OG's Qualifications and Lack of Qualifications

Some readers have asked for greater detail about the Old Geezer (OG). Given the topics of this blog, LB does not view personal details to be relevant. 

Relevant information would include my educational and work background. 

I will summarize areas where I have no qualifications. My knowledge would be generally limited to what can be acquired by a casual and curious reader of news articles in the following:

Lack of Qualifications Include But Are Not Limited to the Following:

1. Any matter relating to technical analysis of securities

2. Science and Math

3. Securities Law

4. Technology Broadly and Liberally Defined

5. I considered buying 100 of Berkshire Hathaway in 1974 at $16 but passed on it since Left Brain was scared of losing money.

6. I bought 100 shares of Apple Computer at $12 in my regular IRA and sold it at $16 due to one of Left Brain's stinking rules.

7. A reader reminded the OG on 8/6/12 that he knew almost nothing about accounting, so this inadequacy was added to the list.

8. A reader was kind enough to point out to the OG on 8/8/12 that he attended only one day of a course in Federal Income Taxation and never came back until taking the final exam which he barely passed with a "D"

My Qualifications for writing this blog include and may be limited to the following:

1. I have never had a course in economics. I would not disagree with the comment made by August von Hayek in his Nobel Prize acceptance speech that economists have "made a mess of things". Washington Post - The Death of 'Rational Man'; Efficient Market Hypothesis as Hokum (3/29/10 Post); ERROR CREEP and the INVESTING PROCESS (12/14/11 Post)

2. I have been investing for a long time, so there is a lot of information stored in the OG's mush of a brain which unfortunately is finding inventive ways to hide from the increasingly erratic OG's retrieval system.

I attended public schools in Alabama and Tennessee until the 11th grade when my father enrolled me in a private school called the Peabody Demonstration School (annual tuition $600 which dates me), which is now known at the University School of Nashville, located across a street from Vanderbilt.  Coming from a public school in Huntsville, Alabama, it did not take long for me to realize that I was way out of my league with the other students at that school. Some of them were attending courses at Vanderbilt in science as high school juniors and would later go to places like MIT and Cal Tech. Others would end up at Harvard, Yale, Princeton and Stanford. About 10% of the senior class were Merit Scholars. Most of the Merit Scholars in Tennessee from 1969 were in my senior high school class.

I decided to go to Tulane for one primary reason. It was the only school back then that allowed me to avoid calculus. The OG has never been a math whiz and would do just about anything to avoid taking a calculus course. Even at an early age, the OG was fluent in B.S. and could form persuasive arguments about the most mundane and esoteric subjects. Instead of taking math, I was allowed to substitute Philosophy at Tulane and enjoyed reading Plato.  

In my first year, I was not much of a student. I then hunkered down and ended up with three majors. I graduated third in my class with about 163 semester hours, with majors in history, philosophy and political science. I was allowed by the university to take graduate level courses in history and had enough hours in those courses to qualify for a masters degree. I was accepted in the graduate history program at Harvard, but elected to attend law school instead. 

I was elected to the George Washington law review and to their National Moot Court team in 1976. After receiving a law degree, I became a trial attorney and a senior partner in a firm by 1979 located in Washington, D.C. I was about 30 when I argued this case before the 4th Circuit: 666 F.2d 50. Similar type cases included the following: 603 F.2d 791 587 F.2d 671 

When I left Washington, I worked on whatever interested me as a self-employed attorney, sometimes on matters where I would work for my out-of-pocket expenses. An example would be this case: 793 F. 2d 129 (environmental case). I was also involved in a variety of trials and appeals involving "torts" and contracts. One firm in Nashville employed me for years to write briefs. As one can see, there is nothing in this educational and work background that qualifies me as a "financial" person.   

In 1996, I took semi-retirement and started to focus more on my investments. I am now fully retired at age 60.

I view myself as a True Conservative which explains my point of view when discussing politics. I would not be welcomed in the modern Republican party. I was mildly comfortable with Daddy Bush and Ronald Reagan. I will vote for Obama in the upcoming election and Senator Corker for the Senate. 

GJN-Wells Fargo/More on When Does A Capital Treatment Event Occur

This is my second post for today.

I understand that some lawyers may be interested in representing the former owners of GJN. I have already been contacted by one. By clicking the profile button, a reader is taken to a page where an email can be sent to me. 

I am retired with a lot of free time on my hands, one reason for this blog. 

I am not going to become involved in any lawsuit.  My involvement so far has been solely due to my outrage about how the GJN owners were treated by WFC. 

I generally do not like most lawyers. I still have an active license just in case a family member is in need of free legal assistance.  

I would hope that this case does not end up with lawyers who just want to make a fee and settle the case for an amount significantly less than $12+ million while doing as little as possible. Some class action lawyers have a tendency to focus on harvesting compensation for themselves based on a percentage of the settlement. 

I would go after the entire amount and would not let up until the clients corralled me. 

Where available, I would ask for pre-judgment interest at the statutory rate on the entire amount. In Tennessee, that could be up to 10% per annum as an element of damages. This kind of award could be appropriate in contract actions involving a liquidated sum.  

Some of the legal theories, which I have advanced so far, are based on contract law, including the implied obligation of good faith and fair dealing, cases relating to third party beneficiaries of trusts (particularly those involving the creator of a Grantor Trust taking the beneficiaries money & fiduciary duty obligations), and contract construction. The last area involves tying the make whole provision to the swap termination fee, as I explained in GJN-Wells Fargo-New York Times.  I have no expertise in securities law, but that would be an obvious area for research and further investigation. 

