Saturday, September 28, 2013

Bought 300 of Artis REIT at C$14.36/Bought 50 BANCP at $25.19/Bought 50 RZA at $24.47-ROTH IRA/Bought 50 WBSPRE at $22.59/Sold 50 GAL at $33.13-Roth IRA

Big Picture Synopsis


Stable Vix Pattern (bullish)
Short Term: Expecting a 10+% Correction
Intermediate and Long Term: Bullish

Blackstone's Byron Wien is singing a negative tune about stocks.

I noted in a March 9. 2009 post that Wein was not optimistic then either. Stocks, Bonds & Politics He advised investors to stay away from stocks which "may be too risky now". NYT He did note at that time that he expected a rally later in the year.


Short to Long Term: Slightly Bearish Based on Interest Rate Normalization: The Difficult Path to Interest Rate Normalization

I will become more or less bearish based on future inflation and inflation expectations. The slightly bearish tilt for bonds is based on the current inflation forecast embodied in the ten year TIP.

Subsequent to the FED announcing that it will continue its asset buying binge at the $85B monthly clip, intermediate and long term bond yields have drifted down. Some of my bond CEFs have actually started to go up in value.

HSBC Global Research strategists opine that the 10 year treasury will decline to a 2.1% yield within the next 12 months. I doubt it, but a continuation of QE at full throttle into 2014 will likely place downward pressure on intermediate and longer term rates. After hitting a 2.96% yield on 9/10/13, the ten year closed last Friday at 2.64%. Daily Treasury Yield Curve Rates

The break-even yield on the 10 year TIP closed at 2.18%.

I will play a variety of alternate scenarios. I never put my eggs in one basket or in furtherance of one future scenario.

One of those alternate and less likely scenarios is that intermediate and longer term rates will remain abnormally low for an extended period. I view that scenario as unlikely and consequently will not play it with substantial amounts of cash.

The recent purchases of fixed coupon preferred stocks, long term first mortgage bonds, and leveraged bond CEFs are examples of playing that type of scenario. Most of those purchases were made after a significant decline in price from early May as intermediate and long term rates spiked up, causing a significant loss in value for those types of securities, particularly the leveraged bond CEFs. 


Recent Economic Reports:

The FED's "flow of funds" report for the second quarter was released last Wednesday. I view this report as important.  Household net worth increased $1.3 trillion during the 2013 second quarter. The FED estimates that household net worth totaled $74.8B as of 6/30/13.  Home mortgage debt declined by 1.7%. Owner's equity in household real estate as a percentage of household real estate rose to 49.8%. A WSJ article has a long term chart of household net worth dating back to 1945. The $74.8B number is the highest on record, without adjusting for inflation.

For July, the Case Shiller home price indices showed increases of 1.9% and 1.8% from June for the 10 and 20 city composites respectively. For four consecutive months, home prices in all 20 cities have shown monthly gains. Over a 12 month period through July, prices rose 12.3% and 12.4% as measured in the 10 and 20 city price indices respectively. Case Shiller Home prices in several cities rose more than 2% from June through July: Atlanta +2.2%; Chicago +3.2%; Detroit +2.7%; Las Vegas +2.8%; Los Angeles +2.1%; San Francisco +2.2%;  and Tampa 2.3%.

On a nationwide basis, the FHFA reported that home prices rose 1% on a seasonally adjusted basis in July from June.

The government estimated that real GDP rose 2.5% in the second quarter. This was the third estimate. Consumer spending increased by 1.8%, unchanged from the second estimate. Residential construction increased at a 14.2% annualized rate, higher than the previous estimate of +12.9%. News Release: Gross Domestic Product

Markit reported that its flash Eurozone composite output index rose to 52.1 (51.5 in August). The September number represents a 27 month high.

China's HSBC flash manufacturing PMI rose to 51.2 in September, a six month high. Markit

Last Tuesday, the treasury sold $33B in two year notes to yield .348%.

The MBA reported that mortgage applications rose 5.5% for the week ending 9/20. The refinancing index rose 4.9%. MBA

Labor Productivity and Wages:  

A reader brought to my attention a thirty minute video from Ray Dalio, the billionaire hedge fund star, that explains why the world hit a brick wall in 2008, and his prescription for how to avoid similar fiascos hereafter. MarketWatch

Dalio offers three prescriptions. Debt can not rise faster than income growth. Income growth can not rise faster than productivity. And everyone needs to focus on ways to increase productivity.

Simply put, labor productivity measures the amount of goods or services produced by one hour of labor. It measures how efficient a country is producing goods and services. Growth in productivity is certainly important.

I would agree with Dalio that growth through spending, which is financed mostly by ever increasing amounts of debt rather than income growth, is a prescription for a financial disaster.

Clearly, millions of households incurred rapidly increasing amounts of debt to disposable income starting in 1985 and hitting a crescendo in 2007 (a period that I call the "Age of Leverage"):

Household Liabilities to Disposable Income
As I noted in an earlier post, this chart shows aggregate numbers. If the government excluded the millions of households with no mortgage debt (1/3rd of homes are owned free and clear), the developing problem would have jumped off this chart and would have been obvious to even the most obtuse observer. While I don't have the numbers, we are talking about millions incurring total debt at greater than 200% of disposable income, and the debt service costs were also relatively high particularly compared to now.

