Bought 100 GJP at 21.95/Bought 1 Synovus Junior Bond Maturing in 2017 at 86.3

This is a link to a helpful site that provides the "troubled asset ratio" (TAR) for virtually every bank in the country.  The  TAR "compares the sum of troubled assets with the sum of TIER 1 Capital plus Loan Loss Reserves". Bank search    Lower is better for the TAR ratio.   This is a link to the TAR ratio for TOWER (TOBC), the last add in the Regional Bank Stocks' basket strategy.

Denis Gartman added his opinion to the growing chorus of gurus warning about the emergence of a long term secular bear market in bonds.  CNBC.com He expects the long treasury bond to hit an 8% yield in a few years.  I would agree with him that a long term secular bear market is in the offing for bonds.  These cycles historically have been measured in decades rather than years.   The last bond bear market, which was born after WWII, began its life taking baby steps before inflicting substantial injury to bond owners starting in the late 1960, administering the   coup de grâce in 1978 to 1982.  By 1981, the yield on the long bond exceed 14%.  What happened?  I previously reproduced a chart of the rate of inflation in those years: 

1965	31.5	1.6
1966	32.4	2.9
1967	33.4	3.1
1968	34.8	4.2
1969	36.7	5.5
1970	38.8	5.7
1971	40.5	4.4
1972	41.8	3.2
1973	44.4	6.2
1974	49.3	11.0
1975	53.8	9.1
1976	56.9	5.8
1977	60.6	6.5
1978	65.2	7.6
1979	72.6	11.3
1980	82.4	13.5
1981	90.9	10.3

Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis  The number on the right is the rate of inflation.  I believe it was more the demand for money, rather than the inflation rate, that caused the bond bear market prior to 1965.  The stock market was experiencing a long term secular bull market between 1950 and 1965, shown by a 45 degree upward slope in the S & P 500 depicted in graphs at LONG TERM SECULAR BULL PATTERN 1950 TO 1966/ Long Term Secular Bear Pattern from The Great Depression.

The Barrons technical analyst believes that a long term bond bear market will be confirmed by a fall in the 7 to 10 year treasury ETF, IEF, to the $89-90 range.  IEF closed yesterday at $93.22, down from $100.08 on 10/11/2010. IEF Historical Prices | iShares Lehman 7-10 Year Treasury 

While I agree with the premise that we are near the transition point to a long term secular bear market in bonds, I am not yet convinced that the market has already made that transition.   Still, I am using a 4% yield on the 10 year treasury as a trigger to reduce my bond fund exposure and to invest those proceeds in individual intermediate term bonds that I can hold to their respective maturities.  The 10 closed yesterday at a 3.4% yield.  MDC - Java Chart - WSJ.com - for UST10Y

1.  RB Bought 1 Synovus (SNV) Junior Bond Maturing in 2017 at $86.3 with the Concession (85.5 Limit Order)  on Thursday (see Disclaimer):  First of all, LB disclaims all responsibility for the purchase of this junk rated junior bond issue from the troubled southern regional bank Synovus Financial Corporation.  LB was diligently working on a modification to trading rule 1,434,730,184 (1)(A)(2)(iv) for the Unstable Vix Pattern when the RB seized control over the trading desk and purchased this bond.  

This particular junior bond matures on 6/15/2017 and has a 5.125% coupon.  According to FINRA, the bond is rated junk, with Moody's assigning a B3 rating.  There are 400 million of these bonds outstanding.  

This particular bond was issued in 2005, which explains its low coupon.   This bond has the same priority as the 2013 bond bought earlier in the week.  Item # 5 Bought 1 SNV Junior Bond Maturing in 2013 at 94 The market has more confidence in SNV paying off the 2013 bond than the one maturing in 2017, judging from the yield differential.    My confirmation states that the current yield at my cost is 5.938% with a yield to maturity of 7.881%. 

This is a link to its prospectus:    SYNOVUS FINANCIAL CORP.  Interest is paid semi-annually in June and December. 

