Saturday, August 3, 2013

Intel/China/Sold 505+ RVT at $15.89/Bought 50 HBAPRF at $20.95 and 50 HBAPRG at $23.61/Roth IRA: Sold 105+ SDIV at $22.54, Bought 50 EMQ at $24.83, Bought 5 Vanguard Stock ETF MGC at $57.79/Sold 151+ WBCO at $15/Sold 300 SNMX at $3.06

Big Picture Synopsis:


Stable Vix Pattern (Bullish)
Friday's Close (8/2/13): VIX: 11.98 -0.96 (-7.42%) 
Short Term: Praying for a 10+% Correction
Intermediate and Long Term: Bullish

The stock market is starting to make the OG nervous. To relieve that anxiety somewhat, I continue to be a net seller of stocks. In my opinion, the weight of the evidence is that the market is now in a long term secular bull market. Even in those long term bullish cycles, which historically have produced greater than 14+% annualized returns in the S & P 500, with dividends reinvested and adjusted for inflation, those periods can experience a serious bear cycle (e.g. crash in October 1987) and an extended period of consolidation and digestion (October 1987 to 1992).

Most cycle researchers will start the previous two long term secular bull markets in 1949 and August 1982. A recent article written by Doug Short contains a long term chart going back to 1871 breaking down the long term bull and bear markets and providing his total inflation adjusted returns. Seeking Alpha Please note that Short's use of inflation adjusted S & P 500 prices still has the current market classified as a long term secular bear. The current number is "17% below the 2000 high" on an inflation adjusted basis.

Michael Santoli  wrote last week about one of the "most accurate" market forecasting tools known as the "Value Line Median Appreciation Potential", based on that services calculations of estimated 3 to 5 year price appreciations for 1700 stocks. The median number is currently 7%. Whenever the number has fallen that low, which would be in the bottom 10% of all readings since 1970, the market has been down or flat over the next five years.

Kopin Ray points out in his column this week that the economy has grown by $1.3 trillion since the market hit its lows, but the market has increased by $12 trillion.


Short to Long Term: Slightly Bearish (Based on Interest Rate Normalization)

The better than expected GDP report released last Wednesday caused the 10 year to bust out of its 2.5% to 2.6%% range, rising to 2.8% intra-day but then declined after the FED slightly downgraded its assessment of the economy. FRB: Press Release--Federal Reserve issues FOMC statement--July 31, 2013

The market soon forgot about the Fed's statement on Thursday after ISM's PMI index for manufacturing rose more than expected in July and the official manufacturing PMI for China rose into expansion territory. The 10 year treasury yield popped to 2.74% last Thursday.

Please note that the flash HSBC manufacturing PMI for China was 47.7, so who do you believe?

With an improvement in the unemployment rate from 7.6% to 7.4% in July, and a decent increase in private sector jobs during August, I anticipate that the FED will start to taper in September. The jobs report, discussed below, was sufficiently disappointing that bonds were able to recover their losses from Thursday.

Historical Chart for the Civilian Unemployment Rate

The 4 week moving average for initial unemployment claims has returned to the range prevalent during past periods of expansion. 4-Week Moving Average of Initial Claims

For the past few weeks, I have been buying up to $1,000 of a bond CEF. I elected to refrain from any purchases last week, and will most likely make a purchase this coming week.



As I have said several times, I am more worried about China than Europe. It is clear to me that a significant amount of GDP growth was due to the construction of ghost cities and unnecessary infrastructure projects.  Growth based in part on that kind of spending is not sustainable and is in large part an illusion. I also doubt that even the Premiere could give you an accurate number of real GDP within a reasonable range. All of those type of numbers, even when compiled in good faith and with a massive expenditure of resources, are not susceptible to certainty but can only provide a point within a reasonable range.

I have previously referenced the 60 minute program about the ghost cities. China's real estate bubble - 60 Minutes; Transcript at CBS News.

I also read in the past couple of weeks that following that highlight some of the problems facing China now:

"China’s Locomotive . . ." (Morningstar)

This is a link to a negative Credit Suisse report on China that has a number of charts:

This is a link to historical GDP numbers: China GDP Annual Growth Rate

See, also: "I.M.F. Tells China of Urgent Need for Economic Change" - NYT

My sense is that China is in the midst of a multi-year transition to a more market driven and consumer based economy. Multinational firms whose earnings have been closely tied to China's construction have probably seen their best years. The future is more likely to belong to those firms who are or become successful at selling products and services to the Chinese consumer. Ford might enjoy rapidly increasing vehicle sales over the next few years, while Vale and BHP will struggle with iron ore shipments.

