 par value. Prospectus

Due to the abnormally low short term rates, this security has been paying its minimum coupon since my original purchase in May 2009 and will likely continue doing so for at least two more years. Consequently, GYC will likely be a low yielding security for several years. The three month LIBOR rate will have to exceed 2.6% during the relevant computation period to trigger an increase in the minimum 3.25% coupon.

At $22.22, the yield at 3.25% is about 3.66%. The profit on the shares is worth more to me than that coupon yield.

I will now try to discuss as clearly as possible the GJN issue in relation to GYC.

First, it is important to keep in mind what triggered the redemption of GJN and the outlandish swap termination fee paid to Wells Fargo, the originator of the Grantor Trust via Wachovia. The precipitating event was J P Morgan's decision to redeem the underlying trust preferred security, a trust preferred security maturing in 2035, that was bought by Wells/Wachovia and sold to the trust created by it.

And, importantly, JPM relied on the "capital treatment event" exception and refused to pay a "make whole" payment in connection with that redemption. You will not see "capital treatment event" exceptions to make whole payments in senior bond prospectuses. That type of event is relevant only to trust preferred securities that used those securities as Tier 1 equity capital before the passage of the Dodd–Frank financial reform legislation and will have to phase out that use. It is the phase out of TPs as Tier 1 equity capital that is the so called "capital treatment event", though there is a question of "when" that event occurs. Item # 1 When Does a Capital Treatment Event Occur I would not assume that a court or jury will agree with JPM on that issue.

What is a make whole payment? It is compensation to the bond owner triggered by the issuer's optional redemption. Think of it as a penalty that issuers would ordinarily not want to pay. While the calculation will vary from prospectus to prospectus, usually on the discount rate to calculate present value, the starting sum is the total amount of interest  payments remaining in the term and the principal amount, discounted to present value. JPM would not have redeemed the TP in GJN if it had to make that make whole payment. It would have been crazy for them to do it.

The underlying bond in GYC is a senior AT & T bond maturing in 2034. FINRA The prospectus for the underlying bond contains a make whole provision. Prospectus Supplememt (page S-11 to S-12).

The prospectus for GYC summarizes the make whole payments as follows:

As the reader can see, this would be a substantial payment when there are a large number of scheduled payments remaining in the bond. This is why I doubt that AT & T will call the underlying bond anytime soon.

The bond prospectus has the same swap termination payment provision as GJN which is cause for some concern. What if, unexpectedly, there is a trust termination event for some other reason, unrelated to the redemption of the underlying security, that would be classified as a default by the trustee?

Those other events are described at page S-32 of the prospectus.  Some of them deal with events characterized as swap counterparty defaults, where even an immoral Master of Disaster would not claim a right to compensation for their own default. What if AT & T declared bankruptcy, would the swap counterparty make a claim on whatever may remain after the bankruptcy reorganization? I do not know. Since I assume that Masters of Disaster will always try to line their own pockets with other people's money, until proven beyond a reasonable doubt otherwise, that would be a matter of concern. But, in that circumstance, the owners of the TC would have already lost most of their money, since the risk of an issuer default rests with them.

The swap counterparty for GYC is UBS who is also the calculation agent for the swap termination fee. I wonder if these knuckleheads even realize that they are dealing with individual investors who are third party beneficiaries of a trust created by them. Before the issue of the termination fee is even reached, it would first have to be determined by the appropriate fact finder (e.g. court or jury) that the swap counterparty could invade the redemption proceeds when the result would be to pay the third party beneficiary of the trust less than $25.

Perhaps, Masters of Disaster need a refresher course in the legal definition of good faith:  The Duty of Good Faith Revisited

The GYC prospectus contains a similar provision to GJN for a swap termination fee payable upon a trust termination event that is also a swap termination event:


When there is a make whole payment, this could be beneficial to the owners of the TC, provided that payment exceeds the amount claimed by UBS as its swap termination fee. (the annual coupon payment of the underlying bond would have to be greater than the maximum spread resulting from the swap agreement, even if one assumed that the minimum coupon was paid for the next 23 years, provided both numbers are discounted at the  same rate to presents value, but who knows about the magic that Masters of Disaster can concoct when putting more money in their pockets?)