I have not had a kind word to say about SNV whenever I discussed it.  The best possible outcome for its bondholders and shareholders is the acquisition of this bank by one more competently run and consequently in a superior financial position.   It may take more balance sheet cleanup before SNV could be sold to a competently run bank.  10 Regional Banks in the M&A Crosshairs - TheStreet

I do not own the common stock and I am a little queasy owning a miniscule amount of these short term junior bonds.   Someone asked what is the likelihood of a default.  No one knows the answer to that kind of question.  It is certainly conceivable.  If the economy continues to recover, I would just view it as unlikely.  

2. Bought 100 GJP at $21.95 in the Roth IRA (See Disclaimer):  GJP is a Synthetic Floater that I can no longer buy as a Fidelity Brokerage customer.  The rationale given by Fidelity is that a "majority" of their customers do not understand these securities and consequently all of their customers are now prohibited from buying any of the synthetic floaters along with many other exchange traded bonds including a simple "baby bonds".   As a result of that expanding list of prohibited buys, which mostly impacted my Roth IRA, I moved that account to Vanguard and the transfer was completed yesterday.  I was therefore able to buy GJP yesterday.  

For those who have been following my buys and sells of synthetic securities, GJP will be a familiar security.  It will pay the greater of 3% or 1.15% above the three month treasury bill rate on a $25 par value. The interest rate can not exceed 8%.  Is that hard to understand?   GJP is a trust certificate.  The underlying security owned by the trust is a senior bond issued by Dominion Resources (D), a large electric utility based in Virginia.   That bond has a fixed coupon of 5.95% and is rated investment grade according to  FINRA.  The GJP's float is created by a swap agreement between the trust and Wachovia, now part of Wells Fargo.  The trustee collects the interest payments made by Dominion on the senior bonds owned by the trust and then swaps those funds for whatever is due the owners of the trust certificate GJP.  Due to the low interest rates now, Wachovia would pay the trust 3% and collect 5.95%, keeping the spread.     The bank can start to lose money on the deal, assuming it has not hedged its risk, when the three month T Bill rises above 4.8%.  At that point the bank would be paying more out than it receives under the swap agreement.

The owners of the TC bear the credit risk of Dominion paying the interest on the note.  If it fails to pay, the owners of the TC will be the ones to suffer, while Wells Fargo only loses a right to receive its spread.  I am comfortable with the Dominion's credit risk, which is a main reason why I keep coming back to this security after selling it.

Due to complex tax issues associated with the swap agreement, I will only own synthetic floaters in a retirement account.

GJP has a 8% maximum rate which will be hit when the 3 month Treasury Bill rate exceeds 6.85% (6.85% 3 month T Bill + the 1.15% Spread=8%).  While that is not going to happen anytime soon, historically speaking, a three month treasury bill rate over 6.85% has occurred for expended periods of time.    www.federalreserve.gov

I now know can compute the range of interest rates payable by this security at my total cost of $21.95.   I know that the guarantee of 3% translates into an annualized yield, paid in monthly installments, of 3.41%.  The maximum rate, hit when the three month T Bill exceeds 6.85% during the relevant computation period, will be 9.1%.   I also have the potential for capital appreciation due to a rise in the market price or simply by holding this security until the underlying bond matures on 6/15/2035.

GJP Prospectus:  www.sec.gov

I have already realized several gains from this security, along with several monthly interest payments: Bought 100 GJP at $18.97 (October 2009) Sold 100 GJP at 22.42 (Feb 2010)  Bought 50 GJP at 20.55 (July 2010)  Sold: 50 GJP at 23.31, 50 JZS @24.15 (Oct 2010)  Bought GJP at $17.75 (April 2009).  On that last post referenced, I can not find where I sold the GJP's shares purchased at $17.75.    If I can successfully trade this security a couple of more times, and collect more interest payments,  I will hopefully be in a position of playing with the house's money on a 100 share buy.   I will need to find out how much was made selling the shares bought at $17.75 to have a better feel for when that point is reached.   For each time that I have bought this security, it would be fair to say that I was not attempting to shoot the lights out, but overall my returns have been good given the nature and terms of this security.

3. Current Chart and Cash Flow of Junk Bond Ladder:  The following is a chart and other pertinent information about the junk bond ladder that I have been building.  This information is provided by my brokerage firm, and this kind of depiction helps me construct the ladder in a matter which I deem appropriate for me:

                                       

Where there is only green shown in the chart, this simply means that nothing comes due in that year but I still have some bonds generating interest income.   I know where I need to add by looking at this chart, but I have had difficulty finding suitable bonds maturing in 2015 and 2019 so far.  My ladder will not be equal weighted by year. 