I also believe that lawyers wishing to investigate claims will need to focus on whether J P Morgan correctly invoked the capital treatment exception in order to avoid a make whole payment. As the beneficial owners of $27.7 billion in J P Morgan TPs, the owners of GJN should have standing to complain about the amount of JPM's payment into the trust. To understand this issue, rules of contract construction would come into play. The issue is when can JPM claim a capital treatment event when the TPs could still count as Tier 1 equity capital. (section 171 ‎housedocs.house.gov pdf)

So, if I was involved in such a lawsuit, which is not going to happen, I would seek as my ultimate objectives the following: (1) the termination of all WFC's rights in the prospectus due to securities act violations and/or material breach(es) of agreement, etc. and so on; (2) the return of the entire amount paid to WFC by the Trustee; (3) pre-judgement interest at the statutory rate on that amount; (4) a make whole payment by JPM to the owners of GJN to the extent it is in excess of the payment already made by it; and (5) attorneys fee if available by statute or under the American Rule for the award of attorneys fees. 

A make whole payment is calculated as follows:

Page A-5 of the GJN Prospectus:

"JPMorgan Chase & Co. will have the right to redeem some or all of the

Junior Subordinated Debentures at a redemption price equal to the greater of:

     o    100% of the principal amount of the Junior Subordinated Debentures
          being redeemed; or

     o    the present value of scheduled payments of principal and interest from
          the prepayment date to August 1, 2035, on the Junior Subordinated
          Debentures being prepaid, discounted to the prepayment date on a
          semi-annual basis (assuming a 360-day year consisting of twelve 30-day
          months) at a discount rate equal to the treasury rate plus a spread of
          0.25%, as determined by The Bank of New York or any successor
          calculation agent that JPMorgan Chase & Co. may appoint;

in each case plus accumulated but unpaid distributions to the date of payment.

          JPMorgan Chase & Co. may elect to redeem Junior Subordinated
Debentures at one or more times in this manner. The Underlying Securities
Property Trustee will give holders of the Underlying Securities not less than 30
days' nor more than 60 days' notice prior to the date of any redemption of the
Underlying Securities.

          In addition, at any time within 90 days after a Tax Event or Capital
Treatment Event, JPMorgan Chase & Co. may elect to redeem all, but not less than
all, of the Junior Subordinated Debentures for a price equal to their principal
amount (plus accrued and unpaid interest)."

End of Quote from Prospectus (emphasis and coloring added)

Added:

If it is possible for the capital treatment event to occur before the phase out period even starts,  which is JPM's position, then why did it not occur when the President signed the Dodd Frank law?

I took a snapshot of the pertinent prospectus language relating to the capital treatment event:

Please note how the language keys off the "reasonable determination" of JPM. If that reasonable determination could have been made when the President signed the Dodd-Frank bill, then the ninety day period expired long before JPM actually made the redemption. Would a Court give them a second chance, a third chance, etc to start the ninety days running?

While the GJN Trust owned $27.7 million of the J. P. Morgan Chase Capital XVII securities, the total principal amount of this TP was $500 million. J.P. Morgan Chase Announces Redemption of Approximately $9.0 Billion in Aggregate Amount of Outstanding Trust Preferred Capital Securities So a lot of money is involved in the make whole payment on that entire principal amount. 

There is most likely a number of cases dealing with the standard for making that "reasonable determination". I am not going to research the matter. Since the capital treatment event relevant to this issue is a new event, I doubt that any cases will be found dealing with that specific topic. Instead, a lawyer will have to draw analogies from cases in other topic areas.  

VIX/Added 50 FFBC at $15.95/Earnings: ONB, MTOR, MNI

The Chief Financial Correspondent for the New York Times, Floyd Norris, wrote a column in today's paper about GJN. NYTimes.com The article appeared last night in the NYT online edition. I published a post about that article last night. GJN-Wells Fargo-New York Times 

I wrote an email to a reader about this NYT article earlier this morning. I call it my current analytical guess:

Wells Spokesperson uses plural of the word "hedge" and "substantially": Meaning?

The VIX has moved below 20 again. I require three months of continuous movement below 20, allowing for some temporary movement slightly above 20 without restarting the court, before declaring the termination of the Unstable VIX Pattern and the formation of the Stable VIX Pattern. Vix Asset Allocation Model Explained Simply With as Few Words as Possible The market has been in an Unstable Vix Pattern since the August 2007 Trigger Event that required a reduction in my stock allocation without equivocation. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern  When VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks The Unstable VIX Pattern is a dangerous pattern for individual's to navigate. Its  defining characteristic is a whipsaw action in the VIX, mostly between 20 and 30, with spurts below 20 marking a market rise and above 30 indicating a market decline. Mark Hulbert and the Use of the VIX as a Timing Model

For now at least, I am not restarting the count with the 20.47 close on 7/24. It was a close decision given the magnitude of the move from the prior day. ^VIX Historical Prices The VIX returned to below 20 the next day (7/25) and has been below 20 since 7/25.

One of my 25 daily readers, judging by his recent remarks in the comments section, may have had a mind meld with Pimco’s El-Erian who called the recent purchaser manager's indexes in both Asia and Europe "frightening". He believes that there is a 35% chance of a Eurozone breakup within the next six months. His estimate for a U.S. recession is between 25% to 33%.

1. Old National Bancorp (own: Regional Bank Basket Strategy):  Old National reported second quarter net income of $27.2 million or 29 cents per share, up from 23 cents in the 2011 second quarter.  

The consensus estimate was for 24 cents.

The capital ratios are good:

ONB Capital Ratios as of 6/30/12

As of 6/30/12, the net interest margin was 4.26% (temporarily boosted by accounting issues related to acquisitions); NPLs to total loans were high for banks in this basket at 2.88% (prefer less than 1%); the coverage ratio for non-covered loans was 50% (prefer over a 100% when making an initial investment); and the return on average assets for the quarter was good at 1.27%. So there is a mixed bag on this one from my perspective.