What caused that spike in debt to disposable income? The simple answer is the availability of credit. Banks opened the spigot until the relevant loan criteria was the borrower having a pulse. 'If you had a pulse, we gave you a loan' - Dateline NBC

If credit has been more restrained during the Age of Leverage to something approaching sensible, particularly mortgage credit availability, then the 2008 meltdown and the prolonged period of deleveraging could have been postponed for several years, perhaps for a decade.

Postponed-Not Eliminated.

More restrained credit availability would not have solved the underlying problem that was gaining momentum throughout that period.

The problem was not productivity growth between 1985-2007 which was generally good in the U.S., as shown by the table below.

The problem was not that income growth was greater than the increase in productivity.

Ultimately, the problem was the failure of wages to keep pace with productivity growth.

Wage growth has grown at a far slower pace than productivity:

A Decade of Flat Wages: The Key Barrier to Shared Prosperity and a Rising Middle Class | Economic Policy Institute

Productivity rose by 80.4% between 1973-2011 compared to a 10.7% growth in median hourly compensation. Since 2000, wage growth has flatlined, making the disparity even greater since that time. CNN Money- Mar. 7, 2013

The minimum wage kept pace with productivity growth between 1947 to 1969 which led to a 170% increase in the real value of the minimum wage over that time period. The link was broken in the 1970s. cepr.min-wage1-2012-03.pdf

U.S. Department of Labor-History of the Minimum Wage Rates

About 95% of the income growth since 2009 has been harvested by the top 1% of income earners. Between 2009-2012, the top 1% incomes grew by 31.4% while the other 99% grew only by .4%. Needless to say, the top 1% and their apparatchiks in academia want to keep it that way or even improve on their take.

For millions of households in the middle class, income growth simply did not match the increases in expenses which caused the acquisition of more debt. One of the key drivers in increased spending is children, followed by a list of sundry non-discretionary items like insurance, mortgage payments, automobile costs and utilities. The only way to make up for the deficit between mostly necessary spending and income was to incur more debt. When you have to think twice about taking the tribe to Red Lobster for dinner, then you are already in trouble.

(There is no reason to discuss those who would routinely engage in irresponsible discretionary spending irrespective of income growth. I would roughly estimate that those hapless souls constitute roughly 15% to 25% of the Indebted Class).

On an aggregate basis, the primary underlying problem was that labor did not share in productivity growth. The secondary problem was the improvident extension of credit to those incapable of servicing their debt obligations out of disposable income generated by earnings.

Going forward, there is now an ongoing problem with productivity growth in developed countries.

The OECD has a table showing labor productivity growth by country: Labour productivity growth in the total economy

The slowdown in U.S. productivity growth, as shown in the following tables, is a matter of concern:

Productivity Growth by Major Sector, 1947-2012. Bar Chart

Output Per Hour % Change Y-O-Y
The preceding chart is a modification of this one, Output Per Hour, to highlight the yearly percentage changes.  The growth after the 1991 recession was instrumental in the 1990s stock market rally and the relatively benign inflation rates.

Productivity growth needs to accelerate some for the U.S. to have a healthy economy. But, it is also important for the middle class to enjoy far more of the output generated by increased productivity through growth in wages compared to those who are already wealthy.

Since the U.S. economy is based on consumer spending, increases in disposable income after debt service payments is key.

There are multiple ways to decrease the ratio of debt service payments to disposable income.

One way is to simply lower the amount of debt and/or the cost of servicing that debt. The historic mortgage refinancing wave has lowered the debt service cost and consequently raised the amount of disposable income that can be spent and/or saved by households.

The lower DSR and FOR ratios due to long term mortgage refinancings are important secular forces that will support benign consumer spending for many years to come. Household Debt Service Payments as a Percent of Disposable Personal Income- St. Louis FedHousehold Financial Obligations as a percent of Disposable Personal Income- St. Louis Fed

By benign, I am referring to spending paid out of disposable income rather than financed by debt.

It is important to consider both the amount of the debt and the cost to service that debt when drawing conclusions about the financial health of the the American households. Stocks, Bonds & Politics: David Levy (introduction under the heading TLT vs. Randomly Selected Blue Chips . . .)

Another way to increase disposable income is to return to normalized interest rates on savings. With almost $10 trillion now stuck in "risk free" savings earning nothing, another $400B+ in income could be generated by the average rate on those savings hitting 4%.(over $7T is in savings accounts, Total Savings Deposits at all Depository Institutions - St. Louis Fed. A return to normal interest rates is particularly important for seniors who are no longer working and own their homes free and clear.

Lastly, and possibly the most important long term, more of the income generated by labor's productivity gains need to flow to workers that generate those gains, giving them more disposable income to spend and/or to save without incurring more debt and starting the Age of Leverage cycle all over again at some future time.