During the first six months, Ford's vehicle sales in China increased 47% to 407,721 vehicles. Sales in other Asian countries were robust. Earnings 8-K

Westerners harp on the obvious misallocation of resources that have occurred over the past few years in China. Apparently, we have already forgotten about our own housing bubble.

China's official manufacturing PMI for July was reported at 50.3. WSJCNBC; Reuters

China's official services PMI for July was reported last night at 54.1, up from 53.9 in June. Bloomberg;

Recent Economic Reports:

The Labor Department reported that nonfarm payrolls rose 162,000 in July, slightly below the consensus forecast. Private payrolls increased 161,000. The federal government shed 2,000 jobs.

The unemployment rate decreased to 7.4% from 7.6%. The unemployment rate is compiled from the household report that showed a higher increase in jobs than the payrolls report. A smaller contribution to the unemployment rate decline was a slight decrease in the participation rate. (see graph at MarketWatch)

Hourly earnings decreased .1% with an average workweek at 34.4.Employment Situation Summary Jobs gains in May and June were revised down by 26,000. The U-6 number decreased to 14 % from 14.3%. Table A-15. Alternative measures of labor underutilization

The U-6 number is still abnormally high by historical standards: Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons (U6RATE)

As noted in a NYT article, it would take about seven years to close the "jobs-gap" created by the Near Depression at the average rate of growth this year. The jobs gap refers to both returning to pre-recession employment levels and absorbing new entrants into the labor force each month. Jobs Gap  »  The Hamilton Project Another estimate, recently released by the Chicago Fed, estimates that it would take five years to close the jobs gap at an average +165,000 jobs per month (page 4, .pdf)

I would characterize the latest jobs report as less than fair.

The Calculated Risk blog has a number of helpful charts on this last jobs report.

Personal Consumption Expenditures (PCE) increased by .5% in June. News Release: Personal Income and Outlays Personal income increased by $45.4B or .3% and disposable income increased by $33.6B or .3%. The personal savings rate was 4.4% in June, down from 4.6% in May. The price index for PCE increased by .4% in June, up from .1% in May. The core PCE price index increased .2% compared to May's .1% increase.

Long Term Chart of the Personal Saving Rate

Long Term Chart of Real personal consumption expenditures

The Case Shiller home price index rose 12.2% in May, the largest Y-O-Y increase since March 2006. Shiller Price May Index Several metropolitan areas experienced greater than 3% increases in May compared to April: Atlanta (3.4%); Chicago (3.7%); San Diego (3.1%); San Francisco (4.3%); and Seattle 3.1%.

The government reported that real GDP increased at an annual rate of 1.7% in the second quarter. This is the first estimate. News Release: Gross Domestic Product The price index for gross domestic purchase increased .3% in the second quarter. Real personal consumption expenditures rose 1.8%, down from +2.3% in the first quarter. Real gross domestic purchases of good and services increased 2.4%, compared to a 1.4% rise in the prior quarter. Real nonresidential fixed investment increased by 4.6% vs. a 4.6% decrease in the first quarter. Corporate spending on equipment rose a 4.1% annualized pace. Residential construction increased at 13.4% annualized rate, adding .4% to GDP. Real disposable income increased 3.4% and current dollar personal income increased $140.1 billion or 4.1%. Exports rose 5.4%, the largest gain since the third quarter of 2011.

The government also released comprehensive revisions to GDP from 1929 through the 2013 first quarter. One revision was a new category for intangible assets like research and development.  The revision for 2012 increased GDP growth to 2.8% from 2.2%. The revision also took down the 2013 first quarter to 1.1% from the previous 1.8% number. The revisions has produced a higher savings rate.

ADP National Employment report for July showed that private employers added 200,000 jobs in July, better than the consensus forecast of 180,000. Other private services estimate far slower July jobs growth: TrimTabs says just 23,000

The ISM manufacturing report for July was much better than the consensus estimate. The manufacturing PMI was reported at 55.4, up from 50.9 in June. The consensus was 52. The new orders component jumped to 58.3 from 51.9. Employment rose to 54.4 from 48.7. Any number above 50 indicates expansion.


