10 Year TIP Auction/Fidelity Response on Odd Lot Trading/Sold Tennessee Municipal Bond Fund/

Updated 4/9/2010: I summarize what the NYSE ARCA said about the fill of STDPRB discussed in Item # 3 below in NYSE ARCA Responds to My Inquiry About Odd Lot Fills

1. 10 Year TIP Auction: The Treasury auctioned the 10 Year TIP yesterday. This was a reopening of a prior issue that had 9 years and 9 months remaining in its term with a coupon of 1 3/8%. The auction resulted in a price to yield of 1.709% on that coupon. www.treasurydirect.gov .pdf The real yield (the coupon) is at least moving in the right direction. Before participating in a ten year auction in my Roth, I would want a coupon yield of over 2%, and possibly a better price on breakeven (meaning a lower estimate baked into the price than what I would expect as the annual average rate over the next 10 years). The current breakeven, roughly calculated on the 10 year TIP is 2.38, which is close to my current estimate of 2.5.

I calculated the current breakeven by subtracting the coupon yield shown for the 10 year TIP (1.59%) at yesterday's closing prices from the nominal yield of the 10 year treasury (3.97%), with both data points taken from Bloomberg.com: Government Bonds. The breakeven point would be the market's current forecast of the average ten year inflation rate. Inflation would have to rise on average more than that amount for the investor to be better off buying the 10 year TIP over the 10 year non-inflation protected security. I would not be buying either, since I expect both the real and nominal yields to be rising, and the prices of seasoned issues to continue their decline. /Sold All Shares TIP ETF/Started Hedge for Corporate Bonds Bill Tedford's Inflation Prediction & His Sell of TIPsHowever, since I can purchase the 10 year TIP at auction at no cost and hold the security until maturity in a retirement account, I do not face that kind of interest rate risk which would be present holding a TIP ETF or mutual fund which has no maturity date. Advantages and Disadvantages of Treasury Inflation Protected Securities: And the TIP does have value to me as a non-correlated asset class of particular value in a retirement account. Treasury Inflation Protected Securities as a Non-Correlated Asset

Last year I did participate in a ten year TIP auction when the coupon rate was 1.92%: Item # 4 10 Year TIP Auction

The 10 year TIP, the one which was reopened yesterday, was auctioned 3 months ago with a 1 3/8% coupon, For new buyers of that seasoned issue yesterday, that coupon had become 1.709%. The TIP ETF closed yesterday at $102.71. On January 5, 2010, adjusted for subsequent distributions, the TIP ETF closed at $103.86: TIP: Historical Prices On 12/2/09, the adjusted close was $105.19. On a price adjusted basis, the TIP ETF has declined 2.36% since 12/2/09. The 7 to 10 year treasury ETF (IEF),which I compare from time to time with the IShares TIP, has fallen 3.19% during that same time adjusted for distributions. IEF: Historical Prices The Fed's date on the 10 year CMT was at 3.32% on 12/2/09 and at 3.96% on 4/2/2010: www.federalreserve.gov If investors want more yield for the 10 year non-inflation protected security, then I would expect them to want more yield from the comparable TIP too. That desire for more yield will cause those seasoned issues sold at lower yields to fall in price and too rise in yield. As inflation concerns mount, I would anticipate investors to demand more of a coupon yield from TIPs to compensate them for that actual and/or perceived risk.

2. Australia Rate Hike: While our Federal Reserve has been continuing its Jihad against savers and responsible Americans by keeping the federal funds rate near zero, the Australian central bank has repeatedly raised its benchmark rate over the past several months in 1/4% increments. Today, the Reserve Bank of Australia raised its policy cash rate a 1/4% to 4.25%. RBA: Media Release-Statement by Glenn Stevens, Governor: Monetary Policy Decision Both the Australian and Canadian dollars have been gaining ground against the greenback recently, as the Euro has declined in value.

3. FIDELITY ON ODD LOT ORDERS: I mentioned in a prior post that Fidelity had cancelled the odd lot fill by Knight Trading of a market order for 50 shares of STDPRB at $18.85. Fidelity Corrects Odd Lot Trade on STDPRB Round lots were then trading at or below $18.50. Fidelity explained in an email received today that the change in the fill was an accommodation by Knight Trading to me, rather than an adjustment made as part of Fidelity's interpretation of any requirement under Rule 124 (C) of the NYSE rules. It is Fidelity's position that Knight was under no obligation to fill the order at the round lot OFFER price:

"At the time that Fidelity accepted your order, 3:50 p.m. ET on March 26, 2010, the National Best Bid Offer (NBBO) Ask of $18.50 existed on ARCA. ARCA, as an Electronic Communication Network (ECN) does not recognize the odd-lot execution rules to which you referred. These rules are only binding on trades completed on the NYSE. While your order is not due a price improvement, in recognition of the disruption this matter caused, Knight Capital Group provided an accommodation by adjusting the price you paid from $18.85 per share to $18.50 per share.

