Build America Bond CEFs/Bought 50 AF at $8.9/GIS/Update on Liberty Media and its Bondholders/BAC Debt Downgrade/Sold Remaining Shares of EXC at $44.44/Bought 100 NSSC at 2.56 as LT

The market found no comfort in the Federal Reserve's downbeat assessment of the U.S. economy. FRB: Press Release--Federal Reserve issues FOMC statement--September 21, 2011 Operation twist was expected by most observers, whereby the FED would buy longer dated treasuries and sell those maturing within three years. FRB: Maturity Extension Program FAQs

That operation did cause the long treasury bond to rally. Possibly, mortgage rates will fall further, prompting some buyers to purchase their first home. The 10 year treasury note closed at a 1.868% yield. The 30 year had a more robust rally, gaining 4 1/32 to close at a 3.013% yield.  The Jihad against the savings class continues. I would view it as unlikely that the 10 year note, purchased at a price to yield 1.87%, will provide a positive real rate of return over its life, and that would be before taxes. These kind of rates are not signs of a healthy economy, but of a diseased one.

This is a link to a WSJ article that shows how the FED changed its August 2011 statement with the one released yesterday.

The ^VIX rose 13.57% yesterday to close at 37.32. The Russell 2000 VOLATILITY index rose 8.94% to 45.33.

A WSJ article asks rhetorically whether the Hewlett-Packard Board of Directors is the worst one ever. I would have to say that the HP Board is thoroughly incompetent and is probably the worst non-corrupt Board ever. HP rallied yesterday on leaked news that the Board may fire the idiot Leo Apotheker. WSJ

Moody's downgraded Bank of America debt yesterday. Bloomberg As part of that downgrade, the TPs were reduced to the junk rating of Ba1 from Baa3. Bank of America | Investor Relations | Fixed Income Investor Relations  Moody's had rated the TPs Baa3. Fitch is now the only major rating service that gives BAC TPs an investment grade. I currently own 50 CPP, 50 KRBPRD and 100 KRBPRE, among the TPs. CPP was bought a day before the downgrade, Bought Back 50 CPP at $21.35, and closed yesterday at $21.4. CPP Stock Quote The other two TPs were originally issued by MBNA Capital, later acquired by BAC: MBNA Capital D 8.125% TruPs, KRB.PD Stock Quote MBNA Capital E 8.10% TOPrS Series E, KRB.PE Stock Quote  

Overall, my exchange traded bond portfolio had a positive gain during the market's rout yesterday which is viewed as a plus. 

1. Bought 50 AF at $8.9 Last Monday (Regional Bank Stocks' basket strategy)(see Disclaimer): I always view it as a victory when I profitably sell a position at a higher price, then buy it back at a significantly lower price. I previously bought and sold Astoria Financial, a thrift headquartered in Long Island, at lower prices than my re-entry at $8.9. Bought: 100 AF @ 13.08 Bought  50 AF @ 12.08 Sold 50 AF at $14.09 Sold 101 AF at 14.89 My last sale was at $14.89 last January. The stock has fallen over 40% since that time. As a result, the dividend yield has risen to about 5.9% at Monday's closing price, Astoria Financial, and almost 6.5% based on yesterday's closing price of $8.03. The stock went ex dividend on 8/11. 

This is a link to the bank's 85 branch locations: Astoria Federal Savings Branches

Many regional banks have taken a drubbing over the past several months. The ETF with the most similarity to my basket is probably the SPDR KBW Regional Banking ETF (interactive chart), which hit a high of $27.53 in January and is now trading slightly close to $20 to $21.   

The main reason for the decline, arguably overdone already, is the continued decline in housing prices, the foreclosure mess, the stagnant economy, and the heightened risk of another recession.  Those issues do not impact the regional banks in a uniform fashion. 

Part of the problem is also the pressure on net interest margin caused by the prolonged Jihad by the Federal Reserve against the Saving Class. The banks have already largely received the benefit of low CD rates paid to savers, as CDs have already rolled over to the lower rates. The amount received in interest earning assets has continued to decline.