I would simply question whether any Wall Street firm would appropriately calculate its "damages" with no checks and balances, and where the aggrieved party would be a bunch of individual investors, most of whom were just expecting a par value payment. The calculation method in these circumstances reeks of potential self-dealing:

 Process for Determining Amount of Swap Termination Fee Payment 
Assuming more than three quotes were obtained, what were those dealers told about the GYC swap agreement and were they told who would benefit by the quote? Would you trust the number? Do you trust these people in the least to do what is right and fair? I am sure they will tell you with a straight and earnest face, while wearing their Armani suits and obsessing about their multi-million dollar bonus pools, that they are honest people with impeccable morals, and are offended by any suggestion otherwise.

How does one go about calculating for the next 23 years the value of a swap where UBS pays the greater of 3.25% or .65% above the 3 month LIBOR rate up to 8%. The 3 Month LIBOR has historically been all over the place. An average rate over the past 23 years would be close to 5%. There would likely be several years when UBS would have to be dipping into its own pocket to make payments since the fixed coupon of the 6.45% AT & T bond would not cover it.

Now, if the estimate was made in bad faith, the number could be even greater than the outrageous fee paid to Wells Fargo originating from GJN's trust termination event.  Why? The main reason is the that the AT & T bond has a higher coupon than the JPM TP. Another catalyst for an outlandish estimate would involve the potentially over estimating the impact of a .65% spread over 3 month LIBOR compared to GJN's 1% spread over the three month treasury bill. Over long periods of time, that difference might be close to equal. However, if your calculation assumes that the .65% Libor spread would create more of a spread for the swap counterparty over the life of the agreement, than you could even come up with a higher number. There is certainly room for mischief. If there is room for a Wall Street Dickhead to screw you, it would be advisable to assume that you will be screwed. The implied term of good faith and fair dealing is not exactly part of their repertoire, as shown over and over again by events during my lifetime. I quit counting after a million.

On balance, at least where there is a significant unrealized percentage profit, I do not think GYC is worth the trouble given its low coupon and the current price relatively near its $25 par value. The GJN situation is a matter of some concern, though not so much for an early issuer redemption with a make whole payment. The bankruptcy of the issuer is an outlier type of event. The synthetic floaters with long maturities have more potential downside risk, as shown by the GJN event, in the event of an early trust termination/swap termination event where no make whole payment is made by the issuer.   

Friday, July 27, 2012

Bought 100 of the Stock ETF LIT at $13.72/Sold 50 GSPRD at $20.03/ADX/Earnings: Husky Energy, BHLB, BYD, UBCP, CLGX/Harland Clarke

The market reacted positively to a comment by the ECB chief that the bank "will do whatever it takes to preserve the Euro".

The well known banking analyst, Dick Bove, listed a number of his customer service grievances against Wells Fargo in a recent research note. Reuters

If anyone becomes aware of a lawsuit being filed against Wells Fargo/Wachovia (assuming WFC was the swap counterparty), the trustee, and/or J P Morgan in connection with the GJN redemption, please let me know by leaving a comment or sending me an email.

Harland Clarke sold $235 million in aggregate principal amount of 9.75% senior secured notes due 2018 at 96. SEC Filed Press Release The company intends to use the net proceeds to repay a portion of its secured credit facility. I do not see this event as having any impact on the senior unsecured bond owners. I own 3 of the 2015 senior unsecured bonds. I am keeping my overall exposure to junk bonds modest, hovering in the 60 to 70 thousand dollar range. I will not go above the top end of that range due to the risks. Item # 8  Junk Bond Ladder Table (37 different issuers currently in the basket)

This is a link to the Adams Express (ADX) recently released second quarter report. ADAMS EXPRESS COMPANY - FORM N-CSRS - JUNE 30, 2012 As of the date of that report, this CEF had a 4.3% weighting in Apple. The trading activity was far more active than normal (page 13). Net realized gain for the first six months was reported at $.21 per share.

