Saturday, October 19, 2013

KO, INTC, GE/Sold 107+ GAM at $34.44/Sold 50 GAL at $33.08/ Bought 50 SGZA at $20.6/Bought Roth IRA 100 FSC at $10.1/Paired Trade Roth IRA Sold 50 DRE at $15.95 & Bought 50 TCBIL at $21.3/Radical Reactionaries and Massive Resistance

I am back on my regular weekly publication schedule after Congress ended the government shutdown and decided to avert for now a government default. I will have more political observations about these recent events below, particularly in the "Politics and Etc" section.

The government may not have a functional site for Obamacare for several more weeks. It is even possible that the administration will have no choice but to postpone the individual mandate due to the most significant debacle in the history of website development, leaving us with the same timeless question.

Can the U.S. government do anything right?

For a crap website apparently designed to cause the maximum amount of frustration to millions, the government has probably already spent over $500M based on the GAO report, referenced below, and my rough estimate since that report. The level of competence appears to be what one would expect from a third world country attempting to launch a similar site, using programmers whose training comes from reading one of those idiot guides and 1/100th of the money. USA Today has some choice quotes from experts, Tech experts.

The largest contractor on the project is a Canadian company called CGI Federal which has been accused of missing critical milestones for Vermont's Health Connect. Altogether, the government hired 55 contractors. Those two sentences highlight one problem. Why not hire one contractor-Amazon, for example, who at least knows how to build a website?

Even those who are in favor of this program are not pulling any punches on this issue: Huffington Post and the Slate.

Charles Schwab may have the same software programmers that the government is using to set up the healthcare exchange.

That is not a compliment by the way.

In a Schwab brokerage account, a number of exchange traded bonds and preferred stocks, with $25 par values, are showing price swings in the thousands, causing the reported account value's "day change" to wrongly swing wildly up and down by tens of thousands.

The account was actually up several thousand dollars yesterday when I took this snapshot:

A number of errors contributed to that grossly incorrect number.

I just took a snapshot of one of them:

Schwab was reporting a $4,744.55 decline in a mere 50 share position of the $25 par value preferred stock WBSPRE. The accurate number was a $7.5 gain from the prior day's close.

These errors have been ongoing for several days now. I have never seen anything like it; and I have multiple brokerage accounts and have been trading online since the early 1990s.

Big Picture Synopsis


Stable Vix Pattern (Bullish):
Closing Price Last Friday: VIX: 13.04 -0.44 (-3.26%) 

Short Term: Expecting a 10%+ Correction (market is not cooperating)
Intermediate and Long Term: Bullish

I continued to pare my stock allocation in response to the political developments, and I transferred some excess cash from a brokerage MM fund into a FDIC insured bank account which pays slightly more than .01%.

I have now reduced my stock allocation by slightly more than $25,000 since 9/30/13. That is a slight pare for me.

Most of the proceeds are sitting in a MM account. I am replacing the lost dividend income by purchasing bond and bond like investments using far less money to generate the same level of income. As noted in my last post, this kind of allocation change reduces my stock allocation slightly, increases my cash allocation and keeps my income generation about the same.

Needless to say, I am surprised by the market's upward trajectory. Since stock market timing is so difficult, I rarely make significant reductions in my stock allocation. The largest reduction since 1999 was in 2007.

The bond market experienced declining yields last week, not exactly in harmony with the recent robust stock rally. MarketWatch

With the radicalization of the GOP (, I am concerned about the nation's ability to rationally govern itself. The past five years have been good ones for me as an investor, another motivating factor for moving soft tissue back into the shell.

Will there be a repeat of the most recent political dysfunction before the November 2014 elections? It is conceivable that a few GOP politicians have learned something but many will be anxious for a repeat performance.

In a 2006 book, Off Center: The Republican Revolution and the Erosion of American Democracy, the Yale political scientist Jacob Hacker found that the House GOP had shifted six times further to the right since 1975 than the Democrats had shifted to the left. And, the GOP shift to the right has been on massive doses of steroids and amphetamines since 2010.

Maybe a large number of investors owning U.S. paper will simply tire of the political dysfunction.

Three strikes and your out. Maybe the U.S. can shoot for the Golden Sombrero when Hilary succeeds Obama for eight years, provided the GOP still controls the House. The GOP is doing whatever it can to improve Hilary's chances in 2016.

The market sang Hallelujah in response to Congress damaging the economy less than expected during October 2013, while managing to reopen the government and to extend the debt ceiling until early next year.

It is really hard for the OG to become excited by such events.

Many are starting to recognize that the U.S. Congress is the Clear and Present Danger to the economy.

Congress did manage to inflict some damage to U.S. economy and prestige, as noted in this NYT article, while accomplishing nothing positive.

At least the republican politicians told us for the millionth time, possibly more, that all of them want to repeal Obamacare, a fact known to every American over the age of 2 and to most perceptive 1 year olds.

It was not necessary to shut the government down to prove that point.

Most of us got the idea after all of them voted against Obamacare before it became a law. Those who spend their time watching programs like the Jersey Shore probably got the message when all of them voted over and over again to repeal, defund or dismantle Obamacare since it become the law of the land.

Since 2011, 15% of the time spent on the House floor has been devoted to that endeavor.  NYT

The GOP's blame spin about the shutdown assumes that their constituents are brain dead. Many of them are either brain dead or brainwashed without question. Sure, Obama and Harry Reid are clearly to blame for the shutdown, since they refused to repeal Obamacare or to appoint negotiators to engage in that discussion.

An editorial in the made the following observation that squarely placed the blame on the GOP, referring to the "quality of thinking-or lack thereof" that has "afflicted many GOP conservatives":

"They picked a goal they couldn't achieve in trying to defund Obamacare from one House of Congress, and then they picked a means they couldn't sustain politically by pursuing a long government shutdown and threatening to blow through the debt limit."

