Bought 100 MSF at 15.68/FNB UBSI CBU OPXT CIZN BDGE/Case Shiller/More on KTX

The Case Shiller Index for home prices in twenty metropolitan areas continues to confirm  a double dip in home prices.  The index for those 20 cities fell 1.6% in November from October 2010.  Only San Diego eeked out a gain with a .1% increase.  The remaining 19 metropolitan areas experienced a decline in prices from October, with the largest declines in Atlanta (-2.5%); Chicago (-2.2); Cleveland (-2%); Detroit (-2.7%); Minneapolis (-2.1%) and Portland at -1.6%. The report can be accessed at www.standardandpoors.com. 

This is part of Fidelity's response to my email requesting their rational for prohibiting purchases of HBAPRF while permitting the purchase of all kinds of securities that are virtually guaranteed to lose their customers money:

"Since an IRA is considered to be a significant source of retirement funds, it is important that the account be managed for adequate long-term growth. We can determine certain securities inappropriate for retirement and or non-retirement accounts especially those that tend to entail higher risks. The risks involved with the security included in your message have been determined as less than suitable for our investors at this time. We are not permitting buy orders for the security HSBC USA Preferred F (HBAPRF). You can contact a Fidelity Representative at 800-544-6666 available 24 x 7 x 365 for an interactive discussion. I regret any inconvenience you have experienced."

This was my response: 

 

"Please do not respond to this email. I view your responses on this subject to be pure garbage anyway. As I have said, your policy is just asinine and without any justification. Previously, you have justified the restraint on the grounds that your customers are not intelligent enough to understand these securities on your sh-- list. Fidelity's policy constitutes an unreasonable restraint on your customers' ability to conservatively manage their accounts for both capital appreciation and income. I would point out that Fidelity believes its customers are intelligent enough that you graciously allow them to purchase two other floating rate preferred stocks, HBAPRD and HBAPRG, AT LEAST FOR NOW, that are issues from HSBC USA, the very same firm obligated to pay HBAPRF which you will not allow me to buy. What about METPRA? Or GSPRA or GSPRD, when are they going to join the list? It goes without saying that I have other brokerage accounts, and I was able to place the order with a firm that does not want to treat its customers like children. By the way, did Fidelity prohibit its customers from purchasing common stocks that were clearly overvalued in 2000, which did not provide them with any income, which HBAPRF does? Could I buy FFIV in my regular IRA if I had sufficient funds this morning?"

The OG knows that it is futile to understand what is beyond rational explanation.  When I asked for their rationale, I expected no sensible explanation and none was given.  Although it has been said that the OG is more tolerant of stupid reasoning than Headknocker, that is not the same as saying the OG suffers fools with equanimity.  I am referring to those who are actually making the decisions on this issue at Fidelity, and not to their customer representatives.


And, this latest confrontation with Fidelity is draining what little energy the OG can muster after getting out of bed in the morning.   Possibly, with some stimulation of one sort or another, the OG will be in a position to discuss the two small purchases made yesterday in the next post.  One of the buys was a floating rate equity preferred stock with a guarantee, viewed as less credit worthy than HBAPRF, which the OG was able to buy in a taxable account at Fidelity.  But, "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines", and Emerson forgot to add Old Geezers.   

1. Bought 100 MSF on Monday at 15.68 (see Disclaimer):  This security is a CEF that invests in emerging market stocks, which I have discussed in several prior posts. (e.g. Added 100 MSF at 13.57 Bought 100 of the CEF MSF at 14.4 Sold 100 MSF at 17.02)

Last Friday, MSF closed at $15.69 and had a net asset value  at that time of $17.10 per share.  This created a discount of -8.25.  The daily NAV information can be found at the WSJ Closed-End Funds section under "World Equity Funds", at the sponsor's web site, or at  the Closed-End Fund Association.

With this last purchase I am now back up to 200 shares. My last buy was 100 shares in November 2010, and I received the fund's annual dividend for those shares:  BOUGHT: 100 MSF @ 15.69  I booked a $403.14 profit on 200 shares in 2010:

MSF closed on Monday at $15.7 with a net asset value up just two cents for the day to $17.12 per share.  On Tuesday, the net asset value per share fell 4 cents and MSF closed unchanged at $15.7. 

This is the link to this CEF's last filed form N-Q which contains its holdings as of 9/30/2010.  The last shareholder report is for the six month period ending in June 2010.

The net expense ratio is around 1.54%, which is not unusual for this type of fund:  Fund Details - United States : Individual Investor - Morgan Stanley Investment Management

See generally: Emerging Market Currencies and Bonds as Non-Correlated Asset Classes; Instability & Volatility in Asset Correlations

The fund is not rated by Morningstar.  Another closed end fund that invests in emerging markets is  the Templeton Emerging Market fund (EMF), which has a 1.55% expense ratio and sells at a lower discount to net asset value.  As shown at the preceding linked page at the CEFA for EMF, the ten year annualized return based on NAV for EMF is  16.55% and 10.61% over five years.   MSF has done slightly worse over 10 years with an annualized return on NAV at 13.52% and 8.99% over five years.  That difference may explain the larger discount for MSF.   