Forest City announced the partial redemption of its 2015 senior note at par value plus accrued interest. The principal redemption amount will be $125 million leaving $53.3 million outstanding.  I only own one of those bonds and plan to do nothing in response to this redemption. FCE raised the redemption proceeds by selling an additional $125 in aggregate principal amount of FCY, a 7.375% exchange traded senior note maturing in 2034. I would just as soon be left alone on my 2015 bond. Bought 1 Forest City Enterprises 7.65% Senior Bond Maturing 6/1/2015 at 100 I bought that bond just to receive the coupon until June 2015.

The VIX fell 9.72% to close at 17.46, as the S & P 500 average rose 1.65% to close at 1360.

Unilever reported yesterday that underlying sales rose 5.8% in the second quarter, compared to a forecast of 4.8%. SEC Filed Press Release Net profit was reported at €2.435 billion. Earnings Call Transcript The "UL" shares rose over $2.08 in trading yesterday:

UL 70 Shares Unrealized Gain of $1,206.5 as of 7/26/12 
Unilever PLC ADS (UL)

United Technologies reported an E.P.S. that beat the consensus estimate by 16 cents but the company lowered guidance for the remainder of 2012. Reuters

According to the WSJ, Ford is planning a F-150 truck with an aluminum body.

1. Husky Energy (own 200 shares HSE:CA: Canadian Dollar (CAD) Strategy): Husky reported second quarter net income of $431 million or 43 cents per share, down from 71 cents in the year ago quarter. SEC Filed Press Release 

This report is discussed in an article published by Reuters.

The Board also announced a regular quarterly dividend of 30 Canadian cents per share. Husky Energy Announces 2012 Second Quarter Dividend This results in close to a 5% dividend yield at the current price. I also believe that Husky has long term potential, though the short term outlook is not rosy. I am close to break-even on my current position of 200 shares and have had some realized gains from trading.

Stock Quote Toronto Listed Shares: Husky Energy (TOR: HSE)
Stock Quote U.S. Listed Ordinary Shares: HUSKF Husky Energy

I have a smaller position in Suncor.

Husky Energy (TOR: HSE) shares rose 32 cents in trading yesterday to close at $25.

2. Boyd (own 1 senior 2018 bond and common as part of the Lottery Ticket Basket Strategy): If my exposure to a company is limited to a lottery ticket, I will glance at an earnings release. When I also own a bond, I will read the entire release and an analyst report discussing the release. Most of the time that report will be from a Morningstar analyst, but could include reports issued by other firms. 

Boyd Gaming missed the consensus estimate by 6 cents. BYD reported adjusted earnings of 4 cents per share on a 7.1% rise in revenues to $615.2, which was below the consensus forecast of $628.7M. BYD's wholly owned businesses reported a 12.4% increase in revenues to $438.7M. Borgata, a 50/50 joint venture, reported a decline in revenues. That casino is located in NJ.

The LT in Boyd's common is probably a lost cause for at least a couple of years.  

3. BHLB (ownRegional Bank Basket Strategy)Berkshire Hills reported second quarter net income core E.P.S. of 47 cents (GAAP at .37 including charges).  The consensus estimate was for 47 cents.

As of 6/30/12, the net interest margin was 3.7%; the efficiency ratio was 59.29%; tangible equity to tangible assists was 8.04% NPAs were .6% of total assets; the coverage ratio was 126%; and the core return on assets was .94%.

Berkshire Hills was a recent addition to this basket: Bought 50 BHLB AT $21.66

Berkshire Hills Bancorp fell 9 cents in trading yesterday to close at $21.61 after hitting an intra-day high at $22.04.

4. CoreLogic (own 2 senior bonds: 2028): CoreLogic reported net income from continuing operation of $41.1 million or 39 cents per share. Revenues increased 18.6% to  $389.4 million.

The consensus estimate was for 37 cents per share.

The bonds are hard to purchase, as previously noted. If an investor is able to purchase them at or near their last traded price (80), and is comfortable with a lack of liquidity, the purchase of the bond will provide a significantly better current yield and YTM than the purchase of a TC containing the bond. (see discussion in introductory section at  CoreLogic) The TC in question is Merrill Lynch Depositor Inc. PreferredPLUS 7.55% Trust Cert. Series FAR-1 for First American Corp (PJS).

