Saturday, September 14, 2013

Bought 50 HBAPRF at $18.53/ Roth IRA: Bought 50 PJA at $25.18, Bought 50 CBLPRD at $24.6, Added 50 SANPRB at $18.24 & Sold 100 PGX at $13.65/Bought 50 CBLPRE at $22.7

Big Picture Synopsis


Stable Vix Pattern (Bullish)

Friday's Close: VIX: 14.16 -0.13 (-0.91%) 
VIX Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Expecting a 10%+ Correction
Intermediate and Long Term: Bullish

I would be more sanguine about stocks with a 10%+ correction. The huge rally since 10/3/11 without a correction actually makes the OG nervous. The S & P 500 closed at 1099.23 on 10/3/2011. Historical Prices | S&P 500 Index 

Stanley Druckenmiller, who was one of the most successful hedge fund investors prior to his recent retirement, believes that QE is propping up and subsidizing all asset prices. In his opinion, the end of QE will cause asset prices to go down. Bloomberg


Short to Long Term: Slightly Bearish based on Interest Rate Normalization (The Difficult Path to Interest Rate Normalization)

I would become more or less bearish depending on future inflation and inflation expectation numbers. The slightly bearish stance is based on the average annual ten year CPI forecast remaining in the 2% to 2.25% range.

I am continuing to buy equity preferred floating rate stocks that pay the greater of a minimum coupon or a float over the 3 month Libor rate. Over the past several weeks, those securities have been hit hard and have found another air pocket which is not unusual for them as discussed below and in many prior posts. I debated another SA reader about the merits of those securities compared to the fixed coupon preferred stocks from the same issuer in the comment section to this Seeking Alpha article.  


Turtle Investing:

I am attempting, as always, to improve my cash flow through the purchase of income generating securities. My most basic investment approach is called by me "turtle" investing, a slow accumulation of money through the purchase of income generating securities and to then use the constant stream of cash flow to buy more of the same. I am not swinging for the fences or trying to hit the cover off the ball.

A corollary is that my approach is cautious, involving for the most part small lot purchases, buying more in small lots on dips, and frequently selling the higher cost shares on pops. 

Another facet of turtle investing involves the ownership of securities throughout the capital structure and widespread diversification, so that no company or even a small group of companies can cause a material adverse change in my financial position by going bankrupt or by suffering a severe, unexpected and permanent downturn in its business and share price.

Economic Reports:

CoreLogic reported that 2.5 million more residential properties returned to positive equity during the second quarter. Corelogic estimates that there are 41.5M mortgaged residential properties and 7.1 of those had negative equity as of 6/30/13, down from 9.6 million at the end of the first quarter.

Still, those homeowners who have just returned to positive equity, and who have not been able to refinance their mortgage under HARP, may have time to save money through refinancing and to decrease their DSR ratio (debt service payment to disposable personal income, Chart Household Debt Service Payments as a Percent of Disposable Personal Income). By doing so, the monthly savings can be used to reliquify their balance sheets, where needed, and/or to increase savings and/or spending.

For the week ending 9/12/13, Freddie Mac reported that the average 30 year FRM was 4.57% with .8% in fees and points. The 15 year FRM averaged 3.59% with .7% in fees and points. Freddie Mac - Mortgage Rates Hold SteadyPrimary Mortgage Market Survey- Freddie Mac

Through the 2013 second quarter, there have been 2.7 million completed refinances under the HARP program. There are several criteria that must be met to qualify. For example, the mortgage needs to be owned or guaranteed by either Fannie or Freddie which excludes all of those mortgages owned by private companies.

China reported better than expected industrial output and retail sales for August. Industrial production rose 10.4% from August 2012 and retail sales increased by 13.4%. 

Alcoa, Bank of America and Hewlett Packard are deservedly being kicked out of the DJIA effective 9/23. They will be replaced by Visa, Goldman Sachs, and Nike. Goldman Sachs, Visa & Nike Set to Join the Dow Jones Industrial. Ken Lewis sank BAC with the Countrywide acquisition and HP has undergone a plethora of self-inflicted wounds. While I own Alcoa, as a contrarian play that the OG finds appealing with mix results historically, Alcoa's glory days are in the distant past as a representative of America's industry. Of course, the DJIA probably needs a new name such as the Not So Industrial Average.