Unless otherwise directed, Fidelity will route an order to an automated trading desk which looks for the NBBO. Our order-routing policies are designed to result in transaction processing that is favorable to you and considers many factors including the liquidity offered and the potential for price improvement."

I was under the impression that ARCA was part of the NYSE, NYSE Group, Inc. > Products & Services > NYSE Arca Equities I do not have time now to research whether or not NYSE RULE 124 (C) DOES NOT APPLY TO NYSE ARCA, but I thought this was sufficiently important to at least make an inquiry directly to the NYSE which I did early this morning as follows without mentioning names and I quoted the relevant part of Fidelity's response in this inquiry:

"I entered an odd lot market order to buy an actively traded NYSE listed issue, then trading at between 18.45 to 18.49, and the order was filled at 18.85. I complained that the fill was a violation of NYSE Rule 124 (C). The broker replied that this rule did not apply to the NYSE ARCA, as an electronic exchange, which had 18.50 posted as the National best offer. This is part of their response to me: "the National Best Bid Offer (NBBO) Ask of $18.50 existed on ARCA. ARCA, as an Electronic Communication Network (ECN) does not recognize the odd-lot execution rules to which you referred. These rules are only binding on trades completed on the NYSE" My inquiry is whether the NYSE Rule 124 (C) applies to NYSE ARCA trades." This inquiry was sent directly to the NYSE.

I also do not know whether Knight compensates firms for order flow to it. I really do not have the inclination to pursue this matter further. Why? It is clear to me that the policy being followed is not NYSE Rule 124(C) even if the order is routed to NYSE ARCA.

It is clear to me that the policy is to allow matching of odd lot market orders with other odd lots, rather than the round lot pricing, and the only reason for a change on this one trade was the stink that I caused on the issue. Theoretically, once the tie to pricing of round lots is broken, and this is possible according to the statements made in this Fidelity email, any fill of an odd lot order that matches with the best odd lot offer (or bid as the case may be), no matter how ridiculous and unfair, would be a legal trade according to Fidelity.

Readers of this post know that I make a large number of odd lot trades. While all of my problems on fills in this area have been solely with Fidelity via Knight so far, it is conceivable that it may arise in the future with other brokers that I use. I can only say now that all of my problems have been with Fidelity, and then only when the trade is routed to Knight Trading rather than any other market maker. As I recall the trading on STDPRB was active on the day that I placed my trade, with a lot of round lot fills before and after my order in the $18.45 to $18.49 range when Knight filled my odd lot market order at $18.85.

At a minimum, the response given by Fidelity today raises the same issues about how much confidence is possible when an investor clicks that order button for odd lots.

4. Sold All Shares in a Tennessee Municipal Bond Fund: I made a mistake in buying the DuPree Tennessee Tax Free Income fund (TNTIX) via Fidelity that charged a $75 online commission, since this particular fund was not part of its NTF network. I would have been better off just buying shares directly from the fund, which would have allowed me to add to the holdings without incurring additional fees. So, eventually, I will take those funds out of my brokerage account and invest them directly with DuPree, one of the few firms that offer a municipal bond for Tennessee. However, this does not explain why I elected to sell those shares now. I am becoming increasingly concerned about the potential onset of a bear market for bonds, and I have a profit in these shares now.

Bonds are trading up today in price, down in yield.

Bought 100 MOU at $10.12/NADX Being Bought at $17/ISM Services/Sold HTGC in Regular IRA

The LB has heard rumors that the Heaknocker may be ready for the Old Folks home, now LB would not say such a thing, which goes without saying, LB just heard the rumor after HK appointed that no wit RB as Head Trader. LB mused that it was not sure how much longer it could hold down the fort here at HQ, maintain order and discipline against the continuous onslaught of the RB's nonsensical babble. Fortunately, the RB is too busy listening to Bruce Springsteen's "Born to Run", playing on a repeat cycle on the Itunes music player all day long, to cause much damage to HK's capital position. Besides, how many orders can the lame brain enter in the 60 seconds it is willing to work during a day, before starting to complain of cruel and inhumane working conditions? After all, the favorite phrases for the RB are "Don't Sweat the Details", "Let's Party", TGIF followed in close order by TGIM, TGIT, TGIW, TGIT, and TGIS (ditto on that one). RB just said Yea, all of that is true, but who said go all in on National Dentex at $1, and which company is being acquired for $17, the RB howled in satisfaction for its stock picking prowess. And how many shares did the Nerd buy : Buy of 50 NADX at $1.27 Some earlier comments on this subject need to be quoted in full:

"RB noted that it has more power than the HK and LB know and is going to say something about NADX, bought at $1.07 and $4. Buy of 50 NADX at $1.27 Buy of 50 National Dentex (NADX) When RB was asked how many shares to buy at $1.07, the RB said 10,000 and what did the LB do, the Nerd bought 50 shares of a $1.07 stock. That is no joke. Calling the LB a girlie man is an insult to girlie men worldwide, girlie man does not quite capture the essence of the LB, RB believes the LB has no Weenie at all, certainly no apparatus attached to the weenie, need the RB say more. Isn't this NADX buy of 50 shares proof beyond a reasonable doubt? Sure, if the HK was as destitute as our Uncle Sam, it could possibly be explained. Possibly, the RB is being too harsh, engaging in hyperbole about that weenie, if HK brought in an election microscope to take a hard look at LB on high resolution, you know, take a look down there, something of a man nature might be detected under the highest resolution possible, RB would not totally rule that out, RB added in closing."

RB is tired of all of those stinking rules promulgated by the Nerd, rules on top of rules, adjustments to rules, modifications and exceptions to rules, exceptions to exceptions, a plague of stinking rules.

1. Bought 100 Of MOU AT $10.12 (See Disclaimer): MOU is another principal protected note issued by Citigroup Funding, and guaranteed by Citigroup. It has a 3% guarantee, a $10 par value, and a due date of 3/10/2014. The interest payment may be increased up to 37% based on the percentage gain of the Russell 2000 Index during the relevant annual period. If there is one close in this index above a 37% increase for just one day during the relevant annual period, then the interest reverts back to 3%, no matter what happens thereafter. In fact, this happened during the 1st annual period for MOU owners. The first annual period experienced a reversion back to 3% based on a maximum level violation. The first annual period had a starting value of 394.58 and a maximum level of 540.56. The index easily violated that maximum level from its starting value on 7/23/2009, ^RUT, and one day during the annual period is sufficient to cause the reversion. I am not surprised by the sell off after the maximum level violation, and there will be investors concerned about the credit worthiness of Citigroup. MOU Charts - Citigroup Fdg Inc NT RUSS2000 In the first coupon period for MOU, there were multiple violations of the 37% maximum due to the large percentage gains in the indexes off the March 2009 lows. I would surmise that few individuals buying these notes in February 2009 expected a 37% gain in the index from its 1st year starting value or at least viewed a maximum violation then as less than probable.

The second annual period starts on 2/23/2010 and ends on 2/23/2011, so anything can happen between now and then. I am just betting a small amount that the Russell Index will not experience another large gain in the current period. (page PS-3: Pricing Supplement). Based on the data at YF, the Russell 2000 index closed at 625.07 on 2/23/2010: ^RUT: Historical Prices for RUSSELL 2000 INDEX This would put the maximum level during the current coupon period at 856.3459 for the Russell 2000 Index. One close above that number on or before 2/23/2011 will cause a reversion back to the 3% guarantee for the second straight year. The index closed 4/1/2010 at 683.98, up about 9.24% so far this year. If there is no violation of the maximum level during the second annual coupon period, then the percentage increase is of course determined as of the closing date on 2/23/2011. The next coupon payment date is 3/2/2011.

I am placing a small bet that the Russell will not have a repeat performance in the second annual period. Most of the recent trading has been hugging the $10 par value, up and down by a few cents.

This one has almost a year before the next payment, which is one reason to withhold any serious buying. You could have another reversion even with that large 37% maximum. The opposing argument is that this one has a lot of room to run without violating that maximum. The downside is known: (1) a $20 loss on maturity of the $10 note assuming Citigroup survives to pay par value and (2) a minimum payment of 3% in each of the four remaining coupon payments (2011, 2012, 2013, 2014).

I will at most buy another 100 shares of a $10 par value note issued by Citigroup Funding. This brings me so far to 200 shares of MKZ, 100 MKN, 100 MHC and 100 MOU, so around a current $5000 exposure to Citigroup Funding bonds. The investors who bought these kind of securities issued by Lehman of course are in a world of hurt. These type of securities are unsecured debt obligations.