More individual investors gave up on Intel after the company failed to raise the dividend at the normal time, which was for the third quarter payment. Intel Corporation (INTC) Dividend History - Nasdaq.comIntel Corporation - Dividend Summary Intel maintained its quarterly rate at $.225 per share.

While I view myself as a dividend growth investor, I am not going to sell a stock just because the company failed to raise the dividend. My criteria are set out in an old post: Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds (March 2010). Intel has doubled the dividend since the $.10 quarterly payments in 2006. There has been in the past periods where Intel did not raise its dividend. The quarterly rate was maintained at $.02 per share from the 2000 third quarter to the 2004 first quarter when it was raised to $.04. Intel maintained its quarterly rate at $.14 for seven quarters starting in March 2008 before raising it to $.21 in the 2012 first quarter.  In both of those earlier periods, the economy had sunk into a recession.

Overall, the rate of dividend growth has been good, and there have been no dividend cuts since Intel started paying one.

The Free Cash Flow and Free Cash Flow Yield numbers are still good. I came up with a slightly higher number than in a Seeking Alpha comment by using Intel's cash and securities number found at page 11: 10-Q 6.29.2013. I am using the long term debt number from page 4, the market cap number from Yahoo Finance as of 8/2/13, and the FCF numbers from YCharts:

According to YCharts, Intel produced $9.946B in free cash flow over the past four quarters ending this past June.

Intel Free Cash Flow (INTC)

The free cash flow yield at Friday's closing price of $23.22 is 9.8%.

According to an article at TheStreet, a free cash flow yield of 8% to 10% is a "stunning bargain". Free Cash Flow Yields

FCF Yield: Free Cash Flow Dividend by Market Value Plus Debt Minus Cash

Market Cap: $115.59B
+ Long and Short Term Debt of $13.413B = $129.003B
-Cash & Investments ($27.52B)
Enterprise Value= $101.483B

Divided FCF of 9.946B by $101.483B= 9.8% FCF Yield

Still, given the time period when I made my foray into the stock, the total return has not been good

Intel Average Cost Per Share= $17.91
I have started to reinvest the dividend again after suspending that option starting in September 2011. Based on the current dividend rate, my current yield at my constant cost number is 5%.

A recent bullish article about Intel's new products can be found at Seeking Alpha.

A recent negative article was published by Motley Fool where the author, who appears to be very young, asserted that Intel's server and consumer business "is dead".

The current consensus E.P.S estimate is $1.87 for 2013 and $1.98 for 2014: INTC Analyst Estimates


1. Sold 505+ RVT at $15.89 (see Disclaimer): I was not pleased with Royce's decision to fund a new CEF out of RVT's assets as noted previously. Stocks, Bonds & Politics: Introduction I voted against that proposal, but I suspect that it will pass by a comfortable margin with large numbers of individual shareholders failing to vote. I decided to go ahead and liquidate my position as an expression of my displeasure. 

Snapshot of Trade: 

2013 Sold 505+ Shares RVT at $15.89
Snapshot of Profit:

2013 RVT 505+ Shares +$436.03 ($332.3 ST; $110.73 LT)
While I do not recall whether I took any dividends in cash, the total for the reinvested dividends shown in the preceding snapshot is $1,343. For the most past, the shares purchased with the dividends were sold at a profit, adding to the overall return as well as the value of those dividends. Shares purchased with quarterly dividends from just two quarters (12/23/2008 and 3/23/2009) produced more profit at $241.98 than the total amount of the dividend paid for those two quarters. That profit number ended up being more than than one-half of the total share profit and highlights the benefits from reinvesting the dividends to acquire shares during the worst of times. 

RVT has not paid any recent dividends supported by a return of capital (ROC). Royce Value Trust (RVT) There was a period in 2009-2010 when the fund suspended its managed distribution policy after the Near Depression period wiped out its unrealized capital gains. Realizing capital gains was and is the only way to avoid ROC support for the managed distributions. 

As shown above, most of my capital gains originate from open market purchases made in 2009-2013 with some contributions made by shares bought with the reinvested dividends. I was hurt by two 100 shares purchases made in 2007 that resulted in a combined loss of $715.99. Notwithstanding that drag, I did manage to pull out a $110.73 long term capital gain. Most of the share gain, however, was short term. 