ONB was a recent add to my regional bank basket. Bought 100 ONB at $11.85 (May 2012)

Quote:  ONB Stock Quote

2.  Meritor (own 100 Shares of the MTOR and 1 senior bond: Junk Bond Ladder Basket Strategy): The market has hammered Meritor common stock over the past two years. In February 2001, the stock was trading over $22 MTOR Interactive Chart I decided to buy earlier this year a couple MTOR senior bonds and up to 100 shares of the common stock. Since purchasing the 100 shares in two fifty share lots, the stock continued to decline and accelerated some after Cummins warned about earnings. That warnings indicated a falloff in demand for commercial trucks. Reuters Meritor manufacturers truck parts.

The warning from Cummins occurred around 7/10. I bought the MTOR shares earlier. {Bought 50 MTOR at $7.62 April 2012 and average down at predetermined price: Added 50 MTOR at $6.55 April 2012). I am okay holding those shares on my usual valuation analysis. I would always assume that a company like Meritor will ride the cyclical demand waves, up and down.The valuation of the company can not be based on peak demand earnings or results occurring during a slowdown. Neither will last for an extended period, unless a depression hits similar to the Big One.

I would not project a good quarter indefinitely into the future or one evidencing a deceleration of earnings for a few quarters. If I concluded that a down period would threaten the firm ability to survive until better times, then I would have to look at differently. So, you need to look more at normalized earnings over cycles, rather than paying attention to temporary noise. Institutional investors have already bailed on the company due to temporary cyclical factors, without knowing or caring how long those factors will last.

I made this kind of analysis when discussing Alexander & Baldwin stock back in March 2009. The market was valuing the stock as if the bad times would last forever. I will just take a snapshot of those comments: 

Alexander & Baldwin (March 2009 Post)

So, in a roundabout way, I am now ready to discuss Meritor's earnings report.

For its fiscal third quarter, Meritor reported GAAP net income 51 cents per share. On an adjusted basis, net income per share from continuing operations was 38 cents per share. Revenues declined 13% to $1.1 billion and adjusted EBITDA fell 11%, compared to the year ago quarter.  Free cash flow for the last quarter was positive at $46M, compared to a negative $1 million in the same period last year. The company had total liquidity of $732 million as of 6/30/12.

The consensus estimate was for 38 cents.

As expected, the company is seeing global weakness. Consequently, it reduced its fiscal 2012 forecast adjusted E.P.S. to a range of $.90 to $1.15 from $1.08-$1.39

As of 6/30/12, the company had $226M in cash and long term debt of $1.048B. 

I have sold 1 of the 2 bonds at a profit. Bought 1 ArvinMeritor 10.625% Senior Bond Maturing on 3/15/2018 at 96- Sold 1 ArvinMeritor 10.625% Senior Bond Maturing in 2018 at 105.5

I have an unrealized gain in the 2015 bond: Bought 1 ArvinMeritor 8.125% Senior Bond Maturing 9/15/2015 at 93.5

Quote: MTOR Stock Quote It looks like MTOR common will soon pierce the $4 price to the downside. 

3. Added 50 FFBC at $15.95 Last Monday (Regional Bank Basket Strategy)(see Disclaimer): What I am about to say will sound like nickel-and-diming (N & D) for a very good reason. That is exactly what I am doing with this add. For FFBC, the N & D strategy would have worked better by waiting to add this 50 share lot yesterday.

I took the following snapshot of my FFBC position shortly before placing a limit order to buy 50 shares:

FFBC  105+ Shares

As shown in this snapshot, I am struggling to move this position into the green.

My highest cost shares were purchased at a total cost of $17.01. When I am in a nickel-and-diming mode for a security which pays a good dividend, I may buy 50 shares with the intent of selling 50 shares currently owned after a pop. In this case, the shares would need to pop to around $17.5 before I would sell my highest cost shares using FIFO accounting. Bought 50 FFBC @ 16.85 November 2010; ADDED 50 FFBC at $14.87 December 2011.  Assuming that can be accomplished, I would lower my cost basis some while generating a tad more shares purchased with the generous dividends during the interim.

I commented on FFBC's last earnings report in Item # 1 FFBC.

Currently, this bank is paying a fixed dividend of 15 cents per share and a variable dividend equal to the difference between 15 cents per share and its earnings per share. Since the bank earned 30 cents in the second quarter of 2012, the next dividend will be 30 cents. I would not anticipate that the bank will continue with this generous payout for a long time. It current says that it will continue adding that variable rate until the end of 2013 unless there is a material change in the bank's capital position:

FFBC Statement on Variable Dividend

Quote Taken From: First Financial

At the fixed rate of 15 cents, the dividend yield would be about 3.76%, which is okay, at a total cost of $15.95 per share. That is the yield that financial websites like Marketwatch will show. First Financial Bancorp (Ohio), FFBC Stock Quote It is not the correct yield given the variable rate addition to the 15 cent fixed rate. On an annualized basis, including the variable dividend, the dividend yield would be about 7.52% at a total cost of $15.95. I am reinvesting the dividend to buy more shares.

My average cost is now $16.06 on 155+ shares.

Quote: First Financial Bancorp (Ohio) (FFBC)

4. McClatchy (own 1 unsecured 2017 Bond):  Before discussing MNI's earning release, I would like to confess that there is no rational explanation for this bond purchase. Possibly, the OG has a fondness for newspapers, typical of those individuals from his generation. Personally, I do not know any young person who actually subscribes to a paper. When RB bought this 2017 bond (who else!), there was an acknowledgement that MNI had made a potentially fatal mistake in acquiring Knight Ridder, near the top of newspaper valuations. Without question, that was a colossal mistake, as shown in the long  term chart:  MNI Interactive Chart Of course, the well known problems impacting all newspapers have only made matters worse. Bought 1 Knight Ridder 5.75% Senior Bond Maturing 9/1/2017 at 85 If I could sell that bond at 85, I would do it. The bond trades lightly with the most recent trades mostly between 78-83.