2. F.N.B. Corporation (FNB)(own-Regional Bank Stocks' basket strategy):  FNB  reported net income for the 4th quarter of 23.5 million or 21 cents per share, up from 15 cents in the 4th quarter of 2009.   There were some extraordinary items that increased earnings by 6 cents per share.  Excluding those items, the bank earned 15 cents per share. The consensus estimate, made by 7 analysts, was for earnings of 13 cents.   As of 12/31/2010, the allowance for loan losses to NPLs was 78.44%; NPLs to total loans was at 2.22%; the efficiency ratio was at 59.96%; and the net interest margin was 3.77%.  I have sold all of my shares in FNB except for 50 shares purchased at $7.8.

3.  Community Bank System (CBU)(own: Regional Bank Stocks' basket strategy):  reported net income of 15.9 million for the 4th quarter or 47 cents per share, which included 2 cents per share relating to its proposed acquisition of Wilber.  I owned Wilber (GIW) and sold my shares in response to that offer.    I had not heard of CBU when it announced its acquisition offer.  After researching the bank,  I decided to buy a small stake: Bought 50  CBU @ 23.18 Sold 151 GIW @ 9.26 Bought 100 GIW at 7.03 Added 50 GIW at 6.55 The consensus estimate was for 47 cents.  

As of 12/31/2010, the loan loss allowance to NPLs stood at a very comforting level of 222% (compare that to Hudson); NPLs to total loans was at .62%; the TIER 1 leverage ratio was at 8.23%; and the net interest margin was at 4.07%.

CBU reported its 4th quarter earnings after the market closed on Monday.  In trading last Monday, the stock closed at $26.87, down 35 cents for the day.

The current consensus estimate for 2011 is for an E.P.S. of $1.98.

4.  United Bankshares, Inc (UBSI)(own:Regional Bank Stocks' basket strategy): UBSI had recently given upside guidance (Form 8-K) for its 4th quarter earnings.   UBSI reported 4th quarter net income of 19.3 million or 44 cents per share. I will just quote some pertinent passages from the press release:   " United continues to be well-capitalized based upon regulatory guidelines. United’s estimated risk-based capital ratio is 13.7% at December 31, 2010 while its estimated Tier I capital and leverage ratios are 12.3% and 9.9%, respectively. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10%, a Tier I capital ratio of 6% and a leverage ratio of 5%. . . . United’s asset quality also continues to outperform its peers. United’s percentage of nonperforming loans to loans, net of unearned income of 1.28% at December 31, 2010 compares favorably to the most recently reported percentage of 4.26% at September 30, 2010 for United’s Federal Reserve peer group. At December 31, 2010, nonperforming loans were $67.2 million, down $5.0 million or 7% from nonperforming loans of $72.3 million or 1.26% of loans, net of unearned income at December 31, 2009. As of December 31, 2010, the allowance for loan losses was $73.0 million or 1.39% of loans, net of unearned income, as compared to $67.9 million or 1.18% of loans, net of unearned income at December 31, 2009. United’s coverage ratio of its allowance for loan losses to nonperforming loans also compares favorably to its peers. The coverage ratio for United was 108.6% and 93.9% at December 31, 2010 and December 31, 2009, respectively. The coverage ratio for United’s Federal Reserve peer group was 71.0% at September 30, 2010. Total nonperforming assets of $112.0 million, including OREO of $44.8 million at December 31, 2010, represented 1.57% of total assets which also compares favorably to the most recently reported percentage of 3.58% at September 30, 2010 for United’s Federal Reserve peer group. "  

I thought that this passage was helpful, since the comparisons with the national averages explains why I emphasize certain items when discussing bank releases.  It is important to know about where a bank stands in relation to other similarly situated institutions.  I do not want to own a collection of banks that fall around the averages for the items viewed as important by me. 

 UBSI closed yesterday at $29.26, up 42 cents.    Bought 50 of UBSI at $16.65 (Nov 2009). 