I really do not have much hope that labor will make much progress in securing a larger share. The pool of available workers and a declining collective bargaining power will combine to keep wage growth slower than  the post WWII average. The average worker who demands a 5% annual pay raise will be shown the door.

Nor do I see any restraint on the growing disparity in income between top management and average employee. So most of my positive future forecast relies on increased disposable income resulting from the refinancing wave and the return to normalized interest rates for risk free savings, with a small assist from wage gains that will largely or entirely be offset by inflation.

I discussed this subject some in the comment section to this recent Seeking Alpha article. One reader took vehement exception to my argument about the benefits accruing to households when interest rates return to normal levels.

It was his position that savers are not really subsidizing borrowers. Instead, a return to normal interest rates determined by a free market would involve a subsidy to savers. A better solution to increase disposable income in his view would be to eliminate the payroll tax and to increase social security benefits apparently to a level that compensates seniors for the lost interest income emanating from artificially low FED induced interest rates that was subsidizing risk assets including his investments.

I thought that was an unusual alternative to normalized interest rates, which has been the norm for virtually our entire history except for part of the Great Depression and since 2008. I understand how it would be preferable to someone who was starting to lose money in bonds and bond substitutes due to the recent rise in rates from deep in negative yield territory.

He was not particularly concerned that the payroll tax funds SS benefits and part of Medicare, nor that the GAO has estimated a $75+ trillion long term shortfall even with the funding from the payroll tax and the current inflation increases built into the SS benefits.

If we terminated the payroll tax in order to continue subsidization of risk assets for the wealthy and well off, the desired alternative of that gentlemen, then I see no way that SS or Medicare could continue, an objective that many rich citizens would prefer since those are primarily middle class benefits and safety nets anyway and are not needed by the rich. Both Medicare and SS would have to be terminated after a brief period. Just throw Mama off the train and maybe she will land on her feet.

There are a lot of seniors at SA with risk investments in REITs, preferred stocks and other income investments which are interest rate sensitive. They would much prefer QE to infinity in order to subsidize their risk allocation decisions for the remainder of their lives.

Over the past several years, the artificially low rates have artificially subsidized those types of income investments. The recent rise in rates, which are still at substantially abnormal levels, had to smart some. I know the feeling. I have taken a hit myself.

Ultimately, a return to normalized rates determined by a free market will benefit those investors long term, as they invest income and new money in securities paying higher rates than now.


Barrons published a favorable article on Unilever, pointing out that Unilever's shares trade at a P/E multiple in line with its food competitors, like Nestle and Danone, but well below its personal care peers. The author noted that higher margined home and personal care (HPC) products inched over 50% for the first time last year. The company expects HPC to rise to 70% over the medium term.  I discussed adding 100 shares of Unilever in my last post: Item # 2 Bought 100 Unilever at $38.10+ (purchased 9/11/13)

Associated Estates Realty has not performed well since my 50 share purchase. The most recent decline occurred after the REIT announced the acquisition of seven apartment complexes for $324M. Associated Estates To Acquire 1,606-unit Portfolio For $324 Million AEC claims that this purchase will have "a blended nominal cap rate of 5.5% on year one stabilized net operating income". That portfolio has an "average year built of 2012". The REIT intends to dispose of several older apartment complexes, with an average age of 23 years, for estimated proceeds of $230M to $240M.

Two BDCs, both owned, announced new share offerings after the close last Wednesday. Ares Capital Corporation Announces Public Offering TCP Capital Corp. Announces Public Offering of Common Shares. Ares sold 11 million shares, plus an option granted to the underwriters to purchase up to an additional 1.65M shares. One SA author viewed this offering as a positive for shareholders. Seeking Alpha Book value was reported at $16.21 as of 6/30/13. 10-Q at page 2

I own 170 shares, with 120 of those owned in IRA accounts (50 in Roth and 70 in Regular IRA).

Item # 3 Bought: 50 of the BDC ARCC at 16.17 in taxable account and 50 at $16.3 in Roth IRA (January 2011); Item # 3 Bought 50 ARCC at $16.51 Roth IRA (March 2011);  Item #5 Sold 50 ARCC at $17.7 in taxable account (May 2011)-Bought: 50 ARCC at 16.89 in taxable account (December 2010); Item # 4 Added 50 ARCC at $16.9 Regular IRA (May 2011));  Item # 2 SOLD 100 ARCC at $17.54-IRAs in Two 50 Share Lots (September 2012); Item # 2 Bought 70 ARCC at $17.24-REGULAR IRA

TCP sold 3.8M shares at $15.76 with an over allotment option of up to an additional 570,000. TCP Capital Corp. Announces Pricing of Public Offering of Common Shares Book value was reported at $14.94 per share as of 6/30/13. 10-Q at page 2

While TCP was quick to disclose the pricing of those shares, I have not seen any disclosure by Ares yet.

Closing Prices Last Friday:
ARCC: $17.29 -0.02 (-0.12%)
TCPC: 16.07 +0.43 (+2.75%)

1. Bought 300 Artis REIT at C$14.36 (see Disclaimer)

Snapshot of Trade:

Security Description: Artis Real Estate Investment Trust(AX.UN:TOR) is a diversified Canadian REIT that owns office, retail and industrial properties in Canada and the U.S., with a focus on Western Canada. As of 9/13/13, Artis' commercial property comprised 24.8M square feet of leasable area in 233 properties.

