Masters of Disaster and Risk Control/EK, AWF, INTC/Performance Numbers/IPB Ex Interest

Goldman Sachs estimates that the European crisis could cut up to 1% from U.S. GDP in 2012.  Daily Ticker GS expects a significant recession in Europe: Goldman Sachs | Global Economic Outlook - Outlook 2012 Video Part 1

Fidelity provided my performance data yesterday through November 30, 2011. I last referenced the data through 10/31/2011. Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker For the three years ending 11/30/11, the main taxable account was up 87.24% and the regular IRA zoomed from 100% to over 170%, based on investments made during the darkest hours since 1974, though a major assist was undoubtedly contributed by dropping November 2008 from the 3 year number:

Top Column Regular IRA Performance to 11/30/11/2nd Column S & P 500 

RB was heard to day "no guts, no glory, finer words never spoken and beyond the comprehension of Mama's Boy, Lame Brain".

The TC IPB was ex interest for its semi-annual distribution yesterday. Merrill Lynch Depositor Inc. 6.0518% Index Plus Trust Series 2003-1, IPB This is an unusual TC. The underlying securities consist of 14 different corporate bonds and treasury strips maturing in 2030. www.sec.gov I own 150 in the ROTH IRA:

150 IPB ROTH IRA Unrealized Gain +785.8

Bought 100 of the TC IPB at $16.99 August 2009 Sold 50 IPB at 20.28 February 2010 Bought 50 of the TC IPB at 21.3 August 2010 Bought: 50 of the TC IPB at 23.11 in IRA October 2010 Calculations On How to Recreate Trust Certificate IPB

I have no interest in IPB at its current price, and have considered selling it.  I decided to keep it for its income generation, at least for now. Trust Certificates: New Gateway Post

Motley Fool has a retrospective on the factors that crushed Eastman Kodak in 2011. While I do not own the common, never have, I am suffering enough as the owner of two senior bonds maturing in 2013.   Eastman Kodak Bonds: Update on Third Quarter Earnings Report A less negative article about EK appeared earlier this week in the USA Today business section. The 2013 bond is now selling at close to 40 on fairly heavy volume indicating a near total lack of confidence in EK's survivability to pay off this bond in November 2013.

MKM Partners remains bullish on Intel (own) even after the recent warning. A summary of its report can be found at Barrons.

The bond CEF AllianceBernstein Global High Income Fund (AWF) declared its regular monthly dividend of 10 cents per share plus a special income dividend of $.322 per share.  I own just 100 shares. There are a number of holdings in this fund that make me antsy. The ex dividend date is 12/22.

Masters of Disaster can not be allowed to police themselves. While some would call this observation an opinion, it is instead a fact, and one that can not seriously be disputed by anyone.  The MF Global debacle is just the latest example supporting the foregoing statement as a fact.  One common trait among the Masters of Disaster is an unquenchable thirst to undermine risk control.  As you would expect, the manager of risk control at MF Global was fired by the Master of Disaster Jon Corzine after questioning the risks being taken by that firm which ultimately caused its demise and the apparent "loss" of a billion or so of its customers' funds. CNBC The risk manager hired thereafter had his authority emasculated by Corzine.

If you want to be a risk manager for the Masters of Disaster, then it best to just say "yes" and read romance novels while at work. The worst possible career move would be to place your hand in between a Master of Disaster and red meat.

Undermining risk control was done frequently in the period leading up to the recent Near Depression. The NYT published a number of articles in 2008 detailing how risk management was undermined by the Masters of Disaster at several financial institutions (e.g. The Reckoning - Citigroup The Reckoning - Merrill Lynch)

The seminal event leading to the recent Near Depression was the 2004 SEC Rule change that basically allowed the Masters of Disaster to police themselves. Stocks, Bonds & Politics: 2004 SEC Rule Change 12/22/2008 Post The MDs were allowed to increase financial leverage since they understood risk so well. Rather than having debt to equity capped at 12 to 1, the Masters of Disaster could increase their leverage to just about any level, and major financial firms soon had 30 or even 40+ to 1 debt to equity, which of course increased the compensation for the Masters of Disaster while endangering their firms and the world financial system.  But, endangering the world's financial system is a small price to pay for enriching a few self-proclaimed financial "wizards".

And, how long did it take for the Masters of Disaster to bring down the world's financial system after the 2004 SEC Rule change?  What was their critical and essential roles in creating the housing bubble and subsequent collapse?


1. Cash Flow Receipts Main Taxable Account on 12/51/2011:  The following three snapshots capture most of my cash flow paid into my main taxable account yesterday. I will reinvest this cash flow to purchase income generating securities, creating a compounding effect over time. Some payments are not shown since I did not want to make a 4th snapshot to show a few additional items. One payment left out in the foregoing was a 5% stock dividend and regular quarterly dividend paid by Landmark (LARK):

12/15/11 Cash Flow Main Taxable Account Part 1 

12/15/11 Cash Flow One Account Part 2

12/15/11 Cash Flow One Account Part 3

 The general idea is to create a constant flow.

Some brokers do not even show dividends and interest on the date of payment. I found that kind of service irritating.  Charles Schwab and Vanguard, for example, do not show a distribution until the day after payment.  If the dividend is reinvested, Schwab does not show the number until two days later.  Since I have so many securities, it is not unusual for me to sell what I believe to be all shares and then have shares pop into the account thereafter which were purchased with a dividend. Admittedly, this is likely to happen to those who are very active traders and can not keep track of the dividend payment dates of all owned securities.

Since Schwab has been a discount broker for three decades, there is no excuse whatsoever for their delay in posting dividend and interest receipts. TD Ameritrade will at least show the amount on the day of receipt, though it fails to identify who paid the distribution on the date of payment.

Fidelity is at least on the ball in this regard. However, Fidelity is expanding its list of securities of securities that no individual is allowed to buy, and that is extremely disconcerting  One security recently placed on the no buy list is the exchange traded bond AEB, where I have realized good percentage gains.  (see snapshots at the end of Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities).

I can not buy HBAPRF at Fidelity but I can buy the functionally equivalent HBAPRG. I can not buy any exchange traded "principal protected notes" or synthetic floaters.  Fidelity Prohibits New Purchases of Exchange Traded Principal Protected Notes I can not buy, just as another absurd example, the exchange traded bond DFP.  Fidelity Brokerage Extends Denial of Trading Opportunities to Synthetic Floaters and Even an Exchange Traded Junior Bond DFP  I have noted new trading restrictions crop up on some other exchange traded preferred stocks.  In those cases, I will use another broker.

I will discuss some of my trades from late this week in my next post.   

Added 50 MSF at $13.1/Bought 50 KRBPRD at 23.6/Vulcan Materials

Due to my absence from HQ and times constraints, I will only briefly summarize two trades in this post which occurred earlier this week.  I have explained both securities in prior posts. 