5. Opnext (own: LOTTERY TICKET strategy):  HK wanted to know what the heck is a "high power, 60mW, 445nm blue laser diode" that consumes 30% less power than the "leading" blue laser offerings, according to an  Opnext press release.  Then the HK saw another Opnext press release yesterday, something about a "high power 404nm, 500mW violet laser diode for medical illumination", and wanted staff to research that product.  LB responded that it did not care, maybe the "HK needs to spend his time reading one of the novels downloaded into his Kindle."  LB has better things to do than to research one of the Nit Wit's LT selections.  Besides LB was recently fired -unjustly of course-as Head Trader and was not feeling well.  The OG did not know, which is his normal answer, and the OG then said that " my head started to hurt just listening to HK's quotes from those two press releases."  RB, who has been the moving force behind the Opnext buys, replied that it did not know either, which is always its response to any question requiring  knowledge of a fact, though RB added that it sounded "really cool, all of this blue light stuff".  RB was proud of the fact that it did not know anything about any of Opnext's thingamajigs, and then added it wanted to go "All-in, Swing that Big Stick and buy a 1000 shares."   Bought 50 OPXT at $1.91 Sold LT Opnext at $3.1 Bought 100 OPXT at 1.89 Sold 100 OPXT at $2.47 Bought 100 OPXT @ 1.6

LB does not know how much longer it can keep it altogether here at HQ.

6. Citizens Holding Company (own: Regional Bank Stocks' basket strategy): Citizens Holding Company had an uninspiring 4th quarter.  Net income was reported at 35 cents per share, unchanged from the 4th quarter of 2009.  The net interest margin decreased to 4.06%, compared to 4.22 in the year ago quarter, but that is still good compared to a lot of banks.  

7. Bridge Bancorp, Inc (own:Regional Bank Stocks' basket strategy):   reported 4th quarter net income of 2.4 million or 38 cents per share, up 9% from the 35 cents per share earned in the year ago quarter.  As of 12/31/2010, the net interest margin was 4.26%; the operating efficiency ratio was 60.92%; the NPLs to total loans stood at 1.33%; the coverage ratio was 126.35% (allowances as a percent of NPLs); and the total capital to risk weighted assets ratio was 13.7% (no TARP).    Total assets increased 15% in 2010.  Loan growth grew 13%, and deposits increased 16%.   I am not aware of any analysts following this bank.


8. More on KTX: A reader disagreed with my decision to keep KTX, discussed in Tuesday's post. He noted correctly that Xerox could call the underlying bond at a small premium to par value.  That is true. (see page S-13 of the prospectus: www.sec.gov).  My reply involves a condense version of one of my investment philosophies, the one known as "sometimes it is just better to leave it alone".   This is my email reply:

"You are right about Xerox having the right to call, even though there is no call warrant.  I am betting that Xerox will not want to call this bond, given its junior status and its rights of deferral for up to five years.  I would be more concerned about an exercise of a call warrant if and when the price exceeded 105. Xerox could refinance this TP at a lower rate by issuing a senior non-deferrable bond.   If it does so, I will lose less than $50 of price appreciation adjusted for the soon to be paid semi-annual interest payment. The alternative is to sell and then reinvest in a lower rated bond that yields less at my cost.  That could end up costing me more.   I am content with the 8% yield at my cost and particularly that yield now with this kind of credit and a 2027 maturity.  I look everyday at what I can buy in bond land, and it is really, really awful when you look at what is available in the bond market.   I can not get much more than 6% in a BBB bond purchase with a maturity in the 20 to 30 year range.  Most of those are trading at premiums to their par values.  And, the exchange traded bonds are becoming a dying species."  

Xerox does not really have any actively traded long bonds with a similar maturity.  Morningstar  I would guess that a senior bond could be floated, with a 2027 maturity, now at around 6%.   A new junior bond with deferral rights from Xerox Capital would probably yield about the same as the existing 2027 bond.   So, when you add the costs associated with refinancing, including a premium payment to the existing bond owners and the underwriting cost of issuing new bonds, there would still be a current cost advantage to replace the junior bond with a senior one,  but possibly not an important one considering the liberal deferral rights of the existing bond which are normal for TPs.   I would add that I simply do not know whether there is some advantage to Xerox Capital to have a TP which would enter into the refinancing consideration.   I would emphasize that I would not buy shares at the current price. My problem was whether I should sell the 100 shares bought near par value.  


Xerox reported earnings this morning.  XRX reported adjusted earnings of 29 cents per share, which excludes 17 cents primarily related to restructuring charges.  Operating cash flow was reported at 1.3 billion.  

Comments on Barrons Roundtable Part II/KTX/Intel/PKM Called

Although I have not yet seen a press release, two brokerage companies have informed me that the TC PKM has been called for redemption at $25 plus accrued interest. The call date in one of those notices has the call date as 2/15/2011. ("PREFERREDPLUS ALLMERICA FINL CORP 8%, cusip 740434832 . . . is scheduled to be redeemed on 2011-02-15.")   I will realize a large percentage capital gain on 100 shares, having bought the shares at an average cost of below $18 per share:

 The remaining 50 shares were bought more recently in the ROTH IRA at 24.84.  I have had one realized gain on PKM before this call.  Pared PKM I previously realized gains on the call of KRH, another TC with the same Hanover Insurance junior bond as its underlying security.  KRH-Exercise of Call Warrant Bought 50 of the TC KRH at $19  ADDED 50 KRH @ 24.3  Before the KRH call I had realized a $283.02 gain on a 50 share transaction in an IRA: Bought 50 KRH in IRA at $18.62 Sold 50 KRH at 24.6  Along with several interest payments, the Hanover junior bond TCs, classified as junk by the rating agencies, have been worthwhile investments for me.