Verizon sold $49B in bonds to partly finance its $130B buyout of Vodafone's interest in Verizon Wireless. Reuters Apparently there is no shortage of money laying around. Verizon Prospectus


1. Bought 50 PJA at $25.18-Roth IRA (see Disclaimer):

Snapshot of Trade: 

2013 Roth IRA Bought 50 PJA at $25.18

Security Description: The Merrill Lynch Depositor Inc. Preferred PLUS Cl A 8% TRUCs QWS-2 for Qwest Capital Funding (PJA) is a Trust Certificate (TC)

Stocks, Bonds & Politics: Trust Certificates: New Gateway Post

I decided to break this down into single sentences:

A brokerage firm forms a Grantor Trust and appoints an independent trustee as administrator.

Bank of New York is the trustee.

The brokerage firm buys bonds in the secondary market and then sells the bonds to the trust.

The trust funds the purchase with the sale of trust certificates to the public.

The TC PJA represents an undivided beneficial interest in Qwest Capital Funding senior bonds.

That bond is referred to as the "underlying security".

The underlying security has a "make whole provision" (pages S-5, S-30)

The underlying security has a 7.75% coupon and matures on 2/15/2031.

The TC will mature at the same time.

The TC PJA has a higher coupon at 8% than the underlying security.

The higher coupon is supported by the trust owning more bonds.

Qwest Capital Funding is now part of CenturyLink (CTL).

CenturyLink Profile Page at Reuters; CenturyLink Key Developments Page

CenturyLink Website 

The trustee collects the interest paid by CTL and then pays the owners of the TC.

Finra Information on the Underlying Bond

According to FINRA, the bond is currently rated Ba1 by Moodys and BB+ by S & P.

At a total cost of $25.18, the current yield is about 7.94% which is tax free in the Roth IRA. Before taxes and inflation, money will double in 9.07 years at that rate. Estimate Compound Interest

The current consensus E.P.S. estimate is for $2.71 this year and $2.71 next year. CTL Analyst Estimates | CenturyLink

CTL's stock is currently rate 4 stars by Morningstar. 

Prior Trades: In addition to this 50 shares purchase, I own 150 shares in a taxable account: Bought 50 PJA at $19.45 December 2009Bought 50 of the TC PJA at 25.06 April 2011Added 50 of the TC PJA at $24.6 November 2011.

150 PJA as of 9/6/13: Average Cost Per Share=$23.2
At my $23.2 average total cost per share number, the current yield is 8.62%.

I have taken a small profit on a 50 share lot previously purchased in the Roth IRA:

 2013 Roth PJA 50 Shares +$22.52
I received the semi-annual interest payment for those 150 shares held in a taxable account on 8/15/13:


Unlike bonds purchased in the bond market, the trust certificates traded on the stock exchange trade"flat", which simply means that the buyer does not have to pay accrued interest to the seller and whoever owns the TC on the ex interest date receives the entire interest payment, just like a stock in that respect.

Rationale: Again, it is all about tax free income generation in the Roth. Cash flow is used to purchase more income generating securities. I am in effect converting a taxable bond, paying close to 8%, into a tax free one by buying it in the ROTH IRA.

Risks: Credit and interest rate risks are both important.  

I calculated the "Macaulay" duration of this bond at 9.67 years. Investopedia

CTL has a lot of debt, and the bond matures in 2031. A lot can go wrong in the next 17+ years. 

For this kind of company, a 17 year time frame will require constant monitoring as to CTL's credit worthiness. 

CTL 10-Q for Q/E 6/30/13 (long term debt at $20.283B)

Future Buys and Sells: I do not intend to buy more in the ROTH IRA. I may sell the 150 shares held in the taxable account when and if the price exceeds $26 provided I have a better idea for the proceeds. 

Friday's Close: PJA: $25.11 +0.06 (+0.23%)

2. Sold 100 PGX at $13.65-Roth IRA (see Disclaimer):  

Sponsor's webpage: PGX | Preferred Portfolio

Duration as of 8/30/13=6.46 years

Snapshot of Trade:

Sold 100 PGX at $13.6539
Snapshot of History: I suffered a loss on the shares that was offset by the cash dividends paid monthly. Needless to say, that is not a desired result.