2. Sold 50+ of the BDC HTGC in Regular IRA: 

Profit Snapshot= $40.52

3. Feds May Not Seek Indictments Against Joseph Cassano/ Mortgage Fraud in the U.S. -One of the Primary Causes of the Near Depression: The WSJ is reporting that the Feds are leaning against even seeking an indictment against Cassano and other former AIG executives at the London Financial Product unit. Cassano was head of the head of this unit which was largely responsible for the near collapse of AIG. I doubt that anyone would seriously argue that AIG would have collapsed but for the huge U.S. government bailout. The individuals in this small unit made 423 to 616 million per year writing credit default insurance on subprime mortgages along with other activities which proved their worth as Masters of Disaster and the best of the best in financial wizardry NYT It is not surprising that the Feds have concluded that nothing was amiss at this unit. After all Cassono told investors in August 2007 that the credit default swaps were a sure thing according to the NYT. (see also: Bloomberg.com: “It is hard for us, without being flippant, to even see a scenario within any kind of realm or reason that would see us losing $1 in any of those transactions,” Cassano said on an Aug. 9, 2007, investor call, according to a transcript.)

After all the FBI largely looked the other way as mortgage fraud became the crime du jour for several years in the U.S. prior to 2008 so there is almost no danger of anyone committing fraud even being investigated in the U.S., let alone charged or convicted. Adding Failures of Law Enforcement to my Top 12 Causes FBI Receives a Generous Grade of F- for Investigating Mortgage Fraud

Alan Abelson pointed out some egregious examples in his Barrons column, which were apparently raised in a lawsuit by Morgan Guaranty Insurance to invalidate its mortgage loan insurance contracts written on loans originated by Countrywide. It would be pleasing for me to see a jury return a verdict against Countrywide in this lawsuit. I mentioned in one of my prior posts on this subject (FBI Failures) the total number of mortgage fraud cases investigations conducted by the FBI nationwide. A diligent law enforcement agency could have launched more than 10 times that nationwide number in just one county in California. 'If you had a pulse, we gave you a loan' - msnbc.com

3. ISM SERVICE SECTOR: The ISM service sector increased to 55.4 in March, greater than the consensus expectation of 54, from a reading of 53 in February.ISM The new order component leaped to 62.3 from 55 in March. The employment number is inching toward 50, with the March reading rising to 49.8.

4. Bad Day for Bonds: BND, the Vanguard Total Bond Market ETF, is down about .5% in early afternoon trading today. The current SEC yield is close to 3.25%: Vanguard - Vanguard Total Bond Market ETF (BND) This would be an intermediate bond fund with an average maturity currently around 6.6 years. Vanguard - Fund Holdings I sold my shares in BND at $79 in 2008: For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal Possible Those shares are currently trading at $78.4 on 4/5/2010. BND

The long treasury market has already been in a bear market for about a year now. The ETF for the 20 year treasury,TLT, is down about 1.5% in trading this afternoon, currently hovering around $87.5. On December 4, 2008, TLT closed at $112.3 and $107.39 adjusted for the subsequent dividend payments. TLT: Historical Prices for iShares Trust iShares Barclays

I sold out of my TIP ETF shares several weeks ago and this security is down about .75% so far today trading around $102.67.

Jobs/Added 50 AMSWA at 5.81/SCEDN-Now A Floater/ISM-Manufacturing Looks Good/AMAT/MKN & MKZ

I am having my annual physical today. My health insurance with Blue Cross has a $5,000 deductible, a HSA plan, but the annual physical is one of the few health costs which will be paid without regard to that deductible. I have never spent one day in the hospital, nor have I even had a cold in over a decade.

So, I am virtually a pure profit customer of Blue Cross Blue Shield of Tennessee. Last year, Blue Cross did not pay a dime on my annual physical. I called them up and was told that my doctor had coded the claim as a regular office visit, which was applied toward my deductible, rather than a physical which would be paid by the insurance. And, there was no credit shown on the statement for the $20 co-payment that I paid. Okay, Blue Cross was not the problem, so a quick call to my doctor's office would straighten the mess out, I negligently surmised in my first billing dispute on a healthcare bill.

About two hours later, after being shuffled back and forth among various offices in Nashville and then to St. Louis, and back to Nashville, I am finally directed to a woman at Baptist Hospital who says she is responsible. Great, I say, always good to find the responsible person, but then she says that she can not change the bill until Blue Cross returns the paper work denying the claim. She tells me to call back in a week.

Well, as you probably have figured out, I call back in a week and she does not answer the phone so I leave a voice mail message identifying the issue again for her. So in a couple of weeks, I receive another statement from Blue Cross, still coded as an office visit, rather than a physical, but at least I have received credit for my $20 co-payment this time. I feel like I am making progress after about 3 hours of my time. Then, I realize that my time is actually worth more than the bill, around $170, so I write a letter, pointing out everything that had happened, enclose my check, and then said in the letter, if you want to do the wrong thing, just deposit this check. Well, that check was deposited that very day.