For the Q/E 6/11, Astoria reported net income of $16.845 million or 18 cents per share, up from 17 cents in the year earlier quarter. SEC Form 10-Q. As of 6/30/11, the net interest margin is low at 2.34% for the second quarter; the NPLs to total loans was high for banks in my basket at 2.79%; and the allowance for loan losses as a percent of NPLs was at 48.55% (prefer a number of 80%). The capital ratios are okay: see page 3 of SEC Filed Investor Presentation 

Profile | Reuters.com

Astoria and other thrifts are discussed in this article at Motley Fool. I also own FFIC, NYB, and OCFC mentioned in that article.

Regional bank stocks were crushed in yesterday's market downdraft. Astoria Financial fell 55 cents to close at $8.03 yesterday, with a yield at that price of close to 6.37%. It is not hard to find regional banks yielding over 6% now. 

2. RB Bought Back 100 NSSC at $2.56 as Lottery Ticket Last Tuesday (LOTTERY TICKET strategy) (see Disclaimer): A few days ago, Napco Security Technologies (NSSC) reported earnings for its fiscal 4th quarter of 7 cents per share, up from a loss of 10 cents per share for the Q/E 6/10. Revenues were $20.697 million.

The press release pointed to some new products that were in the process of being rolled out, and that is one consideration supporting the purchase along with an improvement in earnings. Another positive is that the company is using cash flow to pay down debt. For the F/Y ending in June 2011, the company reported revenues of $71.392 million and the market cap is around $48.5 million at a $2.56 price.  

The RB has been moving into and out of this stock for several years now, and may be going to the well one to many times. Nonetheless, I am playing with the house's money:

2011 Realized Gain $136.76 as LT

2009 Realized Gain $77.99

2007 Realized Gain $100.28 Pre-LT

Buy 100 NSSC at $1.02 Sold LT NSSC at $1.96 Bought 100 NSSC at $1.8 Added 70 NSSC as LT at 2.25 Sold 170 NSSC at 2.93

Since the Lottery Ticket strategy is reserved to the RB, it is not taken seriously by other staff members.

NAPCO Security Technologies closed yesterday at $2.41, down 13 cents. 

3. Sold Remaining Exelon Shares at $44.44 Last Tuesday (see Disclaimer): After selling shares earlier in the year, I was down to just 39+ shares, with 30 of those bought in an open market transaction @ $41 and the remaining shares were purchased with dividends. The profit on this last transaction was close to $100. As a result of this small sale, I was a net seller of stocks last Tuesday. 

SOLD: 100 EXC @ 44.67 

Exelon closed at $43.41 yesterday, down 66 cents.

4. General Mills (own)(Common Stock Dividend Growth strategy): General Mills reported earnings for its first quarter, ending 8/29/11, in its 2012 fiscal year.  GIS reported net income of $405.6 million or 61 cents per share on $3.85 billion in net sales. Revenues grew  9%, with foreign exchange contributing 2 points of net growth. The non-GAAP E.P.S. number, which excludes the effect of mark-to-market valuations of commodity positions, was 64 cents. That was two cents better than the consensus estimate of 62 cents. I am reinvesting the GIS dividend to buy more shares.

General Mills rose 96 cents to close at $38.45.

5. Liberty Media (no longer own bonds-and will never buy one again): I sold my last trust certificate containing a Liberty Media bond last Monday. Sold 50 of the TC PIS at $24.83-Roth IRA (9/21/11 Post). Any owner of a bond has to be concerned with the perpetual efforts undertaken by John Malone to undermine the security for those bonds. Those efforts are for the sole benefit of common stock owners and are designed to enrich those owners at the expense of the bondholders. The method used to effectuate that policy is to remove assets from the corporation by distributing stock in subsidiaries to the common shareholders, leaving the bondholders with less security for their loans.

As explained in my Post Liberty Media and its Bondholders, the most recent salvo was the plan to spin out Liberty Starz group (LSTZA) and Liberty Capital Group (LCAPA) leaving Liberty's bondholders only with the assets of Liberty Interactive Group (LINTA) to back their unsecured loans.  The main asset of LINTA is QVC which is itself very heavily in debt (debt piled upon debt, a modus operandi of an operator like Malone). Of course, transferring these companies without the holding corporation's debt makes them more valuable to the receiving shareholders, and Liberty's bondholders receive nothing in exchange for those assets.