Snapshot of Loss:

2013 Roth IRA 100 PGX -$116.54

Dividends: $116.09
Share Loss= $116.54

I had previously sold a 200 share lot profitably. Item # 3 Bought 200 PGX at $13.53 (June 2010)- Item # 5 Sold: 200 PGX at $14.38 

2010 PGX +$155.96
Since I now expect further share price declines due to interest rate normalization, I decided to stop the bleeding on this one, and hope to buy it back below $12.75 in the ROTH IRA. PGX has a significant weighting in junk rated bonds:


I am more comfortable at the moment with the bond CEF IGI, which I discussed in last week's post. IGI is weighted in investment grade bonds and is scheduled to liquidate in 2024.

PGX closed at $15.02 on 5/2/13: PGX Historical Prices

3. Averaged Down-Added 50 HBAPRF at $18.53 (see Disclaimer):

Snapshot of Trade:

2013 Bought 50 HBAPRF at $18.53
I will just copy and edit where appropriate my prior discussion made in Item 6  Bought 50 HBAPRF at $20.95 The editing is done to reflect the yield difference based on the lower purchase price. I will now sell that lot whenever I have a profit after commissions. 

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.


HBAPRF went ex dividend for its quarterly distribution on 9/11, shortly after this last purchase.

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 flipped a 100 share lot in 2008:

2008 HBAPRF 100 Shares +$232.99

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 $18.53, the minimum yield will be 4.72%. 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 7.75% at a total cost of $18.53.

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 probable 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 4.72% at a total cost of $18.53.  

The ten year average annual CPI forecast was on 9/5/13 when I made this purchase: 

Break-Even= 2.06%

The break-even was 2.07% as of 9/6/13.

I am in a trading mode for all equity preferred floating rate stocks. However, when I buy these securities at below $20, I am content to hold them long term too.

Future Buys-Sells: I am not likely to buy more HBAPRF. I will sell the highest 50 share lot whenever I have a profit.  

This one has continued to sink.

Closing Price Last Friday: HBA-PF: $17.81 -0.28 (-1.57%)

4. Added 50 SANPRB at $18.24-ROTH IRA (see Disclaimer):

This was an average down from a recent purchase:  Item # 6 Bought Roth IRA: 50 SANPRB at $19.35

I will simply copy some of the discussion from that prior post starting in the Security Description section below.

Snapshot of Trade:

2013 Roth IRA Added 50 SANPRB at $18.24
This purchase was made on Thursday, 9-5, and interest rates moved up that day. 

Closing Prices 9/5/13:

Many of the floating rate equity preferred stocks fared worse:

Security Description: Santander Finance Preferred S.A. Unipersonal Floating Rate Gtd. Pfd. Series 6 (SAN.PB) is an equity preferred stock that pays qualified, non-cumulative dividends at the greater of 4% or .52% over the 3 month Libor rate on a $25 par value. Prospectus

The prospectus does contain a stopper clause that prevents Santander from paying common stock cash dividends after eliminating the cumulative preferred stock dividend.

Stopper Clause Page 47
Prior Trades: I sold earlier this year 50 shares of SANPRB in the ROTH IRA and another 50 shares in a taxable account:

2013 Roth IRA 50 Shares SANPRB +$225.47
2013 Taxable 50 Shares SANPRB +$124.58
Item # 7 Sold 50 SANPRA at $21.72-ROTH IRA (April 2013)-Bought 50 SANPRB at $16.93-Roth IRA (October 2012)

Item # 4 Bought 50 STDPRB at $17.96 January 2011-Item # 4 Sold 50 SANPRB at $20.77 February 2013

I also have several trades when the symbol was STDPRB:

2010 STDPRB 100 Shares +$265.01
2011 STDPRB +$143.16 (two 50 share lots)
2010 STDPRB 50 Shares +$37.03
Bought 100 STDPRB at $15.3 (September 2009)-Sold 100 STDPRB at $18.11 (August 2010)

