Friday, October 11, 2013

Paired Trade Sold 50 BKLN at $24.7 and Bought 50 TCBIP at $22.64/Sold LT GGAL at $9.6/Sold 50 of 150+ FISI at $21.26/Sold: 50 PIE at $18.75 and 65 VWO at $41.75

After selling into the rally yesterday, I have started to pivot from paring my stock allocation to replacing the income lost through those minor reductions. I will discuss those purchases sometime next week. I may sell one more stock fund.

Since I have been selling mostly low yielding stock ETFs, I will be able to replace the lost income with bonds and bond like investments using significantly less money.

My portfolio needed some pruning anyway. Any disagreement?

One benefit of the rally yesterday is that I recovered all of the October decline in one day and then some. And yesterday was a big ex dividend day for me. So the OG feels a little better now.

Closing Prices Thursday 10/10/13
VIX: 16.37 -3.23 (-16.48%)
S & P 500: 1,692.56 +36.16 (+2.18%)

Gold did not like a whiff of sanity in Washington: GLD: $124.27 -1.84 (-1.46%)

Congress is not likely drop nuclear bombs on their constituents.

Maybe we all need to say a prayer on that subject. Let's take a prayer moment.

Please note the phrasing used in the preceding sentence about Congress nuking their constituents: "is not likely" as opposed to "will not".

Politicians are not worrying about their 5% approval rating, lower than "dog poop". MSNBC

The market is convinced that the latest outbreak of dysfunction will be successfully resolved before the infestation does significant damage to the economy. The certainty level by stock investors is at 100%.

Yesterday, the market reacted favorably when the GOP claimed that it was willing to grant a concession to the Democrats. MarketWatchNBC

The GOP would not insist that the government default on its lawful obligations for a few weeks, while still refusing to vote on a clean CR to end the government shutdown.

As one liberal publication noted in a large, red colored headline, the republicans would relinquish one of their two hostages for a short period until the Democrats grant their demands.

So, isn't that reasonable?

The Democrats will be given a few more weeks to reconsider granting the GOP's demands for "structural reforms" of entitlement and safety net programs before the GOP grants its concessions to the Democrats which consist of reopening the government and avoiding a government default on its lawful obligations enacted by Congress and signed into law by the various Democrat and Republican Presidents.

I am curious though. What else is the GOP offering the liberals other than pain and suffering in their entitlement and safety net programs?

To resolve this impasse, the Democrats will probably receive the reopening of the government and a debt limit increase lasting, at a maximum, the remainder of Obama's term.

In return, the Democrats will apparently have to give the GOP some red meat to avoid a worldwide economic meltdown.

I would suggest the Keystone pipeline (unfortunately, the environmental review is being held up by the GOP shutdown), a lowering of the income thresholds for Medicare premium increases over the standard level (discussed below), and the use of chain weighted CPI rather than the current CPI index when calculating increases to benefits and the inflation indexes used in the tax code. WSJ.comReuters That last one will be a really tough sell to the liberals and would probably require a major GOP concession on taxation {e.g a $50,000 cap on deductions, the elimination of the carried interest loophole  (important to the GOP but also favored by some NY Democrats), etc.} Something may be done on the medical device tax and some changes in the sequester law to make it less onerous.

The CBO calculated that the chained CPI calculation could save $340B over 10 years, including $127B in SS payments. Government-wide_chained_CPI_estimate-2014_effective.pdf Many disagree with that estimate.

I suspect that the Democrats will have no choice but to accept the GOP's "concession" about the debt limit simply to avoid the meltdown likely to occur later this month after a government default.  NYT  It is necessary for someone to behave like an adult.

Eric Cantor said that the meeting with Obama yesterday was "very useful" and a "good first step".

Nonetheless, I am having difficulty understanding why the market views a possible temporary reprieve from disaster as a positive development worth a 323+ point gain in the DJIA. There is not yet an agreement on a 6 week debt limit extension and the government is still in partial shutdown.


The mere fact that a large number of GOP politicians view a government default on its obligations positively is disconcerting.

Prior to 2011, I have never seen any politician talk cavalierly about the Full Faith and Credit of the U.S. or express a willingness to undermine it.