I will mention that I made a slightly better purchase for a family member, by buying a 2017 senior secured MNI bond well below par value, when I was able to buy just 1 bond during a severe downdraft  last October.  FINRA I am stuck with the 2017 senior unsecured. FINRA I gave that bond a 10- risk rating in my personal risk ratings. Personal Risk Ratings For Junk Bonds It was a dumb, inexplicable buy.  Having lambasted myself, I am not currently worried about default anytime soon. There is a significant risk related to refinancing a large debt load as notes come due.

MNI reported a second quarter profit of $26.9 million or 31 cents per share, up from 6 cents per share in the year ago quarter. SEC Filed Press Release Adjusted for special items, the company had a net profit of $16.1 million in the last quarter.  Debt was reduced by $35 in the second quarter and by $70.5 million in the 2012 first half. Revenues declined in the quarter by 4.8% compared to the 2011 second quarter.

As of the Q/E 3/25/12, the balance sheet shows an uncomfortable amount of non-current liabilities:

Form 10-Q A discussion of the long term debt can be found at pages 12-13. It is important to keep in mind the refinancing risk for a highly leveraged company. Some of the debt is relatively low cost and matures in 2027 and 2029 (365+M). However, the senior secured note has $846M in face amount and it matures on 2/15/2017 before my unsecured 2017 note (9/1/17). The only other bond maturing before mine is a 4.625% coupon maturing in 2014. FINRA

Based on what I now see, MNI should be able to service the debt, provided it continues to post operating profits. The major issue will likely be the refinancing of both the senior secured and the unsecured debt maturing in 2017.

This report is discussed in a MarketWatch article.

The common stock is on my monitor list for Lottery Tickets. I have not pulled the trigger. The stock is trading mostly in a $1.5 to $2.8 channel this year, and is closer now to the bottom of that range.  MNI Stock Charts

Quote: MNI Stock Quote

5. R R Donnelley (own 2 senior bonds): S & P lowered its rating on RRD senior unsecured debt to BB from BB+ for the reasons given in a press release. TEXT-S&P The outlook is stable.

Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89

Bought Back R.R. Donnelley 8.875% Senior Bond Maturing in 2021 at $96.95 

GJN-Wells Fargo-New York Times

I contacted Floyd Norris, the Chief Financial Correspondent for the NYT, about the GJN situation, and he published today a column about it. NYTimes.com  

Please note that WFC is claiming that the swap termination fee was for its damages to unwind another swap, some kind of a swap (hedge) for the GJN swap counterparty, as I understand their claim? Who knew about that one?  

WFC/Wachovia (WFC) sold the mop and pop investors, the widows and orphans crowd, a beneficial interest in $27.7 million of a JPM Trust Preferred security. WFC then took over $12 million of that amount from the redemption proceeds of that bond, so that WFC could "substantially" settle some kind of swap/hedge transaction. I seriously doubt any investor even contemplated such a possibility.  I am not sure what substantially means in this context? Was the remaining portion used for caviar and cocktails?  

Without any doubt, reasonable or otherwise, it is clear from the price action of GJN from the time of JPM's redemption announcement in mid-June until trading was suspended on 7/12/12 at $24.88 that investors did not even have an inkling of this possibility, as the security traded near its $25 par value until it was delisted. Investors were contemplating the full $27.7 million in proceeds plus accrued interest. 

If there had been adequate warning in the prospectus, short interest in the security would have spiked after JPM's announcement and the GJN price would have plummeted. Instead, GJN rose in price after JPM made its redemption announcement on extremely heavy volume for that security, and small short interest declined in the weeks prior to redemption as noted by Norris.  I noted in a June 13, 2012 Post, near the bottom, that GJN had risen on June 12th by over 13% on very heavy volume to close at $24.4, but I did not know the reason for that action. I did not own GJN in mid-June, and I certainly was not going to buy it near its par value.

Efficient market theory? 

If WFC had made an adequate disclosure of the risk, GJN would have been the leading loser that day on the NYSE! 

The gory details are summarized in some other posts.

Wells Fargo-GJN-Securities Act of 1933

Item # 1 When Does a Capital Treatment Event Occur?

More On JPM Potential Liability for a Make Whole-Redemption 2035 TP

The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty

Item # 3 GJN Redemption

Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater Positions

Sold 100 GYC at $22.22 : Ongoing Reassessment of Synthetic Floaters

Wells Fargo-GJN

Subsequent Posts:

On JPM's Potential Liability-Make Whole Payment: GJN-JPM-Make Whole Payment

Legal Claims:   GJN-Wells Fargo/More on When Does A Capital Treatment Event Occur

Added 8/3/2012: In the comment section below, I refer to the lack of a call warrant attached to the GJN Trust Certificate. New readers may not understand what I am talking about. I took a snapshot of the call warrant provision in the synthetic floater GYB to make my comment clear:

GYB Prospectus at page S-3

Prospectus

The fixed coupon trust certificates would have the call warrant exercisable for any reason soon after the original IPO data.  Trust Certificates: New Gateway Post. For anyone interested in learning more about call warrants and trust certificates, I would recommend the following posts dealing with fixed coupon TCs: Call Warrant Exercised on JZE and JZJ; Call Warrants and Trust Certificates; More on the Call Warrant in TCs; Call Warrant Exercise for TC XKK; Call Warrants and Trust Certificate: XFL CALLED; Notice Filed for Redemption of Trust Certificate DKF;  Call Warrant Exercise for XFJ.

So in context, I would argue that the overall structure of the GJN, and the status of the GJN owners as third party beneficiaries of a trust created by WFC/Wachovia, is important in its construction. With that thought in mind, the argument would be that the swap termination fee could only be taken out of any make whole payment. The construction of the prospectus, in proper context including the facts of who sold it to investors, is a separate issue from any liability for securities act violations or other arguments presented by me to date. This argument was actually my first one formulated to use against WFC.