Bought STDPRB at $18.6 March 2010 Roth IRA-Sold 50 STDPRB at $19.64 in the Roth IRA February 2011

Bought 50 STDPRB at $18.54 March 2010-Sold 50 STDPRB at $20.2 March 2011

StBought 50 SANPRB at $18.5 March 2010-Sold 50 STDPRD at $20.34 May 2011

Total Realized Gains (Excluding Dividends): =$795.25

I also have an unrealized gain on 80 shares, held in a satellite taxable account, that I have decided to hold long term, or until I develop serious concerns about Santander's ability to pay the dividend. I have a low cost basis for those shares: Bought: STDPRB at $13 (August 2011)Added 50 STDPRB at $15.44 (November 2011)

Rationale: The main advantage of this security is that it provides a measure of problematic inflation and low inflation/deflation protection in the same security. The low inflation/deflation protection is provided through the 4% minimum coupon, while the problematic inflation problem is addressed by the 3 month Libor float provision.

By buying this security at a discount to its $25 par value, I juice the yield for both scenarios. At a total cost of $18.24, the current yield would be about 5.48% using the minimum 4% coupon.

At a 5% 3 month Libor, the coupon would become about 7.57%. 

While Santander has no obligation to call this security, it has the right to redeem it on or after 3/15/17. I doubt that this right would be exercised unless there was problematic inflation that would cause a serious spike in the coupon rate, reasonably estimated to last for a prolonged period of time, when SAN could refinance at much better rates using senior bonds or even a fixed coupon equity preferred stock. I would give that scenario a very low possibility rating for the next five years.

SANPRB is much more favorably priced than two similar equity preferred floater issued by Suntrust and Zions, both of which have 4% minimum coupons and similar floating rate provisions:

SunTrust Banks Inc. Dep. Pfd. (Rep 1/4000th Interest in a share of Perp. Pfd. Series A)(STI.PA)

Zions Bancorp Dep. Pfd. (Rep. 1/40th Interest in a Share of Fltg. Rate Non-Cum. Perp. Pfd. Series A) (ZB.PA)

According to quantumonline, the current ratings for those three securities are as follows:

                  MOODYS / S & P

ZBPRA:     B1 / BB

S & P does not see any difference in the credit quality between ZBPRA and SANPRB but there was a market price difference on 9/6/13/ in favor of ZBPRA

As of 9/6/13, ZBPRA closed at  at $21.47 +0.03, while the Suntrust floater closed at $21.69. The Morgan Stanley floater has a 4% minimum and a better spread over Libor at .7%, and it closed $19.35 with a slightly better rating from S & P at BB+ compared to the Zions' security.

I discuss the disadvantages and advantages of equity preferred floating rate stocks in this 2009 post: Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities That post also contains snapshots of my trades in this niche sector.

Risks: I discuss risks for this type of security in the preceding linked post. I have also discussed the risks in a previous discussions of this security linked above.

Equity preferred securities issued by financial institutions would become worthless in a bankruptcy just like the issuer's common stock. Senior bond owners would likely be paid at most pennies on the dollar. The fear of a security going to zero, which is the ultimate downside risk, will create volatility due to both real and imagined concerns about the issuer's ability to pay.

As late as August 2011, I was able to buy this security at $13 per share after selling it at $20.34 a few months earlier. That kind of volatility creates both risks and opportunities.

For the Santander preferred, volatility can simply be created by some negative story coming out of Spain. Santander of course has operations worldwide including significant operations in the U.S. and in Latin America. 2012 Annual Report.PDF Total customers totaled 101.9 million for the Group with 44 million in Latin America, 30 million in Continental Europe, 1.7 million in the U.S. and 26.2 million in the UK. The total number of branches stood at 14,392. (page 32 Annual Report)

I last discussed Santander in detail when buying 50 shares of the common: Item # 3 Added 40 SAN at $6.8

The issuer discusses risks starting a page 15 of the Prospectus.

This one has continued to sink.