The WSJ editorial board is the GOP's best buddy too. The RB really enjoyed the phrase "or lack thereof" coming from the GOP's best buddies in journalism or lack thereof.

The madness infesting the House of Representatives first appeared in full bloom in 2011 and again this October. There is no known cure for this madness other than the election of new representatives who are at a minimum sane, regardless of their political persuasion or tribe membership, and who express their sanity by their unwavering refusal to undermine the Full Faith and Credit of the U.S. due to ideological and policy disputes.

There is a recognized way to express disagreements in a democratic government. In the U.S, the proper way is called winning an election, and then repealing a law.

When the GOP ended its hostage taking in 2011, Mitch McConnell, the GOP's Senate Minority Leader made the following statement which speaks for itself:

"I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn't think that. What we did learn is this--its a hostage that worth ransoming." The Washington Monthly;  The Washington Post (2nd page, last paragraph).

Buffett said that a threat to refrain from raising the debt ceiling was a "political weapon of mass destruction.


Short Term: Slightly Bullish
Intermediate and Long Term: Slightly Bearish

The intermediate and long term outlook is based solely on interest rate normalization. The Difficult Path to Interest Rate Normalization The forecast assumes an average annual inflation rate of 2%-2.25% over the next ten years.

My bond CEFs have started to contribute to my overall total return.

The 10 year treasury closed at 2.6% on 10/18/13: Daily Treasury Yield Curve Rates

The average annual inflation forecast over the next ten years, embodied in the pricing of the 10 year TIP, was 2.18% as of  10/18/13.


Recent Developments: Congress kicked the can a few weeks down the road, providing for government funding through 1/15/2014 and extending the debt ceiling until 2/7/14.

The Senate voted 81 to 18 to end the government shutdown and to increase the debt ceiling, nothing more than a can kick. The vote did avoid a debt default this month.

Eighteen GOP Senators voted to continue the shutdown and to cause a default. Those included the reactionary senators Cruz (TX), Lee (UT), Paul (KY), Rubio (FL), Toomey (PA) and Vitter (LA):

Mike Lee said afterwords that the GOP made the right decision to shutdown the government until the Democrats agreed to defund Obamacare. Lee Glen Beck views Cruz and Lee as part of the center. The current batch of political reactionaries view anyone to the left of them as liberals or worse.

Both of the current Texas senators, the radical reactionary Cruz and Cornyn, voted in favor of a government default. Roll Call Vote

It is hard to believe now that Ralph Yarborough was ever a senator from Texas. Yarborough was a strong supporter of Civil Rights and a fervent advocate for Medicare and SS. He refused to sign the blatantly racist Southern Manifesto.

The two Tennessee GOP senators, Alexander and Corker, voted to reopen the government and to avert a default. I voted for both.

The GOP has been kidnapped, and most of the perps are known.

Some of them have pleasant sounding names like Americans for Prosperity, Citizens for a Sound Economy, Club for Growth, Federalist Society, FreedomWorks, Generation Opportunity, Heritage Action for America, Senate Conservatives Fund, Tea Party Patriots, and Young Americans for Liberty.

Those organizations are funded by the usual list of extremely wealthy patrons. Keep your dirty hands away from our billions is their basic Motto.

There were 144 Republicans who voted in favor of a government default. Final Vote Results for Roll Call 550Congressional Bills and Votes -

That would be a good list for anyone desiring to identify the core radical reactionaries infesting the House. A majority of republicans view their Tea Party wing favorably. "Tea Party’s Image Turns More Negative" | Pew Research Center

All of the GOP House members from Tennessee voted to continue the government shutdown and for the government to default on its lawful obligations.

There were a large number of republican Tea Party fellow travelers who voted to reopen the government and to avoid a government default. The term "fellow traveler" was first defined and used by Leon Trotsky in his 1924 book Literature and Revolution, Chapter 2. There are no moderate republicans in the House anymore. though the mainstream media obligingly slaps that label on a few GOP representatives from time to time.

As noted by the republican Bruce Bartlett, NYT, there are a large number of republicans who want the U.S. government to default as a means to balance the budget. Those republicans, including the Tea Party wing and their fellow travelers, have tried to convince the American people that a failure to raise the debt limit is no big deal since the U.S. could prioritize its payments and would have sufficient revenue to pay interest on the debt.

Defaulting on other obligations besides interest payments is not viewed by those republicans as putting a gun to the head of Full Faith And Credit (not to mention the Prompt Payment Act) and just pulling the trigger.

In a way, when and if it a default occurs, maybe next year, that event will dispense rough justice to those middle class voters responsible for electing radical reactionaries and anarchists as well as the business interests that provided them with abundant cash.

"Default Wouldn’t Be That Bad" - NYT"What default? Republicans downplay impact of U.S. debt limit" | Reuters;  "5 debt ceiling deniers in their own words" - CNNMoneyBack in force: Debt limit deniers" POLITICO.comUSA Today: "Debt limit breach no big deal"; "Republicans Downplay 'Default,' Dismiss Debt Deadline" -

The  republicans deliberately put in jeopardy the government's Full Faith and Credit in order to achieve a policy goal that they could not otherwise secure through the normal democratic process. Their conduct goes way beyond irresponsible and reckless. Party of Responsibility? B.S.