I mentioned in a 2008 post that I bought some shares in a few closed end funds in 2007 after selling stock ETFs and mutual funds. The reasoning was that the higher dividend stream would provide some protection in a bear market, buying more shares at lower prices, and I always make a small bet against my most likely scenario which was a bear market on the horizon in 2007. That approach would have been okay, but only far a relatively shallow bear market rather than the one which actually happened in 2008-March 2009. Stocks, Bonds & Politics: Buy High & Sell Low /Retrospective on the Good & Bad (10/18/2008 Post)

The 2007 purchases were made before I started writing this blog in October 2008. The later purchases were discussed in these posts: Added to RVT at $9.69 (August 2009); Item # 2 Added 50 RVT at $12.37 (June 2012)  Item # 3 Added 100 RVT at $13.03 (October 2012)

Rational: For now, I have decided to go with a mutual fund in the small cap value space. I sold RVT and bought Brown Advisory Small-Cap Fundamental Value Fund (BIAUX), which was discussed in last week's post. Item # 7 Initiated Position in BIAUX

Given the robust move in the stock market, and the need for a 10% to 20% correction, I hope to scale into BIAUX at lower prices. The net result of this pared trade so far is a increase in my cash allocation.

As noted in a WSJ article published after I sold RVT, the Russell 2000 index has gone up far more than the S & P 500 this year and over the past year. That index was trading at 18.3 times the next 12 months estimated earnings. In my book, that P/E would be outside my reasonable valuation range for an economy growing well above 2% with no reasonably foreseeable recession on the horizon. 

Future Buys: In the event the shareholders approve the spinoff and the price declines at least 20% adjusted for that spin-off, I will consider re-initiating my position in stages.

Closing Price Last Friday: RVT: $16.04 +0.04 (+0.25%) 

2. Sold 105 Shares of SDIV at $22.54-Roth IRA (See Disclaimer): The Global X SuperDividend ETF Fund (SDIV) is a world stock ETF that focuses on high yielding common stocks. 

Snapshot of Trade:

2013 Roth IRA Sold SDIV 105+ Shares

Snapshot of Profit:

2013 Roth IRA Sold 105+ SDIV +$93.2
The 5+ shares were bought with the monthly dividends that totaled $130.4 and some of those repurchased share were sold at a loss. The total dollar return was $223.6 or 9.8%.

Item # 1 Added 50 of the ETF SDIV at $20.43-Roth IRA (June 2012); Item # 1 Bought 50 SDIV at $22.33 (February 2012)

Rationale: In the Roth, my main objectives are capital preservation and income generation. I decided to harvest my profit in these shares, taking into account those objectives in relation to my current near term outlook for stocks. In case you have not noticed, the S & P 500 is up around 40%+ since September 2011. The risk to the downside outweighs the potential near term upside considering those investment objectives. 

After reading a SA article about SDIV, I agreed with many of the cautionary comments. Seeking Alpha The overall quality of the companies selected for inclusion in this high yielding dividend fund is not that good and a significant number would more likely reduce their dividend than to raise it. Still the overall attractiveness of the dividend is still present.

Dividends are paid monthly: Distributions

Sponsor's website: Global X SuperDividend ETF - SDIV (expense ratio .58%)

Future Buys: I am targeting a potential re-entry at less than $20.

Closing Price Last Friday: SDIV: $22.53 +0.16 (+0.72%)

3. Bought 5 of the Vanguard ETF MGC at $57.79 Roth IRA (New Teaching Strategy for the Young Investor(see Disclaimer):

Snapshot of Trade: 

2013 Roth IRA Bought 5 MGC at $57.79
This stock ETF can be bought in my Vanguard brokerage account without a commission:

Consequently, I can buy just 5 shares without having my average cost per share impacted by a commission. This kind of arrangement will allow investors, who currently have limited financial resources to invest, to build up a ETF position in a cost effective manner.   

Security Description: The Vanguard Mega Cap ETF Fund is a low cost ETF that will own stock in the largest U.S. companies.

Sponsor's website: Vanguard

The expense ratio is .12%.