Closing Price Last Friday: SAN-PB: $17.87 +0.21 (+1.19%)

I have not seen any recent negative stories about SAN that would cause investors to have credit concerns. The common stock has recently moved above its 50 and 200 day SMA. SAN Interactive Chart I own over 200 shares of the common. {last discussion:  Item # 3 Added 40 SAN at $6.8 April 2013}

5. Bought 50 CBLPRE at $22.7 (see Disclaimer): 

Snapshot of Trade:

2013 Bought 50 CBLPRE at $22.7

Security Description: CBL & Associates Properties Inc. 6.625% Cumulative Preferred Series E (CBL.PE) is a perpetual equity preferred stock that pays cumulative dividends at a 6.625% fixed coupon rate on a $25 par value.  Prospectus

The issuer is a REIT that owns malls.

CBL & Associates Properties Profile Page

CBL & Associates Properties Key Developments Page at Reuters

Dividends are paid quarterly and the last ex dividend date occurred shortly after my purchase on 9/11/13.

The dividend yield at a total cost of $22.7 is about 7.3%.

The prospectus contains a typical stopper clause that would prevent CB & L from deferring a cumulative preferred stock dividend while continuing to pay a cash dividend to the common shareholders.

Stopper Clause at page S-14 
As noted in my Gateway Post on REIT preferred stocks, the owner of those securities have a preference right over common shareholders as to dividend payments, and the stopper clause is just an expression of that preference right.

Gateway Post: Stocks, Bonds & Politics: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages



On the day of my purchase, the common stock closed at $19.18 +0.01 (+0.05%)

CBL Key Statistics

CBL & Associates Properties Website

Unlike other equity preferred stocks, all or virtually all of the dividend payments made by REITs will not be characterized as qualified dividends. This different treatment is due to the non-taxation of income at the corporate level. 

I checked some of my recent tax history for preferred stock dividends paid by REITs. In 2012, the two dividends paid by SLGPRC were classified as 100% non-qualified. None of the dividend paid by CBLPRC in 2009 was classified as qualified which was also true for SLGPRD and LXPPRD. Occasionally, I have seen a small amount classified as a qualified dividend. Another possible classification is return of capital which was a prominent item during my prior ownership periods of Glimcher Realty preferred stocks.

Prior Trades: This is a new preferred stock. I have traded CBLPRC and CBLPRD. 

CBLPRC was called for redemption at its $25 par value plus the accrued dividend on 11/5/12. It had a 7.75% coupon. 

CBLPRD is still trading and has a 7.375% coupon. Prospectus When I purchased CBLPRE, which has a lower coupon, CBLPRD was trading at $24.65 and had a slightly higher effective yield at 7.48%. I just went with the one that cost less money for a 50 share odd lot given the small differential in yield.

Buy CBLPRL Near $10 (October 2008)-Item # 2 SOLD CBLPRC at $12.7 (May 2009)

2009 CBLPRC 50 Shares +$118.98
Item # 1 Bought 50 CBLPRC at $21.87 (June 2010)- Item # 5 SOLD CBLPRC at $24.25 (August 2010)

2010 CBLPRC 50 Shares +$100.57
Item # 1 Bought 100 CBLPRC @ 24.36 (November 2010)-Sold: 100 CBLPRC at $25.36 (May 2011)

2011 CBLPRC 100 Shares +$84.07
Other Trades:

Item # 3 Bought 100 CBLPRC @ $24.36 (August 2011)-Item # 2 Sold 50 CBLPRC at $24.88 (January 2012); Bought 50 CBLPRD at $23-Sold 50 CBLPRD at $23.71 (January 2012)

2012 CBL Preferred +$19.64
Total Realized Gains CBL Preferred Stocks: $423.83

Rationale: When an investor buys an equity preferred stock, all that you have is the dividend and a preference right for the payment of that dividend over the common shareholders. The dividends are cumulative which affords a modest amount of protection compared to non-cumulative. CB & L can defer payment once it eliminates the cash common dividend but can not eliminate the obligation to pay short of bankruptcy. And, since CB & L is a REIT, it has to pay out 90%+ of its net income to shareholders to maintain its tax status.

Risks: The reason for buying 50 shares is that I see a potential for further price declines based on interest rate normalization. I am using cash to purchase this security that is generating .01% in income and likely to continue doing so for two or more years.