1. Jobs: The unemployment rate for March was 9.7%, same as in February. March payrolls increased 162,000. This was the largest gain since March 2007. There was the first increase in construction jobs since June 2007. Household survey, which picks up small business, had a 264,000 increase, the third straight month of increases in the household survey. March census jobs were less than expected at 48,000. Employment Situation Summary The non-seasonally adjusted U-6 number, the broader gauge of unemployment, was 17.5% in March, down from the 17.9 reading in February: Table A-15. Alternative measures of labor underutilization The average work week expanded to 34 hours. The futures for the S & P 500 rose on the report. The stock market is closed today.

2. Applied Materials (owned)(2010 Speculative Strategy): AMAT raised its revenue guidance for 2010 last Tuesday to more than a 60% increase from 50%. An article in TheStreet.com has a good summary of AMAT's 2010 revenue guidance and the reaction to it by brokerage firms. Barclays was unimpressed, while Piper Jaffray expect AMAT to hit $22. Barrons has a summary of a Caris & Company report, where the analyst raised the price target to $15 from $14 after AMAT's new guidance. Applied Materials detailed its new guidance in a press release.

There is some debate among staff here at HQ as to whether or not to continue the 2010 Speculative Strategy given the current macro forecasts being made by the department heads for Macroeconomic Forecasts and for Historical Trend Analysis, discussed in yesterday's post. RB wants to expand the 2010 Speculative Strategy to include twenty more stocks with odd lot purchases of 10,000 shares each. The LB is leaning toward selling most of the stocks currently in the 2010 speculative strategy and plow the proceeds into the dividend growth strategy. RB countered, pointing out that the ^VIX has had 25 consecutive days of movement below 20, and under LB's stinking Vix Asset Allocation Model, it was time to shoot for the moon howled the RB. LB replied that the RB had never even read the post about the VIX Model. If the dim wit lame brain had read it, it would have seen that 3 months is required before the formation of a stable vix pattern. And so on it went for hours during the early morning staff meeting, as the OG sipped on his coffee and tried to read the morning papers.

3. ISM Manufacturing: This was a good report. The ISM manufacturing index rose to 59.6% in March, higher than the consensus forecast of 57.5%, and the highest reading since July 2004. The new order index increased to 61.5 from 59.5%: ISM The RB just said "go all in", then it launched into more babble about how it said to go all in back in March 2009. Some readers may remember that was when the LB called the Doc to see if he would inject a quart of valium into the RB. Fed Is Less Gloomy

4. SCEDN (Owned): This may be my favorite equity preferred floating rate security now. I would not be surprised by a call at some point within the next two years at its $100 par value. RB just said that it recommended buying a 1000 at $84 and instead the super cautious nerd LB bought just 50 shares at $ 84 last October. SCEDN went ex dividend on 3/31 for its last fixed coupon and promptly recovered the full amount of that dividend in its share price, staying at $100 per share. Quote Southern California Edison Co. - SCEDN Other investors may be thinking along the same lines as me, since the price is hugging par value. SCEDN has the best float of all of the floaters in my opinion, and it is an issue of Southern California Edison. I much prefer owning a non-cumulative equity preferred stock issued by that utility than a similar issue from any financial institution, the source of all other exchange traded equity preferred stocks: Advantages and Disadvantages of Equity Preferred Floating Rate Securities. The SCEDN will afford decent protection in a rising rate environment, paying a 1.45% spread over the greater of 3 month Libor, the 30 year treasury or the 10 year treasury (using CMT for the treasuries, see Federal Reserve Data on CMTs: 30 year weekly data). Prospectus Supplement I would not personally buy it at $100 however. The 30 year CMT is the higher number now. The Fed weekly data has a 4.68% print on it for the week 3/26/2010. If that was the relevant number during the next computation point for SCEDN, hypothetically speaking, then the yield would be 4.68 + 1.45=6.13% x. $100 par value=$6.13 annually divided by 4 quarters =$1.5325. The prior fixed coupon rate was $1.3373. The last fixed coupon dividend is scheduled to paid on 4/30/2010.

5. Added 50 AMSWA at $5.81 (now part of 2010 Speculative Strategy)(see disclaimer): American Software (AMSWA) was previously bought in the LOTTERY TICKET category. /Bought 50 AMSWA at 6.02-LT There is no reason to repeat the discussion in that post. I would note that a sizable position was acquired in AMSWA by the hedge fund Renaissance Technologies, www.sec.gov. The position disclosed in this SEC filing may or may not be current.