List of Portfolio Holdings: Vanguard - All fund holdings

It would not be difficult to predict the kind of stocks owned by this fund:

Prior Trades: None

Rationale and Risks: At the moment, I view the valuations of Mega Cap U.S. multinationals to be more reasonable than other U.S. capitalizations.

Most of these companies are multinationals and have the ability to prosper from long term growth trends in emerging markets.

Even if sales stagnant for KO in the U.S. or Europe, for example, the company can still grow in Asia, South America and Africa. 

The holdings of this ETF would include some of the most financially sound companies in the world. Their balance sheets give them the ability to survive and to prosper long term. Mistakes will be made by them from time to time, and opportunities lost, but these large companies have the ability to bounce back.

Generally, it would take a series of serious mistakes over a long period (e.g. Kodak) to relegate one of these companies to the dustbin of history. And, at some point during that process of decline, the stock could be jettisoned from this Mega Cap ETF and replaced with a new up and coming company.

The financial position, including the cash and capability to raise additional funds through low cost borrowing, provide these companies with a long term advantage. They must still adapt and change; no company can afford to stand still and allow other firms to supplant them with new products or services.

On the flip side, there is the law of large numbers. These companies simply can no longer grow fast. Single digit or low double digit earnings growth would be more normal than five years straight of 20% growth.

There is the usual risk associated with stocks. If the S & P 500 goes down 20%, this ETF will decline in value, possibly by a lower amount, but it will go down in price during a stock market selloff.

Closing Price Last Friday: MGC: $58.37 +0.05 (+0.09%)

4. Sold 151+ WBCO at $15 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2013 WBCO 151+ Shares +$217.23
Item # 5 Added 50 WBCO at $13.3 (5/6/13 Post); Item # 4 Bought 100 WBCO at $13.46 (11/2/2102 Post)

Recent Earnings Report: WBCO reported much lower than expected second quarter earnings due to a "reforecast of expected cash flows of covered loans prompted additional provisions for those loans". Those loans are "covered" in a loss sharing agreement with the FDIC. As a consequence, WBCO reported net earnings for the quarter of $19 cents per share, down from $.30 in the previous quarter, but up slightly from the $.18 per share in the year earlier quarter. SEC Filed Press Release The earnings would not have been satisfactory in my opinion even by adding back the 7 cent hit from that "reforecast".

Rationale: With banks, I do not like surprises. Since the dividend payout is linked to net income per share, the will lower than expected E.P.S. for the 2013 quarter will result in a dividend cut. The bank pays a regular dividend of 7 cents plus a variable rate that results in a total dividend which will equal close to 50% of net income. The $.19 in net income resulted in the bank declaring a variable dividend of only 2 cents for the next quarterly payment or a $.09 total dividend. Whidbey Island Bank Dividend History

Future Buy: I will consider buying back at less than $13.3, provided I see no more problems such as the one disclosed in the last earnings report.

Closing Price Last Friday: WBCO: $14.20 -0.33 (-2.27%)

5. Bought 50 EMQ at $24.83-Roth IRA (See Disclaimer): This purchase represents the second recent investment that plays an alternative scenario to my current forecast of rising interest rates. That alternative scenario, viewed as far less likely, is that long term rates will remain about the same as now, or will drift lower.

Snapshot of Trade:
2013 Roth IRA Bought 50 EMQ at $24.83
Security Description: The Entergy Mississippi Inc. 6.00% Series First Mortgage Bonds 2032  (EMQ) is a first lien bond issued by Entergy Mississippi, a wholly owned subsidiary of Entergy Corp.  (ETR).

Entergy Mississippi (EM) is an electric utility that serves 440,000 customers in 45 of Mississippi's 82 counties as of 12/31/12. A map of the service territory can be found at Entergy Mississippi - Service Area.

Interest is paid quarterly. The coupon is 6%. Par value is $25. The bond matures on 11/1/32 and may be redeemed now at par plus accrued interest. Since I bought the security at below par value, I am not concerned about a call.

EMQ is a first lien bond "on substantially all" of EM's property.


Rationale and Risks: The most important risk is interest rate risk. The most important benefit is a 6% tax free interest payment. By buying this First Mortgage bond in the ROTH IRA, I convert taxable interest into a tax free interest. Before inflation and taxes, money will double in 11.9 years at 6%. Estimate Compound Interest The quality of this bond is good.