PKM closed at $25.87 yesterday, up 56 cents.  The last ex date for the semi-annual interest payment was on 8/11/2010. So a 2/15 redemption date looks to me to be the entire 6 months of interest of $1 per share.  I will simply hold for the payout on all 150 shares.  PKM is also the first Merrill Lynch originated TC to be fully called by the warrant owner.

If I find a press release on the call, I will add a link to it here:

I have bought two other ML originated TCs at below par value, where it would be profitable for the warrant owner to exercise its option.

The Goldman Sachs equity preferred floaters were ex dividend yesterday for their quarterly dividend payments.  I currently own 50 shares of GSPRA and GSPRD.

Intel (owned) raised its quarterly dividend to 18.12 cents or 15% and increased the authorization for share buybacks by 10 billion dollars.   Since initiating stock buybacks in 1990, Intel has purchased 3.4 billion shares at a total cost of approximately 70 billion.  I calculated that would be around $20.59 per share.

While Fidelity still prohibits its customers from buying HBAPRF, as noted in an earlier post, I confirmed yesterday that its customers are smart enough to still purchase HBAPRG and HBAPRD, two other equity preferred floaters from the same issuer.  This suggests  that my earlier observation about the true reason for the expanding no buy list at Fidelity may be close to the truth, the persons making these decisions are not over endowed with an abundance of IQ points.   Perhaps, that person is one of the 30 year old wunderkind, rejected for employment as a Master of Disaster, forever disappointed about being denied millions of dollars per year to be one of the most overpaid doofuses of all time.

I have noticed that KTX, a TC which contains a Xerox Capital trust preferred, has taken off recently and was trading over $27 yesterday.  Chart Xerox Capital Trust| KTX   I would not buy it at that level, and it is about to go ex interest for its semi-annual interest payment.  That is another reason not to buy it now.  I was thinking about selling my 100 shares into this strength. Bought 50 KTX at 25.14 Roth IRA    Added 50 KTX at 25  My purchases were made near par value, and I did not expect much, if any, appreciation in the share price when I made those purchases.  I bought the shares for the 8% coupon:  www.sec.gov Before making a decision, I checked the trades for the underlying bond at FINRA, and the last trade was near par value for the underlying bond which also has an 8% coupon.  The trading volume was extremely light however.  I then reviewed the prospectus for KTX again, and I could not find a call warrant attached to this TC.   Since I did not buy this TC at any discount to its par value, I view the absence of a call warrant to be a positive.  I decided that I would whether have the 8% interest payment for the next 16+ years than the small profit on the shares.

Our new Head Trader, the Old Geezer, worked for about ten minutes yesterday before declaring that it was time for a rest break, and then took off for the remainder of the trading day.  The OG only made one trade yesterday as a consequence.  Even with the IV drip of chill pills, laced with Xanax and Pepto Bismol, the OG was heard to exclaim with a voice quivering in anxiety, "why not sell everything before the market corrects".   RB just said go "all in".  The LB does not understand why Headknocker installed such a slacker as the HT here at HQ, besides the OG's idea of investment research is to write symbols on a piece of paper, throw them up in the air, then say some gibberish like "let the Lord decide", and buy whichever one lands on the generous extension of his mid-section.  Sometimes, it is worse than that, the LB noted with alarm, the OG actually listens to the RB, as he did yesterday when buying a security.

The OG, who is now responsible for the minutes, decided that the following was enough for today's post. It is clear that the OG is working too hard; and he is consequently way too tired to discuss the one security purchased yesterday.  Maybe, with some B-12 shots, and an assortment of other energy boosters, the OG will be able to muster the stamina to discuss that purchase in the next post. It has sometimes been said that the OG is a mellower version of Headknocker, and a mellower version of HK is not to be confused with being mellow.


1. Comments on the  Barrons.com Roundtable Part II:  Most of the panelists in the Barron's Roundtable are predictable in their opinions, always searching for bits and pieces of information that support their rigid worldview, which is frequently reeking in pessimism.  If doom is not already upon us, it is almost here, just wait, and some beast will devour you and your best laid plans.  Possibly,  it would be worthwhile for Barron's subscribers to read what the crew had to say in early 2009, just before the market took off a 91.2% run as of the close last Friday:   Barron's 2009 Roundtable, Part One  Barron's 2009 Roundtable, Part Two

I have previously noted that Alan Abelson was warning investor's to get out of stocks in the March 9, 2009 issue of Barron's.   Barrons's & David Rosenberg  If Abelson had just a smidgen of balance in him, which of course he does not and never will, his column from early March 2009 would have been an excellent time for him to express optimism about the market, since the government had already saved the financial system by that time and was already engaged in extraordinary fiscal and monetary stimulus.   But when you are perpetually dour, seeing the glass as perpetually empty or full of raw sewage contaminated with nuclear waste,  there will always be some negative information to support whatever dire prediction that Alan is just predisposed to make anyway.  