The buy of 50 shares of AMSWA was purchased after compromise #12,243,954,145.17 was reached by the LB and the RB. After AMSWA was cleared for purchase as a result of the foregoing compromise, the voting commenced on the number of shares to be purchased with the number of votes assigned by Headknocker. RB voted its entire 7 vote allocation in favor of buying 10,000 shares, thinking that it had finally figured out how this Democracy at HQ worked, best not to split the votes. The LB, given 8 votes by the HK, voted to buy 50 shares.

The end result was that 50 shares of AMSWA could be bought with the entire 100 transferred to the 2010 Speculative Category, provided AMSWA does not cut its dividend which is currently yielding about 6.2% at a $5.81 price: American Software Inc, AMSW.A This is a link to the Reuters description of American Software and to its key developments page.

6. Simon Johnson: In this interview found a YF's Tech Ticker , Simon Johnson, a MIT professor, thinks that the next meltdown will be collapses in emerging markets including China.

7. MKN and MKZ (own): This unusual security (MKN) was ex interest yesterday with a $1.8 per share annual interest payment on its $10 par value. I like these kind of principal protected securities. The ones which I own are issued by Citigroup and pay the greater of a guarantee (3% for MKN and MKZ) or some rate tied to the annual percentage gain in an index. The key problem is that the percentage gain can not exceed the maximum permissible level, based on closing prices, on any day during the annual period, otherwise the interest rate reverts back to the guarantee. The notes are short term, both MKN and MKZ mature in 2014 at $10. The worst thing that can happen, assuming Citigroup survives to pay par value, is that the investor will receive a 3% annual interest payment each year until the note matures. I managed to pick up MKN at less than its par value late in January, to my surprise. Bought 100 MKN at 9.85 On 4/7, I will receive my first annual interest payment, a 18% interest rate based on the percentage gain of the commodity index from its starting value to the closing date for the first annual period (commodity index java chart: WSJ.com) The closing value of the index on 3/30/2010 will now be the starting value for the second year. Pricing Supplement No. 2009- I believe, subject to further check, that the closing value on March 30, 2010 of the index was 132.67. Note ON MKN The permissible increase is 33%. This means that the commodity index can never close a single day to and including March 30, 2011 over 176.45, during the second annual period. If there is one day of a close above 176.45, then the interest is 3% for the second annual period, no matter what happens after that maximum level violation.

So assume for purposes of illustration, that the commodity index does not have a close above 176.45 before 3/31/2011 and closes 3/30/2011 at 160. Then the interest rate for the second annual period would be 20.599%. If you had one close at 179, just one day above the maximum level, the interest rate would revert back to 3%.

I also own 200 shares of MKZ, a similar security, that has a 31% maximum level tied also to the same commodity index as MKN, though with different starting and closing dates. Pricing Supplement This one has a 3% guarantee and matures on 7/11/2014. This one is nearing the end of its first annual period which will be June 23, 2010 (payment date 6/30/2010). The starting value for the first annual period is 123.338. It has not violated its maximum which would be 161.56. Bought 100 MKZ at 9.91 in the Roth IRA/ So it has room to run over the next 3 months without breaking the maximum number. The index closed Thursday at 133.86, up 1.7 for the day. If the index closed on 6/23/2010 at that level, the percentage gain from MKZ's starting value would be 8.53%, but no telling what will happen over the next 3 months. It would be hard to see a maximum violation during the remaining 3 months, but you never know with these kind of securities. Theoretically it would be possible to receive as much as 31%. MKN hit 18% in its first year.

One of my readers sent me an email discussing the percentage gain of MKN on its ex dividend date. At one point yesterday, it had gained back almost the entire value of the $1.8 interest payment. It was ex interest yesterday so none of those buyers on Thursday will receive the interest payment on 4/7. I could not explain it, and it doesn't matter why to me since I am not a seller of this security. I want to see what happens next.

Fidelity Corrects Odd Lot Trade on STDPRB

Fidelity must have had a come to Jesus meeting on odd lot trades.

NYSE Rule 124 (C) seems relatively clear to me: "Marketable odd-lot orders will be executed in time priority of receipt by the System at the price of the next round-lot transaction on the Exchange." When I entered the trade to buy 50 shares of STDPRB, the round lots were trading at 18.49 and 18.50, nowhere close to where Knight filled the order. So, I may stay with Fidelity notwithstanding this particular problem that I have been having with them, unless they fire me as a customer which they have done in the past for someone else. I have had far more perplexing problems with other discount brokers (e.g. Brokerage Firms-You Have to Look Out For Yourself) And it was not even necessary for me to be doing anything at all to have the problem as shown in the story recounted in that last linked post.