It is now routine to hear GOP politicians talk about undermining the Full Faith and Credit of the government.

It is routine now to hear GOP politicians argue that the payment of interest on debt obligations is sufficient to avoid a default and consequently a refusal to raise the debt limit is no big deal.  "Many in G.O.P. -  Default Wouldn’t Be That Bad" - NYT"What default? Republicans downplay impact of U.S. debt limit" | Reuters; "Back in force: Debt limit deniers"; "'Bring stability to world markets' - 5 debt ceiling deniers in their own words" - CNNMoney

Ted Yoho (R-FL), a Birther, argues that a default would bring stability to world markets.  CNBC Yoho was the beneficiary of gerrymandering by the republican Florida legislature.

Prioritization is just a fancy word for a default.

Without question, a large number of lawful obligations would go unpaid without a debt limit increase.

In another context, republicans would call individuals who "prioritize" their payment obligations deadbeats and would not flinch from that characterization.

Unfortunately, the treasury had to give Boehner a lesson about responsibility and the Full Faith and Credit standard: to Boehner.pdf

In fairness to Boehner, the positions now being staked out by the republicans, which has resulted in the shutdown and threatens the Full Faith and Credit of the United States, was not his idea. MarketWatch

I hope that the citizens do not have to discover first hand what happens after a U.S. government default. A limited number of individuals were able to prosper and expand their wealth considerably during the recent Near Depression.

The vast majority of people will just get shellacked by those type of events. The beneficiaries will be those individuals, primarily in the top 1%, who have a lot of cash available to buy assets at hugely discounted prices such as those prevailing between September 2008, 2009 and most of 2010. It was the best of times for me.

A recent poll found that a majority of republicans believed that the failure to raise the debt limit would be a "good thing". CNN Those are mainly middle class voters.

Part of me would like to teach them a lesson, just let the country default on its legal obligations, and maybe, just maybe, a few of them will learn something, but most will just blame the Democrats and Obama for whatever happens to them. I heard a lot of that in 2008 and 2009.

It is just impossible for any responsible person to advocate prioritization and default. Anyone advocating prioritization is per se irresponsible.

Some of the legal issues are discussed here: Dorf on Law

And the treasury had to tell another republican that it is not even set up to prioritize the 80 million payments made each month. at pages 5-6 .pdf

I discussed this issue in more detail in the last post. The opinion column written by the republican Bruce Bartlett is also instructive on the prioritization approach. NYT

Reality does not matter to those who live in their own reality creations. Anyone attempting to piece the bubble with reality is simply trying to put worms in their head.

The Party Is Over: How Republicans Went Crazy, Democrats Became Useless, and the Middle Class Got Shafted: Mike Lofgren: Lofgren is a republican. Mike Lofgren - Wikipedia This book is reviewed in the Washington Post and The Atlantic

Big Picture Synopsis:

Stable Vix Pattern:


Short Term: Expecting a 10%+ Correction 
Intermediate and Long Term: Bullish

The market is assigning a 100% probability to a quick resolution of the government shutdown and debt limit increase. I view the risk as non-trivial that the market is wrong.

I have not yet bought a triple short stock ETF as a hedge. Mostly, I have been hedging the non-trivial risk by reducing my allocation to stocks slightly. 


Short Term: Bullish 

Intermediate Term and Long Term: Slightly Bearish

As noted in prior posts, the intermediate and long term forecast is based on interest rate normalization within the context of subdued inflation. 

I have increased by several months my forecast for the following: the start of tapering, the end of QE, and the start of a tightening cycle.


Recent Developments:

In the Credit Suisse global wealth report, that firm estimated that the bottom half of the global population own less than 1% of the total wealth while the top 1% account for 46%. (page 10:

To be in that top 1% worldwide, an individual needs $753,000 after subtracting debts.

The Kochs have told the GOP to focus on spending rather than Obamacare. The GOP thereafter started to pivot to entitlement "structural reforms", as duly noted in a Paul Ryan opinion column published by the WSJ last Tuesday.

What is meant by structural reform? Generally, it means less benefits for more money.