I will just touch on some of the bullet points made by the panelists:

A. Zulauf recommends buying volatility.  He states that we "will see" something like the spike in the VIX to 48 from around 17, which happened during the market correction between April and July of last year.  ^VIX Historical Prices  Possibly, there will be another surge in volatility caused by some adverse and unexpected development later this year.  I would just say that it is impossible to have Zulauf's certainty.

The VIX may be entering into what I would call a Stable VIX Pattern, defined to mean continuous movement below 20 for an extended period of time measured in years, not months, weeks or days.    Vix Asset Allocation Model Explained Simply  The VIX has been in an Unstable Pattern since August 2007. For as long as that pattern lasts, it would make sense to go long volatility when the VIX falls below 20 and then meanders for a few weeks below that important demarcation line between bullish and bearish stock cycles.  During the Unstable VIX Pattern cycle, the market will be easily spooked, and the VIX will not stay below 20 for long before it pops again.  This whipsaw movement in the VIX, mostly between 20 and 30, with temporary movement below 20 and above 30, is the defining characteristic of the Phase 1 cycle of the Unstable Vix Pattern.  A corollary to going long the VIX would be to pare stock positions and/or to buy hedges.  

The VIX has been continuously moving below 20 since 12/2/2010.  If that pattern continues until early March 2011, then the market has confirmed the formation of a Stable VIX Pattern, based on historical evidence, and that pattern  normally lasts for several years based on past history.  The last STABLE VIX PATTERN lasted about 3 years or so as shown in the charts found at Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2  The continuous movement below 20 in the VIX  in those years correlated with a substantial rise in the market's averages, as did the Stable VIX Pattern in effect from 1991 to 1997: VIX and S & P Compared 1990 to 1997  (see also: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern)

While this is just a guess, I suspect that the odds are greater than 50/50 that the market is moving into a Stable Vix Pattern.  So shorting volatility will not likely be a productive strategy.    I lack Zulauf's arrogance and readily confess to an inability to predict the future.   

Zulauf recommended buying a Canadian security that owns uranium,  URANIUM PARTICIPATION CORP. The website for Uranium Participation Corporation does not provide current net asset value information.  The last NAV information was for 12/31/2010.  www.uraniumparticipation.com/ jan17-11.pdf   I was sufficiently interested in his arguments to place that stock on my monitor list for Canadian securities.  I have a long term position in Canadian dollars.

I routinely buy income generating securities on the Toronto exchange with that stash, mostly Canadian Bond ETFs, Canadian REITs and energy companies.  Bought 100 CBO:TO at 20.4 Added 200 CBO:CA @ 20.58 CAD Added 100 CLF:TO  BOUGHT 200 CLF:TO AT 20.20 CAD Bought  100 of ETF CLF:TO at 20.10 CAD  Bought 100 HSE:TO at 26.25 CAD  Bought: 200 XRE:CA @ 13.78 CAD Bought 100 TGA-UN:TO at 10.3 CAD Bought:  100 TGA-UN.TO @ 10.58 CAD Bought: 200 SRQ-UN.TO @7.53 CAD Bought 200 AX-UN.TO @ 13.41 CAD Bought: 100 CAR-UN.TO @ 17.35  Bought 100 CUF-UN.TO @ 21.68 CAD  Bought: 100 KMP:CA @ 10.17 CAD & 100 ZCM:CA @ 15.3 CAD

B. Fred Hickey recommended buying short term Canadian government bonds.   His reasoning is that Canada has a better deficit outlook than the U.S.  Their government is running "significantly" less debt than the U.S., and the country is rich in natural resources. He also mentioned that Canada has just lowered the corporate tax rate to 16.5% with plans to cut it to 15% by 2012.   I have no interest in buying Canadian government bonds directly.  Instead I own 400 shares of the Claymore 1-5 Yr Laddered Government Bond ETF, referenced above, which uses a ladder strategy for short term Canadian federal and provincial government bonds,  and has a .15% expense ratio.

He also recommends Microsoft on valuation grounds primarily.  If I become really bored, and want to see if an elephant can tap dance,  and MSFT falls to around $25, I might buy some shares.   Sold MSFT at $28.11  ADD 50 MSFT at $17.79

C. Bill Gross had the most interesting predictions about the future.  The most stunning was his prediction that short term rates will stay around .25% for "at least two years and maybe three".   Wow!  Just plow the savers into the ground and say a prayer over their financial grave.   While my crystal ball is admittedly cloudy, I would predict that he will be proven wrong with that forecast.  By this time next year, the three month T bill will be at 1% according to our LB who has crunched all of the variables and alternated scenarios.