1. Bought 50 KRBPRD at $23.6-Roth IRA Last Monday (see disclaimer):  KRBPRD is a typical trust preferred, originally issued by MBNA Capital, that contains as its underlying security a junior bond issued by MBNA, later acquired by Bank of America.  The credit rating is the same as TPs originally issued by BAC. Bank of America | Investor Relations | Fixed Income Investor Relations Both Moody's and S & P have reduced BAC's TPs to junk. S & P rates the TPs at BB+ with a negative outlook. Moody's rates them at Ba3 with a negative outlook. Fitch still has them at investment grade, barely at BBB, but has a negative outlook too. A listing of the outstanding BAC equity and trust preferred securities can be found at the bank's website:  Bank of America | Investor Relations | Capital Issuances

The coupon is 8.125% on a $25 par value.  Prospectus The TP and the underlying bond mature on 2/15/2032.

At a total cost of $23.6, the current yield is around 8.6%. Since this security was bought in the ROTH IRA, that is in effect a tax free yield. 

I recently sold a similar security, KRBPRE, in the ROTH IRA. I indicated then that I would be looking for an opportunity to buy one of the MBNA TPs back at a lower price.   Sold 100 KRBPRE at $25.13-ROTH IRA (November 11, 2011 Post) (and see SOLD 50 KRBPRE @ 25.96) I no longer have a position in KRBPRE which is viewed as functionally equivalent to KRBPRD, though the "D" series matures a few months earlier.  For functionally equivalent securities, choosing one over another comes down to yield at my purchase price.  

Both KRBPRE and KRBPRD make quarterly interest payments but the time periods are different. The "E" series just went ex interest early last month, while the "D" series will go ex later in December.  MBNA Capital D 8.125% TruPs, KRB.PD MBNA Capital E 8.10% TOPrS Series E, KRB.PE 

A more extensive discussion of this security can be found in a prior post. Bought 50 KRBPRD @ 25.14  That purchase was made in a taxable account and I still own those shares. 

Being in effect junior bonds, trust preferred securities issued by banks will be extremely sensitive to credit concerns.  Interest payments can also be deferred for up to five years provided the stopper clause is not activated by a distribution on, or repurchase of a junior security.  Trust Preferred Securities: Links in One Post For BAC to defer cumulative interest payments on KRBPRD, it would have to eliminate its common dividend and non-cumulative equity preferred dividends, and defer all cumulative distributions on other TPs as well as any cumulative equity preferred stocks.  For BAC to do that, it would be an invitation for depositors to yank their money in excess of FDIC insurance limits. 

Anyone owning a TP after a bank failure will likely recover nothing, i.e., your money went to money heaven.

KRBPRD rose 9 cents yesterday to close at $23.8. 

2. Added 50 of the stock CEF MSF at $13.1 Last Tuesday (see Disclaimer): Morgan Stanley Emerging Markets Fund is a closed end stock fund.  Generally, I would expect emerging market stocks to be positively correlated with U.S. stocks except with a higher beta. That relationship has broken down in 2011, with emerging market funds falling 15 to 20% while the major U.S. stock averages are close to flat lining.  The 2011 NAV return for MSF was -16% as of 12/12/11.  A lot of the decline is associated with the overall poor performance of Chinese stocks. 

On the day of my purchase, the net asset value per share was at $14.46. 

MSF page at the Closed-End Fund Association

MSF page at  Morningstar

This is a link to the  last filed SEC  N-Q which lists the fund's holdings as of 9/30/11: www.sec.gov 

This is a link to the last SEC filed shareholder report:  www.sec.gov 

This fund generally pays an annual distribution in late December. I hope that it is not much since I never want to buy a large dividend. I am waiting to buy another 50 shares of the China Fund (CHN) after its goes ex dividend in a few days with its large distribution.

This 50 share purchase brings me up to 150 shares. My last transaction was to sell 100 shares at 16.2 last April. Whenever I can buy shares back at a lower price, I at least feel like I am winning or losing less, a form of winning for us Stock Jocks in bear markets.

3. Vulcan Materials (own senior bonds only: 2018 and 2021)(Junk Bond Ladder Strategy): Both of my Vulcan Materials senior bonds popped after Martin Marietta Materials made a hostile bid for Vulcan.  Press Release The Martin Marietta bonds are investment grade,  FINRA, while the VMC senior bonds are rated in junk territory.  I may sell one or both of them.  The 2021 maturity is held in the regular IRA.

4. Hedging: I have previously noted that 1250 to 1300 on the S & P 500 would likely prove to be a stiff resistance area. (e.g. Stocks, Bonds & Politics: 11/15/11 Post Introduction)  As a result of that belief, more accurately called a guess, I have been buying double and triple short stock ETFs as hedges when the S & P 500 starts to breach 1250 to the upside.  I now own two triple shorts and two double shorts and will likely dispose of all of them before the end of this year. Hopefully this can be done at a profit, possibly on the next major down day. Since I have realized gains on my hedges this year, I would not mind losing money on the recently purchased ones, but all of them are currently in profit territory based on this week's action. I sold one triple short last week on a quick pop. It would not take much of a Santa Claus rally to cause the triple shorts to lose money, a ten percent or greater daily move is not uncommon in this volatile market.

S & P 500 1 Year Chart/Red Line 50 day SMA/Blue Line 200 day SMA

Instead of using the VIX as a signal for the purchase of hedges, I am now using what I perceive to be the  resistance level in the S & P 500 as the signal.  Generally, as discussed in many prior posts, the prior hedging was limited to purchases when the VIX moved below 20 during the Unstable Vix Pattern.  Mark Hulbert and the Use of the VIX as a Timing Model/Modification # 1 To Vix Asset Model Approved re: Hedging  The primary reason for this modification revolves around concerns about a possible significant downdraft.  The stock allocation has already been reduced to my minimum level, and the hedges are small compared to even this reduced allocation.  

ERROR CREEP and the INVESTING PROCESS

I am away from HQ today. I am not doing much for the remainder of this year. My next significant decision will be whether or not to harvest some large unrealized gains early next year. 

Today, I want to discuss one of my favorite topics, the compounding impact of error creep in the decision making process. 

Many investors will not do any original source research prior to making an investment decision. When purchasing a bond, the general approach to conducting research might be to enter a search term at Google and then read whatever some other person had to say about the bond. The same would be true for a potential stock purchase. Research for a stock might also include an opinion offered by another investor or possibly a cursory review of an analyst report. No effort is made to review original source material that can easily be found at the SEC or to review even the last earnings call transcript. There is nothing wrong about reading analyst reports, but that can never be the sole extent of the research effort. Original source material has to be reviewed.   

When there is a total disregard for gathering and evaluating original source information, the odds of making incorrect investment decisions will substantially increase. That kind of investment process just adds to the error creep that will cause unsatisfactory results. Acquiring Relevant Information 9/18/11 Post 

It is also not unusual to have accurate and material information and yet fail to draw the appropriate conclusions. In such cases, I might as well not have the information, so drawing the proper conclusions from the information is just another source of error creep. 