As long time readers know, I employ a multitude of strategies involving all kinds of asset classes.  The junk bond ladder is just the latest.  If the economy continues to grow, hopefully some of the credit issues for these companies will improve which is why junk bonds have been faring better than the so-called credit risk free treasury bonds.  I am also responding to a possible increase in rates by buying mostly short and intermediate term individual bonds, thereby giving me the option of holding them to maturity.  Still, being what I would call an Aggressive Conservative Investor, I am not going to risk much in these low quality bonds.  I am actually looking forward to having the opportunity to build an investment grade corporate bond ladder at higher yields than prevailing now.

I am attempting to keep track of the bonds purchased under this strategy in Item # 3  Junk Bond Ladder Strategy.

I bought shares in a Canadian REIT and a senior bond on Thursday that I will discuss in the next post. 

Retail Sales/Chinese Currency/The Movie "Precious"-LGF/Medicare Fraud & the Government/ING SNV

1. Retail Sales: The government reported that retail sales for October rose a greater than expected 1.4%, and .02% excluding autos. However, the number for September was also revised down from -1.5% to -2.3%. Economic Indicators.gov These statistics are seasonally adjusted, but no adjustment is made for price. Gasoline sales are included in the retail sales, and that is just one item where there is a lot of price variation. Gas retail sales were down 15% from October 2008, and that shows the impact of price on this data release.

2. VOLATILITY INDEXES: After spurting to over 30 at the end of October, the S & P 500 volatility index is moving back toward 20, the demarcation line between bullish and bearish action in the Vix Asset Allocation model. The move toward 20 is itself positive. At the time of this post, the VIX had fallen to 22.83 and the DJIA volatility index is making another push toward below 20.

3. Chinese Currency ETF: I bought last week 100 shares of the Wisdomtree currency ETF for the Chinese Yuan, based on what appeared to be a possible relaxation of the desire to keep a peg to the U.S. dollar BOUGHT 100 CYB at $25.36/ An article in the NYT over the weekend suggested that this may be premature, at least for several more months. (compare that article with this one earlier in the NYT) I have no idea who is right on this issue, but suspect that China will allow its currency to float some next year. If CYB is not up more than 5% by this time next year, including any dividend paid at year end, then I will reassess holding it. I mentioned in the post discussing the purchase of CYB that I expected at best modest appreciation, and did not see at least for now much in the way of downside. (see also this article: ETF Expert) At the APEC meeting in Asia, the leaders did not include in their final statement a reference to currency exchange, though a near final draft called for a move toward market oriented exchange rates. WSJ.com Mark Zandi anticipates that China will allow the Yuan to increase against the dollar next spring at the rate of 5% per annum. MiamiHerald.com

In another story over the weekend, Liu Mingkang, the Chairman of China's Bank Regulatory Commission, chastised the Federal Reserve for indicating that it will maintain the current abnormally low interest rates for 12 to 18 months. Bloomberg.com Liu said that this approach was fueling speculation in assets and creating "new, real and insurmountable risks to the recovery of the global economy". You know, it sounds to me like China would like to give the U.S. a spanking. This is a link to the website for this regulator: China Banking Regulatory Commission

This is a link to an article from this morning in Seeking Alpha about CYB.

4. National Association of Independent Businesses: This organization conducts surveys, similar to the ISM, except the concentration in on America's small businesses. The November report is available as the Associations web site: www.nfib.com .pdf The Index of Small Business Optimism rose in November to 89.1, 8.1 points higher than its lowest reading in March. However, the index has spent six quarters below the threshold 90 level, compared to just 1 quarter during the 1980-1982 recession. Overall, I view this report as a continuing negative. The small business job machine "is still in reverse". Capital spending is at historic lows. Reduction of inventory and price cutting, as opposed to new orders, is still the trend. Credit availability does not appear to be a serious problem for most small businesses, though credit terms continue to be an issue.