If Gross is right about the future, then leveraged bond funds would make sense, and he recommends one from Pimco, PTY.  Those funds will be able to borrow money at very low short term rates, and continue to make money on the spread between their cost of funds and the interest paid by the bonds bought with those borrowed funds.  Since his forecast also includes low inflation and continued high unemployment, investment grade corporate bonds would likely hold or increase their value during such a scenario.   This scenario will also "rob" savers of a real return on their investments for an extended period of time.   That is one reason that Gross recommends investing in in countries that offer a positive rate of return, such as Canada and Brazil, and where there is growth potential and a  better "credit solvency" than in the U.S.

Bought 50 MSPRA @ 19.57, 50 PYT at 18.06, & 50 GYB at 18.63 in the Roth IRA/ UNB OCFC

I discussed another purchase made last Friday in an earlier post. Bought 50 HBAPRF at 20.69/ Fidelity Prohibits Purchase of HBAPRF   As discussed in that post from last Friday, I discovered that Fidelity prohibited me from buying this easily understood equity preferred stock.  The inclusion of a preferred stock like HBAPRF on Fidelity's no buy allowed list, along with some baby bonds previously mentioned, belies the purported reason given by Fidelity for its ever expanding prohibitions, that their customers are not intelligent enough to understand the security.  Of course, when did it become a prerequisite for an online brokerage customer to understand any security traded on the stock exchanges?  And, assuming Fidelity has one or possibly two customers who do not understand HBAPRF, which I seriously doubt, why does that justify prohibiting all of its customers from purchasing it or DFP or JBK?  These unreasonable restraints on customer purchases is without question entirely unjustified and based on considerations that have nothing to do with the reason given to date.   I ended up placing the order to buy HBAPRF at Vanguard.  Over 300,000 shares of HBAPRF traded last Friday.  According  QuantumOnline.com, all of the equity preferred stocks issued by HSBC USA are rated investment grade,  A- by Moody's and Baa1 by S & P.

I would add one caveat to my earlier posts that discussed these preferred stock issues from HSBC USA.  This firm is wholly own by HSBC North America Holdings, which is wholly owned by HSBC Holdings, plc.   One legal protection of a preferred stock owner is that their dividend has to be paid whenever a dividend is paid to the common shareholders.  If a company wants to eliminate the non-cumulative preferred dividend, it would have to eliminate the common share distribution first.   All of these banks that have issued equity preferred floaters have independent shareholders who expect to receive a dividend and have voting rights for the Board members.  I would not say that situation is applicable to a parent and its wholly owned subsidiary.   This is a link to the last filed Form 10 Q.

Of course, there is another explanation for Fidelity's ever expanding list of securities on its no buy list.  The people making the decision are incompetent and/or not very bright.


1. Bought 50 MSPRA at 19.57 and 50 GYB at 18.63 last Thursday in the Roth IRA (see Disclaimer):   Both GYB and MSPRA are floating rate securities that I have discussed in several posts. 

MSPRA is a non-cumulative equity preferred stock originating from Morgan Stanley.  I decided to up my stake in MSPRA to 100 shares after Morgan Stanley reported its 4th quarter earnings.  As previously discussed, MSPRA pays qualified dividends at the greater of 4% or .7% above the 3 month LIBOR rate, calculated on a $25 par value.  www.sec.gov  At a total cost of $19.57, the yield at the guarantee of 4%, the current applicable rate, would be about 5.1%.  This would be the minimum rate at the foregoing cost per share number.  Theoretically, there is no upside limit on the coupon.   If MS did not call this security at its par value, and the 3 month LIBOR rate hit 10% during the applicable computation period, then the coupon would become 10.7% which translates into an effective yield of 13.67% at the constant total cost number of $19.57.  MS may redeem the shares at $25 plus accrued dividends at its option at any time after 7/15/2011.   The primary advantages of this type of security is that the guarantee provides some protection in a low inflation or deflation scenario, whereas the LIBOR float provision will give the investor an increased coupon when rates rise to potentially problematic levels for the vintage fixed coupon bond.   Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Normally, I would buy a security that pays a qualified dividend in a taxable account, and a bond in the retirement account.  I have included some equity preferred floaters in the retirement account, for one reason or another.  I bought AEB which pays qualified, cumulative dividends in an IRA during the Dark Period since I was concerned about a deferral of that dividend, which would have unfortunate tax consequences for a U.S. taxpayer in a taxable account.  The total cost of those 100 shares of AEB currently owned in the Roth is $6.06 per share.  When I transferred the Roth IRA account to Vanguard from Fidelity, due entirely to Fidelity's prohibitions on certain exchange traded bond purchases, I lost my cost basis information.  This is a snapshot of the AEB Roth IRA holding taken from my brokerage statement as of 12/31/2010, and I still own those shares:

  

I bought some METPRA during the Near Depression in a regular IRA, and have since sold some, just because of the I had some cash and it looked like a good investment at the price paid: 

There is some benefit in having floating rate securities that pay guarantees in a retirement account, in that they do provide some balance to a bond portfolio that is heavy into longer term fixed coupons.   Still, I prefer to buy the floaters that pay qualified dividends in the taxable account, and will buy the Synthetic Floaters only in the retirement accounts due to their unique tax issues which I want to avoid.  