Another source of error creep is an individual's refusal to learn much of anything about news developments in the world. Without an appraisal of the big picture issues, the investor is unlikely to arrive at a satisfactory asset allocation, except by happenstance, appropriate to what is actually happening in the world. The big picture issue will often dictate the appropriate allocations among asset classes.

Most of a successful investor's returns over time will be due to successful asset allocation rather than to security selection. And, successful asset allocations can not be performed in a state of ignorance about world events or in some static, predetermined fashion. The Big Picture Questions 8/25/11 Post I know a large number of people, particularly younger ones, who refuse to read anything about world news events.

Generally, the only way to outperform the market during a long term secular bear market for stocks is to engage in constant up and down allocation shifts, and those shifts have to be predicated upon an analysis of the big picture events. The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets 6/27/11 Post; Precipitating Cause of Long Term Bear Markets 6/30/11 Post; Instability & Volatility in Asset Correlations 5/30/09 Post

When the current long term stock bear market finally ends, the vast majority of stock mutual funds will have suffered an annualized loss since October 1997 adjusted for inflation.  The Roller Coaster Ride of the Long Term Secular Bear Market 5/16/10 Post

During a long term bull market in stocks, a different strategy has to be used, since most individuals will not be able to outperform a broad based index fund with low costs. Minor adjustments of the stock allocation may be made based simply on some valuation criteria such as forward P/E. 

So far, I have identified three major sources of error creep. Two involve an unwillingness to gather accurate factual information and to form reasonable and objective opinions based on those facts. The other is always problematic and concerns forming the best judgment based on accurate information. It is not unusual to form a sound opinion based on good research and to fail to act in an appropriate fashion for one reason or another.  This will often involve a discounting of negative information (something that I did earlier this year when purchase 1 General Maritime bond). Since I make a concerted effort to acquire relevant information, this last mentioned source of error creep is usually where a breakdown starts to develop for me.

Another error is that fact gathering and evaluation processes have to be ongoing, performed with no ideological filters. Any opinion previously formed has to be constantly challenged with new material information and without any interference from one's ego, as if someone else formed the original opinion. There can be breakdowns, and even more error creep, by failing in any of those decision making processes.

A major source of error creep is to assume that the future can be predicted based on data from the recent past. These kind of errors can take many forms. Investors might value a component manufacturer at an absurd multiple based on two or three years of 20%+ growth, when those gadgets have a short shelf life. This is relatively common. There are times when stocks are valued as if economic conditions will never get better (March 2009) or that growth will accelerate without being interrupted by a recession into infinity (1999). 

Errors can creep into the process even with all of the foregoing followed without deviation. Some errors will occur just due to unknown and unknowable factors. The future is always a wild card. Every decision has to be made with unknowable material information about the future. I have discussed the game of blackjack to illustrate this problem. BlackJack and Stock Investing: Lessons Learned & Applied 3/15/09 Post; Investing process with a story illustration 1/6/09 Post; Making Decisions with Incomplete Information 5/29/09 Post

Then, there are a lot of personality quirks that cause error to creep into the decision making process. One of the more common reasons may be a lack of confidence in the opinion, which unfortunately is a hazard to those who start to question everything. Another common issue for me involves the error creep associated with trading too much, an occasional hesitation about realizing a tax loss until it grows to the point where it no longer matters, and an occasional desire to sit too long on a large unrealized gain for tax reasons or to stubbornly adhere to  predetermined target prices.  

When the investment process is broken down this way, the possibilities of making mistakes are quite large. This compounding error creep explains why individuals are unable to beat the market. Efficient Market Theory: Do Humans Really Behave Rationally-Seek out Relevant Information & Then Process Information With Good Judgment? 6/08/09 Post; Efficient Market Hypothesis as Hokum 3/29/2010 Post

Once mistakes are minimized and an investor learns how to profit from the irrationality of other market participants, it is certainly possible to outperform the market even when making a number of mistakes.

I took a snapshot of my three and five year returns in my main taxable account and in the regular IRA. Those returns were calculated by Fidelity, not by me. Those results are shown in the post from yesterday in Item # 2 Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker (12/13/11 Post) As shown in that snapshot, the IRA was up 100% in value for the three year period ending 10/31/11 and the main taxable account handily beat the S & P 500 index by a large amount. 

Sold 50 CYS at 13.33/Joseph Stiglitz on What Needs to be Done/Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker

Moody's stated that it would review the credit ratings of the European nations. Moody's added that the recent summit failed to produce "decisive policy measures" and the risks to cohesion continue to rise.

Fitch also made some less than positive comments about the results from the recent European summit. Fitch's comments are reproduced in this WSJ.

I suspect that S & P will carry through with downgrades of European sovereign debt after placing most euro zone countries on credit watch with negative implications last week.

Italy sold one year paper yesterday to yield 5.952%, close to the record Euro era yield of 6.087% set last month.

As I previously mentioned I am checking the prices of European 10 year sovereign debt everyday now.

It is also important to monitor the Euro/USD. The Euro slumped to a two month low against the U.S. Dollar yesterday. Bloomberg One easy way is to check the price of CurrencyShares Euro Trust (FXE). (see also EURUSD)   The break yesterday below 132 concerns me. The Euro is also heavily weighted in the Dollar Index which has been rising. U.S. Dollar Index (DXY) Index Charts A rise in that index indicates USD strength against a basket of currencies. The DXY is currently trading well above its 200 day moving average.

Intel (owned) reduced its estimate for 4th quarter revenue by $1 billion due to hard disk supply shortages. SEC Filed Press Release The shortages are due to the flooding of manufacturing facilities in Thailand.

The noble laureate in economics, the liberal Joseph Stiglitz, wrote an interesting article published in this months The  Vanity Fair. Stiglitz believes that the government needs to ramp up its spending of borrowed money in order to jump start the economy. His recommendations for new spending programs are more than a bit mushy (page 37).  

Government spending is a fairly typical Keynesian prescription to replace private demand when it plunges, an approach  advocated by Paul Krugman and other liberal economists.  Both gentleman believe that the government has not spent enough borrowed money so far in order to stimulate the economy. In other words, the budget deficit needs to grow much larger in their view, which is okay for them since the government can now borrow money at low rates.  I did not find that part of the article to be interesting, since it was more of the same from Stiglitz, and is not likely to garner more than a few votes in the current Congress. The President and the Democrats already blew the nation's wad on an ill-designed, short term stimulus program. (see introduction to Stocks, Bonds & Politics Post 4/27/11)

For these liberal economists, the reason that country sank back into the Depression in 1937 was the withdrawal of fiscal stimulus, generally viewed by them as inadequate from the start of FDR's Presidency in 1933 but sufficient to keep the world from sliding even deeper into an economic abyss. 

Instead, the interesting part of the article was his non-traditional explanation for the severity and length of the Great Depression. The Depression was not due to the bursting of a stock market bubble and the subsequent tightening of credit by the Federal Reserve in this hypothesis, but to the productivity gains in agriculture. Those gains created an abundance of food and drove down agricultural prices. The nation was then dependent on the financial well-being of farmers since the transition to an industrial/service economy was still in the works. When farmers went under or cut back their purchases of goods due to lower incomes, the ripple effect was felt throughout the economy. No other source of income or employment was capable of picking up the slack, and it would take many more years to successfully transition workers to an industrial based economy. 