One structural reform advocated by Ryan, and approved by virtually every GOP member in Congress, was to give seniors a voucher to purchase private insurance, thereby shifting costs from the government to the seniors. I call the millions who would receive those vouchers the "Unfortunates". Life is just not fair.

Ryan was quick to point out that those over 55 back in 2011 could keep traditional medicare and save a bundle compare to the Unfortunates.

Other structural reforms include the gradual increase in the eligibility age for Medicare and to means test Medicare benefits.

Medicare has been means tested since at least 1993, when Congress modified the program to raise premiums, and to lower the subsidy, for the richest beneficiaries.

In 2013, the Part B standard monthly premium was $104.9 for an individual with a modified adjusted gross income (MAGI) of $85,000 or less (couples $170,000 or less) For an individual with a MAGI between $85,000 to $107,000, the monthly premium would increase by $42 and would rise gradually until the top monthly premium was hit with a MAGI over $214,000 (standard +$230.8 per month)

The general idea for this kind of "structural reform" is to significantly lower the income thresholds so that a lot more people have to pay more.

So just as a warning for anyone personally interested in personal costs and benefits related to this debate, when the GOP talks about structural reform, the thrust will  be less benefits for more money.

Ask yourself these questions.

How does the government save money under the "reform"?

Stocks, Bonds & Politics: The Most Abused Word: Reform/Buys of IR at $11.82 & DD at $16.68/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology (March 7, 2009)

And who will get stiffed? Maybe it is you. Pay more and receive less.

The GOP is losing its reliable business allies.

The Chamber of Commerce and the National Retail Federation told them to approve a CR and a debt limit increase. "National Retail Federation - NRF Calls for Immediate End to Government ShutdownAs Pressure Mounts, House G.O.P. Weighs Short-Term Debt Deal"; Multi-Industry Coalition Letter Regarding the Continuing Resolution and Debt Limit | U.S. Chamber of Commerce; Reuters

The NYT published a story that the business groups were contemplating open warfare with the Tea Party republicans and may even fund Democrat's running against GOP incumbents. The Democrats must be smiling.

Maybe a few republicans will listen after those business organizations actually turn off the money spigot. Talk is cheap. Those business organizations did everything possible to elect as many zealots as possible.

Gallup Poll 10/9/13: "Republican Party Favorability Sinks to Record Low"

GOP Scores Lowest Marks Since WSJ Started

Is anyone listening?

Is there anyone remaining in the GOP capable of listening, which may be the more relevant question?

John McCain is listening. He told his compadres that they were embarked in a "fool's errand" in shutting down the government over Obamacare.

If politicians could just remove those cobwebs and concrete, or whatever else has caused their brains to ossify, some progress might actually be made in solving the nation's problems.


Note: In the last few days, my snapshots of trades and other material have turned dark from a clear white. The original snapshot is as before, a white background, but Google's Blogger software is turning it into a dark shade when I insert the snapshot into the draft post.

As a reminder, FINRA revamped its website and changed the links to information about bonds. Consequently, my links prior to a few weeks ago will no longer work. 

1. Paired Trade: Sold 50 BKLN at $24.7 and Bought 50 TCBIP at $22.64 (see Disclaimer):

Snapshot of Trades:

2013 Bought 50 TCBIP at $22.64
2013 Sold 50 BKLN at $24.7
Snapshot of BKLN Loss:

2013 BKLN 50 Shares -33.42
With the dividends, I would call it break-even on BKLN.

Security Descriptions: The PowerShares Senior Loan Portfolio Fund (BKLN) is a junk bank loan fund.

The Texas Capital Bancshares  Non-Cumulative Perpetual Preferred Series A  (TCBIP) is an equity preferred stock that pays qualified, non-cumulative dividends at the fixed coupon rate of 6.5% on a $25 par value. The issuer, Texas Capital Bancshares, has the option to redeem this security on or after 6/15/2018.

Texas Capital Bancshares is the parent company for Texas Capital Bank, with branches located in Austin, Dallas, Fort Worth, Houston, and San Antonio. As of 6/30/13, total assets totaled $10.978+B.  