This brings me up to 100 shares of MSPRA with 50 shares held in a taxable account. I have previously bought and sold it, realizing one good gain: 

Bought 100 MSPRA at $12.88 SOLD 100 MSPRA at 21.43 Bought 50 MSPRA at 15.7 Sold MSPRA at 18.50

MSPRA has the same guarantee as STIPRA and ZBPRA, issued by Suntrust and Zions respectively, but has a better float provision.   According to QuantumOnline.com, S & P rates the floater from Morgan Stanley at BBB, an investment grade rating, whereas the  Suntrust floater is rated BB and the one from Zions is rated "B" by S & P.   STIPRA, which I own, closed on Friday at $20.35.   ZBPRA, which I have sold, closed at $19. MSPRA closed at $19.33.  The float of both STIPRA and ZBPRA is .52% above 3 month LIBOR.   Final Prospectus Supplement   www.sec.gov  MSPRA's float provision is .7% above 3 month LIBOR.   www.sec.gov

As to GYB, I have bought and sold that one many times.  In a prior post, I totaled my trading profits from this security at $1071, never owning more than 100 shares at any point in time.  Item # 3  Bought 50 GYB @19.07.    It is a synthetic floater that pays the greater of 3.25% or .85% above the 3 month LIBOR, but not more than 8.25%.  I added 50 shares in the Roth IRA at $18.63 last Thursday.  I would just copy my previous explanation of this security: 

"GYB is a trust certificate that has as its underlying security a trust preferred issue from Goldman Sachs. While this security has multiple legal layers, I view the underlying security as a GS junior bond. While the underlying bond has a fixed coupon of 6.345%, www.sec.gov, GYB is a synthetic floater that pays the greater of 3.25% or .85% above the 3 month Libor rate, but no more than 8.25%, www.sec.gov. The float is created by a swap agreement with UBS.

The trustee for GYB collects the fixed coupon payments at 6.345% from GS and then exchanges those funds with UBS for either the guarantee of 3.25% or the amount due under the Libor float. So, that is a good deal without question for UBS now. UBS takes no risk of a GS default, which is borne by the owners of the TC, and collects the difference between the applicable rate now which is the 3.25% guarantee and the 6.345% paid by GS. The worm will turn against UBS when the LIBOR rate exceeds 5.495%. It is what it is and I can not be concerned about the merits of the deal for UBS but only whether I am satisfied with the terms of GYB at the $19.07 price. I would say just barely satisfied, and only barely in light of the Jihad by the Fed against savers now in its third year. So, it is relative."

At a total cost of $18.63, I can now calculate the range of interest payments for this security.  The minimum payment would be the guarantee, the current applicable rate, which would result in an effective minimum yield of 4.36%.  The maximum yield is reached when the 3 month LIBOR hits 7.4%.  At that point, the effective current yield to a buyer at a total cost of $18.63 would be 11.07%.  If held to maturity in 2034, there would be an additional yield associated with capturing the spread between my cost and the $25 par value. 

Some of my prior trades of GYB can be found in the following posts: Added another 100 GYB in Regular IRA at $11 Bought 50 GYB at $11 Sold 50 GYB at $15 Pared Trades in Roth: Sold 100 PYT at 19.25 & Bought 100 GYB at 18.98 Sold 70 PYT at 18.66 and Bought 70 GYB at 18.49 in Regular IRA Sold 50 GJS @ 16.20 & 100 GYB @ 19.9 Sold 100 GYB @ 19.

2.  OceanFirst (own- Regional Bank Stocks' basket strategy): OceanFirst Financial (OCFC) reported 4th quarter net income of 5.8 million or 32 cents per share, up 3 cents from the 4th quarter of 2009.  The consensus estimate from 4 analysts was for 28 cents.  For the quarter ending 12/31/2010, the net interest margin was 3.52%; the efficiency ratio stood at 59.5; NPAs to total assets was at 1.77%; and the allowance for loan losses to NPLs was at 52.48%.

OCFC closed at $13.24 last Friday, up 24 cents.  Bought 50 OCFC at 10.4 (Dec 2009)

3. General Electric (own):  General Electric reported earnings of 36 cents per share from continuing operation on 41.4 billion in revenues.  GE stated that its backlog rose 12%, bringing the total to 175 billion.  The consensus estimate was for 32 cents on 39.9 billion in revenues.  Profits for GE Capital kicked into a higher gear, rising to 1.06 billion.