Closing Price Last Friday: EMQ: $24.98 +0.02 (+0.08%)

6. Bought 50 HBAPRF at $20.95 (see Disclaimer): This security was bought in what I call a satellite taxable brokerage account, created after the FED commenced its Jihad Against the Savings Class in an effort to earn some money from savings formerly devoted to "risk free" securities such as treasury bills, bank certificates of deposit, savings accounts and money market funds.

Snapshot of Trade:

2013 Bought 50 HBAPRF at $20.95
Security Description: The HSBC USA Inc. Fltg Rate Non. Cum. Pfd. Series F (HBA.PF) is a floating rate equity preferred stock that pays qualified, non-cumulative dividends at the greater of 3.5% or .75% above the 3 month Libor rate on a $25 par value.


The issuer is HSBC USA, an indirect wholly owned subsidiary of HSBC Holdings PLC. A subsidiary of HSBC USA is HSBC Bank USA

For the 2013 fist quarter, HSBC USA reported net income of $183M. HUSI 3.31.13 10-Q The capital ratios are good, see page 55.

This security is mentioned along with the other publicly trades HSBC issued preferred stocks in its last SEC filed Annual Report:

2012 10-K Note 20 at page 191
HUSI 12.31.12 10-K

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Floaters: Links in One Post

Prior Trades: I have clipped very small profits with two prior trades: (1) Item # 1 Bought 50 HBAPRF at 20.69 (January 2011)-Sold 50 HBAPRF at 22.44 (May 2011); and (2) Bought 50 HBAPRF at $19.89 (August 2011)-Sold 50 HBAPRF at $20.65 (March 2012)

I slightly disfavor this one, compared to others, due to its lower than normal 3.5% minimum coupon.

Fidelity does not allow their customers to buy HBAPRF, but they are allowed to buy other functionally equivalent HSBC floating rate equity preferred stocks. The prohibition that I noted in a 2011 is still in effect: Fidelity Prohibits Purchase of HBAPRF

I have bought the functionally equivalent HBAPRG and HBAPRD:

Added 50 HBAPRD at $20.85 (December 2009)-Sold: 50 HRBPRD at $24.23 (July 2010)

Bought 50 HBAPRG at 23.31 (January 2011)- Item # 4 Sold 50 HBAPRG at $24.02 (April 2011); Item # 1 Bought Back 50 HBAPRG at $19.29 (September 2011)-Sold 50 of 100 HBAPRG at $20.09 (November 2011); Item # 3 Bought 50 HBAPRG at $16.8 (October 2011)-Item # 3 SOLD 50 HBAPRG at $20.64 (February 2012).

Rationale: The main advantages of this type of security are as follows: (1) the security pays qualified dividends and (2) provides a measure of deflation/low inflation and problematic inflation in the same security. The deflation/low inflation scenario is addressed by the minimum coupon, while the protection for problematic inflation involves the LIBOR float activation. By buying at a discount to par value, I juice the yield in both scenarios.

At a total cost of $20.95, the minimum yield will be 4.18%. There is no maximum coupon. If the coupon becomes too high for HSBC due an increase in the LIBOR rate, then the security can be called at the $25 par value, which will generate a decent percentage profit, plus the accrued dividend at the time of any such redemption.

At a 5% three month LIBOR rate during the applicable computation period, the yield would become 6.86% at a total cost of $20.95.

According to Quantumonline, this security has investment grade ratings: Baa1 by Moody's and BBB+ by S & P. Many equity preferred securities issued by financial institutions are still rated in junk territory.

Risks: For the risk section, I am just going to copy a recently written discussion involving another floating rate equity preferred stock, with a few modifications to make the discussion pertinent to HBAPRF:

(1) Highly Volatile/Heightened Risk/Non-Cumulative: I started to invest in some of these securities during the Near Depression when they could be purchased at greater than 50% discounts to their $25 par values. The downside risk is zero as shown by what happened to those unfortunate souls who owned LEHPRG, a Lehman equity preferred floater, that is now worthless of course.

An equity preferred stock is only superior to common stock. It will be junior in the capital structure to all bonds. Given that low priority, the non-cumulative dividends paid by most of them, and the highly leveraged balance sheets of financial institutions issuing them, there will be no recovery in a bankruptcy for an owner of an equity preferred stock. Investors realized that would be the likely outcome and will behave irrationally when there is a whiff of a possible financial collapse. (a 75% chance of bankruptcy when a rational number would be less than 10%).