(1) Interest rate risk is probably the main risk. This security has no maturity date. CB & L has the right, but not the duty, to redeem this security on or after 10/5/2017 at its $25 par value plus accrued dividends. CB & L would only exercise that call option when and if it is in its interest to do so. If interest rates rise, then the owners of this security are simply stuck with it. This security started trading in October 2012 and hit $26.59 on 5/10/13. The security declined 14.63% since hitting that high until my purchase at $22.7. That demonstrates clearly the interest rate risk. There has been no change in my opinion on the credit risk issue. The decline is consistent with other perpetual, fixed coupon equity preferred stocks. 

(2) Credit Risk: The last economic downturn demonstrates the potential downside pricing risk associated with both real and imagined credit concerns. As noted above, I bought CBLPRC at close to $10. Last year, that issue was redeemed by CB & L at its $25 par value. This kind of history demonstrates that there is considerable downside risk when buying any equity preferred stock near par value. The fear that overtakes investors becomes the driving force in pricing decisions. It is impossible for many to see the light at the end of the tunnel even when it is clearly visible. 

The crash in REIT preferred stock prices during the Near Depression had nothing to do with interest rate risk. It was due entirely to concerns about credit risk. The fear of losing the entire investment becomes the only relevant factor for many investors, as the sell button is hit with abandon, and other more rational investors are concerned about catching a falling knife and become reluctant to enter buy orders. The downside risk of an equity preferred stock is zero, just like the common shares. 

The fear of losing everything invested in an equity preferred stock during the last downturn was rational in October 2008. The world was then on the cusp  of a worldwide Depression. Many leveraged REITs would not have survived another Great Depression. That is just a fact. 

The value of their properties would have likely fallen below the values of their senior debt, making it unlikely that equity preferred shareholders would have received anything in a bankruptcy. After the passage of TARP and the adoption of a large number of highly proactive policies by the government and the Federal Reserve, the depression scenario was off the table, and the pricing then became irrational at levels prevailing in March 2009. 

CBL does have a lot of debt. As of 6/30/13, mortgage and other indebtedness stood at $4.949+ Billion. Assets were listed at $7+B. Page 3, CBL-6.30.2013-10-Q The maturity schedules are listed in note 6, page 23.

Closing Price Last Friday: CBL-PE: $22.33 +0.02 (+0.10%)

6. Bought 50 CBLPRD at $24.6 (see Disclaimer): 

Snapshot of Trade:

2013 Roth IRA 50 CBLPRD at $24.6
After buying CBLPRC in a taxable account, I decided to buy the slightly higher yielding, and functionally equivalent, CBLPRD in the ROTH IRA. The sole purpose for purchasing this security is to generate income in the ROTH IRA. 

CBLPRD is a cumulative equity preferred stock that will pay mostly or entirely non-qualified dividends at the fixed coupon rate of 7.375% on a $25 par value. Prospectus 

CBL.PD went ex dividend on 9/11/13. 

At a total cost per share of $24.6, the dividend yield would be about 7.5%. In the Roth IRA, that would be tax free income and would result in a doubling before inflation in 9.58 years. Estimate Compound Interest

CBLPRD can be called now at the issuer's option. It is possible that CBL will call the security provided it can refinance at a sufficiently lower rate to make it worthwhile. The recent rise in rates probably puts a damper on that possibility. As mentioned above, CB & L did redeem CBLPRC, which had a 7.75% coupon, back in November 2012. CBL Announces Redemption of 7.75% Series C Cumulative Redeemable Preferred Stock Rates were lower last November compared to now and the Preferred D coupon is lower. 

Future Buys and Sells: I will be monitoring both CBLPRC and CBLPRD for a possible 50 shares average down. I am not likely to go beyond a combined 150 share total due to the risks. 

Closing Price Last Friday: CBL-PD: $24.50 +0.10 (+0.41%)

Both CBL preferred stocks closed last Friday above my purchase after adding back the dividends.