5. Medicare Fraud: As the Democrats try to advance "health reform" with a public option, I am struck by the continuing flow of information about fraud in the government's medicare program and the lackadaisical approach for decades to control it, nothing even resembling a good faith comprehensive stab at reducing the sheer magnitude of fraud and theft, just the usual politician jive at election time. I previously referenced a story on Sixty Minutes about how easy it was for Fraudsters to falsely bill Medicare for medical supplies that were not provided to patients by firms that really did not even exist. It would be relatively straight forward to substantially eliminate that kind of fraud estimated at 60 billion. CBS News You would start with a certification process for medical suppliers, requiring proof of financial capability, and some background checks. Then there would be periodic audits. And, acts of fraud would be prosecuted and punished with serious jail time after a conviction. The AP ran a story over the weekend about the government paying close to 50 billion in suspect claims. Whenever the government starts distributing large amounts of money, the amount lost to theft and fraud is invariably a staggering sum. It does not matter whether it is the billions allocated for Iraq reconstruction, Medicare, defense spending or anything.

6. ING: I am not aware of anything in the form ING hybrid prospectus that requires ING to buy back the hybrids. It is solely up to ING whether or not to redeem a hybrid at par value. INZ is callable now at ING's option. All calls are at ING's option: ISG after 1/15/2011; ISP now; IND now; IDG after 10/15/2012; ISF after 6/15/2012; IGK after 9/15/2013 Hybrid Securities - ING

Also, while it may never come up, the mere announcement of a dividend does not cut off ING's optional deferral right. The next IGK dividend is payable on December 15th. ING may defer by giving notice "not less than 16 business days prior to the interest payment date". So the optional right to defer is lost if the notice is not given before that cut-off date. There are 10 business days in December excluding the 15th. So anyone anxious about this issue may want to check the news from now until around next Wednesday.

7. Lion's Gate (LGF): LGF was bought as a lottery ticket last week. When I looked at the top box office films for last week, I noted that the LGF release, "Precious", moved up to #4 with 6.1 million in revenues, and the film is still in limited release, playing in only 174 theaters and averaging around $35,000 per venue, compared to the 19 thousand average for the recently released 2012 which played in over 3400 theaters. I referenced in a prior post a favorable 4 star review from the Washington Post, and here are a few other reviews by major publications: latimes.com NYTimes.com WSJ.com rogerebert.com

8. Japan GDP: Occasionally, I will buy an ETF that focuses on stocks from one country. The RB likes Canada, so it bought EWC during its frolic and detour in March. Buy of EWC at $15.55 I don't know who is responsible for buying the ETF for Japan, EWF ( Japan Index Fund (EWJ), all the "its" disclaim any involvement and the OG does not remember as usual. I did not mention the buy of 100 shares of EWJ for that reason, none of the its would claim it. Really, talk about stocks for the long term to someone from Japan who bought stocks in 1989 when the Nikkei was at 39,000, now hovering 30 years later at less than 10,000. NIKKEI 225 Index Chart Maybe it is time for another spurt in Japan, a Barron's columnist seems to think so. And, it was reported today that Japan's economy grew at an annualized rate of 4.8% in the third quarter, beating the expectations for a 2.6% rise.

I do own some funds that are country specific. For Switzerland, as an example, I own the CEF Swiss Helvetia fund (SWZ) rather than the ETF EWL ( MSCI Switzerland Index Fund (EWL) The ETF is just too highly concentrated in a few issues for me.

9. Synovus (SNV-Lottery Ticket owned): SNV was a recent lottery ticket purchase that is in the red some, and I have had nothing positive to say about it from the time of purchase. I own just 50 shares based on the hope that some day it will recover, a strategy based in part on the recovery cycle of banks after their last near death experience from 1990-1991. Bought 50 LT SNV at $3.73 SNV-Just Awful/ It helps to have the Old Geezer around to remember these long ago historical events. SNV issued a press statement today saying its capital position was strong, it was not under any regulatory requirement to raise additional capital, and that it had an opportunity to earn a profit in 2010. exv99w1 The LB being a stickler for words and phrases, parsing everything into bits and pieces, wondered what exactly is meant by an "opportunity" to earn a profit. The market apparently does not think that this reassurance means much, with the stock up seven cents this morning to $2.