BAC equity preferred stocks, for example, could have been bought for less than $10 even in 2009. I bought ZBPRA, a Zions equity preferred floater for $7.8. Bought 100 ZBPRA at $7.8 (May 2009)(see snapshot in Gateway Post on this topic) None of those equity preferred floaters missed a dividend payment. (METPRA for less than $8, rational or irrational? or AEB for less than $5, rational or irrational?)

Periodically, these stocks will hit an air pocket and just fall as if a bankruptcy filing was imminent. I am just use to it.

I discuss an example from August 2011: Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities I was able to buy Santander's floater at $13 during that one. A few weeks later, yet another downdraft, and I picked up HBAPRG at $16.18 (HSBC's US operation). Bought 50 HBAPRG at $16.8

One of my earlier discussions about embracing their volatility in a trading strategy is discussed in a May 2009 post. Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock

So, volatility and risk are just known hazards. Know what you are buying, its history and characteristics.

2. No Coupon Bump Likely for Several Years: The likely continuation of ZIRP for two more years and the likely slow pace of the subsequent tightening cycle after ZIRP's end will combine to keep the 3.5% minimum coupon as the applicable rate for several years. It would take a rise in the 3 month LIBOR rate to over 2.75% during the relevant computation period to trigger any increase in the coupon. I do not currently see that happening before 2017.

On the flip side, HBAPRF will at least produces a current real rate of return of over 2%, before taxes, based on the currently forecasted inflation rate embodied in the ten year TIP price. As noted above the yield is 4.18% at a total cost of $20.95.  

The ten year average annual CPI forecast as of last Thursday 8/1/13) was 2.26%.


Based on the inflation forecast made in the pricing of the five year TIP, the real rate of return for the purchase of a 5 year nominal treasury would still be in negative territory. 

Needless to say, I am in a trading mode for all equity preferred floating rate stocks.

Closing Price Last Friday: HBA-PF: 20.93 -0.13 (-0.62%)

7. Bought 50 HBAPRG at $23.61 (see Disclaimer):

Snapshot of Trade:

2013 Bought 50 HBAPRG at $23.61
Fidelity allowed me to buy HBAPRG, while prohibiting the purchase of HBAPRF. The issuer of both securities is HSBC USA, and both are non-cumulative equity preferred floating rate stocks.

The only difference is that HBAPRG has a minimum higher coupon at 4%

HBAPRG pays non-cumulative qualified dividends at the greater of 4% or .75% over the 3 month LIBOR rate on a $25 par value:


The same discussion above is equally applicable to HBAPRG. At a total cost of $23.61, the yield is about 4.24%, slightly higher than HBAPRF at a total cost of 4.18%.

I am just trying to earn some income in my taxable accounts with this kind of purchase. I will sell these types of securities for small profits, as I have done with HBAPRG in the past (see Prior Trade section in #6 above) and snapshots of profits at the end of this Gateway Post: Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities The largest gain realized for HBAPRG was $176.08 from the 50 share lot purchased during October 2011.

Closing Price Last Friday: HBA-PG: $23.49 -0.30 (-1.28%)

8. Sold 300 SNMX at $3.06 (see Disclaimer):

Snapshot of Trade:

2013 Sold 300 SNMX at $3.0633

Snapshot of Profit: 

2013 SNMX 300 Shares +$84.10
Item # 2 Bought 300 SNMX at $2.73 (April 2012)

As shown in a two year chart, I have been in the hole until recently: SNMX Interactive Chart

I missed the boat on this one, selling too early in the day after a pop. The shares closed at $3.78 +1.01 (+36.46%) The market saw a much better picture in the earnings report than I did after reading the earnings release before entering my sell order yesterday.

SEC Filed News Release

Earnings Call Transcript - Seeking Alpha


This post is long enough. I will describe a couple of trade from last week in the next blog. 


  1. Hi! This is curls-100. I'm puzzled. You've saying "secular bull market," which you've been saying. But you posted three supporters of a secular bear market (or are they not secular bear, but substantial bear intermediate term).