I have avoided the really serious problems that individual investors have experienced over the years who have used full service brokers. I would not use a full service broker now if they paid me to use them. I do not need to recount or summarize those types of recurring and extremely serious problems. My last buy from a full service broker was in the late 1970s, when I bought 400 shares of Duke via Smith Barney, one of the few stock buys that I made during that period.

Problems Brewing for Stocks and Bonds?/Brokerage Firms-You Have to Look Out For Yourself

My father sold his construction business in 1987 to a nationally known company. The business was started with another young man in 1951 that my father met in a boxing match for the southern golden gloves championship in the late 1930s. Left Brain & Right Brain Decision Making The only change in his spending habits after selling his business was that he bought my mother a 1987 Mercedes with some of the proceeds and paved the driveway to his home, originally built by him in 1967. Both of my parents still live in that same house and that 1987 Mercedes is still their only car, recently experiencing its 23rd birthday and still running like a charm. So, in a sense, I am a child of the depression even though I was born in 1951. Frugality is not such a bad habit to follow. Prudence, responsibility and frugality are quaint personality characteristics, not exactly observed by millions of Americans over the past decade.

Yesterday, I was driving him to pick up the 1987 Mercedes at the garage, in need of a few repairs and good as new almost now, and I started to discuss my most current problem with brokers. His response was simply not to place any trust in any of them. Then he said something along the lines of not giving a plug nickel for any of them. They will find a way to do bad things.

Since I started to purchase stocks when I was 16, a long time ago, there have always been issues and problems. Some of the problems that I have had over the years just defy explanation. I will give just one illustration of what I mean.

For example, I had about $50,000 at a firm, and one day I noticed that almost $6,000 had been moved to another account unknown to me. What I am about to say needs to scare individuals into looking at their statements all of the time, thoroughly.

Okay, someone was stealing my money or so I thought. So I called the online broker number, told the representative that I have not authorized that transfer and knew nothing about that other account. I confirmed the conversation with an email. I notice the amount was returned to my account the next day. Then, guess what, the money is then moved back to that other account. So now I am becoming a little peeved. I go through the motions again. I am promised that the money will be moved back to my account. And, it is and then it is moved back to that other account. Finally, I say something about contacting the local D.A. to investigate this theft, and I was going to give him a call that afternoon since this was an unlawful conversion of my money each time it happened. LB was in its kick the sh-- out of everybody mode, tear them a new a--h---. OG apologizes for the language, LB-author of these minutes, got carried away. And, as the OG has said many times, LB is not the most patient and understanding staff member of the operation here at HQ, sometimes it makes Headknocker look like some kind of Mother Teresa saint.

Within an hour someone calls me and tells me a story to explain the problem. Yes, my money would be returned to me for the third and last time. A man was trying to move money from his account to his wife's account. Maybe it was a late alimony payment. And maybe he was drunk when he called the broker, who knows. He called to make the transfer and gave the wrong number. The brokerage firm, not particularly concerned about the different names on the accounts, started to fund the wife's account with my money. When I complained, my money was sent back to my account. When she complained, it was sent from my account back to her. I had no idea who those people were but I did not receive an apology from the brokerage firm. I was just told that mistakes happen and I should understand. I may have been given 3 free trades for my trouble. After listening to this guy from the brokerage firm, I was almost grateful to him for allowing me to keep my money.

Now, I still have all of the documents relating to the foregoing. I will not name the brokerage except it is that broker which I referenced by name in an email to a reader yesterday. I keep the documents just in case they say something like that could never happen, sort of like those quants who proved conclusively in a paper published in 1995, in a series of brilliant and incontrovertible mathematics, that the 1987 crash could not have happened. (a 27 deviation event, with a probability of 10 to the 160th power, really who could argue with that, the 1987 crash could not have happened). As I have said, I knew I had to be dreaming that day in October 1987, probably some form of pre-OG nightmare, kind of a warning of early onset dementia, hey wake up dude, the mind is turning to mush. And another false memory about that day was a hallucination that I called Schwab to buy stocks late in the day, and they said no one had quotes, and the tape was running at least twenty minutes behind. I was told that I could place a market order but there was no telling what would happen, sort of like now with odd lot orders at Fidelity.

Fidelity did send me an email saying that the issue raised by me about NYSE Rule 124 (C) is being researched. Now, that is a relief. I wanted to tell them not to bother if the answer was not known. But then LB thought to itself, being too kind to voice this sentiment in a public manner, something about why are they having to research the legal requirements for odd lot fills. This is not happening either. As Rene Descartes said, I think therefore I am, so it must be happening. More likely, it is just another case of the individual investor not knowing the club rules, the ones disclosed to those who know the secret handshake and passwords.