In another post, I mentioned that the magic coin may be called into action to decide whether or not to add 50 shares to SNV, rounding the lot to 100 big ones. For those unfamiliar with the rules relating to the magic coin, this is a brief summary: a magic coin needs to be found which is not easy to do, then placed into a cup of your two hands, it must be shaken vigorously with the eyes closed, tossed way up in the air, the coin must land on a hard floor, and heads means buy (or hold) and tails means sell (don't buy), though some magic coins may have different indicators. If the coin rolls under a refrigerator, then forget about that stock for the rest of your life.

10. Empire State Manufacturing Survey: This index is still positive for growth, but fell 11 points to 23.5 from the September number. The chart provided by the NY Fed shows the slump and the recovery: Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York

Sold LT Sunopta at $4.06/Bought 50 LT SNV at $3.73/Wolseley & Landec Earnings/Repeat of the 1970s Inflation?

1. Coca-Cola (owned): The buy of my remaining shares of KO was at $38.72. Buy of KO at 38.72/Newt Gingrich & GOP Ideology on Financial Regulations Yesterday, Citigroup initiated coverage of KO with a buy and $61 target.

2. KBC Belgium (nothing owned): KBC announced that 72% of the outstanding hybrids were repurchased in response to its tender offer, for a total of 834 million Euros. Forbes.com So, apparently the European Commission is okay with using state aid to repurchase the hybrids, even when it had previously asked KBC to defer paying the coupon on the hybrids. That is just beyond my comprehension. Item # 7: EC: Beyond My Comprehension It simply does not compute.

3. Wolseley (OWNED-LOTTERY TICKET): This LT was recently purchased knowing that patience and long term were the two operative words. The company reported better than expected operating profit before charges of 447 million pounds for the year ending in July 2009. More importantly from my perspective Wolseley reduced its debt to 959 million pounds from 2.47 billion pounds a year ago. www.otciq.com/otciq FinancialReport This firm trades on the Pink Sheet electronic exchange in the U.S. Wolseley plc - WOSCY At some point, I may splurge, go crazy, and buy another 50 shares of this one, to round up my odd lot to an even 100 big ones.

4. Sold 100 Sunopta (STKL)-Lottery Ticket (See Disclaimer): STKL was sold yesterday at $4.06, a good percentage gain from its purchase at $1.65 in 12/08. Buy of Sunopta: Highly Speculative This is just pure profit taking. STKL is selling at a high multiple of its estimated 2010 earnings of .24. STKL

Profit Snapshot: $224.04

2009 STKL 100 Shares 

5. Huntington Bank (HBAN) (owned Lottery Ticket): I really do not have much confidence in most of the bank lottery tickets purchased over the past few months. RB is responsible for this shotgun approach to picking up some of these regional bank stocks in the low single digits, and hoping that a few may return to prosperity 5 to 10 years down the road. This approach would have worked just fine in 1990-1991, the last time the banks blew themselves up with bad real estate loans. Huntington was upgraded by FBR yesterday to outperform with the price target raised to $5 from $4, apparently based on the recent capital raise of 400 million as being sufficient to weather the current downturn. I have no idea whether or not that is the case. All of these large capital raises at prices prevalent back in the early 1990s are just dilutive from my perspective to long term shareholders, but I am a shareholder of very recent origin buying well after the banks blew themselves up. I just bought 50 shares, which shows my overall lack of confidence, at $4.27: Proctor Upgrade/Bought 50 Huntington Bank as Lottery Ticket/Sold 50 ISF at $14.65 and Bought 50 AEF at $16.82/ Pared JZH by Selling 50 at $20.2