The NY Fed manufacturing PMI for the "Empire State" declined to 1.5 in October from 6.3 in September. The employment index declined to 3.6 from 7.5, while the new orders component rose to 7.8 from 2.4. Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York

Fitch placed U.S. debt on its negative rating watch last Tuesday, noting that it could cut the AAA rating on U.S. debt based on the "prolonged negotiations over raising the debt ceiling (following the episode in August 2011)" which "risks undermining confidence in the role of the U.S. dollar" as the global reserve currency and casts doubt over the Full Faith and Credit of the United States.  In August 2011, S & P cut the rating to AA- when the GOP last engaged in brinkmanship on the debt ceiling.


Coca Cola (own): KO reported 3rd quarter net income of $2.447B or $.54 per share, up from $2.311B or $.50 per share in the year ago quarter. The non-GAAP comparable number was $.53 in line with the consensus estimate. 2013 Q3 Earnings Release Net operating revenues fell to $12.03B from $12.34B. Excluding "structural changes", comparable currency neutral net revenues grew 4% in the quarter and 3% year to date. Currency was a 2% headwind on comparable net revenues and a 5% headwind on comparable operating income. Emerging market currencies were particularly weak in the third quarter. Currency headwinds will decrease comparable operating income in the 4th quarter by as much as 6%.

Global volume grew 2% in the quarter. North America volume grew 2%. Europe was down 1%. The Pacific Group's volume increased by 5% with 9% growth in China and 8% in India.

I thought that Latin America was slightly disappointing with zero growth after increasing 5% in the previous quarter. Currency headwinds were strong at 9%. Operating income decreased by 2% but comparable currency neutral income was up 11% in Latin America. Mexico's President has proposed a 1 peso per liter tax on sugary soda to raise revenue.

The report was released prior to the market's open last Tuesday. The DJIA declined that day 133.25, an insignificant response to the persistent political dysfunction.

Closing Price on Earnings Release Day 101/5/13: KO: $37.66 -0.25 (-0.66%)

I still view the shares as slightly overvalued at the $37.66 price given the anticipated earnings growth. The current E.P.S. consensus is $2.1 in 2013 and $2.25 in 2014, only a 7.14% projected growth in E.P.S. At a $37.66 price, the forward P/E on the 2014 consensus is high in my opinion for a slow earnings grower at 16.74. I am not reinvesting the dividend until the shares fall back below $35 on a consistent basis. I quit reinvesting the dividend in 2010.

KO shares briefly traded over $43 back in early May. KO Interactive Chart

KO Position as of 10/18/13 Average Cost Per Share=$25.41
Closing Price Last Friday: KO: $38.78 +0.23 (+0.60%)


INTEL (own): For the third quarter, Intel reported net income of $3B or $.58 per share, unchanged from the 2012 third quarter. Revenues were reported at $13.5B, flat with the 2012 third quarter but up 5% sequentially. The consensus estimate was for $.53 per share.

The PC Client group had revenue of $8.4B up 4% from the prior quarter but down 3% Y-O-Y. The Data Center Group had revenue of $2.9B, up 12% Y-O-Y. The other Intel architecture segments had revenue of $1.1B, up 13% from the prior quarter, but down 9% Y-O-Y. Software and services operating segments had revenue of $621M, up 6% Y-O-Y. Gross margin for the quarter was 62.4%

Cash flow from operations was $5.7B during the quarter. The company paid $1.1B in dividends and bought back $.5B in stock. Total cash investments stood at $19.1B at the quarter's end, up $1.8B from the second quarter. Of that amount, $8.4B is held by U.S. subsidiaries.

Capital spending for 2013 is expected to be $10.8B, plus or minus $300M. The July forecast by the company was $11.B.

CFO Commentary Q3 2013 (SEC Filing); MarketWatch; Bloomberg

Importantly, Intel divulged on the conference call that it will delay its Broadwell 14 nanometer chip by 3 months. Q3 2013 Results - Earnings Call Transcript - Seeking AlphaReuters A nanometer is a billionth of a meter.

A discussion of this report and the Broadwell chip delay can be found in this Seeking Alpha article.  I would agree with that author that Intel shares will be dead money for the remainder of 2013. I am losing patience. I will need to see substantial progress in tablets and smartphones during the 2014 first half or I will dump my shares.

Intel Position as of 10/18/13/Average Cost Per Share=$17.91
IBM (do not own):

IBM reported that  China was down 22%.  PAGE 2: Q3 2013 Results - Earnings Call Transcript - Seeking AlphaCNBC

Canadian REITS: Artis and Canadian Apartments

Recently, I used part of my CAD stash to buy two Canadian REITs. Both pay monthly dividends as shown in this snapshot:

Bought 200 Canadian Apartments at C$20.67Bought 300 of Artis REIT at C$14.36

Closing Prices Last Friday:

CAR-UN.TO: C$21.87 +0.54 (+2.53%)
AX-UN.TO: C$14.62 +0.41 (+2.89%)

General Electric (own): For the 3rd quarter, GE reported operating earnings of $3.7B or $.36 per share, excluding items, beating the consensus estimate by 1 cent. SEC Filed Press Release Orders grew 19% to $25.7B. Backlog at the end of the quarter was "its highest ever at $229 billion, up $6 from the second quarter." The CEO was optimistic about 2014. Profit margin improved 1.2% from a year ago.

Q3 2013 Results - Earnings Call Transcript - Seeking Alpha

Closing Price Last Friday (day of earnings report): GE: $25.55 +0.87 (+3.53%)

My plan for GE is to sell my highest cost shares between $30-$32 which would reduce my average cost per share to about $15 from the current $20.09 level:

GE Position as of 10/18/13/Average Cost Per Share=$20.09

1. Sold 107+ GAM at $34.44 (see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2013 GAM 107+ Shares +$518.31 ($476.56 LT; $41.75 ST) 
Item # 3 Bought 100 of the Stock CEF GAM at $29.52 (September 2012)

The short term capital gain originated from the shares purchased with dividends.