Stock Quote: CoreLogic (CLGX)

5. UBCP (own: Regional Bank Basket Strategy): United Bancorp, a very small bank operating in Ohio, reported diluted earnings per share of 15 cents per share, unchanged from a year ago. The net income was lower in the last $20,836 lower at $731,455. The cash dividend continues to hover close to a 100% payout ratio. As of 6/30/12, the net interest margin was 3.94%; the non-accruing loans to total loan ratio was 1.4%; the coverage ratio was 67.84%; and the average return on assets for the quarter was .7%.

I  pared my position by selling 50 shares last April. Sold 50 UBCP at $10.05 The remaining shares are a marginal hold due the nice dividend yield which is largely offset by the payout ratio and lack of earnings growth.

United Bancorp closed at $9.07 yesterday on 700 shares of volume.

6. Sold 50 GSPRD at $20.03 last Wednesday (see Disclaimer): This security was held in a satellite brokerage account where preservation of capital is the primary objective and generation of income higher than a savings account rate is the secondary objective.

I bought these shares earlier this months and will receive one quarterly dividend payment. Bought Back GSPRD at $18.9

2012 GSPRD 50 Shares $42.47/2012 100 Shares Two 50 Lots=$121.95
Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Stock Quote: Goldman Sachs Group Inc. Dep. Shs Pfd. Series D (GS.PD)

7. Bought 100 LIT at $13.7199 Yesterday (see Disclaimer): I had a consider to buy (note to myself) at less than $14.

Global X Lithium ETF (LIT) includes the major lithium miners, as well as battery makers (e.g. ExideSAFT GroupeA123) and at least one rare earth company (AVL: 1.43 -0.01). It is consequently not a pure play on lithium but you will could not have an ETF with just four stocks in it.

The big four lithium companies are Rockwood Holdings (ROC)Sociedad Quimica y Minera De Chile S.A. ADS (SQM)FMC and the Canadian company Talison Lithium (TOR: TLH). Those four companies control about 95% of the lithium market.  I have profitably traded SQM in the past, but currently have no position in any of those four companies. These companies have about a 53% weighting in this ETF. FMC has the largest weighting at 21%. Both FMC and Rockwood are diversified chemical and materials companies. I would not mind owning FMC, SQM or ROC individually. Since they are heavily weighted in this ETF, I am willing to accept the more speculative companies that take up the rest of the space, and possibly one or more of them will surprise me to the upside. Some have share prices less than a $1.

The fund also also smaller lithium miners. I just looked briefly at the website of two of those firms: Galaxy Resources Limited (GXY.AX at .385 per share) and Orocobre (commercial production expected  in early 2014, ORE.AX: 1.64); and only the stock information and data about another one called Canada Lithium (CLQ.TO: 0.55 +0.01).

If Rio Tinto actually starts to develop its lithium mine in Serbia, advancing beyond the feasibility study stage, then I suspect that its stock will be added to the list. Rio Tinto Minerals - Our projects


The battery companies have been a drag on performance over the past several months. Exide stock was over $10 in early 2010 and is having trouble staying over $3 now.  XIDE Interactive Chart {I do own 2 Exide senior secured bonds and have recently sold its common bought as an LT} A123 Systems has done worse and has no realistic prospect of profits anytime soon. AONE Analyst Estimates Fortunately, the weighting is just 3.69%. That stock closed today at $.63, so most of the conceivable damage is already in the LIT price. Another battery company is GS Yuasa, based in Japan. GS Yuasa Corp (6674.T) Quote, which also has a dismal looking chart. GS Yuasa Chart A lot of the negativity has to be in these companies respective stock prices already, the one and possibly only positive way to look at the foregoing. 

Since I was not familiar with the Saft Groupe, a battery company headquartered in France with a 4.7% weighting in LIT, I visited their web page and examined their recently released quarterly report. (SAFT Stock Quote; website: Saftbatteries.com; quarterly report: saftbatteries.com/SAFT.pdf-net income for six months up 26.6% to €20m or €.79 per share; Saft Groupe SA (S1A.PA) Chart)

Hopefully, some of these battery companies may actually have some positive contributions over the next year or two. 


I set my LIT entry price after reading a positive Barrons' article about Lithium stocks a few weeks ago. The author mentioned this ETF and noted a $14.79 closing price before the publication date. While the battery use of lithium is soaring, the author notes that a majority of lithium production is used in industrial applications which will also influence price.