6. Bought 50 Synovus Financial at $3.73 (SNV)-Lottery Ticket (see Disclaimer): The RB is continuing its frolic in demolished regional banks. SNV has been smashed, and rightly so, ringing up gigantic losses in its real estate loans so far this year. The second quarter report was horrible. It is almost impossible to conceive of any group of people being able to rack up such losses even intentionally. Synovus Reports Results for Second Quarter 2009 The bank also recently diluted the heck out of long term shareholders by selling 150 million shares at $4, Synovus , a price prevalent back in the early 1990s SNV Stock Charts . In March 2007, SNV closed over $32. Synovus was downgraded yesterday by FBR based on expected losses yet to come in its real estate portfolio with a price target lowered from $3 to $2.5. Okay, I know that it is really bad already. But I did read a Reuters story that a few analysts were less negative than FBR: Reuters The second quarter loss was pretty bad though: Synovus On the positive side, and it is hard to find a positive here, I believe that this bank has a concentration of real estate loans in the Atlanta area and the Case Shiller index released yesterday shows an increase in home prices in Atlanta of 2.3% in July compared to June, and a 1.5% increase in June compared to May. standardandpoors.com /pdf/index/CSHomePrice S & P has a sell rating, two stars with a $3 target. The 52 week low was around $2.3 in early March. I do expect some failures in my LT purchases, and the bank LTs are certainly no exception.

The success that I have had this year with the LTs, not likely to be repeated, gives me some leeway to venture into disasters like Synovus, and to hold for the long term without even risking my profit realized from the Sunopta sell yesterday, even if SYN goes to zero. So, that is sort of how I look at it, investing the profit in Sunopta by buying 50 shares of Synovus.

7. Landec (owned-Lottery Ticket): While Landec's earnings for its first quarter of fiscal 2010 beat the consensus estimate by a penny, income fell to 8 cents, down from 11 cents in the year ago quarter, on a 15% fall in revenue year over year. The 2010 fiscal first quarter did have one less week however. The company ended the quarter with 69.5 million in cash and marketable securities and no debt. Market capitalization at the current price of $6.33 is around 167 million. Price to sales is hovering around .75 with a 5 year P.E.G. of less than 1 according to YF. LNDC: Key Statistics for Landec Corporation This is a hold for me. It is possible with some positive news, and/or a price handle below $6, that I will take Landec out of the LT category and round up the 50 share lot to 100 shares. Bought 50 LNDC at $6.2-Lottery Ticket/SLM/Impact of Any Payment to Dutch State in May

8. CIT: According to the WSJ.com, CIT is preparing to exchange up to 30 to 40% of its 30 billion in debt for new debt secured by assets along with most of the equity in the firm. A similar story is from Reuters this morning. Another story is at Bloomberg.com.

9. Philadelphia Federal Reserve President Charles Plosser: Plosser is concerned about a repeat of the 1970s inflation cycle that developed after the severe recession in 1973, due at least in part to easy Fed monetary policy, and further believes that economic slack may not be a good predictor of future inflation:

"While I see little risk of inflation in the near term, I do see greater risk of higher inflation in the intermediate to long term for several reasons. First, monetary policy is extremely accommodative. We have expanded the Fed's balance sheet to an unprecedented degree since last fall and have kept interest rates at historically low levels. Second, I put less weight than many other economists do on the idea that economic slack or low resource utilization is a reliable predictor of inflation....

It is particularly hard to measure slack near the turning points in business cycles, so making policy decisions based on measures of such slack becomes problematic....

Our current circumstances pose an eerily similar set of conditions to those in the mid-1970s. The nation had experienced a severe recession, in part due to a large oil-price shock. Many economists and Fed policymakers believed that a large amount of slack existed and it would help slow inflation and keep it low, even as the Fed undertook a rapid monetary expansion to spur economic growth and lower the unemployment rate.

Unfortunately, slack was poorly measured and turned out to be not as significant as first estimated. Thus, the Fed's monetary expansion led to rising inflation for the balance of the 1970s. One lesson learned during this episode is that inflation expectations can matter a great deal, and if they become unanchored — that is, if the public comes to believe that the Fed will not do what is necessary to preserve price stability — then inflation can rise quickly regardless of the amount of so-called slack in the economy. The price we paid to regain control of inflation and the Fed's credibility to do so came in the form of the 1981-82 recession and was a steep one."

Speech: Demystifying the Federal Reserve (September 29, 2009) - Philadelphia Fed.

I too have been drawing parallels with the 1970s recently: 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? More on 1982 or 1974 I previously mentioned a study by the staff of the San Francisco Fed that suggested the output gap in the U.S. economy may not be as large as many believe, Item # 3 What is the Output Gap/ If the output gap was as large as currently estimated, then core inflation should have fallen a lot more during the recession. And, some of what may be considered production capacity, which is currently idled, may be permanently mothballed capacity.