Showing posts with label BMLPRL. Show all posts
Showing posts with label BMLPRL. Show all posts

Thursday, February 17, 2011

Update on MOU/PaIred Trade: Sold 100 BMLPRL at $19.14 & Bought 100 BMLPRJ @ 19.32/Added 50 CBU @ 25.19/Bought 50 of the ETF DLN at 48.24/KO MDT CBB/CPI

CPI increased .4% in January, with the core index rising .2%.  Food prices increased .5%. Consumer Price Index Summary Over the prior 12 months, CPI has increased 1.6% before seasonal adjustment. Energy rose 2.1%. 

The Philadelphia Federal Reserve reported that its region's manufacturing index rose to 35.9 in February from 19.3 in January. Firms Firms Report Stronger Activity (February 17, 2011)-Philadelphia Fed The prices paid index component increased 13 points in February and has increased 55 points just over the past five months.  www.phil.frb.org .pdf

This is the Friday's post, which I am publishing early since I finished with it, and this is the second post for Thursday.  

1. Medtronic (MDT)(own): Barrons has a favorable article on MDT.  While the firm has issues, who doesn't, the author notes that MDT is selling at 11 times earnings and has rarely been "this cheap". I have been making the same point periodically in this blog, over the past two years, after grabbing some shares during the Dark Period at $26.94 (3/4/2009), soon after the RB dethroned the Nerd Machine LB as Head Trader here at HQ. As long time readers may recall, LB was hiding under the sheets crying for its mama at that time. I have been adding to the position since that initial foray and have been reinvesting the dividends. RB adds 50 MDT at 36.25 ADDED TO MDT at 38.99 Added to Medtronic at 37.58  My position is now close to my limit of $10,000 for securities issued by one company. 

Barron's also noted that sixty new products are expected to launch in 2011, and MDT's ample cash flow would continue to support dividend hikes. The current dividend yield is around 2.24% at a $40.2 price. 

Paulson's hedge fund recently disclosed that it had acquired 9.1 million shares. SEC Form 13-F 

2. Duke (DUK)(own)(core electric utility strategy): Duke Energy (DUK) reported earnings per share of 32 cents for the 4th quarter, including gains from asset sales, on 3.445 billion in revenues. The adjusted E.P.S. number, which excludes one time items, was 21 cents per share, missing the consensus expectation of 23 cents.  

My average cost per share for DUK shares is $15.91. I am not likely to buy more shares in the open market since such a purchase would be well in excess of my average cost.  However, my highest cost shares have a cost basis of $18.14, a fifty share purchase. Those shares were also the first bought. I may dispose of those shares at some point to lower my average cost.  I purchased most of my shares during the Dark Period, with the last open market purchased made in May 2009. Added to Duke (DUK) at $13.56 {see also: Bought DUKE ENERGY (DUK) at $15.79 (Oct 2008); Bought 50 Duke (DUK) at 16.25 (April 2010; and some shares were bought at a total cost of $14.42 in February 2009}  So, the only candidate for a pare under my trading system is the first 50 share lot, and I am not likely to dispose of those shares at less than $19 which means that I will not be selling them anytime soon. 

Duke Energy closed at $18.12 today, up 2.37% or 42 cents. 

3. Cincinnati Bell (own senior bonds only:Junk Bond Ladder Strategy): Cincinnati Bell (CBB) reported earnings of 3 cents per share, excluding items, down from 7 cents in the year ago period, missing expectations by 4 cents.

CBB predicted 2011 revenues of 1.4 billion dollars. It further predicts free cash flow of just 5 million dollars in 2011, but a slight increase in adjusted EBITDA compared to 2010. The cash flow is apparently going into the expansion of CBB's data center operations.

Data center operations increased revenues in the 4th quarter by 118% to 44 million, producing adjusted EBITDA of 22 million for the quarter, primarily due to the acquisition of CyrusOne. I am still concerned about this credit. HK has prohibited the purchase of another bond.   

The bonds that I bought are deservedly rated junk: Bought 1 Cincinnati Bell 8.75% Senior Subordinated Bond Maturing 3/15/2018 at 94 Bought 1 8.375% Cincinnati Bell Senior Bond Maturing in 2020 at 96.8. I have added one more of the 2018 bond, bringing the total to 3 bonds at a total cost, excluding accrued interest, of $2,874. {FINRA Investor Information on 2020 Bond FINRA Investor Information on the 2018 Bond).   

On the day of the earnings release, the common shares fell 10% or 31 cents to close at $2.79.  At some point, I may add CBB common shares in the LOTTERY TICKET category, using the first interest payment on the 3 bonds. The data center strategy is interesting even though it is risky. 

4. One of LB's Paired Trades: Sold 100 of BMLPRL at $19.14 and Bought 100 BMLPRJ at 19.32 on Thursday (Inflation/Deflation Strategy)(see Disclaimer): I have been buying and selling Bank of America (BAC) equity preferred floaters for a couple of years now. I have realized a number of trading profits from them, along with several dividend payments. Mostly, the gains have been small, with the largest gain in this grouping of five securities coming from the sale of 100 BMLPRH at 17.42 which netted a profit of $363.48 (see snapshot in Item # 1 Bought 50 BMLPRG at 16.04)

I discuss in that last link post how I compare the five BAC equity preferred floaters which pay the greater of a guarantee or a percentage above the 3 month LIBOR rate on $25 par values.