There is a typical stopper clause at pages S-16 to S-17:

A stopper clause prevents the issuer from eliminating the equity preferred dividend while continuing to pay a common stock dividend in cash. It is the legal means by which the preferred shareholders are given their preference right to dividend. The only legal way for the issuer to eliminate the preferred stock dividend is to first eliminate the common share cash dividend. If any cash is paid to the common shareholders during a "dividend period", then the preferred shareholders have to be paid in full.

Texas Capital Bancshares Inc (TCBI) Profile Page at Reuters

Texas Capital Bank - About Us - Locations

Recent Earnings Report:

As a owner of Texas Capital's equity preferred stock, the following numbers are comforting. While the bank is well capitalized under current criteria, the capital ratios are low compared to the banks normally selected for inclusion in my regional bank basket strategy.  

SEC Filed Earnings Report 2nd Q 2013
Net Income: $24.072M
Net Income Available to Common Shareholders: $21.634M
Diluted E.P.S.: .52
Net Interest Margin: 4.19%
Efficiency Ratio: 61.2%
Non-accrual Loans to Total Loans: .51%
NPAs to Loans + OREO: .68%
Reserves for Loan Losses to non-accrual loans: 2.1x
ROA: .95%
ROE: 9.94%
Tangible Equity to Tangible Assets: 7.9%
Tangible Book Value Per Share: $21.08
Tier 1 Capital Ratio: 9.6%
Total Capital Ratio: 11.26%

The current E.P.S. estimate is $2.89 in 2013 and $3.34 in 2014. TCBI Analyst Estimates

Form 10-Q

The 2012 Annual Report shows a major dip in earnings during the recent Near Depression, but the bank remained profitable earning $24.266M in 2008 and $24.152 before preferred dividends in 2009. In 2012, the bank reported net income available to common shareholders of $120.672M.  10-K at pages 24-25

Rationale (1) More Income Now and For 2 or more Years and the TCBIP Distributions are Tax-Advantaged: For now, I am going with the higher yielding security based on my current expectation that the securities owned by BKLN will not be increasing their coupons above the minimum coupon levels due to a longer than previously expected continuation of ZIRP.

At a total cost of $22.64 per year, the TCBIP current yield is about 7.18%. I bought this security in a taxable account so the maximum tax rate will be 15% (UBS Tax Planning Guide 2013.pdf)

The BKLN yield using the dividend payments over the prior 12 months is about 4.6%. None of the distributions paid by BKLN will be classified as qualified, which is to be expected for a fund that collects and distributes interest payments.

Over 70% of junk bank loans will generally pay a spread over a minimum Libor floor. An example given by Loomis Sayles is LIBOR + 4% with a 1.5% Libor floor. The coupon would be currently 5.5% since the 3 month LIBOR floor is well below 1.5% (base rate of 1.5% plus 4% spread). To increase the coupon in that example, the 3 month LIBOR rate would have to rise above 1.5%. I do not see that happening now before 2016 and only more likely than not during 2017.

For outstanding bank loans with no Libor floor the decline in the 3 month LIBOR rate from over 5% back in October 2007 to around .25% now would have resulted in a coupon reduction.  3 Month Libor Data St Louis Fed

(2) Credit Rating Slightly Better than Most of the BKLN Owned Secured Junk Loans:
While TCBIP is rated junk at Ba2/BB, according to Quantomonline, those ratings are still higher than most of the secured bank loans owned by the ETF BKLN which had 44% in B and 7% in CCC as of 10/8/13. BKLN | Senior Loan Portfolio | PowerShares I do lose the diversification provided by a fund, however.

Risks: The prospectus discusses risk starting at page S-8.

I would just emphasize that interest rate risk is extremely important for perpetual preferred stocks. That risk is highlighted by recent history. In late March 2013, this security was sold to the public at $25, Texas Capital Bancshares Announces Pricing of Preferred Stock Offering (3/21/13). The preferred shares traded briefly over $25.5 per share before diving below $22 in mid-September. TCBIP Stock Chart There was no event to my knowledge causing that decline other than a rise in interest rates.

The recent Near Depression provides valuable insight into what happens to equity preferred stocks issued by financial institutions. It was common for those securities to sink into the single digits.