His analysis breaks down when it attempts to superimpose that observation, which makes some sense historically, at least as one reason for the severity and length of the Great Depression, onto today's economy. He basically maintains that the economy is going through a similar transition now, except that the current transition is from a manufacturing economy into one more dominated by services. In his view, the government needs to spend a lot more money to assist in this transition, primarily on education and training more finely attuned to the new economy.

The current problems are not caused by the transition from a manufacturing dominant economy to a service one, as Sitglitz tries to maintain. That transition was largely completed a long time ago. The U.S. industrial sector also may be coming back now as wages and costs increase in emerging market nations. The current problems are just far more complex than that simple theory.  The current predicament has resulted from borrowing too much money by individuals and governments, throughout most of the developed world, in order to live in a style beyond their means. Living on borrowed time and money.  The U.S. will see the repercussions of irresponsibility soon enough.     

Another article in this month's Vanity Fair explores the crony capitalism practice by Rick Perry that I have previously mentioned. I would simply call it  "corruption". (see previous Post on Perry's Texas Style Crony Capitalism) While politicians of both parties will exchange favors for campaign cash, Perry takes this form of corruption to a new level, unseen in American politics since the days of Mayor Richard J. Daley of Chicago or possibly going back to Boss Tweed  in NY.  

Several owned securities are ex distribution today, including the following: GFW ($.46875 per share interest quarterly); ARCC ($.36 quarterly dividend); AINV ($.28 quarterly dividend); HBAPRF and HBAPRG (quarterly dividends/floaters with minimum coupons); WIW ($.0335/monthly dividend); STLPRA (.20938/Quarterly interest); JLA ($.284/quarterly dividend); JTD ($.26 quarterly dividend); JSN ($.279/quarterly dividend); JQC ($.2 /quarterly dividend); and CBU ($.26/quarterly dividend).

Several owned securities went ex distribution yesterday, including several CEFs that pay monthly dividends (CMK, BTZ, PSY, ERC, MMT, BHK) and CPP which went ex interest for its semi-annual payment.

The most basic part of my strategy is to generate a constant stream of cash flow from income generating securities and to reinvest that cash flow.

1. Sold 50 CYS at $13.33 Last Friday-Roth IRA (see Disclaimer): I have miniscule positions in Mortgage REITs, primarily in my Roth IRA account.

I noticed last Friday morning that  INVESCO MORTGAGE CAPITAL (IVR) made a substantial and unexpected cut in its dividend, the second consecutive quarterly decline.  I read a summary of FBR Capital's downgrade of IVR.  While some of the problems seem unique to IVR, I suspected that other mortgage REITS might follow suit. I consequently sold my minor position in CYS at $13.33 Friday, having just bought the shares at $12.97. I did hold onto the shares long enough to receive one dividend.

After the bell on Friday, CYS did cut its quarterly dividend from 55 to 50 cents.  SEC Form 8-K This reduced rate still results in an oversized dividend yield at the current price. I will look for an opportunity to buy the shares back at below $12.5.  CYS was last trading consistently below that level last October, CYS Historical Prices.

I have discussed briefly in several recent posts some of the headwinds facing mortgage REITs. A primary concern is the narrowing spread between the cost of borrowed funds and the yields received from mortgage securities bought with those funds.  Decline in Mortgage REITs Linked to Prepayment Risks (9/2/11 Post).

2. Main Account Performance Numbers: Fidelity calculates these numbers. While I have not added to this account, I have withdrawn from it and do not know how Fidelity accounts for withdrawals when calculating the return. The end period is October 31, 2011, the last performance data provided by Fidelity. I do not provide a snapshot, obviously, of the total amount and the account number, but the total portfolio is substantial with well over 200 holdings. Anyone with a Fidelity account can check their performance. The top number is my cumulative performance numbers for this account, and the bottom line is the comparable S & P number.  

TOP LINE Main Taxable Account Cumulative Performance numbers to 10/31/11/Bottom Line: S & P 500

Given my large cash allocation in this account, I suspect that I will outperform the S & P 500 this year only with the market declining into year end, i.e., going down less than the market. I have been hurt in 2011 by my junk bond ladder strategy.  Yesterday, this account went down .49% compared to the 1.49% decline in the S & P 500 and some of my decline was due to the ex distributions.

This performance illustrates the importance of losing less in a major bear market and then having the capital to invest at lower prices. The performance data for the 3 year period starts soon after Lehman's failure in September 2008.

I do not know how Fidelity calculates the return from the S & P 500 but it must include dividends.  On October 31, 2006, the S & P 500 stood at 1,377.94, Historical Prices | S&P 500 The close on October 31, 2011 was at 1253.3. If you were calculating the return without dividends, then the number would not be +1.24% but a negative 9%. Since Fidelity is using a positive number for the five year S & P 500 return, that must take into account reinvested dividends over those five years (probably reinvested somehow).

3. Regular IRA Performance Numbers: The regular IRA is up over 100% over the three year period.

TOP Number is Regular IRA Performance/2nd column is  the S & P 500 Performance/3rd column  is Barclays Capital U.S. Aggregate Bond Index/ 4th column is BC U.S. 3 month treasury 

I transferred this account to Fidelity which explains the absence of five year data. The problem over the past year is that some of the exchange traded bonds have declined in price, as well as some stock CEFs and BDCs. I also own 1 Eastman Kodak 2013 bond, purchased this year, which subsequently lost about 1/2 of its value and I sold an Edison Mission bond at a loss out of this account too. So, it has not been a stellar year managing the Regular IRA. Fortunately, the ROTH IRA is about four times larger and is up a few percent. The main taxable account is about 6 times larger than the Roth IRA.

I do not have the ROTH IRA at Fidelity but believe that the performance number for that account would be substantially higher than the regular IRA, primarily due to the concentration of large and relatively quick gains from TCs and  REIT preferred stocks (see snapshots in respective Gateway Posts), as well as some opportunistic buys in other asset classes including European hybrids issued by ING and Aegon and some stocks purchased in March 2009 (e.g. Dupont at around $16). There were a large number of doubles and even triples. I suspect the performance number from that account would be over 150% over the past three years through 10/31/11. Both retirement accounts did not suffer a meltdown since they had small allocations to stocks then and now.

Both retirement accounts have an usually high cash allocation earning nothing at the moment. The cash allocation in the retirement accounts is over 10%. Generally, I will run that number up when I believe better buying opportunities lie in the future.

The performance numbers in all accounts have been hurt by money market yields being near zero, given the very high cash allocations in taxable accounts starting in 2007. 

I am busy this week on other matters and will have short or no posts for the remainder of the week.  It will probably be Thursday before I will have time to discuss the one small buy (a TP) from yesterday. 