All five of these securities pay non-cumulative qualified dividends. None of them have a maturity date. All of them are senior only to common stock and junior in priority to all BAC bonds. BAC is needless to say a bank, a large one capable of making a large number of really stupid mistakes. All of those points, other than "qualified dividend", spell the same word-RISK.

The five BAC equity preferred floaters are as follows: 

BACPRE 4% or .35% above the 3 month Libor Bank of America Corporation
BMLPRG 3% or .75% above the 3 month Libor  Prospectus Supplement
BMLPRH 3% or .64% above the 3 month Libor Final Prospectus Supplement
BMLPRJ 4% or .75% above the 3 month Libor Final Prospectus Supplement
BMLPRL 4% or .5% above the 3 month Libor Term Sheet

The securities starting with the prefix BML were originally issued by Merrill Lynch, later acquired by Bank of America. BAC pays the greater of the guarantee or the percentage float for each of these securities. 

I bought the 100 shares of BMLPRL in two fifty share lots: Bought  50 BMLPRL @ 17.35 (Dec 2010) and Bought: 50 BMLPRL at 18.17 (Oct 2010). 

I have previously traded BMLPRJ for a small profit: Sold 50 of the 100 BMLPRJ at $19.25 (Sept 2010)  Bought 50 BMLPRJ at 18.50 (August 2010) Added 50 BMLPRJ at 17.74 (August 2010)

Some other trades for this grouping of five securities can be found in the following posts:  Bought BMLprg at $8.8 Sold BMLPRG at 12.45 Bought 50 BMLPRG at 16.04 Sold BACPRE AT $15 Bought: 50 BMLPRH at 16.2

Another discussion on how I compare these securities can be found at BMLPRH vs. BMLPRJ.

The only difference in terms is that BMLPRJ has a .25% higher float than BMLPRL. Both have a 4% guarantee. LB thought that the .25% difference in the LIBOR float in favor of BMLPRJ was worth more than 18 cents a share, at least for someone other than a trader who wants to hold the security long term.

LB refused to disclose its computations to justify its conclusion. The description of a long term holder does not fit the Nerd Machine, of course, who prides itself on its self-proclaimed trading acumen. And RB just added, its linear, short sighted tunnel vision. Anyway, the OG made this trade at LB's insistence, not caring whether the LB was correct in its comparative assessment, since the OG recognizes that the only workhorse in this organization is the LB, everyone else is charitably described as a slacker or worse, and sometimes, as HK has noted many times, it is important just to humor the worker bees. 

For BMLPRJ to prove its value over BMLPRL based on their current prices, there will need to be a return to more normal LIBOR rates,  more than 3.25% which is the level where BMLPRJ's float will be activated.  Historical LIBOR RATES 

At a 5% Libor rate, the difference in income would by about $6 annually, for 100 shares. So to justify the trade, and the two commissions, I will need to keep the BMLPRJ shares for many years to recoup the difference in cost, and have the LIBOR rates yield over 4% during those years. (or, I could sell BMLPRJ on a pop which is what the LB really intends to do).

The floaters that pay the greater of a guarantee or some percentage over a short term rate are part of my Inflation or Deflation strategy, confined to a narrow group of securities that can swing both ways, irrespective of whether there is deflation or inflation. The main issue is CREDIT RISK. These securities have been discussed since the earliest days of this blog, when their pricing presented what may end up being a once in a lifetime opportunity: Item # 4 LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK (October 2008); LIBOR AND THE AEGON FLOATING RATE PREFERRED STOCK (October 2008).

All of the securities discussed in this blog that fall within this strategy are exchange traded, which means that orders are placed in the same manner as an order for a common stock, and is executed on one of the stock exchanges. There are several that trade in the bond market and I have occasionally discussed them.  (see, e.g. Comparing Prudential Floating Rate Bonds Tied to CPI and Fixed Rate Coupon Bonds Maturing in 2018).

The exchange traded bonds that are capable of swinging both ways fall into three categories: (1) floating rate equity preferred stocks (2) CPI Floaters and (3) Synthetic Floaters. Advantages and Disadvantages of Equity Preferred Floating Rate Securities Synthetic Floaters Floaters: Links in One Post

I am only aware of three senior exchange traded bonds that pay interest based on a spread to CPI: PFK, OSM and ISM. (see e.g. Bought 100 PFK at 18.47 Bought 90 PFK in IRA $18.94 Added 50 PFK at $17.83 Added 50 PFK in Roth at 20.88-Averaged UP  Bought 50 ISM in IRA at $11.85 Bought 100 OSM at 15.75-Regular IRA Added to OSM at 18.47//CPI and CPI Floaters-OSM-Dec 2008;  CPI Floaters PFK AND OSM-DEC 2008}.

5. Added 50 CBU at 25.19 on Thursday (Regional Bank Stocks' basket strategy)(see Disclaimer): I mentioned in an earlier post that I will be selling some stocks in my regional bank strategy and adding some to existing positions.  The regional bank basket has been hovering over 40 securities and that is too many for a basket strategy. It is more like a regional bank mutual fund. The fifty shares of Community Bank System bought on Thursday was an average up from the previous purchase at $23.18 (October 2010). I discussed CBU's 4th quarter results in Item # 3 CBU. The current consensus estimate, made by 5 analysts, is for an E.P.S. of $1.97 in 2011 and $2.08 in 2012. The current dividend yield is close to 4% at the $25.19 price. 