Rationale: I am reducing my stock allocation and this stock CEF had a good total return.

Realized Total Return (Share Profit + Dividends+=$717.12

To replace the income from this CEF, I am going to assume a $150 annual payment. The actual amount will depend on the fund's realized gains each year.

2. Sold 50 GAL at $33.08 (see Disclaimer): The SPDR SSgA Global Allocation ETF Fund (GAL) is a fund of funds that owns stocks and bonds worldwide.

GAL - SPDR SSgA Global Allocation ETF  (gross expense ratio .35%)

Snapshot of Trade:

Snapshot of Profit:

2013 GAL 50 Shares +$48.58
Item # 5 Added 50 GAL at $31.79

Rationale: I am reducing my stock allocation by selling low yield stock funds. Even with its bond allocation, GAL has a dividend yield of 2.57%, based on the annual dividends per share divided by the net asset value per share as of 10/15/13.

Future Buys/Sells: GAL is a low cost balanced international fund of funds. I will buy again at a lower price when I am more comfortable with stocks than now.

Fridays Closing Price: GAL: $33.73 +0.12 (+0.35%)

3. Bought 50 of SGZA at $20.6 (see Disclaimer): SGZA is one of the securities bought recently to replace the income lost through stock fund dispositions. 

Snapshot of Trade:
2013 Bought 50 SGZA at $20.6
Security Description: The Selective Insurance Group Inc. 5.875% Senior Notes due 2043 (SGZA) is an Exchange Traded senior baby bond issued by the Selective Insurance Group (SIGI). The note will make interest payments at the fixed coupon rate of 5.875% per annum on a $25 par value. Payments will be made quarterly at $.3671875 per share. SIGI has the option to call the bond on or after 2/8/2018. Otherwise, the bond matures on 2/9/43.


This note was sold earlier this year with the proceeds used to redeem another bond with a 7.5% junior subordinated bond maturing in 2066. SEC Filed News Release

Selective's senior unsecured notes are rated Baa2 by Moody's and BBB- by S & P. Selective - Financial Strength Ratings

Prior Trades: None

Related Trades:

2011 Selective Ins. 6.7% SR. Note Mat. 2035 +$56.39

Recent Earnings: For the second quarter, Selective reported net income of $27.1M or $.48 per share on $468.9M in total revenues. Statutory surplus rose 11% to $1.2B compared to 12/31/12. SEC Filed Press Release


Rationale: I am replacing the lost dividend income resulting from the recent stock fund dispositions. This investment grade note became mildly attractive after falling significantly below its recent $25 IPO price. At a total cost of $20.6, the current yield is about 7.13%. Provided Selective makes all interest payments when due, I am comfortable with that yield and would not be concerned about a further erosion in a 50 share lot's market value. 

When purchasing small lots, I do not mind averaging down with another 50 share purchase. I would like to see something closer to a 8% current yield before doing so however. A $18 total cost would give me about a 8.16% current yield. The YTM would be higher due to the discount to par value. 

Risks: The interest rate risk is just huge and there is at best a slim likelihood that Selective will redeem the bond given its low coupon rate. It is at best conceivable that Selective will find it advantageous to do so. The circumstances would require a materially lower interest rate environment than now at some point during the optional call period. While it is just a guess, I doubt that it will ever be called unless Selective is acquired by a company whose bonds are rated much higher and interest rates are as low or lower than now. 

Future Buys/Sells: I will be looking to add 50 shares between $18-$19, probably in the Roth IRA rather than a taxable account.

Closing Price Last Friday: SGZA: $20.43 -0.21 (-1.02%) 

4. Bought 100 FSC at $10.1-Roth IRA (see Disclaimer):

Snapshot of Trade:

2013 ROTH IRA Bought 100 FSC at $10.1
Security Description: The Fifth Street Finance Corp. (FSC) is a business development corporation (BDC) that invests primarily in small and mid-sized private companies.

FSC recently sold 17.643M shares at $10.31 per share. Fifth Street Finance Corp. Raises $181.9 Million

Another 14.435+M shares were sold in April at $10.85.

An owner of a BDC has to be concerned about a constant stream of equity raises. The announcement will send the price down.

This BDC also recently sold a baby bond with a $25 par value, FSCFL, raising net proceeds of $83.4M.

This BDC publishes a monthly newsletter: Fifth Street Releases Its Newsletter for September 2013

Link to Detailed May 2013 Seeking Alpha article

Recent Earnings Report: For the second quarter, FSC reported net investment income of $.25 per diluted share, down 1 cent from the 2012 second quarter. FSC- 2013.06.30-10Q FSC paid out $.2874 per share in dividends during the quarter.

A list of investments can be found starting at page 5.

Net asset value was reported at $9.9 per share as of 6/30/13 (page 51).

As of 6/30/13, 65.6% of the portfolio was in first lien debt; 14.1% in second lien debt and 16.4% in subordinated debt.

Average debt per share was $5.25.

The consensus estimates are for $1.06 in the F/Y ending in September 2013 and $1.11 for the 2014 F/Y. FSC Analyst Estimates 

Prior Trades: None

Rationale: (1) In my opinion, there is only one reason to buy a BDC. My rationale  begins and ends with income generation. The general idea is to exit the position at some point without losing anything on the shares.

FSC does pay dividends monthly which is always viewed positively. My largest BDC position at close to 600 shares is PSEC which also makes monthly distributions.  

FSC is currently paying a monthly dividend of $.0958 per share. Fifth Street - For Investors : Dividends

Assuming a continuation of that rate, which is in no way assured, the dividend yield at a total cost of $10.1 per share would be about 11.38%. In the Roth IRA, where I purchased this stock, that would be a tax free yield.