Sold 100 IFO at $11.22/GE Dividend Hike/China Fund (CHN)/FNFG-Destruction of Shareholder Value/Bought 50 CBLPRD at 23/

Virtually all of 27 European leaders agreed to negotiate a new agreement that would have stricter budget and debt rules for the eurozone countries. The sanctions for non-compliance with budget rules would be semi-automatic. Once the European Commission finds that a country has violated the budget rules, the offending nation would have to secure a weighted majority of nations to prevent sanctions from being enforced. There would be some kind of adoption of balanced budget rules in each nation's laws. The changes will be in the form of inter-governmental agreements that will take months to work out and to approve. I would simply refer to the forgoing as a non-binding agreement to work toward a binding agreement. The muted reaction to by the market to this agreement suggests that many view it as insufficient to deal with the problems.  I suspect that no one will really knows the last act in this ongoing drama. It does appear that the European budgetary problems are about to made worse by a recession.

Moody's downgraded the debt of Societe Generale, BNP Paribas and Credit Agricole last Friday.

A successful investor will always search for accurate and material information. Any piece of material information believed to be true has to be challenged for accuracy before acting upon it.  It can be extremely difficult to make good decisions even with accurate information since there are so many variables that are unknown, unknowable or at best estimates. Anyone who routinely makes investment decisions based on inaccurate information is doing nothing more than rolling the dice. I am never surprised about the sheer volume of inaccurate information possessed by individual investors who are absolutely certain of its accuracy. 

Jim Cramer said that First Niagara overreached with its acquisitions of HSBC branches. Seeking Alpha I would not regard that as a debatable point. FNFG recently slashed its quarterly dividend by 50% to 8 cents per share, due to that $1 billion acquisition. In addition the bank issued a large amount of common stock, equity preferred and subordinated debt to finance the purchase of branches in declining population areas. And, I would not expect a dividend increase from the reduced level in 2012. 

My current estimate is that it will take five to seven years to restore the dividend to 16 cents per quarter, more likely longer than 7 years than less than 5.

In addition to the large dilutive  common share offering to finance this boneheaded acquisition, FNFG sold $300 million of subordinated notes maturing in 2021 bearing a 7.25% coupon (SEC Filing) and $350 million of equity preferred stock. Both of those securities have a higher claim on earnings than the common stock and will restrain increases in the common stock dividend for several years in my judgment. The terms of the equity preferred stock offering are clearly disadvantageous to the common stockholders. The fixed coupon of that issue is 8.625% until 2/15/2017 when it turns into a floater paying a 7.375% spread over 3 month LIBOR.  Pricing Term Sheet

For the current owners of FNFG common stock, bought in the $12 to $15 range, the cost of the HSBC branches will never be worth the cost.  It will likely take a long time, adjusted for inflation, just to recover the lost income from the dividend slash and the loss in the share price.

There was nothing materially wrong with my decision to buy FNFG's shares initially. Instead, my decision proved to be an error based on a subsequent and unforeseeable poor decision made by the Board and the CEO.  However, I recognized early on that the decision to acquire HSBC branches was indefensible and could have sold my position close to $12 range in early August. My mistake was not following through on a sound judgment reached with accurate information. {In my defense, I did not know then that the Board would slash the dividend by 50%. If I knew that the Board would cut the dividend in half back in August, I would have of course dumped the shares without a moment's hesitation.} As I just said, even with accurate information and the exercise of good judgment based on known information, the decision making process has a tendency to err from time to time.  Keeping shares in FNFG is just one example.  

I would prefer owning the new FNFG equity preferred, purchased at par value or less, than the common stock at the current price. That is simply one way to summarize the value destruction to the common shareholders. Anyone owning the common stock will need to express their disapproval at election time for the Board. First Niagara: Just Another Incompetent Bank Board of Directors First Niagara Dividend Slash Without rational dispute, the Board and their 3+ million per year CEO have already destroyed shareholder value for no justifiable reason, solely due to their bad judgment and apparent desire to become an even bigger fish in a small pond being drained. 

Keeye Bruyette downgraded FNFG last Friday to market perform after the stock has already suffered a substantial price decline.

Any NewAlliance shareholder that took 1.1 FNFG shares earlier this year were fragged by FNFG.  Without the acquisition by FNFG, those NAL shares would in my opinion be trading in the $11 to $13 range. 

GE (own 497+) hiked its quarterly dividend by two cents. GE Board of Directors Authorizes Increase in Quarterly Dividend The new quarterly rate will be 17 cents per share. The next ex date is 12/22/11. I am reinvesting the dividend.

The China Fund, a CEF, declared a large year end distribution. When I saw this information, I elected to change my distribution option to reinvestment.  The total aggregate dividend will be $2.9964 per share, payable 12/29/11 to shareholders of record on 12/23. The ex dividend date will be 12/21/11. Of the total amount, $2.8222 will be a long term capital gain distribution. 

1. Sold 100 IFO at $11.22 Last Thursday (see Disclaimer): IFO is a Citigroup Funding "principal protected" senior unsecured note. I recently increased my exposure to Citigroup by adding to my position in another "principal protected" senior note, MTY, and said then that I would sell another to bring my overall exposure to Citigroup  back to my comfort level. Item # 1 Bought 100 MTY at $10.03 I am now back down to eight $1000 par value Citigroup "principal protected" unsecured senior notes. 

I suspect that most of my profit in IFO was harvested with this sale, but will not know for sure until that note matures in late 2012. Item # 1 Bought 100 IFO at $9.35 

2011 Roth IRA 100 Shares IFO Realized Gain +204.98 

IFO is one of the more unusual "principal protected notes".  Generally, with a caveat not likely to come into play, this note will pay the greater of 12% or the percentage gain in the S & P 500 on 12/2/12 from a starting value of 1,106.24 on a $10 par value. So basically I sold a year ahead of the maturity date capturing the 12% and left the possible higher coupon on the table.

2. Bought 50 CBLPRD at $23 on Friday (see Disclaimer): CBLPRD is a fixed coupon cumulative equity preferred stock issued by CBL & Associates Properties, a REIT that owns malls. The coupon is 7.375% on a $25 par value. Prospectus The yield at a total cost of $23 is around 8%. 

I have bought and sold both the common and preferred stocks of this company. I also currently own 50 shares of CBLPRC viewed as functionally equivalent to CBLPRD. The CBLPRD had a slight yield advantage when I made my limit order purchase last Friday. Both preferred stocks go ex dividend for their quarterly distributions on 12/14: CBL.PD CBL.PC

CBL Profile page at Reuters.

CBL Key Developments page at Reuters

CBL-9.30.2011-SEC Form 10-Q

CBL- September 2011 - Press Release for 2011 Third Quarter earnings.

I view REIT preferred stocks as having more disadvantages to them than advantages. While equity preferred strocks are part of the firm's equity capital, the owners of those securities have no equity interest in the business. All of the beneficial characteristics of equity ownership are lacking in them, leaving only the undesirable attributes including a low priority in the capital structure and the perpetual nature of the security.