CBU closed at $25.21 in trading today, down 14 cents. It recently traded as high as $28.58,  CBU Stock Charts.  

I pared another position in the basket on Thursday which will be discussed in the next post.

Since I started this basket strategy, the realized gains are close to $5000 and the unrealized gains are over $6,400 as of today's closing prices.

6.  Bought 50 of the ETF DLN at $48.24 on Thursday (Large Cap Valuation Strategy)(see Disclaimer): I may pare this trade with a double short on another index. I have been discussing the relative valuation of large and small caps in several posts. LB wanted to buy the double short part of the pare yesterday but OG put the kibosh on it. The LB complained to Headknocker, saying again with emphasis this time that the Old Goat and its NitWit ally, the RB, are going to lose all of HK's money unless they are corralled and restrained soon. LB said that it "needs to be reappointed as the Head Trader of the storied trading operation here at HQ, while there is still time to save the day."

LB could not believe the junk bond that the OG bought on Thursday. The selection was made based on which available offering served the OG's favorite meal, his staple without which he could not survive, at least in his present form, RB helpfully added, the All American Cheeseburger and French Fries. LB howled in protest, just before the Old Goat entered the order, to no avail, since LB has been put out to pasture by the HK, told to work 24/7 with no pay of course, and to keep its mouth shut, unless spoken to first, and then to limit itself to a reply of less than 10 words. HK "will rue the day about mistreating the Stock Stud in such a disdainful manner", LB noted in closing. 

The large cap valuation strategy already has several ETFs in it. It is based on the premise that large American companies are still selling at reasonable multiples of earnings, and arguably present the best value in the market after the historic run in stocks since March 2009.  

DLN is the symbol for the WisdomTree LargeCap Dividend Fund. This ETF has an expense ratio of .28%. Total assets are currently close to 600 million. The weighting is 100% in U.S. companies. The dividend yield is close to 3% at the current price. As of yesterday, the fund had 301 holdings but the index is weighted in the top 20 names: 


This particular ETF would not include Google or Apple, which do not pay a dividend, but those companies would be included in the ETF OEF which is for the S & P 100, which includes some non-dividend paying companies. iShares S&P 100 Index Fund (OEF): Holdings 

Other ETFs currently owned that would be part of the Large Cap Valuation strategy include 100 shares of OEF and VV: Added 100 OEF at 49.11 (second 100 shares bought, reinvesting dividend) Bought 100 VV at 54 (November 2010). 

I have also booked some profits from this particular ETF strategy. {BOUGHT 100 VV at $41.45 (MAY 2009)-- Sold 102 VV at 49.43 Bought 100 OEF at 49.61 (JUNE 2010) Sold: 100 of the 200 shares of OEF at 54.94 Bought 100 DHS at 35.32 Sold:  100 DHS @ 38.16}

Most of my positions are in individual large cap stocks. 
  
WisdomTree LargeCap Dividend Fund (DLN) closed at 48.37 in trading today, up .5% or 24 cents. 

7. Coca Cola (own)( Large Cap Valuation Strategy & Common Stock Dividend Growth Strategy): Buying KO at 38.72 did not require much courage in March 2009.  Since I am close to my $10,000 limit from the ownership of KO common shares, I am not allowed by one of LB's myriad rules to buy more except through reinvestment of dividends which I have been doing since making that purchase in 2009. I probably would not buy more at the current price anyway. 

KO is part of my dividend growth strategy. As noted in prior posts, this company has been on a long term historical trend of increasing its dividend every 7 years.  Item # 1 Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009 The criteria for new adds under this strategy are set out in Item # 6  Common Stock Dividend Growth vs. Long Term Investment Grade Bonds 

Coca-Cola Company announced today that it was increasing its quarterly dividend by 7% to 47 cents from 44 cents. At a 7% rate, the dividend will double in about 10.24 years, so a continuation of that rate of increase would alter the historical rate of dividend growth significantly.

Coca-Cola closed at $64.55 on Thursday, up $1.15.

8.  Update on  Citigroup Inc. 3% Principal Protected Note Linked to the Russell 2000 (MOU) (own): I bought 100 shares of the "principal protected note", issued by Citigroup Funding, at close to its par value last April: Bought 100 MOU at $10.12  This unsecured senior note pays the greater of 3% or the percentage increase in the Russell 2000 as its annual interest payment. I have not paid much attention to it, but did notice over the past few days that this security was trading at over $13. I could realize close to a 30% profit by selling the shares now:



If this security was in a retirement account, which unfortunately is not the case, I would keep it until maturity. The distributions made by MOU are taxable as, the security is a senior unsecured note.  In addition, Tennessee has no state income tax on any of my income other than most categories of dividends and interest (excludes Tennessee and Federal government interest, etc.). I would not pay a state income tax on the gain from selling MOU, but I would pay a 6% "Hall Income" tax on the dividends after exhausting my standard deduction which is usually exhausted before the end of January. So, it is slightly more tax effective for me to take a $300 gain rather than to receive a $300 interest payment. 