Property by Asset Class and Region
Company Website: Artis REIT 

Property MapPortfolio Map » Artis REIT (move cursor over dots and click dot to see properties)

As shown on that property map, U.S. properties are concentrated primarily in Minneapolis and Phoenix to a lesser extent.

The dividend rate is shown at $0.09 per share which is a monthly rate. The next ex dividend date is 9/26/13. Artis REIT Announces Monthly Cash Distribution

The dividend yield at a total cost of C$14.36 is about 7.52%. 

Link to Distribution History: Distribution History » Artis REIT

2012 Annual Report: Artis REIT 2012 Annual Report.pdf

In 2012, the REIT reported the following metrics:

Annual FFO up 7.4% to $1.3 per share
Annual AFFO at $1.15 per share (high in relation to dividend payout)
FFO Payout Ratio Decreased 6.2% to 83.1%
AFFO Payout Ratio Was 93.9%
Reduced Debt to GBV by 6.6% to 51.5%
Acquired 58 Commercial Properties with 6.3M Leasable Space for 990.2M
Improved annual interest coverage to 2.5 times from 2.2x

Prior Trades: I flipped two 100 shares lots in 2011.

2011 ARTIS REIT +$281.27
The tax gain will be dependent on the currency conversion values and will not simply reflect the change in value based on the Canadian share price.  

Given the high commission cost, I decided to try 300 shares rather than just a 100 shares.

Recent Earnings Report: For the 2013 second quarter, Artis increased FFO per unit by 12.9% to C$.35. The company decreased its it FFO payout ratio to 74% from 87.1% as of 6/20/12. The AFFO Payout ratio decreased to 85.7% vs. 96.4%. All of those metrics are moving in the right direction. Artis Releases Second Quarter Results: Year-Over-Year AFFO Per Unit Increases 12.5% and Payout Ratio Decreases to 85.7%

Distributions Per Unit During Quarter: C$.27
Diluted FFO Per Unit:  C$.35
Diluted AFFO Per Unit:  C$ .30
Decreased Mortgage Debt to GBV to 45.4%
Occupancy: 95+%
NOI Growth: +3.1%

Rationale: (1) While this one has some notable disadvantages, the dividend yield is good. The dividend is paid monthly in Canadian dollars which increases the CAD stash, one of the objectives of the Canadian Dollar strategy.

There is some appreciation potential. The stock did hit a 52 week high earlier this year at C$17.03, AX.UN Stock Chart, and had moved up steadily after bottoming near C$4 during the Dark Period.

The stock went ex dividend for its September distribution on 9/26, shortly after my purchase. MarketWatch

Risks and Disadvantages: One of the main disadvantages is a lack of dividend growth. The distribution has remained stuck at $.09 since December 2008, with a brief cut to $.0875 starting in March 2008 and lasting for 5 months. And, I did note that the entire dividend paid in 2012 was classified for non-Canadian owners as a return of capital. 2012-PDF

The dividend payout ratio to adjusted funds from operations is high. This suggests that a dividend increase is not in the cards anytime soon.

Some REIT investors prefer concentration in one asset category.

Future Buys and Sells: I may hang onto these shares for a year or two, just for the income generation. If he shares move back over C$16, I would consider selling them to harvest a profit.

Closing Price Last Friday: AX-UN.TO: C$14.23 +0.02 (+0.14%)

2. Bought 50 BANCP at $25.19-Satellite Taxable Account (see Disclaimer):

Snapshot of Trade:

2013 Bought 50 BANCP at $25.19
Security Description: The Banc of California  Perpetual Preferred Series C (BANCP) has a 8% fixed coupon and a $25 par value. It is an equity preferred stock that pays non-cumulative and qualified dividends on a quarterly basis. Banc of California has the option of calling this security on or after 9/15/2018.


The prospectus contains a typical stopper clause:

The bank can not pay a cash dividend on a junior security and eliminate the cash dividend on the preferred stock. For as long as the bank pays a cash common stock dividend, it has to pay the preferred stock dividend in full. The stopper clause is simply the legal language that implements the preferred stock's preference right to dividends.

In the capital structure, the equity preferred stock will be junior in priority to all bonds and senior only to common stock.

The issuer is Banc of California, a holding company, that owns Pacific Trust Bank and The Private Bank of California. The bank has over $3B in assets and 67 branches and loan production offices.

Bancorp - Investor Relations

Key Developments Page at Reuters

2012 Annual Report Form 10-K

SEC Filed Investor Presentation July 2013 (branch locations at p. 7; loan production locations at page 8)

Prior Trades: BANCP is a new issue. This is my first purchase.