Sponsor's website: Global X Funds

The expense ratios is very high for an ETF at .75%.

This ETF was launched in the Spring of 2010 and traded above $22 during 2011.  Global X Lithium ETF Chart

Stock Quote: Global X Lithium ETF (LIT)(closing price 7/26/12=$13.69).

This is a snapshot of the ETF's holdings as of 7/25/12:


Thursday, July 26, 2012

Bought TEX at $14.43-LT Category/Reddy Ice/Earnings: LSI, HMA, FFBC, CBU, MBVT, FMER, STL/Redemption Proceeds Received BAC Trust Preferred Securities

The U.K.'s second quarter GDP declined .7% compared to the first quarter. This is a preliminary estimate. Gross Domestic Product: Preliminary Estimate, Q2 2012  WSJ.com That decline, consistent with recessionary conditions, was higher than the .2% estimate.

New home sales in the U.S. declined by 8.4% in June to an annual rate of just 350,000. The median price of new homes fell 1.9% to $232,600. Commerc Department.pdf

Investors seem heartened by the steady flood of negative news, believing that such a steady drumbeat will spur the Federal Reserve into another round of quantitative easing. The WSJ published a story that claimed the Fed was "closer" to taking further steps. The stock market has reacted positively to the initiation of the first two rounds of quantitative easing.

While QE3 could spur a market rally in stocks, bonds, gold, other commodities, it could easily make the basic problems worse. A key negative factor involves the impact of lower interest rates on spending by the Saving Class, who have lost any meaningful income generation from their savings parked in bank CDs, treasury bills, and money market funds. As a result, those folks, many of whom are retired, have cut back on their spending. I would just highlight that the U.S. economy is already sluggish with the average 30 year mortgage rate now at 3.53%. Primary Mortgage Market Survey (PMMS) - Freddie Mac The ten year treasury note is currently hovering near 1.4%Chart, and the five year note is around .55%Chart.

The extended period of abnormally low rates will have a long term beneficial impact on debtors. Corporations have refinanced long term debt at much lower rates, and those savings will flow to their bottom lines for years to come. The same is true for individuals that have been able to refinance mortgages. I would submit that most of that long term benefit to debtors has already been captured, while the abnormally low rates will continue to cause a GDP drag through lower spending by the large Saving Class. The Real Cost of The Federal Reserve's Jihad against the Saver Class In addition, the abnormally low rates have had and will continue to have major adverse impacts on pension plans and their funding.

As a result of the Reddy Ice (RI) bankruptcy, I received 43 shares of newly issued common stock in exchange for 1 second lien bond. RI has emerged from bankruptcy.  Item # 3 Reddy Ice Emerges from Bankruptcy I noticed earlier this week that my broker had place a symbol, RDDC, next to those shares rather than a number. I have individual bookmarks for SEC filings, grouped into folders by topic. This allows me to access quickly SEC filings for each company. I clicked the link for RI and did not see an IPO Prospectus. I did not expect to see one. I then surmised that the common shares had been picked up for trading in the Grey Market, which was the case. RDDC Reddy Ice Holdings

A SmartMoney columnist, Jack Hough, wrote an article recommending REITs, which was published in the WSJ last October. He updated that column in a recent article, WSJ, arguing that REIT investors need to be more cautious now. Since his 10/11 article, the MSCI U.S. REIT index has increased by 30%, excluding dividends, compared to S & P's 22% gain. He points to a higher yielding REIT, KBW Premium Yield Equity REIT Portfolio (KBWY), an offering from Powershares that currently has over a 5% dividend yield. He also mentions a much broader REIT ETF that is currently yielding close to 3.3%. Vanguard - REIT ETF - Overview I do not currently own a REIT ETF. I would prefer buying one before the index rises 30%.

Of the individual issues mentioned by him, I have bought and sold Duke Realty (DRE), and I may reestablish that position in an IRA at some point after selling out at $15.3 (May 2011). I will buy individual REITS and currently own small positions in CWH, GOV, BDN, MPW, SIR and a new REIT added yesterday in the Roth IRA which I hope to discuss in next Monday's post.