The second annual interest period is set to end on 2/23/2010.  Pricing Supplement  And Monday (2/21) is a holiday. The starting value of the Russell 2000 at the beginning of that period was 625.07. Fortunately, MOU allows for a 37% increase in the Russell 2000 index before triggering a reversion back to its 3% guarantee.  That places the maximum level at 856.3459. There has been no reversion up to today.  The index closed today at 834.02 RUT Historical Prices. Assuming no maximum reversion, this one is due for a big payday. A close at 850 on 2/23/2011, for example, would represent almost a 36% interest payment on the $10 par value.

MOU closed on Thursday at $13.48. 

I have decided to keep it until maturity, unless I become concerned about Citigroup paying off the note at maturity in 2014.  If an investor wants to buy this exchange traded debt obligation at Fidelity, you are out of look.  That firm prohibits new buy order of all exchange traded principal protected notes. Fidelity Prohibits New Purchases of SIPs  I would not buy MOU at its current price anyway. I have limited my purchase of PPNs to prices below their par values or slightly above.   

I made several more trades on Thursday which will be summarized in the next post. Headknocker reminded all traders here at HQ that no more than two trades per week can be made when and if a Stable Vix Pattern forms. That restriction will remain in place until the next Trigger Event. Vix Asset Allocation Model Explained Simply VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern VIX and S & P Compared 1990 to 1997 Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2  Current Status of Vix Asset Allocation Model (1/31/2011 Post)  More on the Vix Model: What it Does not Predict is as Important as What it Does/Parallels to VXO 1987-1988-Volatility Signals Before October 1987 Crash  More on VIX AND ASSET ALLOCATION
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Tuesday, December 7, 2010

Tentative Deal on Bush Tax Cuts/Bernanke on 60 Minutes/Bought 100 NPP @ 14.05, 50 BMLPRL @ 17.35, 1 QuickSilver Resources Bond @ 96.87/Sold: 100 OEF at 54.94, 50 STIPRA @ 21.24, 100 SJV @ 10.8

In an interview on 60 minutes, Bernanke said that it was a "myth" that the Fed is creating money as a result of quantitative easing, asserting that the amount of money in circulation does not change in a "significant way" when the Fed buys securities. Maybe that is technically correct.  The FED increases bank reserves by buying these securities, and the banks are not lending that money out.  For those increased reserves to "create" money, the bank would have to circulate those funds in new loans.  USATODAY.com   There may simply be a distinction between a common sense view of money creation and the one advocated by practitioners of a pseudo science.

 He is "100%" positive that the FED can act quickly enough to prevent inflation.  The price for gold offers a dissenting opinion to that belief. He believes that the "fear of inflation" is "way overstated".  He does not believe that it is "likely" that the U.S. will have a double dip recession, since the cyclical parts of the economy like housing are already so weak that they can not "get much weaker".

An intelligent critique of Bernanke's beliefs, as stated in this interview, can be found in a press release by the  National Inflation Association.

 The tentative deal worked out by Obama and the GOP on taxes and unemployment benefits may provide a near term jolt to the economy, but the estimated cost of something for everybody will be 900 billion dollars over two years.  Maybe the members of the two tribes want to see what happens when the U.S. hits a two trillion budget deficit in a single fiscal year.  After all, surpassing 1 trillion by a few hundred billion did not seem to be so bad, at least for the time being.

The GOP wants to extend the Bush tax breaks to the wealthiest Americans, their main benefactors, based on  the thoroughly discredited belief that tax cuts for the wealthy pay for themselves.  The GOP strategy of holding hostage the extension of the Bush tax cuts for 98% of the population in order to secure an extension for the wealthy will prove to be successful, as the proposed deal calls for the extension of all of the Bush tax cuts for two more years.

Ultimately, the GOP wants to make the tax cuts permanent. The net effect of a permanent extension according to the CBO will be "to reduce income relative to what otherwise would occur in 2020" due to the cost of the increased debt burden. PolitiFact  WP   cbo.gov-.pdf

 The Democrats received in return the GOP acquiescence in yet another extension in unemployment benefits.  Both parties apparently want a two year reduction in the 6.2% social security tax by two percent.  NYT  As one would expect, all of the foregoing will add more to the deficit,  which is the default resolution to every problem in need of a political solution.  Any amount added to the deficit will most likely be part of the nation's debt for as long as the U.S. exists as a country.   It is hardly surprising that gold continues to set new records.  It is really easy to be irresponsible.

I do recall that Mark Zandi testified that a previous extension of unemployment benefits would increased GDP for every buck spent.   The reason is that those benefits are quickly spent.  Testimony of mark-zandi .pdf (see page 5) Tax cuts for the wealthy have far less positive impact on GDP since a significant portion will be saved rather than spent.   I do have to wonder, however, how many recipients of the continually extended unemployment benefits have refused to accept or even look for a job that is viewed as beneath them.    I see a lot of $8 to $10 hour jobs with a lot of vacancies, and some of them are not exactly physically demanding or taxing to the intellect.

 1. Bought 100 of the municipal bond CEF NPP at $14.05 on Friday (see Disclaimer): NPP is a leveraged municipal bond CEF. NPP - Nuveen Performance Plus Municipal Fund, Inc. The expense ratio is .74% NPP Fund Data  As of early October 2010, the fund had 279 holdings with an average maturities in years of 18.66.  So in addition to the risks inherent in leveraged bond funds with no term date, I also have significant interest risk associated with long bonds.   The overall credit quality is investment grade with 22.5% rated AAA, 37.4% at AA and 25.2% at A. NPP - Holdings Detail 

The current distribution rate is $.0785 per month.  NPP Distributions  If that rate continues for one year, then the tax free yield would be about 6.7% at a total cost of $14.05.

