Motley Fool Article on XIN Taken Down/Intel/New Exchange Traded Bonds/NYB/GOP: Trust Us-Our Tax Plan is Revenue Neutral

The GOP plans to cut the top tax rate to 25% for both individuals and corporations, claiming that they will target the elimination of other tax code provisions to make their generosity revenue neutral. Romney recently identified some provisions that he probably would eliminate--the wealthy's deductions for state income taxes and mortgage interest for second homes. As you would expect, the numbers do not add up to being anywhere close to revenue neutral, as pointed out by James Kwak in this article at The Baseline Scenario; Simon Johnson's column at the NYT; and in the The Atlantic magazine. An article by Jay Bookman in the AGC points out all of the tax credits, exclusions and deductions that would have to be cut to pay for the reduction in tax rates. Those items include the mortgage interest deduction, earned income tax credit, deduction for property taxes, accelerated depreciation, child credit, and many more.

None of those proposed deduction eliminations mentioned by Romney address, of course, the revenue lost from the reduction in the corporate tax rate. And, only the gullible believe that the GOP will cut corporate tax breaks to make up for the substantial revenue losses resulting from the reduction in the corporate tax rates proposed by that party.  It must also be remembered that the GOP tribe members believe that the Bush tax cuts actually increased federal revenue, notwithstanding all credible evidence to the contrary.  (The Atlantic; Tax Cuts Don't Boost Revenues - TIME; CBO Data Show Tax Cuts Have Played Much Larger Role than Domestic Spending Increases in Fueling the Deficit — Center on Budget and Policy Priorities; page 5 Testimony of Mark Zandi .pdf; Figure 1 Center on Budget and Policy Priorities)

It is incomprehensible why anyone (other than TBs) believes, based on the historical record, that either the Democrats or the Republicans will do anything constructive to avert a financial meltdown that will eventually be caused by the federal government's debt. Again, I would simply highlight that the total debt of the U.S. was less than 1 trillion dollars when Ronald Reagan first became President. The U.S. debt was $907.2 billion in 1980. (Appendix in article at United States public debt). It is now $15.661+ Trillion. Debt to the Penny (Daily History Search Application).

Motley Fool took the article about Xinyuan Real Estate, which contained incorrect information about XIN's 4th quarter earnings, off its website yesterday. See Item # 4 in Yesterday's Post:  Motley Fool Article on Xinyuan Consequently, it is no longer available for viewing.  After increasing its annual dividend rate from 10 cents to 16 cents per ADS share, and changing the distribution from an annual to quarterly payments, Xinyuan Real Estate rose 14 cents in trading yesterday to close at $3.55.

SunOpta, a LT selection, recently crossed above its 50 day and 200 day SMAs. STKL Interactive Chart (item # 2 Bought 50 STKL at 5.25, see snapshots of prior realized gains in that post).

The shareholders of FirstMerit voted against that bank's executive compensation plan. WSJ I will be interested to see the First Niagara results.


1. New Exchange Traded Bonds: A number of companies have listed new exchange traded bonds this year. None of them are attractive to me at their current prices. I have them on my exchange traded bond monitor list just in case the prices dive for no good reason.  

Ares Capital Corp. 7% Sr. Notes 2022  Prospectus 

Horizon Technology Finance Corp. 7.375% Sr. Notes 2019 PROSPECTUS 

Maiden Holdings North America Ltd. 8% Notes 2042  Prospectus 

KKR Financial Holdings LLC 7.5% Sr. Notes 2042  Prospectus 

Medley Capital Corp. 7.125% Sr. Notes 2019  Prospectus
Qwest Corp. 7% Notes 2052 Prospectus 

Raymond James Financial Inc. 6.9% Sr. Notes 2042 Final Prospectus 

Stifel Financial Corp. 6.70% Sr. Notes  Prospectus 

Triangle Capital Corp. 7% Sr. Notes 2019 Final Prospectus 

Aegon N.V. 8% Non Cum. Sub. Notes  Prospectus 

See, Exchange Traded Bonds

Types of Exchange Traded Bonds Other Than Baby Bonds:

Trust Certificates: New Gateway Post

Trust Preferred Securities: Links in One Post

Synthetic Floaters

Aegon Hybrids: Gateway Post

ING HYBRIDS: Links in one Post

Item # 2 Principal Protected Notes

I hope this trend continues. Bonds should trade like stocks. All of the foregoing are traded on U.S. stock exchanges just like common stocks.  

A bond recently issued by Hercules Technology Growth Securities will likely start trading on the stock exchange around 4/30 under the symbol HTGZ. SEC Form 8-A I own the common shares HTGC which will voluntarily delist from the Nasdaq in order to join the NYSE. The Hercules senior bond has a 7% coupon and matures on 4/30/19. Filed Pursuant to Rule 497

2. Intel (own 273+ shares): A snapshot of my Intel share purchases can be found at  Intel. I quit using the dividend to purchase more shares after September 2011. All of those purchases were made with cash flow from dividends and interest payments. 