The trustee for the bondholders claimed in a lawsuit that this last plan constituted a default under the bond indenture. While I agree with that position, the Chancery Court in Delaware held that the spinoff was not a default (delawarebusinesslitigation.com.pdf), and the Delaware Supreme Court affirmed that lower court decision yesterday. Liberty plans to divest those major assets on Friday. WSJ

The Delaware Supreme Court's decision can be found at courts.

As a practical matter, this decision weakens what I view as an already very weak provision in a bond indenture. In effect, the decision renders the protection found in the Liberty Indenture meaningless for all practical purposes.

I do not agree with the Delaware Supreme Court decision, but my opinion is irrelevant. The Delaware Supreme Court made its decision, and it is the law. That is that, it is what it is. It would be interesting to read an Indenture for any new bond that Liberty would want to float in the future.

I will not buy any debt from this moment forward that has been issued by any corporation headed by John Malone which is the only way to sensibly deal with this problem. Malone's long history of disadvantaging bondholders in favor of stockholders, summarized in the court's decision, can not be rationally disputed by any informed investor, notwithstanding any court decision that finds that long history of disaggregation fails to show a disaggregation  plan.  

6. Build America Bond (BAB) CEFs: I own two Build America Bond CEFs, BBN and NBB, and noticed last night that both of those funds experienced a significant rise in their net asset values per share yesterday. At first, I thought that the WSJ had made a mistake, and maybe that will turn out to be the case. The NAV per share information for BAB CEFs can be found in the WSJ Closed-End Funds section under "other domestic taxable funds".

A BAB is a taxable municipal bond.  Both of these funds are weighted in long term bonds. The Nuveen fund, NBB, has an average maturity of 28.81 years, Nuveen Build America Bond Fund. Due to the Federal Reserve's announcement yesterday, the 30 year treasury bond rose over 4 points in price and fell in yield, as noted above. So, based on that move, it would not be surprising to see BABs move up a lot too.

The WSJ page shows the NAV information as of last Friday's close and at yesterday's close.

BBN: $21.61 as of 9/16/11 $22.64 as of 9/21/11 Discount -12.01
NBB: $20.95 as of 9/16/11 $21.76 as of 9/21/11 Discount - 8.55

The Closed End Fund Association has the same NAV information for 9/21:
CEFA Page for NBB
CEFA Page for BBN

Both of these funds pay monthly dividends and use leverage.

My last purchase was 100 shares of BBN: Bought 100 of the Bond CEF BBN at 18.15 (7/29/11 Post). I am positive with the earlier purchases of NBB. Bought Back 50 NBB @18.4 (12/10/2010 Post); Sold 50 NBB @ 19.24 (12/3/2010 Post); Bought: 50 NBB @ 18.4 (11/18/2010 Post); Bought: 50 NBB @ 19 (11/16/10 Post);  /Bough 50 NBB at 19.67 (6/29/2010 Post).  I have also bought and sold GBAB, another CEF investing in BABs: Bought 100 of the Bond CEF GBAB at 18.2 (3/11 Post); Sold 100 of the Bond CEF GBAB at 18.84 (5/12/11 Post)

BlackRock Build America Bond Trust, BBN closed yesterday at $19.92, up 1 cent.
Nuveen Build America Bond Fund, NBB closed at $19.9 yesterday, up 1 cent.

Given the market rout yesterday, anything rising in value is showing negative correlation characteristics.

Tomorrow, I will publish a complete redo my Gateway Post on Trust Certificates which will take several hours to accomplish today. 

Bought Back 50 CPP at $21.35/Sold 50 of the TC PIS at $24.83-Roth IRA/

Michelle Bachmann, whose expertise is reality creation, asserted that the HPV vaccine was "dangerous". NYT   PolitiFact | Michele Bachmann says HPV vaccine can cause mental retardation  True Believers (TBs) do not require any factual support for their opinions, which are frequently stated as facts, even when those opinions are bizarre or based on clearly erroneous information.  A TB will routinely phrase their opinions as statements of fact.