Health Management (own as LT) reported second quarter GAAP net income of 14 cents per share, adjusted to 21 cents excluding items, one cent better than the consensus estimate.

I was surprised to see the Lottery Ticket Frozen Food Express Industries report a profit for the second quarter. The common rose over 25% yesterday, almost bringing me back to even. Bought 100 FFEX at $1.4-Lottery Ticket

The Lottery Ticket LSI reported non-GAAP E.P.S. of 21 cents per share and predicted third quarter non-GAAP in the range of $.14 to $.2. Revenues were $659+M. The consensus estimates were for 17 cents in the second quarter and 18 cents in the current quarter. LSI Analyst Estimates The company ended the second quarter with $601.1M in cash and cash equivalents.

Zions Bancorporation (own preferred stock) reported adjusted net income of 40 cents per share, six cents better than the consensus estimate.

1. FFBC (own: Regional Bank Basket Strategy): First Financial Bancorp reported second quarter net income of $17.8 million or 30 cents per share, up from 27 cents per share in the 2011 second quarter. As noted in the press release, this bank has been paying its net income per share in dividends. The next dividend payment will be 30 cents per share ($.15 fixed and $.15 variable). I am reinvesting the dividend. 

The consensus estimate was for 30 cents.

The capital ratios are good:


Return on average assets for the quarter was 1.13%. Net interest margin was good, comparatively speaking, at 4.49%. The coverage ratio for NPLs was 59.82% (prefer over 100%) and NPLs to total loans were high for stocks in this basket at 2.76%.

2. CBU (own: Regional Bank Basket Strategy): Community Bank System reported second quarter net income of $21.1 million or 53 cents per share, up from 49 cents a share in the 2011 second quarter.

The consensus estimate was for 50 cents.

As of 6/30/12, the net interest margin was 3.96%; the efficiency ratio was at 56.1%; the tangible equity to tangible assets ratio was 8.09%; the Tier 1 leverage ratio was 8.98%; NPAs to total assets were excellent at .4%; the coverage ratio was 161%; and the return on average assets for the quarter was 1.2%. I liked this report considering the challenges faced by banks in the current low interest rate environment and increased federal regulations.

Bought 50 CBU @ 23.18. I sold my highest cost shares at $26.82 (December 2011)

Community Bank System rose 32 cents in trading yesterday to close at $26.86.

3. MBVT (own: Regional Bank Basket Strategy): Merchants Bancshares reported second quarter net income of $3.74 million or 60 cents per share, up from 58 cents in the year ago quarter.
The estimate, made by one analyst, was for 57 cents per share

I wanted to highlight one aspect of this report, the extremely low non-performing loans and non-performing assets ratios:


As of 6/30/12, the net interest margin was 3.27%; the efficiency ratio was at 61.02%; the total risk-based capital ratio was 15.85%; the tangible capital ratio was 7.12%; and the return on average assets during the quarter was at .91% (prefer over 1%)

The Board declared the regular 28 cent per share quarterly dividend, with a 7/31/12 ex dividend date.

Merchants Bancshares closed at $27.14. I have bought and sold MBVT and have recently repurchased a 50 share lot. Bought 50 MBVT at $22.9-SOLD 50 MBVT at $26.5Bought 50 MBVT at $26.25

4. FMER (own: Regional Bank Basket Strategy): FirstMerit reported second quarter net income of $30.6 million or 28 cents per share, up from 27 cents in the 2011 second quarter. 

The consensus estimate was for 28 cents.

As of 6/30/2012, the net interest margin was 3.77%; the efficiency ratio was at 67.21%; tangible equity to tangible assets was 8.01%; NPAs to total assets were .76%; the coverage ratio for non-covered NPLs was at 222.24%; and the return on average assets for the quarter was .84%

I recently pared my position in FMER by selling my highest cost shares. Sold 50 FMER at $17.3 I currently own 80 shares bought in the open market, plus reinvested dividends. Added 50 FMER at 16.18Bought 30 FMER at 11.35

FirstMerit closed yesterday at $16.17, unchanged for the day. The dividend yield at that price is slightly under 4% according to Marketwatch.

5. STL (own: Regional Bank Basket Strategy & own 200 of the TP STLPRA)Sterling Bancorp reported second quarter net income of $4.9 million or 16 cents per share, up from 8 cents in the year ago quarter. 