Risks: Reading comments at SeekingAlpha, it is apparent that many investors do not fully appreciate the risks of BDCs. I consequently recommend that any investor considering the purchase of FSC or any other BDC to read the risk section in the Annual Report. For slow readers like myself, it could take as long as 30 minutes to plough through that section.

For the last Annual Report filed by FSC, the discussion of risk factors starts at page 26 and ends at page 48. Those are single spaced pages.  Form 10-K

The monthly dividend was cut from $.1066 to $.0958 in January 2012. The monthly dividend was cut to $.1066 from $.11 in January 2011. The dividend was cut from a quarterly rate of $.32 to a monthly rate of $.10 per share in September 2010.

I would call this BDC a serial stock issuer. However, the recent stock sales were above book value per share. If they tried another anytime soon, I would anticipate a price below book.

Future Buys/Sells: I may buy 100 in a taxable account when and if the price slides below book value per share.

As with all BDCs, my goal is to sell the stock at any profit after harvesting several dividends.

Closing Price Last Friday: FSC: $10.20 +0.05 (+0.49%)

5. Paired Trade Roth IRA: Sold 50 DRE at $15.95 and Bought 50 TCBIL at $21.3 (see Disclaimer):

Snapshot of Trades:
2013 Roth IRA Bought 50 TCBIL at $21.3
2013 Roth IRA Sold 50 DRE at $15.95
Snapshot of DRE Profit:

2013 ROTH IRA DRE +$368.22
Profit for this 50 share lot= $58.53

Item # 2 Bought 50 DRE at $14.5-Roth IRA August 2013

Total DRE Profit Roth IRA in 2013: $368.22

Security Descriptions: The Texas Capital Bancshares Inc. 6.5% Subordinated Note (TCBIL) is an Exchange Traded junior baby bond issued by Texas Capital Bancshares that makes quarterly interest payments at the fixed coupon rate of 6.5% on a $25 par value.

TCBIL may be called at par plus accrued interest on or after 9/21/2017. The issuer would call the bond only when it could refinance at a lower rate, possibly with an equity preferred security, which could be included as Tier 1 equity capital. I would not count on a redemption, however, given the low coupon, but no one can make an educated guess on that subject until a year or so before the optional call date. Then the market will assess the likelihood based on the prevailing interest rates and the financial position of this holding company.

If not redeemed, this bond matures in 2042.


TCBIL will be junior to senior debt and senior to TCBIP, an equity preferred stock issued by Texas Capital Bancshares.

This bond currently is currently rated Ba1 by Moody's and BB+ by S & P.

There is no right to defer interest payments, a common feature in trust preferred securities. TCBIL is a junior bond but is not a TP.

I recently discussed Texas Capital after buying its equity preferred stock, and have nothing to add to that discussion.

Rationale for Paired Trade: I have decided to focus even more on income generation in the ROTH IRA. The common shares of Duke Realty yield almost 3.5% less than TCBIL; and Duke has shown no inclination to raise its dividend after slashing it back in 2008. I discussed the value destruction and the dividend slash in the "Risk" section of the preceding linked post. (see also, Dividend History | Investor Relations | Duke Realty)

At Duke's current quarterly dividend of $.17 per share in effect since the 2009 first quarter, the current yield is about 4.26% at a total cost of $15.95 per share.

TCBIL's current yield is about 7.63% at a total cost of $21.3. I placed TCBIL in the ROTH IRA since it pays non-tax favored interest payments and a 7.63% yield looks a lot better in the Roth than in the taxable account.

Risks Associated with TCBIL: The issuer discusses risks starting at page S-6 of the prospectus.

If interest rates rise, this security will likely continue declining in price. The IPO was late last year at $25 and the decline has been precipitous after a 5/14/13 $25.98 close: TCBIL Interactive Chart I am not aware of any development relating to Texas Capital that would account for the decline. The 18.67% decline from $25.98 to $21.3 was due to the spike in interest rates that started in mid-May. The intermediate term interest rates steadied in September, and started to drift down after the ten year treasury hit a 2.96% yield (9/10/13), Daily Treasury Yield Curve Rates. In response, the price of TCBIL could only manage to remain relatively steady between $21 to $21.5.

The precipitous decline in price over a 4 month period was due to the rise in rates and that decline highlights the interest rate risk associated with perpetual preferred stocks and junior bonds issued by leveraged financial institutions.

In a BK, both the equity preferred stock and the junior bond would likely become worthless.

In a recession that breeds fear about the creditworthiness of financial institutions, non-cumulative equity preferred stocks and junior bonds issued by those institutions will be crushed in price, even when interest rates are abnormally low. During the recent Near Depression, it was possible to buy those type of securities in the single digits. While that kind of event can produce feeding opportunities for those with both cash and a liberal amount of nerve, it is not so desirable for those who bought those securities near par value using borrowed money.

Friday's Closing Price: TCBIL: $21.95 +0.25 (+1.15%)


Trades made after Tuesday will be discussed in the next post. The post next week will discuss seven or eight more trades made last week.


Politics and ETC:

1. Let's Hear Specifics About the GOP's "Structural Reforms":

Perhaps, the GOP will honestly disclose the structural reforms desired by them in Social Security and Medicare. Precisely, with no song and dance number, no jive, just honest, straightforward talk for a change!

For those open to receiving and evaluating accurate information, it will be important to ignore the GOP's talking points and propaganda machine, and to look under the hood, assuming they ever grace us with the specifics.

Instead of giving their constituents specifics, they will engage in platitude talk, liberally using words like "reform" and "fairness". Reform in their parlance is just a code word meaning less benefits for more money or even an elimination of a program.