As of Thursday 12/2, which would be the latest data that I had when I made the purchase on Friday, the fund had a net asset value of $14.53 per share and closed at $14.13.  The discount as of that date was -2.75%.  The discount expanded last Friday to -3.1%, as the NAV remained the same from Thursday close but the market price declined by five cents.  WSJ 

2. SOLD 100 of the 200+ shares of the stock ETF OEF at 54.94 on Friday (see Disclaimer):  Staff here at HQ forgot to hook up the Old Geezer to the IV filled with Maalox and chill pills before the OG resumed his Head Trader duties.  The electrodes were attached to the OG's brain, to administer shocks to wake the Old Goat from those periodic naps during the trading day.   After receiving one of those shocks, and before anyone could restrain him, the OG said "sell stocks" and promptly entered an order to sell 100 of the stock ETF OEF at $54.94.  Headknocker suggested that staff play pleasant sounding "elevator" music  prior to giving the OG a jolt in the future.  The RB added that all the OG and the LB accomplish with all of this trading is to help our needy and destitute Uncle Sam in his hour of need.

Using FIFO accounting, the lot sold was the highest cost shares purchased at $49.61 last June.  I kept the shares bought  at $49.11.   OEF is the ETF for the S & P 100.

3. Sold 50 STIPRA at $21.24 on Friday (see Disclaimer):  This floating rate equity preferred stock with a 4% guarantee was ex dividend in late November.   I thought that the BMLPRL, discussed in # 4 below represented a better value, so I sold STIPRA and bought another 50 of BMLPRL. STIPRA is a Suntrust (STI) preferred stock that pays the greater of 4% or .53% over 3 month LIBOR.   Final Prospectus Supplement  Due to the abnormally low rates now, the applicable rate is the 4% guarantee.  I bought those shares recently at  19.75.  I have previously bought and sold this security:  Bought 50 STIPRA at $17.2   Sold 50 STIPRA at $20.90 

4. Bought 50 BMLPRL at $17.35 and sold 100 of the SIP SJV at $10.8 (see Disclaimer):  On 8/30/2010, I included SJV and two other special investment products in a ROTH IRA conversion after they declined from my initial purchase price.  The decline for SJV was relatively small.  Bought 100 SJV at 9.67  The conversion value on the 100 SJV was $954. 

 If the S & P 500 closes above 1,114.05 on 12/28/2010, I would receive from Bank of America $10.925. So the current pricing of SJV captures most of that gain.  The primary reason, however, for selling SJV is that I wanted to average down on the floating rate equity preferred floater, BMLPRL, which was originally issued by Merrill Lynch and is currently a Bank of America obligation.  

 Given my limit of $10,000 for securities from a single issuer, I needed to sell one BAC security to buy another.  For BAC, to determine whether I am over my limit, I would include the common stock, the equity preferred stocks, the trust preferred and any other bond, and the SIPs since they are after all senior notes.  I would of course include any security where BAC is now the responsible party, irrespective of the firm who originally issued the security.  As a result, I would include in that computation the Merrill Lynch equity preferred floaters with guarantees and the MBNA trust preferred stocks.

As previously discussed, BMLPRL was originally issued by Merrill Lynch.  I have been trading the Merrill Lynch floating rate preferred stocks for close to two years now.  I discussed BMLPRL when I purchased 50 shares last October  at $18.17. Due to the market's concerns about BAC, these securities have fallen in value over the past several weeks. To save time, I will just copy my earlier discussion about BMLPRL from the October post:


"The LB has devised a new strategy for floating rate equity preferred stocks that are obligations of Bank of America. The idea is now to buy several of them and then sell whichever one pops first. BMLPRL is a non-cumulative equity preferred stock, originally issued by Merrill Lynch, that pays the greater of 4% or .5% above the 3 month Libor rate. Term Sheet Due to the Jihad against savers by central bankers around the world, I would anticipate that it will be many months (possibly a year or more) before the 3 month Libor rate will rise above 3.5%, the point where the Libor float + .5% would be greater than the 4% guarantee. A history of the 3 month Libor rate can be found at LIBOR Rates History (Historical). Historically, it would not be unusual for the Libor rate to be higher than 3.5%, but it is now hovering at an abnormally low level of .29%. The daily rate can be found at the WSJ.com under the heading "consumer money rates".

BMLPRL does pay qualified dividends according to QuantumOnline.com. Hopefully, Congress will extend that favorable tax treatment which is set to expire at the end of this year, but I would not bank on it. This security is rated as junk.

The dividend for BMLPRL can be eliminated provided BAC first eliminates the common shares dividend, currently at 1 cent per quarter. It would be embarrassing for BAC to eliminate a 1 cent per quarter dividend, and then eliminate the non-cumulative preferred stock dividends. If you had an amount in excess of the FDIC coverage limits at Bank of America, and learned that it eliminated those dividends to preserve capital, what would you do?