I currently own 50 shares of the common stock as part of my regional bank basket strategy. Bought 50 BANC at $11.3 February 2013 The bank thereafter changed its name to Banc of California from First Pactrust Bancorp. SEC Filing July 2013

I also own a senior exchange traded bond. Item # 6 Bought Roth IRA: 50 BANCL at $25.20

Last Earnings Report: For the Q/E 6/30/13, the bank reported net income available to common shareholders of $4.36M or $.36 per share. SEC Filed Press Release The net interest margin was reported at 3.93%, up from 3.26% in the year ago quarter.

The capital ratios are good:

Rationale: The dividend yield is the only reason for buying this security. At a total cost of $25.19 per share, the yield is about 7.94%.

At the current time, I am comfortable with the credit risk.

Risks: At present, interest rate risk is viewed as more important than credit risk.

If the operating subsidiaries of a bank holding company are seized by the FDIC, I would expect an equity preferred stock issued by the holding company to be worthless. The holding company would have lost its main assets in that eventuality. The holding company would have debt outstanding, as does BANC, which is more senior in priority than equity preferred and common stock.  

When issued by leveraged financial institutions, the downside of an equity preferred stock is zero in a BK.

Future Buys and Sells:  I am likely to buy another 50 shares when and if the price sinks below $24.5.

Closing Price Last Friday: BANCP: $25.29 -0.11 (-0.43%)

3. Bought 50 RZA at $24.47 Roth IRA (see Disclaimer):

Snapshot of Trade:
2013 Roth IRA Bought 50 RZA at $24.47
Security Description: The Reinsurance Group of America Inc. 6.20% Fixed-to-Floating Rate Subordinated Bond (RZA) is an exchange traded junior bond issued by the Reinsurance Group of America (RGA), a company primarily engaged in the reinsurance of individual life and group coverage for life, health, annuity and disability income products. 10-K at page 4

RZA has a 6.2% fixed rate coupon on a $25 par value from 12/15/12 to but excluding 9/15/22. From 9/15/22 this note will pay at an annual rate equal to the 3 month Libor rate, reset quarterly, plus 4.37%. The issuer may freely redeem the bond on or after 9/15/22. Prospectus Prior to that time, the issuer may redeem upon the occurrence of a "tax event" or a "rating agency event", as those terms are defined at page S-27. If not redeemed early, the notes mature on 9/15/2042.

The next ex interest date is 11/26/13:

At a total cost of $24.47, the current interest yield is about 6.33%.

With these kind of fixed to floating rate notes, I would anticipate a call on or after the optional call date when it is in the interest of the issuer to do so. If RGA could not refinance at a more favorable rate than it will be paying after the transition to the floating rate, then the odds favor no redemption until it has to pay more under the floating rate provision than it could then refinance at a fix rate, taking into account the costs associated with new financing such as underwriter fees. A three month Libor rate during the relevant computation period after 9/15/22 would only have to exceed 1.83% to generate a higher coupon than the current 6.2% fixed rate. While no one knows now what the 3 month LIBOR will be in September 2023,  the odds are pretty good that it will be much higher than now.

Reinsurance Group of America Profile Page at Reuters

As of 6/30/13, RZA's short and long term debt stood at $1.935.5B with a debt to capital ratio of 23.3%. The ratio of earnings to fixed charges was then 1.6x.

This note is similar to bank trust preferred securities. Interest may be deferred for up to five consecutive years. Interest will accrue on the unpaid distributions at the then applicable coupon rate. No cash payments can be made on a more junior security (e.g. common stock) while the interest payments on RZA are in deferral (stopper clause: S-25 and S-26).

According to Quantumonline, RZA is rated Baa2 by Moody's and BBB by S & P.

RGA recently sold $400M senior unsecured bond, maturing in ten years, with a 4.7% coupon. Prospectus That bond was rated A- by S & P and Baa1 by Moody's. Zacks;  FINRA

Fitch recently reaffirmed the senior debt at BBB+ and the junior debt (RZA) at BBB-. BloombergReuters

Home - Reinsurance Group of America

Prior Trades: None. I have not own any RGA security. This subordinated bond was issued by the company in August 2012. I only recently became slightly interested in it when the price fell below par value. Earlier this year, the price was near $29 and the security had traded above its $25 par value until August 2013. RZA Interactive Chart

Rationale: While RZA is a junior bond, it is still investment grade and will be paying me a 6.2% coupon for almost nine years. That is not very tempting in a taxable account but has some appeal in the ROTH IRA where taxable interest payments become tax free. The floating rate provision which becomes operative in September 2022 provides some interest rate protection.

As noted above, the common shareholders have enjoyed a long history of receiving dividends. RGA - Dividend History They would not appreciate an elimination of that income. The common cash dividend has to be eliminated before the RZA interest payment can be legally deferred by RGA.

Risks: Simply put, one of the risks for reinsurance companies is a cascade of losses from reinsurance. RGA took a $184M charge during the second quarter to increase claims liabilities in Australia.  Press Release Overall, however, net income has been rising on an annual basis as shown at page 30 of the 2012 Annual Report: 10-K

While credit risk needs to be monitored, the more important risk for the foreseeable future is interest rate risk. Some of that risk is mitigated by the transition to a floating rate on 9/15/2022. If short term interest rates near normal levels at that time, it is more likely that RZA will be redeemed at par plus accrued interest, so the owner is not faced with the prospect of owning until 2042 a relatively low yielding fixed coupon bond when short term interest rates are close to normal and in an uptrend.