White middle class republicans do not want to look at the following table that comes from the CBO analysis of the GOP "Path to Prosperity".

Whose prosperity are they promoting anyway?

CBO: Seniors Would Pay Much More For Medicare Under Ryan Plan - Kaiser Health News; and Economic Policy Institute analysis.

Just avert your eyes and continue believing that your GOP representative has your back rather than that of the Koch brothers and similar ilk.

GOP's Path to Prosperity for Seniors

Is a plan to abolish traditional Medicare and to substitute a voucher plan to buy private insurance consistent with a radical reactionary political philosophy? It is what I would expect from radical reactionaries rather than a concerted effort to reform traditional Medicare.

Maybe they have my back, but I would never have voted for a plan to make the rich richer and a large segment of the population poorer.

The republican candidate for the open NJ Senate seat summed up this political philosophy in a nutshell: "I'd hate to see you get cancer, but that's your problem, not mine" Steve Lonegan That sums it up neatly. In the election held last week, Lonegan received 44.3% of the vote. NYT Lonegan thanked Cruz and Sarah Palin for coming to NJ and campaigning for him.

Maybe a bell would go off for the first time when Mom and Dad have to opt for no health insurance in their golden years after exhausting their savings, or maybe when they take a room formerly occupied by one of the kids who will soon be going to a private university anyway.

So, have you saved enough yet for all of that including the projected premiums under traditional Medicare, let alone the cost under a voucher plan designed to save the government money how exactly?

Votes for and against this Plan: Final Vote Results for Roll Call 277

Denny Rehberg was one of the 4 GOP "nay" votes. Rehberg was hoping to beat the incumbent Senator Jon Tester (D) and a "yes" vote would have hurt his chances in a close election. He lost anyway. United States Senate election in Montana, 2012

The GOP is protecting its rich benefactors, the same ones who are funding those right wing political organizations mentioned above.

And, if there is to be a fair and sensible resolution to the upcoming fiscal crisis, the Democrats have not shown any willingness to tackle those problems, other than by requiring the well off to pay more taxes. The wealthy are viewed as a bottomless pit but even the new taxes associated with Obamacare pay only a fraction of the projected costs.

Instead, the Democrats add to fiscal problems with the passage of more expensive programs (Obamacare/Expansion of Medicaid) without addressing the huge long term funding issues for SS, Medicare and Medicaid.

As noted in a prior post, it goes beyond the additional expenditures associated with Obamacare. The Democrats are also tapping revenue sources for partial funding that would be needed to close some of the $75T funding gap for Medicare. {Politics and Etc. Section: Stocks, Bonds & Politics: Why I Would Have Voted Against Obamacare; and Politics and Etc. Section on Medicaid Expansion at Stocks, Bonds & Politics: Steve King}

I suspect that the only way to avert the upcoming fiscal train wreck would be with a third party capable of capturing the House, electing a President and winning 60 Senate seats fairly soon, but that is not going to happen.

The GOP has swerved so far to the right that they are incapable of resolving the problems in a fair and sensible manner.

That leaves the Democrats. Perhaps, they are the only ones who can make the changes and make them stick anyway.

Will the Democrats address the long term funding problems and then make judicious and necessary cuts in entitlement spending?

I would say no, unless they are pushed, not by the radicalized and reactionary GOP who may easily be on a slow and certain path to political purgatory, reduced to complaining to the faux blondes at Fox and on the WSJ editorial page (and comment sections to WSJ and YF articles) after successfully turning off women, young people, 80% of all non-whites, a majority of independents and after re-energizing the Democrat base.

Some republicans may even recognize that the current strategy, which involves pandering to their American Taliban faction, their Tea Party base (a new name for what has always been present) and assorted wingnuts, is counter-productive long term.

The radicalized GOP will not be willing to offer anything to the Democrats to gain their consent on "structural reforms".

No, the push will likely have to come from within the Democrat party, hopefully soon, with the election of more moderate voices, possibly in a few southern and western states that the republicans now view as their territories (Arkansas, Louisiana, Virginia, Florida, North Carolina, Nevada and the replacement of GOP senators in several mid-western states).

Even Georgia may be up for grabs in 2014, if the republicans nominate one of the two leading Tea Party candidates (see discussion below).

Business interests will need to think more about what they have been doing in the past few elections.

Is a bomb throwing Anarchist a friend of business? That is a simple question with an even simpler answer.

2. Radical Reactionaries and "Massive Resistance":  

Before starting this subject, I will to reiterate that I would have voted against Obamacare, and I have voted for both GOP senators from Tennessee. I view myself as a True Conservative.

Stocks, Bonds & Politics:  Why I Would Have Voted Against Obamacare (Politics and ETC. section)

Radical Reactionaries now dominate the GOP. The GOP is no longer a Conservative party, though there are some true conservatives clinging to that party affiliation due to a lack of viable alternatives.

Reactionaries want to be called conservative, just sounds a lot better to them, and traditional media obliges. I will not oblige them, preferring to be accurate in my characterization. Blatantly racist politicians in the South's segregationist days, belonging to the Democrat party, called themselves conservatives, but they were Radical Reactionaries too. Stocks, Bonds & Politics: What is the Appropriate Political Label

This link might work to a speech given by the "conservative" Strom Thurmond:  YouTube (also at NPR)

The Ryan Path to Prosperity budget plan, approved by virtually all Washington republicans, is just one clear example of the reactionary direction of the modern day GOP. The voucher plan for Medicare would have, without question, bankrupted the Middle Class as the government shifted costs to the seniors while at the same time giving tax breaks to the wealthiest Americans. (FactCheck.Org.: Ryan’s Budget Spin)

There are differences in the reactionaries as to how far they want to turn back the clock in America.