Subsequent Posts: Legal Claims-GJN-Wells Fargo

District Court Decision in Turkle Trust v. Wells Fargo (N.D. Cal)/Summary of Argument: JPM Potential Obligation to Pay Make Whole for its Recent 2035 TP Redemption/Other JPM Capital Trust Preferred Securities: Language on Make Whole Payment and Capital Treatment Event (8/13/12)

GJN-JPM-Make Whole Payment 

Using Google Search Box to the Right/BOUGHT 50 of the ETF YMLP at 19.08/Earnings: FTE, PCS, KFN, TEF, PVR

I am mired in another matter, so there will not be much of an introduction in today's post.

When I opened my main taxable account yesterday, I noted a number of anomalies. For example, I own Quicksilver Resources (KWK) as a Lottery Ticket, which had jumped to $6.05 from Tuesday's close at $4.52. Maybe the Darden family had to decided to sell the company, the OG thought wishfully.  So I checked the news and did not see anything. I thought for a moment, about two seconds was all it was worth, and decided to keep those shares. It would look silly to sell 50 shares bought at $5.3-LT at $6.05, after all the RB started to howl at that prospect. I was more interested anyway in the impact on my KWK senior bonds. I own three KWK senior bonds. I looked at their prices, and saw no upward movement.  Shouldn't the bonds go up if KWK was going to be acquired by a more financially sound company, the OG mused? As it turned out, there was another trading glitch that impacted a large number of NYSE listed securities, including KWK, and it was just another screw up. KWK's stock faded from that intra-day high back to a $4.75 closing price. The NYSE will reportedly cancel the KWK trades at or above $5.91,  WSJ, leaving at large number of investors who bought at lower prices directly impacted by the glitch in the usual "you are screwed mode, get over it".

I want to make a note relevant to Google searches of my blog. I find the search box to the right a handy tool and use it frequently myself to find material. I have noted two peculiar results from those searches that would also apply to searches at Google's site.

Sometimes, the search result will return a link to a Post from 2009, for example, that purports to contain a reference to a post written in 2012. I am not sure how that happens. Sometimes it may be due to a reference to that earlier post in a later post. I see that search issue frequently, and someone who is an expert may be able to explain how it happens. Another strange result happens when a search includes a reference to a subsequent post written shortly thereafter (e.g. search result shows a reference to the header (e.g. "using google search box") of a 8/2 post as if it was included in a 8/1 post on an entirely different matter, where there never was a reference to the 8/2 topic).  I suspect that happens when the Google search engine groups together an archive of posts for a particular month which apparently is done by their machines. Anyone who uses Google searches for this blog will see these anomalies frequently.

I am having issues with some of my junk bonds. Anyone investing in this area is going to get clobbered on a few of them, and hopefully I will be able to realize enough gains to offset the inevitable losses. The reason for taking this risk, which is an uncomfortable one for the OG, is the Fed's Jihad Against the Saving Class likely to continue at least until the end of 2014.  I am at least receiving a steady stream of income from that diverse assortment of senior bonds. I took a snapshot of the income paid by junk bonds into my main taxable account yesterday.

Payments for the most part occur on the 1st and 15th day of every month. Some months have higher rates than others:

I own just 2 Exide and Boise Cascade (now known as OfficeMax) bonds, and 1 bond each of the other two shown in this snapshot. Since I bought the Exide senior secured near 80, this will be highest yielding bond in this grouping based on my cost basis.


1. PCS (own 1 senior 2018: Junk Bond Ladder Basket Strategy): MetroPCS reported second quarter net income of $148.8 million or 41 cents per share, handily beating the consensus estimate of 22 cents, on a 6% increase in revenues to $1.28 billion.   

This report is discussed in an article at Bloomberg The common shares soared 36.78% to close at $8.59 on the day of this release (7/26/12). PCS Historical Prices

Bought 1 MetroPCS 7.875% Senior Bond Maturing 9/1/2018 at 98 (August 2011)

2. KFN (own 150 shares/"units"): KKR Financial Holdings reported net income of $71.2 million or 39 cents per share. Book value per share was reports at $9.79.

The Board also announced a 21 cent quarterly dividend payment, up from 18 cents in the prior quarter. The ex dividend date is 8/7/12.

I briefly discuss in a post my understanding of a tax issue relating to owning KFN in a retirement account which is where I own 150 shares. That issue needs to be kept in mind. Item # 1  Added 50 KFN at $8.81-Regular IRA; see also National Association of Publicly Traded Partnerships

Quote: KKR Financial Holdings LLC (KFN)

3. Telefonica (own 3 senior bonds): Telefónica reported net profit of €2.075 billion for the first half of 2012. Of that amount, €1.327 billion was earned in the second quarter. Total accesses increased by 6% year-on-year to 312 million by 6/30/12. Accesses increased by 10% in Latin America to 208 million.Mobile broadband in Latin America doubled to 21.5 million. Revenues for the first six months totaled €30.96 billion. Operating income before depreciation and amortization declined 7.7% year-over-year to €10.431 billion. Free cash flow for the first six months was €1.727 billion. At the end of June, the net financial debt amounted to €58.31 billion.

TEF scrapped its 1.5 Euro per share dividend for 2012 and will resume only 1/2 of the payout in 2013. Next years payment will be €.75 per share paid in the 2013 4th quarter and another €.75 per share in second quarter of 2014. Together, those dividend savings will amount to about €10.2 billion. While unpleasant for stockholders, this reduction will be beneficial to TEF bond owners and will help TEF maintain its investment grade rating. The dividend cut is discussed in article at Reuters, the  NYT and Businessweek.

Bought 1 Telefonica Emisiones 4.949% Senior Bond Maturing on 1/15/2015 at 96.075

Bought 1 Telefonica Emisiones 6.421% Senior Bond Maturing in 2016 at 95.178

Bought 1 Telefonica Emisions 5.877% Senior Note Maturing 7/16/19 at $91.067

4. PVR (own 1 senior 2018: Junk Bond Ladder Basket Strategy): Penn Virginia Resource Partners reported adjusted net of $9.6 million, compared to $23 million in the 2011 second quarter. SEC Filed Press Release The company was adversely impacted by "a very challenging coal market, low NGL prices and the migration to lower-margin fee-based contracts in the Mid-Continent segment".