Equity preferred stocks are senior only to common stocks and will be junior in priority to all debt. The owners of these securities have only their dividends, which can legally be taken away provided no dividends are paid on the common shares. Their bond attributes are more dominant than the equity characteristics, but these securities lack the priority of bonds or a bond's maturity date, the time certain when the company has to pay back the obligation.  For those reasons and others, I regard equity preferred stocks as a disfavored asset class and will lump them together with my bonds rather than stocks for purposes of determining asset allocation percentages.

REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages  This post also contains snapshots of my trades. 

When bought near their par value, REIT preferred stocks have little in the way of upside potential while having considerable downside price risk.

Anyone who questions that observation needs to look at the prices prevailing during the Near Depression period. This is a snapshot of a CBLPRC purchase made in October 2008:

CBLPRC Bought at $10 per share October 2008 

With any purchase now, the intent is to generate only some cash flow and to hopefully sell the security at a $1 or greater profit.   

Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock

Equity Preferred Stocks as a Disfavored Sub-Asset Class 

More on Investing Process and Blackjack/Large Risks & Opportunities In the Savaged REIT Securities (March 2009 Post)

GE/Added 60 IGR at $6.92/Sold 200 Artis Real Estate at 14.09 CADs/

General Electric (own) may be able to boost its annual dividend to as much as 85 cents per share, from the current 60 cents, according to an analyst at Sterne Agee. TheStreet  Before anyone gets worked up about that possibility, I would add that the annual rate was $1.24 in 2008. As a result of GE's 68% dividend cut in 2009, this company can no longer be trusted as a reliable source of income, and that statement is intended to mean forever in my book.

Morningstar has a five star rating on GE common stock.

Any company that cuts its dividend can not be relied upon ever again by retirees looking for income. Many large industrial companies increased their dividends during the Near Depression period.

Banks are generally an unreliable source of dividend income for retirees, given their propensity to blow themselves up and to otherwise commit mistakes that result in dividend cuts. The natural habitat of the Masters of Disaster, the most overpaid doofuses in the history of civilization,  are financial institutions.

The Master of Disaster Jon Corzine has apologized to the shareholders, employees and customers of MF Global, asserting that he has no idea what happened to the money belonging to MF's customers.  An executive of the  CME will testify that MF Global moved customer money into its accounts.  Reuters

The worldwide Jihad against the savings class continued yesterday as the ECB reduced its benchmark rate to 1%, the lowest on record. ECB: Monetary policy decisions In short, the responsible are being forced to bailout the irresponsible, most of whom profited by reckless, selfish and greedy actions that were either immoral and/or criminal. Of course, those who committed crimes have received a pass from the U.S. government, a topic explored in a recent superficial 60 Minutes episode.

The European Banking Authority has concluded that European banks will need to raise €114.7 billion in equity.  Bloomberg

The European Central Bank squashed hopes yesterday that it would engage in unsterilized bond purchases (quantitative easing). The ECB also indicated that it would not increase its sovereign debt purchases.

Texas Instruments lowered guidance for the 4th quarter. The company now expects E.P.S. to be between $.21 to $.25, down from the prior forecast of $.28 to $.36.  The consensus estimate had been for 32 cents. The revenue forecast was lowered to $3.19 to $3.33 billion, compared to the consensus forecast of $3.4 billion SEC Filed News Release (no position) The reduced guidance was due to "broadly lower demand across a wide range of markets, customers, and products, except for wireless applications processors".

Altera also lowered guidance after the close yesterday (no position).

I am glad to see that John le Carré's "Tinker, Tailor, Soldier, Spy" has been made into a movie, favorably reviewed in the NYT,

1. ADDED 60 to Stock CEF IGR at 6.92 (see Disclaimer): This brings me up to 415+ shares. I also changed my distribution option to reinvestment after noticing that this CEF was selling at over a 14% discount to its net asset value per share.  On 12/6/11, the shares closed at $6.92 which was a 14.57% discount to its then net asset value per share of $8.10.

IGR page at the Closed-End Fund Association

As the name suggests, the CBRE Clarion Global Real Estate Income Fund invest in real estate companies, owning both the common and preferred stocks. 

Last Filed SEC Form N-Q. This form shows the holdings as of 9/30/11. As of that date, the fund had a 81.3% weighting in common stocks and 22.8% in preferred stocks.  The U.S. common stock weighting was at 33.2%. 

Last SEC Filed  Shareholder Report

This fund pays monthly dividends, currently at the rate of $.045 per share. Distribution History Assuming a continuation of that rate, which is no way assured of course, the yield at a total cost of $6.92 would be around 7.8%.

This CEF is not rated by Morningstar.  Morningstar does have data on the fund. This data shows that the dividend has been supported some by a return of capital and the average three year discount is -11.46. The fund uses a modest decree of leverage.

CBRE Clarion Global Real Estate Income Fund fell 17 cents yesterday to close at $6.82. The NAV per share was $8.02 at yesterday's close, creating a discount to net asset value per share of -14.96.

2. Sold 200 Artis Real Estate Investment Trust at 14.09 CADs-Toronto Exchange Last Wednesday (Canadian Dollar (CAD) Strategy)(See Disclaimer): As with other Canadian REITS that I have owned, Artis pays monthly dividends. The shares sold last Wednesday were bought at 13.21 CADs back in September 2011. This is my second round trip transaction in Artis shares. Sold 200 Artis REIT at 13.88 CAD May 2011 I am content to collect some dividends and sell the shares for a profit.

Artis Real Estate Investment Trust closed yesterday at 14 CAD.

For Canadian securities purchased on the Toronto exchange, I will use Canadian dollars to pay for the purchase. All dividends are taken in CADs. The distributions are reduced by a 15% Canadian withholding tax.  Two of the larger positions in this particular strategy are Canadian bond ETFs: Claymore 1-5 Year Laddered Government Bond ETF, CLF Fund Quote - (TOR) (400 shares) and Claymore 1-5 Year Laddered Corporate Bond ETF, CBO Fund Quote - (TOR) (300 shares). 

First Niagara: Just Another Incompetent Bank Board of Directors/SWZ Dividend and Buyback/Bought 70 XIDE as LT at $2.75/Sold 50 BMLPRH at 16.8 and Bought 40 ZBPRC at $25.21/

First Niagara (own) priced 52,941,176 common shares at $8.5 yesterday. SEC Filed Press Release  There is an over allotment option for the purchase of an additional 3.97+ million shares. As noted in yesterday's post, the acquisition of HSBC's branches is viewed as satisfactory proof that both the Board and the CEO are incompetent and are destroying rather than creating shareholder value. First Niagara Dividend Slash On the bright side, it does not appear that the extreme incompetence extends to operations.

First Niagara Financial declined only four cents in trading yesterday to close at $8.97. Possibly, institutional investors were relieved that the stock dilution was out of the way and was less than expected.  I have no plans to average down, except by dividend reinvestment, unless the share price falls below $7.

Fitch placed First Niagara's credit rating on a negative watch. This had to be expected.