The guarantee provided in these securities provides some protection in a low inflation or deflation scenario. At the 4% guarantee, the yield at a total cost of $18.17 is around 5.35%. The Libor float provision in BMLPRL is not a good one, comparatively speaking, but it does provide some inflation protection. 

 At a 6% 3 month LIBOR during the relevant computation period, and the $18.17 total cost, the yield becomes 8.94%. Par value is $25. So if inflation kicks in, causing a rise in short term rates after the central bankers end their Jihad against savers, then the increase in interest rate due to the float provision provides some protection to the value of BMLPRL, possibly even making it more valuable assuming no change in the credit risk. An improvement in BAC's credit risk may also improve its value.  Inflation or Deflation: Bond Alternatives 

I have a gateway post that discusses in detail my opinions on the Advantages and Disadvantages of Equity Preferred Floating Rate Securities."

The following are some links to discussions of buys and sells of other BAC equity preferred floaters with guarantees:   Added 50 BMLPRJ at 17.74 Bought 50 BMLPRJ at 18.50 Sold 50 BMLPRJ at $19.25 Bought 50 BMLPRH at $13.83 Bought 50 BMLPRH at $13.25 Bought: 50 BMLPRH at 16.2 Sold 100 BMLPRH AT 17.42 Bought BMLprg at $8.8 Sold BMLPRG at 12.45 Sold BACPRE AT $15  I now own 100 shares of BMLPRL and 50 shares of BMLPRH in this category. 

BMLPRL has almost a 6% yield at its 4% guarantee for a total cost purchase at $17.35.  STIPRA has about a 4.7% yield at a total cost of $21.26, and less at the closing price from last Friday.  The difference in the LIBOR float provision is not viewed as a material consideration.

The consensus view now that the Bush tax cuts will be extended for the wealthiest taxpayers makes securities like equity preferred floaters, which pay qualified dividends, and provide a measure of protection in both inflation and deflation scenarios, a more desirable investment.

 5. Bought 1 Quicksilver Resources Bond at 97.675 Maturing on 4/01/2016 on Friday (see Disclaimer): The commons stock symbol for this oil and gas company is  KWK.  The current consensus estimate is for an E.P.S. of 68 cents in 2010 on 898 million in revenues and 35 cents in 2011.

 My confirmation states that the yield to maturity is 7.662% and that the bond is rated B3 by Moody's and B- by S & P.

 This is a link to the information at FINRA  for this bond.  The coupon is 7.125%.

 The prospectus states that this bond is a "senior subordinated" obligation, some kind of marketing phrase meaning that it is "subordinated to all our existing and future senior debt and rank senior to all our existing and future subordinated debt."  

 I would prefer to call it a junior bond with some characteristics normally associated with senior bonds but subordinated to them. 


The last earnings report, which I reviewed, can be found at the SEC's web site.  The long term debt, which is substantial for a firm this size, is listed at page 18.  The relative priority of the debt issues can be gleamed from the chart and data at page 19.

 In October, KWK completed the sale of its interests in a publicly traded midstream partnership (CMLP)  for 701 million in cash, recognizing a gain of approximately 540 million, and has the right to earn up to an additional 72 million in earn-out payments in 2012 and 2013.   Form 10Q at pages 10 and 29.  (see also Quicksilver Resources) Some of the proceeds were applied to pay off the senior "secured" credit facility, which had an outstanding amount of 529.274 million as of 9/30.

 Quicksilver recently entered a confidentiality agreement with an investor group, controlled by the Darden familiy, who expressed an interest in exploring strategic alternatives for KWK. www.sec.gov   

 The stock jumped from a close of $12.61 on 10/15 to $14.65 the next day when the letter expressing this interest was made public. If this process ends up with KWK being sold to a large integrated oil company like Exxon or Chevron, then this would have a positive impact on the pricing of this bond, due to an upgrade in credit quality.  However, if this process ends up in a leveraged buyout, and more debt, then the credit rating could sink.

I will discuss the trades from Monday, 12/6, in the next post.  
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Friday, October 8, 2010

Bought: 50 BMLPRL at 18.17, 100 TSCM at 2.86, 50 UBCP @ 8.13/Sold: 300 IMF @ 17.23, 100 JBK at 21.59/AA/MOL & Spot Gold Price

1. Sold 100 of 150 JBK at $21.59 on Wednesday (see disclaimer): I took my long term capital gain in the 100 JBK shares bought at $16.15 in July 2009. This security has had an interesting history that I discuss in more detail in other posts. New Information about JBK more on jbk I still own 50 shares bought in the Roth IRA at 19.63 in late August 2010. Most financial web sites have the yield on this security wrong. At the current price, and based on the trustee's decision to treat Lehman's bankruptcy as a swap termination event, the owners of JBK have been receiving a semi-annual interest payment at the coupon rate of the underlying GS TP since 2/2009. That TP has a 6.345% coupon, which translates into two $.7931 per share/certificate payments annually. This produces a yield of about 7.35% at a total cost of $21.59, not the 14.63% yield shown at Marketwatch. The sites that have the wrong yield information assume incorrectly that the semi-annual payment is made quarterly. JBK was making quarterly payments prior to the Lehman bankruptcy based on the formula contained in the swap agreement, which was the greater of 3.5% or .75% above 3 month LIBOR. www.sec.gov While I did well recognizing that JBK had turned into a fixed coupon TC after the swap termination event, and was paying significantly more than the other fixed coupon TCs tied to the same GS TP, this security required a lot of time and analysis for the profit realized in it.