Bought 1 Penn Virginia Resources 8.25% Senior Bond Maturing 4/15/2018 at 98

5. Bought 50 of the MLP ETF YMLP at 19.08 Last Friday (see Disclaimer):  I would have bought a 100 shares of this ETF if it had been offered by a major fund family. Instead, the offering originates from a company (Yorkville) that was just off my radar screen altogether. I will probably add to the fund some in some lots at lower prices. This buy was in a taxable account.

Stock Quote: Yorkville High Income MLP ETF (YMLP)

This is a new fund. The first quarterly dividend payment was $.400503 per share. Yorkville High Income MLP ETF Distributions The website claims that the distribution yield is 8.45% based on last Friday's cling price of $19.08.

Added Later in the Day of Publication: I found at the fund's website a IRS Form 8937, wherein the fund estimated that the entire amount of this last payment would be classified as a return of capital.  ‎www.yetfs.com.pdf

The expense ratio is shown as .85%.

The fund holdings include energy exploration companies, unlike the other MLP ETFs that I own, which is why I decided to buy some shares. Yorkville High Income MLP ETF Holdings

One of those companies is Linn Energy, which I sold after pulling my hair out one year preparing the Linn section of my tax return:

2010 LINN 100 Shares +$971.28  

Sold 100 LINE at 25.90 (June 2010)

With the ETF, I avoid that kind of headache. I am willing to give up some yield to avoid the tax preparation issues. If you have an accountant and enjoy paying them for the time spent figuring out the K-1s, then you may end up being worse off going that route. LB prepares Headknocker's return for free. The avoidance of this tax issue is discussed in the following article at  Motley Fool.

At my age and my unwillingness to pay an accountant to prepare my tax return, I try to avoid tax headaches whenever possible.

Quote: Yorkville High Income MLP (YMLP)

6. France Telecom (own 100 Shares): FTE reported consolidated net income for the first six months of €1.909 billion on a 1.9% decline in revenues  to €21.843 billion. France Telecom SEC Filed Press Release The company confirmed its target of achieving operating cash flow of close to €8 billion. The company stated that it dividend distribution policy was to pay 40% to 50% of its operating cash flow. The amount of the next dividend will be € .58 per share:

France Telecom SEC Filed Investor Presentation

This report is discussed in a Reuters article.

Earning Call Transcript - Seeking Alpha

Morningstar has a 5 star rating on FTE with a consider to buy price at $16.1 or below.

An investor has no foreign tax credit associated with dividends paid into a retirement account. A good article on this topic, which lists the countries and their tax rates, can be found at Foreign Tax Credit. Some countries, like Canada, do not apply their withholding tax for dividends paid into an IRA. France will require a tax withholding irrespective of whether the dividend is paid into a taxable or retirement account.

Quote: France Telecom ADS (FTE)

I will only add to FTE in my Vanguard and Fidelity accounts, since those are the only two brokerage firms which I use that applied for and received "relief at source" which reduced my tax withholding by France from 30% to 15%.  I recently sold at a small profit 105+ shares of FTE held by a broker who would not file for "relief at source".  Item # 2 Sold 105+FTE at $13.4 (7/23/12 Post)

MTY/STLPRA/Sold 50 NABZY at 25.47/Earnings: UVSP NYB, BDN, RSH, FNFG

The Eurozone Manufacturing PMI fell to 44 in July, the lowest level in 37 months. markiteconomics.com  ‎ 

BNC Bancorp, a LT, reported second quarter net income of 13 cents, including a 5 cent after-tax reduction for acquisition activities, compared to 10 cents in the 2011 second quarter.  The consensus estimate, generated by 3 analysts, is for a 2012 E.P.S. of  48 cents and 74 cents in 2013. BNCN Analyst Estimates

National Penn Bancshares, another bank LT, reported second quarter E.P.S. of 15 cents per share, unchanged from a year ago.

Citigroup Funding Inc. for 3% Min Coupon PPN on Price of Gold (MTY) was ex interest for its annual payment on 7/29/12. The payment will be $.3 per share, made on 8/3/12. This unsecured note paid its minimum 3% coupon for this prior period as expected. MTY is an unsecured senior note with a $10 par value, maturing in 2014, that pays the greater of 3% or up to 35% depending on the price movement of gold. Final Pricing Supplement Any individual investor delving into this area of exchange traded bonds needs to do their homework before even thinking about investing in a "principal protected bond".

Some of my readers are interested in this kind of security. For MTY's current annual coupon period, which started on July 27th and ends on 7/29/13, the starting value for the price of gold is the LONDON P.M. fix on 7/27/12 which was $1,618.25. Past Historical London Fix The maximum level for MTY would thus be 1.35 x. $1,618.25=$2,184.64. One close above $2,184.64 would trigger what I call a Maximum Level Violation which would trigger a reversion to the 3% minimum coupon irrespective of the P.M. fix on 7/29/13.

However, if there was no Maximum Level Violation and the P.M. fix on 7/29/12 was $2,100, the next coupon for MTY would be 29.77% (hypothetical gold closing price on 7/29/13 of $2,100 minus Starting Value of $1,618.25=$481.75 gold price gain during annual period divided by the Starting Value=29.77% coupon on a $10 par value)

I noticed yesterday that one of my trust preferred securities, STLPRA, closed at $10.66 yesterday. Sterling Bancorp Trust I 8.375% Cum. Trust Pfd. Secs., STL.PA I currently own 200 shares in the ROTH IRA and have traded this $10 par value security for small gains using FIFO accounting. Trust Preferred Securities: Links in One Post:

{Bought 50 of the TP STLPRA at $8.99; Added 50 STLPRA at 8.69; Sold 50 STLPRA at $9.4; Bought 100 STLPRA at 8.87; Sold 100 of the TP STLPRA at 10.25; Bought 100 STLPRA at 10.05;
Bought 50 STLPRA @ 10.21; Bought 200 STLPRA @ 10.14; Sold 100 STLPRA at 10.47; Added 40 STLPRA at 10.14 in Regular IRA; Added 100 of the TP STLPRA at $9.87; SOLD 250 STLPRA at 10.2}

Since STL had less than $15 billion in assets as of 12/31/09, it does NOT have to phase out the use of this TP as Tier 1 equity capital. (section 171(b)(4)(C) of the Dodd-Frank Act at page 153 docs.house.gov .pdf) Sterling may continue to deduct the interest paid on this bond, while treating the bond as equity capital for regulatory purposes, unless Congress changes its mind and repeals this section.