While it is not desirable to have an ill informed electorate, it is far more dangerous to have political leaders who hold learning in disdain, as noted by Maureen Dowd in her NYT opinion column.

Steve Forbes believes that the Know Nothing Rick Perry will be our next President.

Another fact checking organization has published an analysis of the false and misleading claims made by GOP candidates in their recent debate. FactCheck.org : CNN/Tea Party Debate

Lying works in politics because so many Americans are uninformed and have no desire to acquire and assimilate accurate information. The Road to Political Power: Lying Works;  Accurate Information is Not a Side to an Issue/ W & the Housing Crisis/Lying Works In Politics (December 2008 Post);

Oracle reported after the close yesterday, beating estimates.

Microsoft (owned) hiked its quarterly dividend 25% to 20 cents per share. I am reinvesting the dividend to buy additional shares.

1. BOUGHT BACK 50 CPP at $21.35 Last Monday-CPP is a Trust Certificate Containing a Trust Preferred Security Issued by Countrywide Capital III (see Disclaimer):

This is going to be a complicated discussion.

CPP is a trust certificate representing an undivided beneficial interest in a trust preferred security issued by a Delaware trust. The trust preferred stock, issued by Countrywide Capital III, represents an undivided beneficial interest in junior bonds originally issued by Countrywide Credit Industries, later known as Countrywide Financial. Bank of America later acquired Countrywide Financial. 

Trust Preferred Securities: Links in One Post 

Regular Preferred and Trust Preferred

CPP has a 8.05% coupon on a $25 par value. www.sec.gov  CPP can be redeemed at a premium to its par value (see Annex A, starting at S-53) CPP and the underlying trust preferred security mature on 6/15/2027. Interest is paid semi-annually in June and December. 

I have recently discussed the terms of CPP when I purchased 50 shares at $21.4, sold a few days later at $24. 

I want to discuss the issue of Bank of America's liability for Countrywide's obligation solely in connection with the trust preferred stock that is the underlying security in CPP. I will not repeat any of the discussion previously made on this subject in Item # 1, Bought 50 of CPP at $21.4  (8/15/2011 Post). I have a few more details to offer on this specific issue. 

I found yesterday a BAC SEC filing listing the obligations assumed by Bank of America when it bought Countrywide. Form 8-K

Among those listed obligations assumed by BAC (Documents for 0001193125-08-230518), there are two references to an indenture dated June 4, 1997:

                                             

This is a link to both of those agreements, whereby Bank of America expressly assumes the obligations under that 6/4/1997 indenture. 2nd Supp. Ind. dated as of 11/7/08 to the Ind. dated as of 6/04/97 3rd Supp. Ind. dated as of 11/7/08 to the Ind. dated as of 6/04/97                                        

This is the specific language whereby BAC, referred to as the "Corporation", expressly assumes the obligations of the issuer under the 6/4/1997 Indenture:

BAC Assumption of Indenture Obligations

2nd Supp. Ind. dated as of 11/7/08 to the Ind. dated as of 6/04/97

This is the specific language whereby BAC, referred to now as the "Issuer" of the bond, due to the foregoing referenced agreement, assumes the obligations of the guarantor under the 6/4/1997 Indenture:

3rd Supp. Ind. dated as of 11/7/08 to the Ind. dated as of 6/04/97

So, based on that document, it does appear that BAC assumed CHL's obligations as issuer and Countrywide's obligation as guarantor under the 6/4/1997 indenture, which it was required to do under section 10.2 of that indenture.  The foregoing documents specifically reference section 10.2 of the 6/4/1997 Indenture.  

I found a 6/4/1997 Indenture involving the parties identified in the forgoing documents attached as Exhibit 4.4 to this filing made by Countrywide in 1997. This is section 10.2 of that Indenture:

Section 10.2 June 4, 1997 Indenture  

This indenture is attached as Exhibit 4.4 to the prospectus for the TP issued by Countrywide Capital III: www.sec.gov That indenture is for the 8.05% subordinated debenture issued by Countrywide Home Loans and guaranteed by Countrywide with the Bank of New York as trustee. Countrywide Capital III purchased that junior bond with the proceeds from the sale of trust preferred securities. It is that TP that is the underlying security in the trust certificate CPP. Section 10.2 of that indenture at page 58 (snapshot above) does require the assumption of obligations by a successor company. And that is the specific section mentioned in the BAC assumption referenced above.     