  2. Hi Curls: Long term secular bear and bull markets will have shorter term bull and bear cycles respectively.

    In the long term bull market that started in August 1982, there was a prolonged period of consolidation and digestion after the October 1987 crash, when the market declined over 20%+ in just one day.

    That kind of extended churning action after a short term bear cyclical move can be consistent with a long term secular bull market, provided the drivers of the long term secular bull market remain in place.

    I believe that the drivers of the long term secular bull market are only now coalescing and will remain in force for a long term. That is a separate issue from whether the market is well overdue for a correction now and/or a period of consolidation and digestion thereafter.

    As to Doug Short's SA article, I left a comment that you may want to read. I come up with different bull and bear secular markets using a long term chart of the DJIA. I noted in my response that it would be an historical aberration for the market to burst to the upside, well outside of the secular bear's trading range, and for the long term bear market to continue. The DJIA and S & P 500 have made that kind of burst in nominal, non-inflation adjusted terms. His charts adjust the S & P 500 average for inflation.

    When reading my blog, it is important to remember that I am attempting to present a balanced view, which requires discussion of contrary points of view and evidence that is inconsistent with my big picture views. My big picture views are based on the weight of the evidence. I have never known a period where all of the material evidence supported one opinion or scenario as opposed to another. This makes me totally unlike many of writers of SA articles who cherry pick and distort facts to support their opinions. I may end up being wrong about the future, but at least I remain open minded and willing to consider all of the evidence when formulating possible future scenarios.

    The other reference made in this post is to current valuation. The market was in my opinion over valued in 1987, which can happen in a long term secular bull market. That is why you had a long period of consolidation (1987-1992) to digest the huge gains realized by the market between August 1982 to October 1987.

    I am basically saying that the same kind of event can happen now unless worldwide growth picks up more steam that would cause investors to raise earnings growth expectations.

    I am going to take this valuation issue up in my next post this upcoming Saturday when I discuss the Shiller P/E 10.

  3. Thanks South! So what I gather is that because the burst upward higher than the cyc. bear we've been in, that's be unusual for a cyc. bear and so it's a bullish indicator. Also that the bearish indicators at current, may well be leading to a consolidation (including some downward movement) within the cyc. bear.

    Also that your blog will include info on a variety of views, in order to explore all the angles, rather than starting from a view and presenting only support for that view.

    I've been expecting that on cyc., and been wondering on the indicators. So that's been helpful for me to see at this point.

    Only thing that will offset it hugely from it's natural flow -- is that if the market's goes down steadily, will the Fed come onto the media and announce a lack of tapering, just to chill it out?

    I'll check in on your valuation thoughts next weekend! They seem to be high enough now, that I'm no longer hearing the expression all over the place of "there's always a value to be found even in a high market" that I'd heard for the last month. Yet the general exuberance that goes with a top, isn't there from all the cash-holders (this time may really be different with them.) So from an earlier post of yours, I'm focusing on valuation itself for telling the inflection points, not "mood." So it'd be interesting to see the data you have and conclusions...!

  4. Curls: I would correct your summary of my opinions as follows:

    My current "Weight of the Evidence" Characterization of the U.S. Stock Market:

    1. We are in a Long Term Secular BULL Market for U.S. stocks.

    2. Probable Short Term Future Scenario:

    A. 10% to 20% Correction-Followed by Short Term 6-12 month consolidation and digestion period, whereupon the long term bull secular market reasserts itself.

    3. Possible, Though Not Likely, short term future scenarios:

    A. Bear Cyclical (more than 20% down) within the confines of a long term secular bull market and/or longer term period of digestion and consolidation (more than a year)

    Those scenarios are constantly re-evaluated based on new evidence.

    I am not advocating a position here. I am managing real money and I want to make the best judgment that I can based on an unbiased assessment of reliable information. In order to do that effectively, I have to be able to identify both positive and negative evidence and to weight their relative importance.

    An example of a possible future negative developments involve my discussion in this post of China.

  5. South - Thanks for the corrections. FYI, my calling it a cyc bear that's being broken out from -- was purely a typo. I meant to use cyc. bull. Sorry!

    That's very interesting to see your scenario assessments. They are different than I was picturing. Very helpful to see, considering if / when tapering starts, I'm been weighting how long that decline will be, in the overall flow of the market. I'll be checking in to see your data as you put things together!