Interest rate risk still exists and will factor into the pricing for several more years. The recent decline in price from about $29 to my purchase price is a clear manifestation of that risk. If intermediate rates continue to rise, then the price could fall further.

However, even with interest rates rising, the security may start to recover a price decline as we move closer to 9/15/22. Why? If short term rates return to normal levels or higher, the odds of a redemption at par increases on or after 9/15/22, which assumes that intermediate or longer term rates are not so high as to deter financing of this note.

Without the Libor float provision, the price for a long term 6.2% coupon maturing in 2042 would be going down during a period of rising long term interest rates. The Libor float provision could reverse that decline in two ways as we move close to the transition. The market could be anticipating a higher rate than the 6.2% fixed rate coupon or a redemption at par plus accrued interest due to the then existing interest rate conditions

There are enough unknown variables in the distant future that still makes interest rate risk an important one for this note.

Closing Price Last Friday: RZA: $24.50 -0.31 (-1.25%)

4. Bought 50 WBSPRE at $22.59 (see Disclaimer): 

Snapshot of Trade:

2013 Added 50 WBSPRE at $22.59

Security Description: The Webster Financial Corp. Dep Shs (Rep. 1/1000th 6.4% Non-Cum. Perp. Pfd. Series E) (WBS.PE) is an equity preferred stock that pays non-cumulative and qualified dividends at the fixed coupon rate of 6.4% on a $25 par value. Prospectus Supplement This is a perpetual security just like Webster's common stock.

Webster Financial has the right to call this security at par value, plus accrued dividends, at anytime on or after 12/15/2017. That kind of provision gives the issuer the right to refinance at a lower rate while the owner has no way to stop the bleeding in a rising rate environment other than to sell the security.

The interest rate risk inherent in perpetual preferred stocks is demonstrated by the decline in this security since early May. This security was trading near $26.5 in early May. WBS.PE Stock Chart

Prior Trade: The OG ignored the vehement protestations of both the LB and the RB and regrettably bought this security at over par value earlier this year. Bought 50 WBSPRE at $25.1

Last Earnings Report: For the 2013 second quarter, Webster reported net income available to common shareholders of $43.734M or $.48 per share, up from $.44 per share in the 2012 second quarter. Q2 2013 Earnings Release

When a company uses the phrase "available to common shareholders", that simply means net income minus the preferred dividends. The net income number for the second quarter was $46.373M and Webster paid out $2.639M in preferred dividends, leaving the $43.734M in net income available to the common shareholders.

Some other material metrics include the following:

Net Interest Margin: 3.23%
Efficiency Ratio: 59.98%
NPL Ratio: 1.52%
Coverage Ratio: 87.55%
Charge Offs to Average Total Loans: .43% (annualized)
ROTE: 12.26%
ROA: .92%

The capital ratios are fine:

Rationale and Risks: The risks and rationale are summarized in the prior post discussing this security. I would simply add that a buy at $22.59 is better than one at $25.1, particularly since the lower price is nearer zero.

The dividend yield at a total cost of $22.59 is about 7.08%. The anticipated real rate of return before taxes, based on the current inflation forecast embodied in the ten year TIP, is close to 5%.

I am attempting to balance the yield differential between .01% paid by a money market (the source of funds) and 7.03% against the potential loss in principal by investing in this type of security. In retrospect, the balance was struck wrong when buying 50 shares at $25.1 and it remains to be be seen whether this last purchase will work out.

That balancing act is discussed in other recent posts.  (e.g. Item # 3  Bought 50 AFPRC at $21.75-Roth IRA; Item # 3 Added 50 BTZ at $12.35; Item # 3 Bought Roth IRA: 100 IGI at $19.43)

I am not currently concerned about the credit risk. I would note, however, that I bought the common stock at $4.58 back in March 2009 and sold that position at $22.49:

So, with a recession, the credit risk profile can change materially.

Future Buys and Sells: If I can sell the first lot purchased at a profit, I will do so. I would consider selling one or both lots to stop the bleeding. I would consider selling the lot purchased at $22.59 at $24 or higher after receiving two quarterly dividend payments.

Closing Price Last Friday: WBS-PE: $22.51 -0.07 (-0.31%)

5.  Sold 50 GAL at $33.13 (see Disclaimer):

Snapshot of Trade:

2013 ROTH IRA Sold 50 GAL at $33.13
Snapshot of History:

Snapshot of Profit:

Item # 4 Pared Trade Roth IRA: Bought 50 GAL at $31.89 and Sold 50 IYLD at $26.58 (January 2013)

When I sold GAL, IYLD was selling at $25.25 so the foregoing pared trade worked out. IYLD lost $1.33 per share in price while GAL gained $1.24.

Security Description: The SPDR SSgA Global Allocation ETF Fund (GAL) is a relatively low cost (.35% expense ratio) international balanced ETF that owns other low cost ETF funds. GAL - SPDR SSgA Global Allocation ETF | State Street Global Advisors (SSgA)

Rationale: As shown in the history snapshot above, this ETF was not generating sufficient income. The ROTH IRA is managed for income generation rather than growth.