The consensus estimate was for 15 cents per share.

The capital ratios were good:


As of 6/30/12, the net interest margin was 4.04%; and NPAs to total assets were excellent at .28%, the coverage ratio was 377%.

Currently, my only significant concern about STLPRA is the possibility that Sterling will elect to redeem it. Par value is $10.

I have bought and sold STL Bought 50 STL at 6.58-Sold STL at 10.5 I repurchased a small lot recently. BOUGHT 88 STL AT $8.98

I have bought and sold the TP on many occasions and currently own 200 shares in the ROTH IRA.

STL Quote: Sterling Bancorp
STLPRA Quote: Sterling Bancorp Trust I 8.375% Cum. Trust Pfd. Secs., STL.PA (CALLABLE NOW AT $10 PLUS ACCRUED INTEREST)

6. Redemption Proceeds Received Yesterday for Three BAC Trust Preferred Securities: Three separate Bank of America Trust Preferred securities were redeemed from my accounts yesterday. Two were 50 share lots in the $25 par value exchange traded TPs KRBPRD and KRBPRE.  The KRBPRD shares were purchased in October 2010. I also lost one $1,000 par value TP that was purchased last October. All of the foregoing were originally issued by MBNA Capital and became BAC obligations it acquired MBNA. I made a small profit on the $1,000 par value bond, and was close to broke-even on the exchange traded bonds. The problem with these redemption is the lack of income alternatives for reinvestment. All of the foregoing securities were yielding over 8% at my cost.

This is a snapshot taken from my main taxable account showing 2 of the 3 redemptions:



As shown in this snapshot, the MBNA Capital Series A $1000 par value TP was redeemed at a slight premium (102.07) to its par value (100) in accordance with the prospectus. Bought 1 MBNA Capital Series A 8.278% TP at 94.5 Maturing 12/1/2026

I will add the snapshot showing the redemption of KRBPRE out of the ROTH IRA later today. Vanguard is a day behind Fidelity in making those kind of entries.

7. Bought Back Terex at $14.425 Yesterday (Lottery Ticket Basket Strategy)(see Disclaimer): I knew that Terex was going to report earnings after the close yesterday. The consensus estimate was for $.49 on $2.05 billion in revenues. Before the release of this report, the consensus estimate for 2012 was at $1.76 and $2.71 in 2013. The stock seemed cheap to me at about 5.32 times estimated 2013 earnings. Another reason for buying it was the positive report issued earlier this week by Caterpillar. The shares continued to slide after my purchase yesterday and closed at $14.11.

I was able to spend more than $300 due to prior realized gains on this stock, consisting of two 30 share trades:

2011 TEX 30 Shares +$116.38
2012 TEX 30 Shares +$176.98
Total Realized Gains TEX Shares: $293.36 What do you expect with 30 share flips? It looks good to the OG who never frets about such purchases. 

The prior gains allow me to buy up to $593.36 of Terex stock. It would be a understatement to say that our LB is a stickler about its rules. I sold the LT Dole to make room for Terex. Another rule now applicable to LT buys is the total amount invested can not exceed the total realized gains for this strategy.

Most of those rules deal with risk management. One way to control risk is by the amount of the investment. Another way, among many, is to avoid buying an entire position all at once when the market is in an Unstable Vix Pattern, as now.

Confirmation of Terex buy showing the amount was within the LT limit:


I also own 1 Terex 2017 senior subordinated bond. Bought: 1 Terex 8% Senior Subordinated Bond Maturing on 11/15/2017 at 96.947 (August 2011). I discuss Terex in that post and in the posts discussing my prior 30 share purchases:

Bought 30 TEX at $13.59-Sold 30 TEX at $18
Bought 30 of TEX at $12.68-LT-Sold LT TEX at $19.11

Profile | Reuters.com

Terex announced after the close yesterday better than expected results.  Income from continuing operations was reported at $83.6 million or $.75 per share on net sales of $2,011.5 billion. The company ended the quarter with $841.5 million in cash and cash equivalents. The company raised guidance for 2012 to $1.95 to $2.05.

Before the Near Depression, Terex common shares hit $90 in 2007: TEX Interactive Chart