I have been buying GE shares mostly in a $10 to $16 range whenever the spirit moves me, and have been reinvesting the dividend. I am currently near 500 shares.  If and when the share price reaches $25, I will change the distribution option to cash payments.   My last two purchases, including commission cost, was just 30 shares at 15.64 last June and 40 shares on July 2 at $14.08.  Other adds in 2009, including commission costs, were at $15.48 in December, 50 shares at $12.54 on 1/23; 30 shares at $11.16 on 2/18; and 30 shares at $12.02 on 6/24.

GE had an usually good day last Friday, rising 7.11% to close at $19.74 and hit a new 52 week high intra-day.

4. Bought 50 PYT at $18.06 on Friday (see Disclaimer):  Last Friday, I noticed that the Synthetic Floater PYT, which is tied to the same GS TP as GYB discussed above, was falling due to heavier than normal selling volume.  The $18.06 price represented a 48 cents decline from the close on Thursday. I have bought and sold this security on several occasions. My last sale was 100 shares  at 19.25.  My prior trades have netted a total realized gain on the shares of $893.73.  Some of my prior trades are discussed in these posts: Bought 50 PYT at 11.2 Bought 50 PYT at 13.34 Sold 100 PYT at 19.25

So, I am playing with the house's money now on PYT.   Interest payments are made quarterly, and have also received several of those.

I will only buy it in a retirement account due to the tax issues associated with this type of security.

PYT pays the greater of 3% or .85% above the three month LIBOR rate with a maximum rate of 8%. www.sec.gov  So it has the same float provision as GYB with a .25% lower guarantee.

Once I establish a constant cost figure, I can calculate the yield range for PYT.  The minimum yield would be at the 3% guarantee, which is now the applicable rate, and the effective current yield at a total cost of $18.06 would be 4.15%.  The maximum yield would be 11.07% reached when the 3 month LIBOR exceeds 7.15% during the relevant computation period.  I would also have an additional yield resulting from capturing the spread between the par value of $25 and the $18.06 cost, when the underlying bond matures in 2034.   Most likely, if GS is still around and prospering after 2030, I suspect that most of that spread could be captured without waiting for the bond to mature.    Please note that the decline in price of PYT caused its maximum yield at the $18.06 price to exactly equal the maximum yield of GYB at the $18.63 price which I paid on Thursday.

One way to evaluate this kind of security is to postulate a reasonable average coupon rate until PYT matures in 2034.   Based the history of the 3 month LIBOR rate, a rational prediction for the future would be an average rate of 4.25%, which would give me 5.1% with the .85% spread.   If I plug that rate into the Morningstar Bond Calculator, I arrive at a 7.96% yield to maturity figure.

The underlying fixed coupon bond has a current yield of around 6.87% based on Friday's closing price,  FINRA, and a YTM of around 7.29% using the same Morningstar bond calculator.   I could purchase the underlying bond now and receive more current income than with either GYB or PYT.   So, I am in effect paying for the inflation protection of the float over the short term, but not over the long term assuming my prediction about the average rate proves to be close.

Of course, the long term advantage of the synthetic floaters over the fixed coupon bond would increase with a higher average 3 month LIBOR rate than 4.25%. If the synthetics paid just their guarantees for the  next 24 years, then the fixed coupon bond would be superior.   I may buy the fixed coupon bond when and if its current yield exceeds 7.5%.

Anyone buying PYT or GYB is subject to the credit risk of Goldman Sachs.   If GS followed in the foot steps of Lehman at some point down the road, PYT and GYB would likely become worthless securities since the underlying bond in both trust certificates is in effect a junior bond.   The owners of a senior bond would likely receive something in the event of a bankruptcy, something in the 10 to 30 cents per dollar range, but I would doubt that a junior bond owner would receive anything or at most a few cents on the dollar.

None of the synthetic floaters can be purchased by Fidelity customers.

5.  Union Bankshares (UNB)(own Regional Bank Stocks' basket strategy): UNB is a small bank based in Vermont whose shares are thinly traded.  Since I purchased 50 shares  at $18 last July, the stock has spent most of its time in a narrow band between $17.8 to $18.2.  The dividend yield is around 5.5% at my cost, so I am content to wait.

I am also satisfied with this bank's 4th quarter earnings report.   UNB reported 4th quarter income of 1.38 million or 31 cents per share, up from 29 cents in the 4th quarter of 2009.  This bank does not provide me with the kind of information that I am accustomed to seeing in earnings releases from banks.   I have to wait until it files the Form 10-Q.  The last filing for the Q/E 9/2010 showed a net interest margin of 4.66%; a total capital to risk weighted assets ratio of 15.54%; and an efficiency ratio of 65.18%.  

 This bank has 13 branches in Vermont and one in New Hampshire.