While the foregoing gives me more comfort about the successor issue, there is still the credit issues associated with any junior BAC obligation, whether originally issued by it or where it expressly assumed the obligation from a predecessor company. I am willing to shoulder that risk, to a small decree, in exchange for around a 9.43% current yield at at total cost of $21.35. This would be a significantly higher yield than the currently prevailing yield of other BAC TPs with longer maturities and subject to being called at their par values now. 

BAC Capital Trust IV 5.875% Cap. Secs., BAC.PU Maturing 2033

BAC Capital Trust I 7% Capital Secs., BAC.PW Maturing 2031

BAC Capital Trust II 7% Capital Secs., BAC.PV Maturing 2051

BAC Capital Trust X 6.25% Cap. Secs., BAC.PB Maturing 2055 

This is my third entry into this security, having bought and sold it twice before. 

I decided to research this specific issue relating to the TC CPP after BAC expressed an intent to put Countrywide in bankruptcy in the event litigation threatens to cripple the parent. Bloomberg Please note in that article an opinion expressed by Adam Cohen that BAC must stand behind the $16.6 billion in Countrywide obligations expressly assumed by it.

While I am more comfortable about BAC's liability for this particular Countrywide TP, I have to recognize that this security will likely be vulnerable to news similar to what was discussed in the foregoing Bloomberg article. CPP fell in response to that story. All BAC TPs are also subject to concerns about BAC's creditworthiness. I bought a TC containing a $25 BAC TP at $7.51 during the Near Depression, later selling that security for an handsome profit after collecting several interest payments.  Buy of 50 MJH at $7.51 Sold 50 MJH at 23.6 I mention the purchase price of MJH to highlight the danger of bank trust preferred securities.

I am bumping up against my $10,000 in exposure to a single company with this last purchase.  That limit is a circuit breaker to prevent significant losses due to a failure of a single company.  I own securities throughout BAC's capital structure (common, equity preferred, trust preferred and senior notes). For some companies, I am near that limit with just the common stock (e.g. KO, GE).

CPP closed at $21.35 on Monday and at $21.51 yesterday.  Merrill Lynch Depositor Inc. PfdPLUS 8.05% Trust Ctf. CCR-1, CPP Stock Quote

TCs trade flat. If I bought the underlying bond in CPP in the bond market, which is possible to do only with great difficulty, I would have to pay the seller accrued interest.  The last sale of the TP issued by Countrywide Capital III was in August 2011, in a small lot.

This is a link to the FINRA Investor Information on the 8.05% Countrywide Capital III TP maturing 6/15/2027, Symbol BAC.IEF, CUSIP 22237AAB2.  According to FINRA, the ratings are as follows: Baa3 Moody's, BB+ by S & P, BBB by Fitch.  The ratings from Moody's and Fitch are investment grade, though at the lowest level for Moody's.  Bond credit rating - Wikipedia 

2. Sold 50 of the TC PIS at $24.83 in the ROTH IRA Last Monday (see Disclaimer):  I am always a reluctant owner of Liberty Media bond, due to John Malone's continuous efforts to undermine the security of Liberty's bond owners. ITEM # 1 Liberty Media and its Bondholders  The TC PIS has as its underlying security a senior bond issue from Liberty Media. www.sec.gov I decided to exit the position near break-even, with a small total return with the interest payments.  Bought 50 PIS at 24.88 in Roth IRA

I recently received the semi-annual interest payment for PIS.

Merrill Lynch Depositor Inc. PreferredPLUS 8.75% Trust Ctf. Series LMG-1 (Issued by Liberty Media Corp.) closed at $24.85 yesterday. 

I also wanted to raise my cash level in the IRAs some, in case better opportunities come along soon.  I have also be de-risking some in my IRAs. The underlying bond in PIS is rated junk.  FINRA