Some wish to turn the clock back to the 19th Century, while others would go back only to what is known in legal circles as the Lochner era, when the federal government had no power to adopt minimum wage laws or to regulate most activities which is viewed by the reactionaries as increasing our freedoms. If a worker is agreeable to a $.25 per hour wage, they should be free to accept it. (see also; Item # 3 Stocks, Bonds & Politics: Conservative or Delusional Reactionaries?Stocks, Bonds & Politics:  GOP and the Lochner Era)

Jeffrey Toobin discusses in the Lochner era and the current legal debates in his 2008 book The Nine: Inside the Secret World of the Supreme Court)

The radical reactionary Glen Beck argued that the republican President Theodore Roosevelt started us down the road to slavery with the passage of such laws as the 1908 Meat Inspection Act. We must be free to eat contaminated meat you see and the "progressives" are interfering with that freedom. (see Jon Stewart's take:  Jon Stewart - 03/18/10 - Video Clip)

{There is another case now pending before the Supreme Court which is being used by reactionaries in their ongoing effort to restrict Federal regulatory power by undermining the Constitution's "Necessary and Proper" Clause. Newsweek. The other avenue of attack is to narrow the scope of Federal laws under the "Commerce Clause"}

Reactionaries are rigid in their beliefs; generally uninformed and unwilling to learn; anti-government to the point of anarchism; unwilling to negotiate in good faith or to compromise; desire to impose their religious beliefs on others; frequently have mean spirits with loud, rude, shrill voices, unwilling to listen and lacking in tolerance for differences in opinions and lifestyles; and generally view the Second Amendment to the Constitution as far more important than the First (automatic weapons with 100 round cartridges, equipped with silencers, are necessary to keep the government from taking away our rights-NPR;  Poll ).

As more Americans accept this view and equate the GOP with their Tea Party wing, which has always been around, the Democrat party will be strengthened, and there will be no effective counter-weight to them at the federal level.

While it is too early to know who will be the GOP's 2014 candidates for open Senate seats, several leading candidates are radical reactionaries. It is possible that the GOP could easily lose the open Senate seat in Georgia, being vacated by the Republican Saxby Chambliss, to a Democrat by running either Phil Gingrey or Paul Broun.

Georgia is viewed as a safe Red state by many, but there is still a strong Democrat party in that state. Saxby Chambliss won his seat by defeating the incumbent Democrat Senator Max Cleland who was a Vietnam War veteran that had lost three limbs in combat.

Saxby did not serve but did air an ad picturing Osama bin Ladin, Saddam Hussein and Cleland, while claiming that Cleland was soft. Chambliss Ad (Cleland) - YouTube  John McCain said the ad was "worse than disgraceful, it's reprehensible". It helped Saxby defeat the Democrat so it worked, and it is what is important after all. Honesty is irrelevant when the objective is to gain and maintain power.

NYT article published last Sunday discussed the GOP's diminishing chances to retake the Senate.

"Massive Resistance":

For historians and older southerners, this phrase connotes the resistance, adopted primarily in the South, to the 1954 Supreme Court's desegregation decision. The "Massive Resistance" approach was soon extended to all racial integration and civil rights issues, including the right to vote, or to use the same bathrooms, motels, lunch counters, etc. (see, e.g. the Southern Manifesto, described also at PBS) Both Tennessee Democrat senators at the time, Albert Gore, Sr. (Al Gore's Dad) and Estes Kefauver refused to sign this blatantly racist document opposing integration in all public places.  

I am old enough to remember the talk, indelibly imprinted on my brain, about the separate bathrooms and lunch counters in downtown Nashville, the segregated public school system, the requirement that blacks had to sit in the back of a bus, and were refused a room at white only hotels and admittance to white only state and private universities.

Even at a place like Vanderbilt University, it was a really big deal after the University admitted Perry Wallace in 1966, the first African American varsity scholarship athlete in the SEC. The resistance was widespread and lasted throughout the south until the early 1970s. I remember watching him play basketball. He is now a law professor.

Back in those days, the politicians leading the massive resistance to integration called themselves Democrats. An example would be Lester Maddox who became Georgia's governor after refusing to allow three Georgia Tech African Americans eat at his restaurant.

Those southern Democrats have long left the Democrat Party and are now republicans. "The Conservative Fantasy History of Civil Rights" The GOP successfully used race to shift southern whites to the GOP, an intentional policy known as the Southern Strategy. The Southern Strategy was inextricably linked to Massive Resistance to integration and Civil Rights for minorities.

True conservatives would not support discrimination. I have always been curious why the "liberal" media called politicians like Strum Thurmond conservative. (What is the Appropriate Political Label (January 2009); Stocks, Bonds & Politics: Item # 2 Strom Thurmond and Rush Limbaugh-The Rhetorical Flourish for the Brain Impaired & Uninformed).

Thurmond, who was called a conservative, walked out of the Democrat convention after that party approved a "civil rights" platform that included a provision against lynching African-Americans. He later gave this fiery anti-civil rights speech at the Dixiecrat convention arguing that the proposed civil rights legislation was "totalitarianism". Free Video Clips | SPIKE Sound familiar, certainly less sophisticated than now, Thurmond, and like minded individuals, soon joined the GOP.

The famous GOP operative Lee Atwater was candid about this strategy in a 1981 interview when he was working with Reagan: YouTubeNYT 

The GOP, which has been captured by the powerful reactionary forces, is now engaged in massive resistance to Obamacare. That resistance is taking many forms.