Friday's Close for Common Shares:   CBL: $19.31 +0.11 (+0.57%)


I was away from HQ during Thursday and Friday all day. I did not have time to discuss two purchases made last Wednesday which will be discussed in the next post. One of those purchases was an add to my Unilever position and the other was a repurchase of a Canadian REIT. There are two Unilever stocks, one is based in the Netherlands, UN: 38.38 +0.26 (+0.68%), while the other is the functionally equivalent UK corporation which trades for a higher price, UL: 39.29 +0.47 (+1.21%). I had bought the UL stock at $18 back in March 2009. Last Wednesday, I bought UN which was then and now trading below its 50 and 200 day SMA lines.  UN Interactive Chart 


  1. That Druckenmiller video was very good, (not the usual fluff.) How much do you agree or disagree?

    What is "2&20"? I'm assuming by "all assets classes" that means stocks, bonds, metals, commodities, international and national.

    He makes the point that QE is prompting up, and that June shows how reactive the market will be when tapering is removed (he's not talking about when it's started if it is in Sept, but when the idea is stated that QE will be ended by mid next year.)

    I'm thinking, it's POSSIBLE that start of QE removable has been priced in. That with each next announcement will be more reaction to the idea, but in between plenty of upswing to counter it. So that Druckenmiller's thought that June shows how badly the market's will react to QE removable may be overkill. (His thinking validates my original thinking, but I've started wondering...)

    Druckenmiller doesn't seem to be basing his expectation on a valuation of fundamentals vs. stock prices. (Not in the video.) He seems to be basing it on the uncertainity level, and that it's not worth betting until you have more certain times.'d be fun, if he could be followed for when he does find good times and buys to be long on!

  2. Last post was from curls :)

  3. Curls: Druckenmiller is a smart guy. He has made a great deal of money for himself. His Duquesne Capital Management reported something like a 30% annual return with no down years. Over the years, his style has been to place large bets where he has a high level of confidence which he lacks now.

    The fact that I am older does not make me wiser.

    I would also note that he admits to being unduly pessimistic at times.

    The 2%/20% reference is a typical hedge fund compensation arrangement. The 2% is a management fee applied to assets under management. The hedge fund would then take 20% of the profits. I view that as just ridiculous. Few managers would be worth that kind of money. Druckenmiller would be one but he recently retired.

    The bond market has not yet fully priced the end of QE. The ten year treasury has another 1% increase in the cards in my opinion.

    Stocks have behaved well as intermediate and long term rates spiked in yield. The ten year has gone from 1.66% (5/1/13) to almost 3%. The S & P 500 closed at 1,582.7 on 5/1 and at 1,687.99 last Friday. That is a 6.65% gain in the S & P Index while intermediate and long rates were spiking up in yield.

    In a word, I do not agree with Druckenmiller that all markets are being propped up by QE. The bond market is certainly being propped up by QE. Stocks in my opinion no longer need that abnormal monetary policy. I actually believe that QE is doing more harm to the economy than good now.

    Still, I know that the elevator will go down a lot faster than it went up. I am concerned about the rise in the S & P 500 since October 1, 2011 without a healthy correction and consolidation period.

    Another one of his interviews can be found here, where he is expressing long term pessimism about the U.S. fiscal situation:

    That is a 30 minute interview.

  4. Links to some other interviews:

    Druckenmiller: Everything Cheap Relative to Bonds

    Druckenmiller Sees Crisis Worse Than 2008

  5. Thanks for the links. He is definitely quite pessimistic. He does tend to bear, so I hope it's overkill.

    While I agree that QE is harmful to stocks at this point... it's also a question of whether the rest of investors will think so.

    It seems to be more retail going in at this point from articles I'm reading, with professionals getting out. I've gotten the impression that too is part of the move as it gets more bearish, with corrections in the making.

    I'll see after Tues what to do next.

    Hope your car check light is feeling better, even if it had little to do with car's ability to run.

  6. Agree, Santander looks relatively solid for now (BB). However given recent FED pronouncements re their interest rate policy (close to zero for many many years to come) I opted out for SANPRF, fixed 10.5%, payed biannually, and somehow Fidelity managed to get me ten of them today below par, infinitesimally so but still below.

  7. I would anticipate that SANPRF will be called on 9/29/14. Since it recently went ex dividend, that would leave two more semi-annual payments at the 10.5% fixed coupon rate. That would be fine but then you will probably need to re-deploy in one year.