After the close yesterday, FNFG priced 14 million shares of non-cumulative equity preferred stock. This security has a $25 par value. The bank expects $338.8 in net proceeds. The coupon is 8.625% until 2/15/2017, and then it will turn into a floater, paying a 7.327% spread to three month Libor. First Niagara Financial Group Announces Pricing of $350 Million Preferred Stock Offering FNFG may redeem the security on or after 2/15/2017 at the $25 par value plus accrued dividends. I view those terms as highly unfavorable to the common shareholders, and further proof of the Board's obvious incompetence in allowing the CEO to pay $1 billion for HSBC branches located in declining population growth markets. Now, I know where 1/2 of my common dividend is going.

FNFG is not done yet raising money to fund the incomprehensible decision to buy these HSBC branches for $1 billion. Next up, the bank plans to float a subordinated debt offering.  As the evidence mounts of the true cost to existing shareholders, and unfortunately I am one, there is no way to describe this decision other than with the term idiotic, and that is being too generous and kind to FNFG's Board of Directors and FNFG's 3 million plus per year CEO in my opinion.  I do not view it as bad, however, as Ken Lewis' megalomaniacal decision to acquire Countrywide Financial.

ING reported that it would take a EUR .9 to 1.1 billion 4th quarter charge to cover guaranteed payments under its U.S. variable annuity products issued between 2003 to 2009.  SEC Form 6-K I recently bought 50 shares of IDG, one of ING's hybrids.

Italian banks borrowed €153.2 billion from the ECB in November. CNBC

European countries and banks will need €1.9 trillion to refinance maturing debt in 2012. MarketWatch Of that amount European banks need to raise 500 billion euros in the first six months of 2012.

S & P added yesterday the European Union and a bevy of European banks to its negative credit watch list. Reuters  Fox Business VOA Breaking News WSJ The possible downgrade includes the currently rated "AAA" EU bailout fund.  So far, the market has ignored all of S & P's warnings about Europe this week. A more negative take on Europe's prospects can be found in Anthony Mirhaydari's column published by MSN Money.

On the pop into the close yesterday, I bought back one of the double short stock ETFs recently sold. Stocks, Bonds & Politics: Earnings: HPQ MDT/U.S. GDP/International Swaps and Derivative Association-Greek Government Debt: Another Example of Rot (11/23/11 Post) A recent modification of the trading rules allows hedges to be bought even with the VIX trading over 20.  Mark Hulbert and the Use of the VIX as a Timing Model/Modification # 1 To Vix Asset Model Approved re: Hedging The ^VIX rose .8 to close at 28.93 yesterday.

Maybe the market is being too optimistic about Europe solving its banking and sovereign debt problems.

1. Bought 70 XIDE at $2.75 (LOTTERY TICKET strategy)(see Disclaimer): Exide Technologies (XIDE) is a manufacturer of motor vehicle batteries.

Link to Exide Technologies profile page at Reuters.

Link to XIDE Key Developments page at Reuters.

This LT selection was based primarily on the usual statistical criteria.  Price to sales is .07; price to book is at .59;  the five year estimated P.E.G. is .6; and the F/Y March 2013 estimated P/E is 3.27, all according to XIDE Key Statistics at YF. Another factor is that the share price has been squashed over the past several months. The stock traded over $12 back in February and was over $9 in May before the bottom fell out. XIDE Interactive Chart  I also read an interesting article about battery technology and XIDE at Seeking Alpha. Of course, I have no technical expertise in this area whatsoever. 

For the quarter ending 9/30/11, the company reported a loss of 5 cents per share on revenues of $772.953 million.  SEC Form 10-Q Exide Technologies Reports Preliminary Fiscal 2012 Second Quarter Results and Revises Fiscal 2012 Guidance

Snapshots of trades made pursuant to the Lottery Ticket strategy can be found at Lottery Ticket Strategy: New Gateway Post. I may harvest the largest unrealized LT gain early in 2012, hovering now over 1500% excluding a 75% annual dividend at my cost basis. 

Exide Technologies closed at $2.75 yesterday.  I am considering buying Exide's senior secured bond. 

2. Sold 50 BMLPRH at $16.8 Last Tuesday (see Disclaimer):  I discussed yesterday BAC's privately negotiated exchange offer for its equity preferred stock. BAC Privately Negotiated Exchange Offers If any public offer is forthcoming to exchange common shares for equity preferred shares, it is unlikely to be meaningful as to the amount, given that 311 million common shares were exchanged in the private offer and BAC previously stated that 400 million was the maximum.  I therefore decided to reduce my position in the equity preferred issues by selling BMLPRH, realizing a total profit on the shares of $10.58. BOUGHT 50 BMLPRH at 16.27 June 2011 I now own only 100 BMLPRJ among the BAC equity preferred stocks.

I only make snapshots of the trades when the profit or loss exceeds $30. (see snapshots at Advantages and Disadvantages of Equity Preferred Floating Rate Securities)

Floaters: Links in One Post

BML.PH  closed at $15.74 Wednesday, down $1.14.

3. Bought 40 ZBPRC at $25.21 Last Tuesday (see disclaimer): I replaced 50 shares of BMLPRH with 40 shares of the fixed coupon equity preferred stock ZBPRC. I have bought and sold ZBPRC. Bought 30 ZBPRC at 18.4 November 2009  ADDED TO ZBPRC AT 23.75 July 2010  Sold 30 of 150 ZBPRC @ 26.47 February 2011  Sold 120 ZBPRC at 26.91

ZBPRC pays non-cumulative preferred dividends. The issuer is Zions Bancorporation whose common shares are currently rated 4 stars by Morningstar.  It has a 9.5% coupon on a $25 par value. Prospectus Supplement

As previously discussed, I have nothing positive to say about the management of this bank. This equity preferred is in my opinion deservedly rated well into junk territory.  That opinion is based on the banks expansion into the Southwest (Arizona and Nevada) when it was clearly apparent that both states were experiencing a real estate bubble. Bank managers are paid a great deal of money to avoid that kind of obvious mistake.

Zions still have government preferred stock on its balance sheet which is not a recommendation for it. Yet, as previously explained, Zions would have to defer the government's cumulative preferred dividend in order to eliminate the dividend on ZBPRC. While that is a possibility, it would be a big step for the bank to take. A very detailed explanation of this issue, as applied to Zions' equity preferred stocks, can be found at Item # 7  Bought 50 ZBPRB in Roth at $19.9

See also: Analysis of Prior Question: ZBPRA vs. ZBPRC OR ZBPRB (December 2009 Post).

ZB.PC closed at $25.15 yesterday.

4. Swiss Helvetia (SWZ: own): The Swiss Helvetia Fund declared a long term capital gain distribution of $1.074 per share and an income dividend of $.168 per share. Both dividends will be paid on 1/27/12. I am reinvesting dividends to buy additional shares. The ex dividend date will be 12/16/11. The fund also announced that it may purchase up to 500,000 shares of its stock. On 12/6/11, the fund closed at $11.16, with a net asset value of $12.59 per share, creating a discount to NAV at that time of -11.36.