Possibly more important, the OG is starting to become a tad nervous about potential adverse developments emanating from Washington, D.C.

I still own 50 shares in a taxable account. Item # 5 Added 50 GAL at $31.79

When and if I can average down, I may buy back the 50 shares sold in the ROTH in that taxable account where I place slightly less emphasis on income generation.

Closing Price Last Friday: GAL: $33.08 -0.01 (-0.03%)
Politics and Etc.:

1. Ayn Rand's Party: In my lifetime, I have not noted any material changes in Democrats. They are still in general more tolerant and open minded than republicans and less inclined to create their own reality bubbles. The gist of their governing approach is to redistribute wealth primarily through the tax code and an array of social programs.

The GOP politicians in Congress have changed dramatically over my lifetime. The moderates and liberal republicans, primarily from the Northeast, are extinct, except for some at the state or local level. And, while many would undoubtedly disagree, there are few true conservative republican politicians remaining in Congress, and most of them are in the Senate. The GOP is no longer a conservative party, but a reactionary one.

The typical House GOP member is not a conservative, but a reactionary who finds their inspiration in Ayn Rand, with a strong aroma of 19th century Anarchism and Social Darwinism. This is an old subject for this blog. Stocks, Bonds & Politics: The GOP's Movement Toward An AYN RAND Vision for AmericaStocks, Bonds & Politics Modern Day GOP: No Longer A Conservative PartyStocks, Bonds & Politics: What is the Appropriate Political Label.

The House GOP's voucher plan for Medicare, approved by virtually all of them, would bankrupt most middle income seniors without question. (CBO: Seniors Would Pay Much More For Medicare Under Ryan Plan - Kaiser Health NewsStocks, Bonds & Politics: GOP's Plan To Bankrupt the Middle Class citing particularly figure 1) Fortunately for the GOP, most of their largely white middle class voters never realized that they were being thrown overboard in order to lower the tax burden on the wealthy.

A somewhat typical Ayn Rand devotee argued in a Daily Ticker ticker interview that the bottom 99% owe a huge debt of gratitude to the top 1% and need to express that gratitude by abolishing taxes for the wealthy.

Almost every republican politician in Congress had no trouble supporting the invasion of Iraq that will ultimately cost American taxpayers well over $2 trillion. (Harvard Kennedy School of Business-Research: Study May Be Downloaded in PDF; total cost of Iraq +Afgan wars $4 to $6 trillion).

The only republican dissenters were the former Senator Lincoln Chafee, the last of the liberal republicans and more appropriately described as a moderate, and six libertarians in the House (e.g. Ron Paul) who would just about vote against any foreign military campaign.

One of the Democrat programs disliked with fervor by republicans is food stamps.

In a party line vote, the House recently passed legislation that would cut $40B from the food stamp program over the next 10 years. According to the CBO, almost 4M people would be removed from the food stamp program. This approach is just another manifestation of the GOP's 21st century version of Social Darwinism, as the GOP continues to regress back to the 19th century and proud of it too.

This cut was made in spite of the Agriculture department estimating that 17.6M American households were "food insecure". USDA ERS - Report summary

About 170,000 veterans would be negatively impacted by the GOP's plan. Center on Budget and Policy Priorities

The GOP could probably secure support from some moderate Senate Democrats by focusing on more narrow cuts. Insisting on a $40B slash in food stamps is a waste of time and highlights an unwillingness to compromise or negotiate on what is feasible given the political dynamics. This piece of legislation received no Democrat votes.

SNAP Is Effective and Efficient — Center on Budget and Policy Priorities

Even If Congress does nothing, which is the likely result, food stamp spending will decline in November anyway. The 2009 stimulus bill granted a 13% increase in benefits which expires for all SNAP beneficiaries in a little of two months. The GOP's $40B proposed slash in spending starts in 2014.


This post is long enough. I will discuss a couple of other trades made last week in the next post. 


  1. Thanks for posting your thoughts on the dramatic change in GOP attitudes and politics. Being from Germany original I know what social darwinism can do how it can derive the most reactionary and extremist policies, like what Hitler and the Nazis did. What I hear from the GOP younger than Sen. McCain and his generation is very similar.

  2. oh come on, republicans today are like Hitler? Really? Just because democrats don't understand the concept of scarcity and want to legislate everyone wealthy, does not mean they are better human beings. Especially in terms of debt they are leaving behind to future generations.

  3. I would not make the analogy to the NAZIs, nor do I agree that the Democrats are attempting to "legislate everyone wealthy", nor are the republicans blameless for the debt the government is "leaving behind to future generations". Just as an example, the Bush tax cuts contributed to deficits and did not result in net job creation for an 8 year period.

    WSJ Article:
    (my calculation using labor department data showing a net loss of 184,000 jobs over a 8 year period)

    Through 2008, those tax cuts added $1.7 trillion in deficits and another $200 billion in interest costs.