2. RB Buys 100 TheStreet.com (TSCM) at $2.86 on Wednesday ( LOTTERY TICKET category)(see disclaimer): LB, always diligent and focused on details, was working on a modification to trading rule 1, 374,492,673.123 (A)(1)(vii) for the Unstable Vix Pattern within the confines of a long term secular bear market in stocks when the Nit WIT RB seized control over the keyboard and attempted to buy 1000 shares of TSCM. As one would expect, LB quickly realized that the RB was up to no good, and managed to delete one of the zeros prior to Lame Brain hitting the buy tab.

Admittedly, and it pains the LB to even say this, the RB did make a successful trade of TSCM, buying 100 at $1.88 in May 2009 and then selling those shares at 3.02 last February.

As far as the LB is concerned, only two positive comments can be made about TSCM. One is that the cash on the balance sheet, as of 6/30/2010, is about equal to the market capitalization of 90.23 million or so at the $2.86 price. The last filed form 10q shows cash and marketable securities at $80,936,805. I did not see any debt. The other is that the price to book is less 1, currently around .89. TSCM Key Statistics Price to sales is around 1.53.

The company did lose 1 cent for the Q/E 6/2010. The stock price is currently supported to some degree by a quarterly dividend that results in close to a 3.5% yield on shares bought at a total cost of $2.86: TheStreet.com Inc, TSCM Stock Quote At best this is a low expectation trading buy in the LT category. TSCM may be able to start turning a profit when and if individuals return to the stock market in a big way.

TSCM closed at $2.9 yesterday.

3. MOL (own 200 shares): It looks like MOL, the "principal protected" note issued by Citigroup Funding, guaranteed by Citigroup as provided in the prospectus, will either have a good pay day next month or will suffer a reversion back to the 2% guarantee. This note pays distributions based on the greater of 2% or the percentage increase in gold up to 19%, provided there is no close in the spot gold price above that 19% cap during this securities pertinent annual period. It only takes one close above that cap to trigger a reversion back to the 2% guarantee, as explained in more detail in Bought 200 MOL at 9.95 It will be tight. I bought this security at $9.95 even though I did not like the low 19% maximum level. That is not much leeway before triggering the reversion back to the guarantee. Whatever, I previously calculated the maximum level for gold at $1391.7 during the current annual period. The good news is that the annual period ends on 11/18/2010 and the price of gold has not yet closed above $1391.7. The bad news is that gold is trading near 1350 now, so there is not much room left before it exceeds the maximum level which triggers the reversion. If there was no maximum level violation, and gold closed at $1350 an ounce on 11/18, then this security would pay out $1.55 per share for its first annual distribution. On the other hand, a close above 1391.7 would trigger a payment of only $.2 per share irrespective of the percentage increase in gold. So, you have to be a bit of a gambler to buy a note issued by Citigroup and then add to that the gamble on a maximum level violation.

Last week, there was a significant bid on MOL at $10.45. As the gold price inched closer to the maximum level, that bid was withdrawn, and the last trade yesterday was at $10.06.

Spot gold did decline some yesterday falling to $1331 per ounce at the NY close: 24-hour Spot Chart - Gold

4. Bought 50 BMLPRL at 18.17 on Thursday (see Disclaimer): The LB has devised a new strategy for floating rate equity preferred stocks that are obligations of Bank of America. The idea is now to buy several of them and then sell whichever one pops first. BMLPRL is a non-cumulative equity preferred stock, originally issued by Merrill Lynch, that pays the greater of 4% or .5% above the 3 month Libor rate. Term Sheet Due to the Jihad against savers by central bankers around the world, I would anticipate that it will be many months (possibly a year or more) before the 3 month Libor rate will rise above 3.5%, the point where the Libor float + .5% would be greater than the 4% guarantee. A history of the 3 month Libor rate can be found at LIBOR Rates History (Historical). Historically, it would not be unusual for the Libor rate to be higher than 3.5%, but it is now hovering at an abnormally low level of .29%. The daily rate can be found at the WSJ.com under the heading "consumer money rates".

BMLPRL does pay qualified dividends according to QuantumOnline.com. Hopefully, Congress will extend that favorable tax treatment which is set to expire at the end of this year, but I would not bank on it. This security is rated as junk.

The dividend for BMLPRL can be eliminated provided BAC first eliminates the common shares dividend, currently at 1 cent per quarter. It would be embarrassing for BAC to eliminate a 1 cent per quarter dividend, and then eliminate the non-cumulative preferred stock dividends. If you had an amount in excess of the FDIC coverage limits at Bank of America, and learned that it eliminated those dividends to preserve capital, what would you do?

The guarantee provided in these securities provides some protection in a low inflation or deflation scenario. At the 4% guarantee, the yield at a total cost of $18.17 is around 5.35%. The Libor float provision in BMLPRL is not a good one, comparatively speaking, but it does provide some inflation protection. At a 6% 3 month LIBOR during the relevant computation period, and the $18.17 total cost, the yield becomes 8.94%. Par value is $25. So if inflation kicks in, causing a rise in short term rates after the central bankers end their Jihad against savers, then the increase in interest rate due to the float provision provides some protection to the value of BMLPRL, possibly even making it more valuable assuming no change in the credit risk. An improvement in BAC's credit risk may also improve its value. Inflation or Deflation: Bond Alternatives/


I have a gateway post that discusses in detail my opinions on the Advantages and Disadvantages of Equity Preferred Floating Rate Securities.