Intel reported first quarter adjusted net income of 56 cents per share on revenues of $12.9 billion. The consensus estimate was for 50 cents on $12.84 billion in sales. SEC Filed Press Release The GAAP number was 53 cents. The non-GAAP E.P.S. excludes the amortization of acquisition-related intangible assets and the related income tax effect. The company generated approximately $3 billion in cash from operations during the quarter and repurchased $1.5 billion in stock.

Intel shares declined 52 cents in trading yesterday to close at $27.94.

My total average cost per share is $17.82:

Unrealized Gain As of Yesterday's Close=+$2,768.02

Importantly, the dividend yield at a total cost of $17.82 is about 4.71%, based on the current quarterly dividend of 21 cents per share. Intel Corporation - Dividend Summary Since the cost per share remains constant with no additional purchases, the yield will continue to rise whenever Intel increases the rate.

Intel Quarterly Dividend Rates:
2003: 2 cents
2004: 4 cents
2005: 8 cents
2006: 10 cents
2007: 11.25 cents
2008: 12.75 cents for the 1st Quarter and then 14 cents
2009: 14 cents
2010: 15.75 cents
2011: 18.12 cents for the first two quarters and then 21 cents
2012: 21 cents for the first two quarters

Item # 6 Common Stock Dividend Growth Strategy

3. New York Community Bank (own 150 shares: Regional Bank Basket Strategy): New York Community Bancorp reported GAAP earnings per share of 27 cents for the 2012 first quarter, one cent better than the consensus estimate. The Board declared the regular 25 cent per share quarterly dividend.

As of 3/31/12, the net interest margin was 3.24%; the cash efficiency ratio was 39.94% and 41.39% using GAAP; the return on average tangible assets was 1.24%; the tangible equity to tangible assets ratio was 7.64%; NPLs to total loans stood at .85%; and the allowance for loan losses on non-covered loans to non-performing non-covered loans was 44.68%.

This report is discussed in this article at TheStreet.

New York Community Bancorp shares declined 32 cents in trading yesterday to close at $13.33. While it is questionable whether this bank can continue to pay a 25 cent share quarterly dividend unless earnings significantly improve (item # 2 NYB), the dividend yield at that rate is about 7.5% at a total cost of $13.33 per share.

Bought 50 NYB at $11.3 October 2009
Added 50 NYB at $11 October 2009
Added 50 NYB at $12.79 February 2012 (snapshot shows prior realized gain of $331.03 in this post)

1940 Census/Motley Fool Article on Xinyuan/Coca Cola/Zurich Financial/CNB Financial/Edgen Group IPO-Edgen Murray Senior Secured Note/Argentina's President-A Hugo Chavez Want to Be

I was able to find my parents listed in the 1940 Census records easily, since I knew their street address at that time. My mother recalls two spinsters living with their elderly father nearby, and she was surprised to learn that both of them were making substantially more than her dad. Percy Priest also lived nearby with his father at 4305 Elkins Avenue -1940 Census. Priest was a powerful congressman from Nashville who, along with Tennessee's two Democrat Senators, Estes Kefauver and Albert Gore Sr. (Al Gore Junior's dad), refused to sign the Southern Manifesto, which stated opposition to racial integration of public places.

(note: the wage number is listed in column 32 of the 1940 census, and it is an annual number for 1939. It is not unusual in this census to see extended families and several generations living together, as well as rooms being rented out to lodgers to help pay the bills. The two sisters were Ruth and Mary Naron living with their 70 year old father at 4301 Elkins. Ruth made $1,200 and Mary $1,970 in 1939, with the later number being more than twice as much as my grandfather. The minimum wage was 30 cents per hour, and the average annual salary for those employed was $1,900. The unemployment rate averaged 14.6% in 1940 which was an improvement over the 23.6% rate in 1932. The U.S. debt was $42.97 billion in 1940, Wikipedia)

My paternal grandfather reported an annual 1939 income of $1,680. Both families had five children. My father and his brothers were all old enough to serve in WWII, three of them in Europe, whereas my mother's brothers were too young. Fortunately, my father and his brothers survived.