The government was shutdown after the Democrats refused to defund Obamacare or to delay the individual mandate. The GOP politicians blame the Democrats, and most of their tribe members accept whatever  blarney is fed to them without challenge or thoughtful consideration. Obamacare is taking away our freedoms. Obamacare bad. Shutdown the government and blame the Democrats for refusing to negotiate.

Good Faith negotiation involves knowing what is non-negotiable. Insisting on a condition which the other side can not concede is not part of any known good faith standard for negotiation in business or politics.

If the Democrats had agreed to negotiate the end of Obamacare, viewed by the President and the Democrats as their most important domestic accomplishment, the GOP would not have had to shut the government down. As anyone can see, the Democrats caused the shutdown for refusing to end or gut Obamacare. Isn't that a really simple message capable of being understood by anyone?

If the Democrats had controlled the House and insisted on raising the marginal tax rate to 70% as a condition to a continuing funding resolution, would those same GOP tribe members blame a Republican controlled Senate and a GOP President for refusing to accept that conditional CR and the inevitable government shutdown that would follow their rejection of that Democrat condition? Those GOP tribe members would be screaming at the top of their lungs blaming the Democrat controlled House for attaching that condition to the CR and causing the subsequent government shutdown.

The GOP's planning for the shutdown developed over a long period and was forced on the House GOP leadership by Senators Ted Cruz and Mike Lee, working with a large contingent of Tea Party House GOP members and their fellow travelers. A Federal Budget Crisis Months in the Planning - NYT

Those politicians will not own the shutdown even though they caused it. Is their any doubt that the GOP has adopted a plan of Massive Resistance, and the government shutdown was just part of that resistance effort? The answer is "Yes" and there can be no rational dispute or debate on that subject.

Shutting down the government has actually increased public support for Obamacare at a time when the facts would warrant significantly decreased support. "Poll Reveals GOP's Government Shutdown Bolstered Obamacare's Popularity By 20%" - Forbes

The massive technical problems at and other issues could have ultimately sunk Obamacare without the extreme tactics used by the GOP which have backfired so far.

The rollout of Obamacare has been a disaster.

Even Obamacare supporters acknowledge this fact. The NYT published a front page article last Sunday that discusses the development of the website that has resulted in the massive technical failures of that website. A NYT reporter has tried to log into that site 40 times over 11 days and was met with a blank screen.

Assuming the Obama administration fixes the website which is far from a given, this program may fail on its own accord without the GOP doing anything. The private insurers may withdraw from the exchanges after discovering that all the uninsured sick people sign up for insurance while the young healthy ones stayed away.

Possibly, the youngsters may refuse to sign up and refuse to pay the fine. What happens when there is massive resistance among young people to paying the fine?

Note the last sentence in this article and sections 1501 (g)(2)(A) and (B) of the Affordable Care Act titled "Waiver of Criminal Penalties" and "Limitation on Liens and Levies". 26 USC § 5000A(g)(2)(A)

The liability for the fine would be added to the total owed to the government and would earn interest. At some future date, the provision cited above could be amended to authorize the usual aggressive steps for collection of overdue taxes.

The GOP is adopting other Massive Resistance methods that are likely to backfire, though to a far lesser decree than their tactic that led to a government shutdown. Those other tactics include governmental restraints on the exercise of First Amendment rights.  One form of Massive Resistance relates to punishing "navigators", hired to help Americans choose a plan, for exercising their free speech rights. Navigators are being funded by the federal government to assist citizens in signing up for Obamacare.

The remaining True Conservative GOP tribe members are not going to approve of government restraints on the exercise of First Amendment rights due to ideological differences. Congressional Research Service: Exceptions to Freedom of Speech and Press:.pdf (2009)

This tactic, among others, is summarized in this article from Businessweek: "The First Sign State Laws Crimping Obamacare May Not Stand" - Businessweek

I mentioned in an earlier post that Tennessee passed a regulation that would fine "navigators" up to $1,000 per occurrence for doing their job. If a navigator engages in "free speech" viewed as prohibited by Tennessee republicans, such as giving advice about the health plans being offered on the public exchanges, then each such exercise of their free speech rights is subject to a $1,000 fine.  USATodayNashville Scene

Needless to say, a number of federal lawsuits have been filed against the state for violating the constitutional rights of its citizens. Harrington v. Haslam: Nashville Librarian The Tennessee regulation was intended to lower the number of navigators through fear of state sanctions, though the GOP will never admit to it, claiming that the sole purpose was to prevent fraud. 

(Previously the Tennessee GOP enacted hurdles to voting before the last election that were allegedly designed to prevent fraud too, but their real purpose was to reduce voting by the poor and the elderly-VOTER ID Law In Tennessee, the new south version of the Poll Tax. Voter suppression efforts have been a common way to preserve power in the South and to cement the power of the already powerful reactionary forces)

A recent story published by MarketWatch pointed to other GOP states punishing the exercise of free speech.

The Office of Tennessee congresswoman, the radical reactionary Diane Black, will provide no assistance to her constituents.

A PEW research poll found that 23% of respondents wanted politicians to take actions that would result in the program's failure. 64% of the Tea Party republicans want their elected officials to do whatever they can to make the program fail. In order words, those individuals want elected officials to actively undermine a law rather than to make it better while also trying to repeal it. Pew Research Center That is just one example of radical reactionary philosophy. 

Tennessee's 6th congressional district, the one currently occupied by Diane Black, is rated a safe republican district by pundits. It is not a safe GOP district unless the GOP controlled state legislature shores up the district with further gerrymandering. Al Gore once represented that district and Bart Gordon, a moderate Democrat, was the representative from 1983 to 2011. The Democrats, assuming that ever gain control over the state legislature, which is doubtful in my lifetime, could make the district more competitive with a minor amount of their own line drawing. We all know where there is concentrations of radical reactionaries.