While this is beneficial and explains why banks issued TPs, I want to remind everyone that this TP can now be called at its $10 par value plus accrued interest. Prospectus If STL elects to retire this relatively high cost debt, anyone buying at an amount greater than par value plus accrued interest could lose some money in the event STL redeems the underlying bond owned by the Sterling Bancorp Trust I, which would of course trigger the redemption of the STLPRA.

My total average cost per share on the remaining 200 shares is $10.17. Each investor has to make their own decisions on how to approach buying bonds at premiums to par value when the issuer can redeem the bond at par value plus accrued interest. My general rule of thumb is to pay no more than par plus accrued interest, though I might go a few dollars above that amount when I start to become desperate for yield. I will also consider whether the issuer can refinance at lower cost in arriving at a maximum price.

For STLPRA, I am not trying to do anything other than capture the yield in the ROTH without losing money on the bond. So far, I have booked a net realized gain of $178.54 in the foregoing trades, with most of that coming from a single 100 share purchase:

2010 STLPRA 100 Shares +$122.03

I will be running behind discussing my trades during earnings season. I will just mention a recent add that some of my readers may want to research  in more detail. I hope to discuss it briefly tomorrow or Friday: Yorkville High Income MLP, YMLP Fund Quote; Yorkville New ETF; sponsor's website: Yorkville High Income MLP ETF (YMLP)

1. Bar Harbor (own: Regional Bank Basket Strategy): Bar Harbor Bankshares, a small bank headquartered in Maine, reported second quarter net income of $3.1 million or 79 cents per share, up from 72 cents in the 2011 second quarter. The one analyst providing an estimate had predicted 83 cents.

The capital ratios are good:

BHB Capital Ratios as of 6/30/12

As of 6/30/12, the net interest margin was 3.17%; the efficiency ratio was at 54.6%; NPLs to total loans stood at 1.41% (down from 1.77% as of 12/31/11); and the company reported an annualized return on assets of 1.01% during the quarter.

Bar Harbor Bankshares increased its quarterly dividend to 29.5 cents per share from 29 cents.

I own 50 shares as part of my regional bank basket strategy.  Bought 50 BHB at $30

Bar Harbor Bankshares rose 34 cents in trading yesterday to close at $34.83.

2. UVSP (own: Regional Bank Basket Strategy): Univest Corporation reported net income of $4.8 million or 28 cents per share for the second quarter, up just one cent from the year ago quarter. The main reason for keeping my 50 shares is the dividend yield.  Bought 50 UVSP at $15.1 At the current quarterly rate of 20 cents per share, the dividend yield at a total cost of $15.1 would be about 5.3%. Needless to say, it is not easy to pick up 5% today. {I hope to generate about 40% to 50% of my total return over the life of this strategy from dividends}

The estimate from one analyst was for 31 cents per share.

The capital ratios are good:

UVSP Capital Ratios as of 6/30/12

As of 6/30/12, the net interest margin was 3.97%; the efficiency ratio was 67.6%; NPLs to total loans stood at 3.05% (down from 3.42% in the 2011 2nd quarter); the coverage ratio was 68.18%; tangible equity to tangible assets was at 10.11%; and the return on average assets for the quarter was .88%.

Univest Corp. of Pennsylvania closed at $15.91 yesterday.

3. NYB (own: Regional Bank Basket Strategy): New York Community Bancorp reported  a second quarter GAAP E.P.S. of 30 cents. Net income rose 9.8% year-over-year to $131.2 million. 

The consensus estimate was for 27 cents per share (21 analyst contributing)

The capital ratios are good:

NYB Capital Ratios as of 6/30/12

The return on net tangible assets was reported at 1.36%.

As of 6/30/12, the net interest margin was 3.3%; the cash efficiency ratio was 36.78% (GAAP at 38.12); NPLs to total loans stood at .84%; and the coverage ratio was 54.73%.

The Board announced the regular quarterly dividend of 25 cent per share.  My average total cost per share is $11.86:

150 Shares of NYB Total Average Cost Per Share=$11.86

The dividend yield at my total cost number is 8.43%. I am not reinvesting the dividend.

I have also traded shares, which were not included in my regional bank basket when bought.  The largest gain was in a regular IRA:

2010 Regular IRA 50 Shares +$331.03

In retrospect, I would have been better off selling all of my NYB at the price realized on that 50 share lot. I calculated the price, after commission, at $17.35. But, it is hard to find income and this is a good income stock at its current dividend level.

New York Community Bancorp rose 19 cents to close at $12.98.

4. Brandywine Realty (own): Brandywine Realty Trust, recently purchased in the Roth IRA, reported funds from operations of $44.6 million or 30 cents per share. 

The consensus F.F.O. estimate was for 30 cents per share. (14 analyst contributing)

As of 6/30/2012, the core portfolio of 218 properties, comprising 24.3 million square feet, was 89% leased.

Brandywine Realty Trust announced the sale of an office building in Exton, PA for $52.7 million.

Brandywine Realty Trust closed at $11.88. I recently added this stock to my ROTH IRA before the last quarterly dividend. Bought Roth IRA: 50 AVK at $15.3 and100 BDN at $11.24

5. RadioShack (own 2 2019 maturity senior bonds: Junk Bond Ladder Basket Strategy): A few months ago, I argued that RSH needed to eliminate its common stock dividend. Another one mentioned in that post was SuperValu. (introduction: Stocks, Bonds & Politics 4/9/12 Post). 