The downside for an equity preferred stock is zero, a virtually guaranteed price when and if the FDIC seizes the operating subsidiary of a bank holding company that owns the branches, takes in deposits and makes the loans. In those cases, the holding company will generally be left with a lot of debt, all senior in priority to equity preferred stock,  and the holding company would have insufficient assets to either service or pay that debt.

When I buy an equity preferred stock, I would not expect anything in a BK.

Future Buys/Sells: I will consider coming back to the junk bank loan funds when the FED starts its tightening cycle or close to it.

I may buy another 50 shares of TCBIP when and if the price falls sufficiently to generate a 8% yield after commission. I would consider selling the security after reaping an annualized 8% total return.

I am hesitant to hold onto these perpetual preferred stocks for too long given my views on interest rate normalization.  I am now simply attempting to balance that risk with the current yield, holding back another small purchase in case the yield becomes more attractive.

Yesterday's Closing Price: TCBIP: $22.35 -0.24 (-1.06%) 

2. Sold 40 GGAL at $9.6 (Stocks, Bonds & Politics: Lottery Ticket Basket Strategy)(see Disclaimer): Normally I do not discuss LT purchases and sells after I started writing the monthly update. I am now using the LTs as a means to reduce my stock allocation some. The last update was published on 9/30/13: Stocks, Bonds & Politics: Updated Tables for the Lottery Ticket and Regional Bank Basket Strategies/Added 50 FISI at $18.8/Bought 40 IRDM at $6.82, 50 AT @ $4.08/Sold 50 NOK at $5.48

Since that post, I have now sold GGAL, EDG and FOE. 

Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

The 40 share order was filled in a 39 and 1 share lot. I apologize to anyone who had their limit order filled with just that one share, but that has happened to me too.  

2013 GGAL 40 Shares +$99.29
BOUGHT 40 GGAL at $6.72-LT Category 

This one generated a decent percentage return. Like many LTs, however, the position was in the red, sometimes deep in the red, since I bought shares. GGAL Interactive Chart One benefit of small exposures is that no anxiety is generated by a decline and consequently I am under no self imposed pressure to liquidate a position to stop the bleeding. A large number of Lottos went deep into negative territory soon after purchase and rebounded to give me significant percentage returns.

I thought that it was comical that Argentina, the host country for GGAL, took almost all of my last dividend. Stocks, Bonds & Politics (Snapshot-Introduction)

GGAL would still be viewed as a buy provided it was not operating in Argentina. This bank did report good earnings for the last quarter which is why it has moved from $5.48 to $9.6 over the past few weeks. Grupo Financiero Galicia S.A. (ADR) (GGAL):  Earnings Call Transcript - Seeking Alpha

3. Sold 65 VWO at $41.75 (see Disclaimer): The Vanguard FTSE Emerging Markets ETF (VWO) is another stock ETF that was jettisoned as part of my ongoing risk reduction.

Sponsor's website: Vanguard - Vanguard FTSE Emerging Markets ETF (expense ratio .18%)

Snapshot of Trade:

2013 VWO Sold 65 Shares at $41.75

Since 9/29/13, I have received $104.44 in dividends. I am not charged a commission when purchasing Vanguard ETFs in my brokerage account. I did not mention the 5 share purchase shown in the following snapshot:

Snapshot of History at Vanguard:
Snapshot of History at Vanguard
Item # 1 Bought 50 of the ETF VWO at $39.73 (February 2012)

While I have not lost money in emerging market ETFs, their performance has been lackluster over the past few years.

Snapshot of Profit:

2013 VWO 65 Shares +$113.36
Prior Trade: Sold: 100 of the Stock ETFs VWO at $50.22 (April 2011)- Item # 1 Bought 100 VWO @ $48.93 (November 2010)(no snapshot-profit=$129.5)

If I still owned those shares bought in November 2010, I would have an unrealized loss close to $700, which just highlights the underperformance of a broad emerging market ETF  compared to the S & P 500 over that time period.

Rationale: I am lowering my stock allocation. I did not share the market's exuberance based on the latest GOP proposal.