More information about this fund is available at the sponsor's website: SWZ.com - Swiss Helvetia Fund It has a heavy concentration in Nestle and Novartis.  Closed-End Fund Association

Swiss Helvetia Fund closed at $11.33 yesterday, up 13 cents.  

First Niagara Dividend Slash/BAC Privately Negotiated Exchange Offers/Sold 200 of the Bond CEF NMO at $13.81/

The ISM services index fell to 52 in November from 52.9 in October. The consensus estimate was 54%.  The new orders component rose slightly to 53.

The OECD reported that the gap between rich and poor continues to accelerate in developed countries.  Bloomberg

Goldman Sachs believes the world will avoid a global recession in 2012. (interview with Abby Cohen at CNBC.com)

General Electric (own 497+) was upgraded to outperform yesterday by Bernstein.  The target price for GE common stock was raised to $21 from $19.

The Australian central bank reduced its benchmark rate by .25% yesterday to 4.25%. Monetary Policy Decision That central bank is concerned about a slowdown in global growth.

In Afghanistan, a woman who is raped is put in jail by the authorities. One key to her freedom is to marry the rapist. CBS News

Jon Corzine, just another Master of Disaster, reportedly rebuffed efforts to control risks at MF Global. WSJ

The head of Vanguard's fixed income division characterizes the inability to fix the U.S. budget problems an "abomination", which is in my judgment unduly polite to the Washington politicians. Fortunately, the world is focusing on the European sovereign debt problems rather than the dysfunction in Washington, but that will change.

1. Bank of America Exchange Offer:  Bank of America filed an Form 8-K earlier this week, stating that it had agreed to exchange certain of its equity and trust preferred for common stock and senior notes. The foregoing SEC form indicates the face amount of each equity and trust preferred issue so tendered by institutions in privately negotiated transactions. This filing does not specifically  indicate the conversion ratios. The exchange includes $314 million in face amount of equity preferred securities and $1.035 billion in trust preferreds. The securities exchanged for those preferred stocks were 125,528,595 million common shares and $442.2 million in senior notes with varying short term maturities ranging from 2014 to 2019. The TPs would have longer maturities.

This SEC filing refers to an earlier filing, made in mid-November, whereby BAC reported the exchange common and senior notes for the listed amounts of equity and trust preferred securities as shown in that filing. Form 8-K

When BAC broached the possibility of this kind of exchange in its last 10Q filing, it mentioned then that the offer, when and if made, would not exceed 400 million common shares. Potential BAC Exchange for Preferred Securities (11/4/11 Post).

As a result of the foregoing privately negotiated exchanges, the total common shares issued in these recent exchanges totals 311,011,300. This is getting close to the up to 400 million shares suggested in the 10-Q filing. I am not aware of any public exchange offer being made.

The foregoing SEC filing does not indicate whether or not BAC will make a public exchange offer.

2. Sold 200 NMO at $13.812 Last Monday (see Disclaimer): NMO was my last leveraged municipal bond CEF.   My position in NMO was recently purchased at $13.03. Last Friday, the net asset value was $13.54 per share, so this CEF had moved from a discount when I purchased it to a premium. I have no interest in holding these bond funds when they start to sell at a premium to their net asset value per share.

NMO page at the Closed-End Fund Association.

Daily pricing information of Nuveen CEFs can be found at Nuveen Closed-End Funds - Daily Pricing. On 12/5/11, the net asset value per share was $13.56.

3. First Niagara's 50% Dividend Slash and Destruction of Share Value by the Current Board and CEO (own: Regional Bank Stocks' basket strategy): FNFG's stock price has declined over the past several months in response to the CEO's plan to pay $1 billion to acquire HSBC branches, primarily for the purpose of increasing FNFG's concentration in the declining growth markets in and around Buffalo. According to the 2010 Census Buffalo's population declined 10.7% since 2000 and 54.9% since 1950. Erie County lost 3.2% the the 2000-2010 period.

Last night, the bank decided to inflict more pain on its shareholders by halving its dividend. According to First Niagara, this move will save the bank $100 million in capital during 2012. SEC Filed Press Release I would not put it that way. Instead, I would just say that it is another 100 million dollar hit to the FNFG's already suffering shareholders. Perhaps the top management will take a similar percentage cut in their take home pay.

The negative reaction by the market to this acquisition is shown by the substantial stock price decline: FNFG Interactive Chart FNFG announced this acquisition on Sunday July 31, 2011, Reuters. The shares closed the previous Friday at $12.25. FNFG Historical Prices

Earlier in 2011, the stock price touched $15 before the Board's value destruction process began in earnest.  I would not now anticipate a return to that level for several years.  I will hold onto my shares, based on the belief that the bank will eventually recover from the recent damage inflicted upon it.  However, a continuation of boneheaded and idiotic decisions will cause me to re-evaluate that decision. More value destruction decisions are certainly possible with the current Board.

I discussed the market's negative reaction to the CEO's dilutive acquisition of HSBC branches in several prior posts: First Niagara Downgrade (10/25/2011 Post); Item # 2 FNFG

In addition to the recent decline in the share price and the 50% haircut on the dividend, the Board of First Niagara has found it necessary to inflict more pain by issuing 450 million dollars of common stock, plus any over allotment up to an additional $33.75 million, at the currently depressed price to fund the acquisition of these HSBC branches, thereby diluting their existing shareholders and likely driving the share price down further in the coming weeks. The bank will also be offering $650 million in preferred stock and notes. Reuters A large equity preferred stock offering would likely keep restrain growth in the common share dividend in my opinion, as earnings are used to pay the higher in priority preferred dividends.

Since I have to be concerned about future Board decisions likely to adversely impact the share price,  I will vote against both the re-election of all FNFG Board members and all matters pertaining to executive compensation, continuing for as long as I own the shares or the entire Board and the CEO are replaced which is unlikely to happen given the passive nature of most shareholders. The vote on executive compensation is advisory now. I would urge all other individual shareholders to do the same.  Once incompetence has satisfactorily been established, it would not be reasonable to assume competence in the future.

I would expect the common shares to continue their decline in response to the most recent developments. I may add to my position when and if the shares decline below $7.

The bank attempts to make the case for its strategy in this filing made in conjunction with the press release announcing the 50% dividend reduction and the large stock offering: Exhibit 99.2

The CEO John Koelmel called this acquisition a "strategic home run" in the last earnings conference call, further calling into question his ability to make sound judgments. Transcript - Seeking Alpha

Mr.  Koemel's became CEO in December 2006 when the stock was hovering near or over $12 per share.  Forbes values his compensation package at over $3 million for 2010.  The annual dividend rate in 2007 was 54 cents and will be 32 cents in 2012. Anyone with a  brain, measured with an IQ five above plant life, can see that both the dividend and share price are going decidedly in the wrong direction, and only a fool would view these recent developments in a positive light.

On the positive side, due to the share price destruction caused by the CEO and the Board, a self inflicted wound permitted by passive shareholders, I will be able to buy shares at lower prices with what is left of my dividend.