After RSH announced a second quarter loss of $21 million or 21 cents per share, the company "suspended" its common share dividend to enhance liquidity. RadioShack Reports The company had no choice but to eliminate that overly generous dividend in my opinion.  This report caused the credit default rates on RSH debt to soar. Bloomberg Fitch downgraded the senior unsecured note to CC from B-, which seems aggressive to me.  TEXT-Fitch A negative article about RSH can be found at  Forbes.

This was an awful report. Revenues did increase 1.2% year-over-year, and same store sales were essentially flat. 

The company claims to have over $900 million in liquidity and positive cash flow for the first six months of 2012. Cash and cash equivalents stood at $517.7 million. The remaining liquidity comes from a senior credit facility that expires in January 2016. There is a debt maturity of $375 million in August 2013. That debt is a busted convertible. RSH intends on retiring that debt by refinancing about 1/2 of it and with the balance paid down at maturity with cash on hand.

I will not average down by buying more bonds. Two will be my limit.

I have a risk rating of 7 on this bonds in my Personal Risk Ratings For Junk Bonds which is already high. I will raise it if the next quarter is a bad one. I am not yet as pessimistic as Fitch.

6. FNFG (own: Regional Bank Basket Strategy): First Niagara has been by far the most disappointing stock in this basket, more so than Valley National, due to its extreme underperformance and the comparative size of my position.

The basic problem was that this bank bit off more than it could chew with a $1 billion acquisition of branches formerly owned by HSBC. This point is not even subject to debate in my opinion. This acquisition caused the bank to slash its dividend by 50% to generate capital for this ill-advised purchase, and to sell a boatload of stock at a historically low price. SEC Filed Press Release Further cash was raised by offering equity preferred stock on very generous terms, Pricing Term Sheet, and selling notes with a fat yield. SEC All of the foregoing were negative for existing shareholders in my opinion, and the stock chart confirms my opinion. FNFG Interactive Chart

This acquisition has already proven to be one too many for this bank. While the acquired branches will make FNFG a bigger fish in slow growing or declining markets, the damage inflicted on shareholders by FNFG's management and Board will take years to repair. First Niagara: Just Another Incompetent Bank Board of Directors; First Niagara 50% Dividend Slash; FNFG-Destruction of Shareholder Value

It will certainly take years for the shareholders to recoup the losses associated with the dividend cut. I estimate currently that it will be seven to ten years before the Board restores the dividend to the level prior to their 50% slash (2018-2020 is my current estimate, maybe longer, not likely to be shorter). The quarterly dividend was cut from 16 to 8 cents per share. SEC Filed Press Release Perhaps the overpaid CEO will take a 50% cut in his pay soon. He referred to the acquisition of the HSBC branches as a "home run", more like hitting yourself in the groin with a bat. Possibly, someone needs to explain baseball to him. A home run is good for the team that hit it, maybe that will suffice as an explanation.

While I have blasted the bank for this boneheaded move, I also believe that the market has overreacted to the downside, when the shares approach $7. The current price would be understandable only if you expected management and the Board to do something else really stupid again, which is of course possible.

First Niagara reported Non-GAAP second quarter net income of $59.1 or 17 cents per share, down from 19 cents in the second quarter of 2011. The GAAP number was a loss of 5 cents per share which included acquisition and restructuring costs associated with the HSBC branch acquisitions.

The consensus estimate was for 18 cents per share. The shares declined 2.24% in response to this report, closing at $7.2 (7/27/12). A new five year low was established also on 7/27/12:  FNFG Interactive Chart I voted against the Board and can not even comprehend why other shareholders voted overwhelmingly in support. As shown in a 10 year chart, the stock has returned to 2002 levels, losing a decade of value. Chart

The capital ratios are trending down:

I am reinvesting the dividend to buy additional shares and hope that the Board will not cut it further or embark on another clearly indefensible acquisition. It will take a minimum of 5 years, for the stock to return to levels prevailing before the HSBC branch acquisition announcement. I suspect that the range will be closer to 7-10 years. The quarterly dividend of 8 cents per share is back to 2004 levels. Stock Splits & Dividends - First Niagara

I have an unrealized loss of over $1,000 on 350 shares bought in the market plus shares purchased with dividends. First Niagara Financial Group closed at $7.58 yesterday, back to a price prevailing in 2003.  First Niagara Financial Group Inc. Stock Chart It is hard to call that result a "home run" without breaking out in laughter.

7. Sold 50 NABZY at $25.472 Last Friday (see Disclaimer): I recently received a dividend payment from National Australia Bank, who ADS shares are traded on the U.S. pink sheet exchange under the symbol NABZY. No foreign tax withholding was made (or if made, not yet shown):

I am having some trouble keeping track of the foreign tax issues. I have enough trouble with U.S. tax issues.

I do remember that the Swiss insurance giant Zurich did not withhold any taxes on its recent dividend payment since that distribution was classified as a return of capital. The dividend was large and reduced my tax cost basis in the stock by the amount of the dividend. Item # 2 Zurich Financial (dividend of $184.48 on 100 shares, reducing my cost basis to $22.95)

However, as of now, there has been no brokerage adjustment in my NABZY cost basis.

While I am not sure why no tax was withheld and no adjustment made to the cost basis, perhaps the explanation lies somewhere in the cryptic statement made by the bank at Shareholder Dividend - NAB The bank stated that the dividend was 100% "franked", whatever that means.

I then discovered another statement by the bank that says no withholding taxes are levied on the franked part of a dividend payment:

"Franked" and "Unfranked"Dividends & Withholding

So, I clipped the dividend with no withholding and no return of capital adjustment, and made some money on the shares bought last March: Bought 50 of the ADR NABZY at $24.55 And, I learned a new term.