Yesterday's closing price: VEU: $49.15 +0.91 (+1.89%)

Future Buys/Sells: I will try again with this one, but re-entry will need to be below the last purchase price; and the politicians will need to provide the OG some comfort rather than contributing to an abundant amount of angst.

4. Sold 50 PIE at $18.75 (see Disclaimer): This is another low yielding stock ETF selected for disposal in the ongoing risk reduction. I was underwhelmed by the news that sent the market skyward yesterday.

Sponsor's website: DWA Emerging Markets Technical Leaders Portfolio

Snapshot of Trade:

2013 Sold 50 PIE at $18.75

Snapshot of Profit:

2013 Sold 50 PIE $40.14

Item # 3 Bought Back PIE at $17.63 (July 2013)

2013 Realized Profits=$173.26
Profit in 2010= $125.52
Total Realized Profit: +$298.78

Rationale: I am lowering my stock allocation largely by selling small ETF positions that pay negligible or low dividends.

Yesterday's closing price: PIE: $18.79 +0.55 (+3.02%)

Future Buys: I will try again at a lower price, when and if the smoke clears. As noted above, it has been tough to realize decent percentage gains in broad emerging market ETFs over the past three years.

5. Sold 50 of 150+ of FISI at $21.26  (REGIONAL BANK BASKET STRATEGY)(see disclaimer):

This transaction had nothing to do with the stock allocation reduction.

Instead, I am just doing what I am normally do in my regional bank basket strategy.

I sold the highest cost lot and kept the lower cost lots. I just received a dividend on 150 shares. Financial Institution (FISI)

Snapshot of Trade-Satellite Taxable Account: 

EMAIL Confirmation

Closing Price Yesterday: FISI: $21.27 +0.57 (+2.75%)

Snapshot of Profit:

2013 FISI 50 Shares +$59.15
Added 50 FISI at $19.8 (August 2013)

For this basket strategy, the total net realized gains on the shares (2010 to date) is now at $14,801.11. (Snapshots at the end of Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST)

The price of this stock has been jumping around as of late. Since July 2013, the chart reminds me of a ski lift, where you are taken way up the mountain and then ski down a slope, and then do it again. FISI Interactive Chart I will try to play that kind of movement.

In a satellite account, I first bought a 50 share lot at $19.83, referenced above, in August 2013. I sold those 50 shares at $21.26.

The stock continued to slide so I bought another 50 shares at $18.8 in a satellite taxable account, where I am reinvesting the dividend. Added 50 FISI at $18.8 (September 2013). I am keeping those shares.

In this kind of trading technique, I would buy back the 50 shares sold at $18 or below, provided the price slide was not due to a material adverse event. Then I would consider selling the shares bought at $18.8 over $22. This kind of trading requires patience and attempts to use the natural and inevitable volatility in the stock price.

Sometimes, the stock is in a clearly defined channel, but FISI is just being whipsawed up and down on generally light volume. The last move up occurred after a Sterne Agee analyst upgrade.

I still own 50 shares bought in the main taxable account: Item # 2 Bought 50 FISI at $15.55 (April 2012) 


  1. "I am having difficulty understanding why the market views a possible temporary reprieve from disaster as a positive development worth a 323+ point gain in the DJIA."

    Irrational exuberance?

    Maybe the stock market will evolve into a branch of Twitter, tweeting its approval or disapproval of whatever story is lighting up the current media spotlight (government dysfunction, Congressional circus act, Obama, Yellen, Europe, etc.) on a near-hourly basis.

  2. Cathie: Since 10/1/13, I reduced my stock allocation by $15,000. That is stock money on an extended vacation.

    I am cash heavy at the moment. My cash allocation is just over 20% in my main taxable account. In 2007, I took that account to over 30%. I would go higher now with the 2007 MM dividend yield which was over 4%. I am not likely to go much higher than 20% when those funds are earning .01%.

    If there is no deal announced before the market opens on Monday with a series of who shot John recriminations, I would anticipate that the market will quickly give up the gains from last Thursday and Friday shortly after the opening. The gains last week made no sense to me anyway.

    Even without political dysfunction, the economy was sluggish. GDP could turn negative this quarter. And, I am not going to assume rational behavior, particularly from the Tea Party republicans and their fellow travelers in the House.