5. Added 50 UBCP at 8.13 on Thursday (Regional Bank Stocks' Basket Strategy) (see Disclaimer): I have little to add to my discussion of this small savings bank made in a post discussing at prior purchase at $8.49. The bank is paying out 14 cents per share in quarterly dividends. At a $8.13 total cost, this translates into a 6.89% yield. I have had recently some banks with high dividends cut them with two discussed in yesterday's post. The bank earned 15 cents in the Q/E 6/2010. The capital ratios are above the well capitalized levels:

Total risk based capital ratio 14.45%
Tier 1 risk based capital ratio 13.51%
Tier 1 capital to average assets 8.75%

10Q at page 29 As of 6/30, the non-accrual loans to total loans ratio was 2.01% and the allowance for loan losses as a percent of nonaccrual loans was 50.54%. That later number is somewhat discomforting. SEC Filed Press Release for Q/E 6 /2010v99

United Bancorp closed yesterday at $8.07.

6. Alcoa (owned): I last bought AA shares at $5.6 in March 2009. Frequently, I hear pundits advise selling AA after its recent run, using some short term criteria to assess the relative worth of this company. If I had listened to the Fast Money crowd on CNBC, I would no longer own my shares. I am not taking a short term view on this stock, however. At some point, there will be a robust economic recovery and Alcoa will be in its sweet spot again. Maybe that recovery is starting now or possibly it will not kick into gear until 2011 or 2013. It is only necessary to have faith that there will be a synchronized worldwide boom within the next few years to buy Alcoa. The issue is not whether a run from $10 to $12 is sufficient to take a profit, but instead whether the stock can return to a more normalized range at over $30 within the next five years.

I made the following comment in a post from April after J P Morgan downgraded AA based on the typical tunnel vision that infects most investors:

" The last purchase of Alcoa was at $5.6 in March 2009.You do not have to be a financial wizard to make money in stocks. It helps just to have some common sense. When Alcoa hit $5.6 in March 2009, the collective judgment of the rational man, so treasured by practitioners of the dismal science, had to be that aluminum demand would not return for at least five years, possibly for as long as a decade. The $5.6 price for Alcoa was prevalent in 1987. Alcoa Inc. Common Stock Share Price Chart | AA Was the market pricing Alcoa efficiently at the time? The market was dominated by irrational pricing behavior that failed to take into account the massive efforts undertaken by governments and central banks around the world to stabilize the financial system. It was evident by March 2009 that those efforts would succeed. The here and now crowd were pricing stocks then, as if nothing would improve for years to come and consequently it was appropriate to value companies as if the recessionary earnings were the new normal. Sort of like the entire world channeling the spirit of Alan Abelson.


I still own my Alcoa shares and have no intention of parting with them. My shares were bought between $5.6 and around $11. .. . The (J P Morgan) analyst cut the 2011 earnings forecast to 48 cents based on an aluminum price forecast in 2011 of 92 cents per pound or $2027 per tonne. This is what I call short term thinking. The analyst apparently acknowledges that Alcoa has used the Near Depression period to take significant costs out of its operation. This appears to be the case. And, wouldn't this be good long term for the business? And how does one, by the way, come up with a 2011 forecast for aluminum prices?. . .

But, in the last analyst, it does not matter whether the J P Morgan's pessimistic forecast for aluminum prices proves to be prescient, though I would question the wisdom of that forecast. What matters is whether the current price is a good entry point for someone willing to hold for five years, giving time for the demand cycle to return, as opposed to focusing one's attention on the hear and now and trying to predict what will happen just in the next year. A rise in price to $20 from $14.4 at any point within five years would give the investor a 38.8% return before taking into account any dividend payments. Yet a $20 price would have been the time to buy, not sell, Alcoa in 1999 and 2002 based on subsequent price movements to the low 40s: Alcoa Inc. Common Stock Share Price Chart | AA"

Item # 2 Alcoa (April 2010)

After the close yesterday, Alcoa reported better than expected earnings and increased its forecast for aluminum demand from 12 to 13%. The company earned 9 cents per share on an adjusted basis on a 15% increase in revenue.

7. SOLD 300 IMF at 17.27 on Thursday (see Disclaimer): IMF is a closed end fund that invests in inflation protected bonds. Legg Mason - IMF - Western Asset Inflation Management Fund Inc.The OG was taking his afternoon siesta, with LB temporarily in charge of the trading desk, when this order was entered, to the great consternation of Headknocker who castigated the LB for taking yet another short term gain, in its typical myopic Nerd think. LB then launched into a thirty minute discussion, replete with charts and numbers coming out the wazoo, putting the entire staff asleep, until the Nerd said "in conclusion, it is clear that inflation protected treasuries are overpriced". Whereupon the RB replied, "is that why the Nerd sold the TIP ETF at $104.68 that closed yesterday at $110.81."

I bought 300 of the CEF IMF at 16.51 in May and collected a few monthly dividends before selling all of my shares yesterday.

IMF closed yesterday at $17.27, which represented a -7.99% discount to its net asset value. WSJ
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