    If the security is not called, it transforms into a floater with a spread calculation that none of us without a Bloomberg terminal could calculate on our own.

    SANPRB will probably pay the minimum coupon for at least 3 more years. As we move closer to the FED's tightening cycle, I would anticipate that investors will give more attention to the equity preferred floaters that pay the greater of a minimum coupon or a spread to Libor. Their prices may not be as favorable at that time as they are now.

    The long term benefit of those securities, assuming no material change in credit risk, comes from buying them at a deep discount to their $25 par values which will juice the benefits of the Libor float when conditions return to normal and particularly when the 3 month Libor rises above it long term average.

    While it is hard to imagine now, I expect to see a 10%+ 3 month LIBOR at some point within the next 10 to 20 years, more likely sooner than 10 years than later than 20, as the world enters into another long term problematic inflation cycle.

  8. MID-SWAPS rates (5yr and others) are available on WSJ site for example. No special terminal needed.

    SANPRF is a somewhat weird security being "fixed to float" as opposed to being one or another. My bet is this: Interest rates will stay low for a while. 10.5% will be nice to have for a while. And when inflation takes over I'm partially protected, LIBOR is built directly into future rates see the formula:

    10.5% + 3m LIBOR (US) - MID-SWAPS RATE (5yr)

    The biggest unknown here is of course the latter, the MID-SWAPS RATE (5yr), but this should fluctuate like hell just by its nature: "the expectation of what the average LIBOR will be over the next 5 years" with little correlation to the actual LIBOR. Hope is I should be able to exit at one point or another principal intact. Will see.

    BTW if this were to float today, the interest would be around 9%, going back three years the worst it would have had been was around 8% though I realize this signifies little given the relative stability of the interest space in the last 3 years.

    The relevant charts:

    Overall my sense/hope is I don't risk too much here long term, and should they call it next year I'll be ahead 10.5%. Redeployment will be an issue of course, hopefully not too much, a correction of some kind is around the corner. One year from now feels more or less right.

  9. I would be curious where I could find that 5 year Mid-Swap rate at the WSJ site. Please provide a link.

    Irrespective of whether the floating rate will be 8% or 9% on the optional call date next September, it would be in Santander's interest to call the security before it starts to float. This is a security that the bank would want to redeem whenever it has a legal right to do so.

    SANPRE is a fixed 10.5% coupon that is callable at its $25 par value on or after 9/29/14. That one closed today at $26.37. I would anticipate that it will be called also. It is being price based on the value of four quarterly dividends ($2.625 per share) for a one year junk rated security or a net return before the purchase commission of about $1.25 per share for 12 months. By buying SANPRF at below par value, you received a better deal than the buyers of SANPRE.

    I seriously doubt that the owners of SANPRE or SANPRF will see a single payment after 9/29/14. The redemption price will be paid then plus accrued dividends to that date.

    Santander does not have to pay now 8% or 9% for a non-cumulative equity preferred. It has a 6.5% fixed rate preferred that traded as high as $24.69 today, with a 52 week high of $26.39.

    A 6.8% non-cumulative equity preferred closed at $24.73 today and has traded as high as $25.92.

    Santander could sell senior bonds to refinance the high cost SANPRF and SANPRE at a significantly lower rate than those equity preferred stocks. A senior note due in 2016, with a 4.25% coupon last traded at 103.

  10. Check out for weekly summary or for the current rates. In both cases under Swaps or Libor swaps which per their notes (bottom of the page) are defined as "International Swaps and Derivatives Association (ISDA(R)) mid-market par rates for a fixed-rate payer, who in return receives three-month Libor" which as far as I can tell is what replaced Telerate Page 19901 reference in the SAN-F prospectus, p.47.

    The rate is cross-posted on the ICAP site (UK provider) see: - dynamic chart on the right side.
    I will have no problem if they call it, 10.5% to park some cash for a year safely suits me fine. Beats 0.01% I would otherwise get from Fidelity.

  11. We will both receiving that .01% for at least the next two years. With a million in a money market now, an investor could fill up their empty SUV tank once a year with the earnings.