    A good analysis of the problem can be found in the book White House Burning (e.g. see footnote 143)

    I also note that the IRAQ war will end up costing well over $2 trillion.

    In next week's post, I will discuss why I would have voted against Obamacare.

  4. I was referring to Joe's comment, who did equate them to the Nazi's. Ironic since you were discussing a distorted sense of reality. As a sidenote, I don't see much difference between republicans and democrats these days, if I were to look only at major trends, I would think Bush was serving a 4th term. Anyways, appreciate the blog very much, keep it up.

  5. I know that you were referring to Joe's comment.

    The U.S. government is headed for a fiscal train wreck. When it occurs, and it will in my lifetime, there will be a lot of finger pointing among devotees of the two political tribes.

    In the last analyst, it will be a culmination of a long series of mistakes including going to war decisions (LBJ and Vietnam; Bush and Cheney IRAQ), spending on social programs (primarily entitlements rather than something like food stamps); ill designed stimulus programs (Obama) and a pronounced desire to fund less than desirable decisions with borrowed money. At that level, I blame both tribes and would not quarrel with anyone assigning a 50/50 share of the blame.

    I do see a huge difference between the modern GOP and the Democrats, as I noted in this blog and elsewhere.

    Moderates could probably avoid the upcoming train wreck, but their voices have been silenced by both sides, primarily through the gerrymandering of congressional districts and the nature of primaries as rewarding non-moderates.

  6. I read your hysterical tirade about the Republicans being the sole reason why we have this govt shutdown. Of course, if you were truly consistent about never voting for a Party who would do such a thing, you would stop voting for Democrats, since they shutdown govt 7 times during the Reagan Presidency. Don't be so sanctimonious and partisan, we all know both sides are equally culpable. Both will play partisan games to bolster their position in the next election

    Finally, I wouldn't have a heart attack about the shutdown. As far as I can tell everything that is essential (air traffic controllers, post office, law enforcement, etc) is open. The only people who will be inconvenienced are federal workers and tourists visiting national parks. Not many people will even notice anything has changed. Your hyperventilation about this is silly. I noticed that much of the media is making it sound like a total disaster, but that is because it is good for ratings to scare the bejesus out of people.

  7. Thank you for your comment. I will publish comments even by those who disagree with my opinions and express their disagreements in an undesirable way.

    A comprehensive review of prior shutdowns was recently release by the Congressional Research Service:

    Reagan did veto a CR in 1981 and 400,000 employees were sent home for lunch. A new CR was signed later that day and the employees came back to work later in the day.

    In 1984, 500,000 workers were sent home with no approved budget. They were brought back the next day.

    The reasons for the other shutdowns during the Reagan administration are described in this article from USC;

    I counted 14 day altogehter over 8 years and those were not all entire workdays.

    So far, as I will note in the next blog, the only direct effect on me is that my tax refund for 2012, which is still being processed, will be delayed further. Part of the problem in the prior delay involves sequestration.

    Mark Zandi estimates that a shutdown of 3 to 4 weeks would clip 1.4% from 4th quarter GDP. The furlough of over 800,000 workers without pay will deprive the economy of about $1B per week.

    I stand by my statement that the GOP is solely responsible for the current shutdown. I do not view your statements as factual.

    I also anticipate that it may last longer than currently expected by the market, and that a resolution of the debt limit issue is potentially another serious problem.

    In Tennessee, I voted for both GOP senators Corker and Alexander and the current GOP governor Haslam.

  8. My last comment had an incorrect link to the USC summaries of the prior government shutdowns.

    This is the correct link:

    In my next post, I will discuss my criteria again for publishing comments at the end of the post. I will reference the preceding comment from anonymous that was mostly a personal ad hominem attack directed at me. I am use to receiving those kind of comments from republicans. Usually, I do not publish a comment that consists 100% of a personal attack, but that one was about 10% germane on the topic discussed in the Politics and Etc. section so I published it.

  9. Zandi's projection of a decline in GDP is only an estimate, nothing more. In fact all the lost wages will be paid once the two tribes (as you call them) work this out. So any spending is only temporarily postponed.

    If you check out the govt shutdown in 1995, GDP grew faster after the shutdown than before. That shutdown lasted 27 days. We also had a major blizzard that paralyzed most of the East Coast during that period.

    I will say it again, the pundits and partisan hacks, mostly Democrats in this case, are going after the Republicans to attempt to influence the 2014 election so they can take over the House. That is the main reason why the Dems refuse to negotiate. Nobody here has their hands clean. It's just raw partisan politics at work. If you think any of them are being sincere, then you are either naive or misinformed.

  10. I will be discussing your comments in my next blog along with many other issues. You can respond to them in the comment section to that post which will be published on Saturday.

    I do not recall saying that politicians are sincere. I do recall saying many times in the blog that politicians lie because it is in their interest to do so.

    "The Road to Political Power: Lying Works/Recent Gold and Silver Sales"

    In the last analysis, it is always primarily about acquiring and maintaining political power.

    I am familiar with your type of argument that assigns a position to another, which has not been stated, and then ridicules it with a phrase like "naive or misinformed".