1. Mark Hulbert Column on Bonds: It is possible that we may be entering a period, hopefully of short duration, when neither bonds or stocks will work well. For those who value the lessons of history, there was a long period in my lifetime where both bonds and stocks failed to provide returns to investors. I am referring to the period starting roughly in 1965 and ending in August 1982. Inflation during that period just murdered bond values, a truly awful long term secular bear market for bonds. And stocks had started a long term bear market cycle. I just did a calculation of the annualized return of the S & P 500 starting on 1/1/1966 and ending 1/1/1982, with dividends reinvested, and adjusted for inflation. I came up with a negative annualized return of 1.04%. CAGR of the Stock Market: Annualized Returns of the S&P 500 Inflation was causing bonds to sink. This is a chart of average inflation rates during that period:

The target funds do not really take into account this kind of history when tailoring bond and stock allocations based just on the age criteria. There can be prolonged periods where both major asset classes fail.

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
1982	96.5	6.2

The Number in the far right hand column is the rate of inflation. What can you say, except I would not want to own any bonds during that period? (Data provided by The Federal Reserve Bank of Minneapolis)(see: Inflation or Deflation in the Years Ahead: Fed Expects 1 to 2%)

I would suggest looking at the 10 year treasury constant maturity rates during that period. www.federalreserve.gov

Mark Hulbert's column is worth a read about a possible course for bond prices in the next year or two. For me, I would not try to predict whether bonds will start to fall in price and rise in yield this year or next. It is just impossible for me to see a favorable long term outcome when your typical bond fund is yielding 3 to 4%. While low rates may continue for months, the only rational prediction long term is that the low point in yields was hit last year for treasuries and possibly this year for investment grade corporates, and the next meaningful move will be a rise in rates accompanied by a fall in existing bond prices. Personally, and it is just my opinion, I do not believe that the treasuries and investment grade corporates are correctly pricing inflation risk now, over the life of the issues. And, I would argue that longer term treasuries have already started their second year of a long term bear market. After all, if you bought ten to thirty year treasuries back in December 2008 , you are already pretty deep in the hole. CNBC Story 12/16/2008: 30 YR Hits 50 Year Low in Yield at 2.89%

2. S & P 500 to 1300 this Year?: Some are predicting a continuation of a bull move in stocks that will take the S & P 500 to 1300 by mid year or before year end. Okay, I don't buy into that opinion. If it happens, I will be a seller of stocks.

The more likely scenario is choppy action near the current level for some time. There are two possible scenarios, one patterned on the history after the 67% rise between August 1982 and June 1983, and the other patterned on what happened after the cyclical bull move off the October 1974 bottom. See Item # 4 Historical Perspective on S & P Gain Since March 2009 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 The former was followed by a digestion period lasting 1 1/2 years, followed by a restart of a longer term secular bull market. The later option, drawn from the secular bear market of the 1970s (1966 to August 1982), is another long period of choppy action lasting several years before a resumption of a long term secular bull market. Another option is that I am wrong. We either fall a lot or keep going up a lot, which are possible though not likely options in my opinion.

This is just my personal opinion, always subject to change based on facts yet to happen. The problems that nearly caused a worldwide depression have not fully healed and are still with us. The healing process may take another two or three years. So while the S & P 500 may move up some more, eventually this bull cyclical move will stall close to where we are now, and then establish a trading pattern somewhere near the 950 to 1200 area on the S & P 500. In this view, the worst is over. In two or three years, provided there are no further catastrophes, most of the problems, including housing and jobs, will be largely healed, the balance sheets of American consumers will be in a far better condition than now, and the middle class will continue growing in emerging market countries, willing and able to spend ever increasing amounts of money on consumer goods. Then, when all of those conditions gel and coalesce, a new long term bull market will start, at a level lower than the market averages now. This would be similar to what happened in 1976 to 1982 without the six year time period elapsing after the end of the short term cyclical bull move which ended in 1976 after the 1974 catastrophic phase of that long term secular bear market.

I did raise a fair amount of cash on Tuesday by selling three Fidelity stock funds. That may or may not turn out to be propitious. Market timing was not the reason for selling those funds, however. I am not taking them with me when I move the account. The only reason for not selling the 4th and last one was that a recent purchase had been made, and I did not want to trigger a trading fee by selling it. But, this selling is also consistent with my view that the market is nearing a short term top. Maybe we are off to the races from current levels, but I am not going to be placing any major bets on the upward and onward scenario.