In the advisory vote on compensation, Citigroup's shareholders voted "no" on executive compensation. WSJ

The Edgen Group filed another Amendment to its S-1 registration statement regarding its proposed IPO. Amendment No. 4 to Form S-1 This is the first time that Edgen mentioned the total number of shares and price range anticipated in the offering. I have no interest in the stock. I do own 1 Edgen Murray senior secured bond, FINRA. The relationship of Edgen Group and Edgen Murray is shown in a chart at page 11. Since the proceeds will be used to pay down debt of the consolidated subsidiaries (page 45), I view the IPO as a positive for the bondholders. The note that I own, which matures in 2015, is mentioned at pages F-19 to F-20. At the present time, I have no intention of selling it. Bought 1 Edgen Murray Senior Secured Bond Maturing 2015 at 97.5

I heard Cramer say "stay away from Argentina", which is probably good advice. The government is hostile to business and any sensible economic policy. This article at MarketWatch discusses the latest effort to undermine a shareholder of YPF S.A. ADS through a nationalization. Argentina proposes to seize the 51% of YPF shares from Spain's Repsol YPF S.A. Once nationalized, the company can be turned into a repository for political patronage.

As noted in a recent post, there is general agreement among economists that the government in Argentina is the main cause for retarding economic growth and progress in that country. My only position in a company based in Argentina is a recent 40 share purchase of GGAL at $6.72 in my LT Category. I have no intention of buying anything else since it is clear that Argentina's President is intent on doing her best imitation of Hugo Chavez. The next Venezuela? In the last analysis, the voters in a democracy deserve their government. Consequently, Argentina deserves Cristina Fernández de Kirchner, who won her second four year term with 54.1% of the vote last October, as well as all of their prior democratically elected leaders.

1. Coca Cola (own 132+ shares): KO reported first quarter net income of $2.05 billion or 89 cents per share on a 6% increase in revenues to $11.137 billion. 2012 Q1 Earnings Release The consensus estimate was for 87 cents and $10.82 billion in revenues. Cash from operations grew 8%.

I view KO's growth prospects to be primarily in emerging markets. Item # 1 Barrons   (August 2009 Post) This last report showed decent volume increases in developed markets, including 3% in Germany, 6% in Spain and 1% in the U.S. The volume growth in India was 20% and 9% in China.

A positive article was published yesterday in Barrons about this earnings report.

Coca-Cola shares rose $1.51 yesterday to close at $73.95. That increase took my unrealized gain to over $3,000:

KO Unrealized Gain as of 4/12/12 =$3,075.19

I am no longer using the dividends to buy more shares. I am not likely to add to my position over $55 per share.

2. Zurich Financial (own): I received the annual dividend paid by Zurich on 4/16/2012. No withholding tax was withheld, and the distribution was tagged as a "return of capital". If that classification holds, then my cost basis in the shares will be reduced by an equivalent amount but at least I do avoid having the distribution reduced by Switzerland's withholding tax:

I previously referenced a statement from the company that there would be no withholding tax applied to this payment. The symbol has changed since my purchase. The new symbol is ZURVY.

Fidelity has already reduced my cost basis to reflect the return of capital distribution:

Adjusted Cost Basis ZURVY $22.95 per share

I bought the 100 shares at $24.72 plus a $7.95 commission or for a total cost of $24.80.  BOUGHT 100 ZFSVY at $24.72

I own this security in a taxable account so the return of capital adjustment has to be made. In addition to avoiding the Swiss withholding tax due to that classification, I can in effect convert a dividend into a long term capital gain by waiting at least a year from my purchase date and selling this security for over $24.9. That does not matter at the federal level when the dividend and a long term capital gain are both taxed at 15%. It does matter to a Tennessee taxpayer who has to pay a 6% tax only on certain dividend and interest payments.

Zurich ADS shares rose 53 cents in trading yesterday to close at $24.35.

3. CNB Financial (CCNE)(own: Regional Bank Basket Strategy): CNB reported 1st quarter net income of $4.3 million or 35 cents per share, a 32.7% increase in diluted E.P.S. over the 2011 first quarter. SEC Filed Press Release announcing first quarter earnings

As of 3/31/12, the net interest margin was 3.47%; the total risk based capital ratio was 15.14%; the tangible common equity to tangible asset ratio was 7.3%; and NPAs to total assets stood at 1.03%. Total loans increased 8.5% compared to the first quarter of 2011, with deposits growing 17.2% over the same period.

I do not see a need to do anything with my shares. Bought 50 CCNE at 11.06 (June 2010).

CNB Financial shares rose 34 cents to close at $16.45.

4. Xinyuan Real Estate (XIN): After reading an article about Xinyuan's 4th quarter earnings report at the Motley Fool, I felt compelled to leave a comment, using the name "southgent".

I view it to be important that all investors perform research using original source materials. Unfortunately, many individuals are too lazy to do so and rely on others to relay material information to them.

When I read this article at Motley Fool, I knew that the author was wrong about important details regarding XIN's 4th quarter earnings report because I had read the firm's press release announcing earnings.  I noted in a prior post that this Chinese developer reported 38 cents per ADS. XIN The Xinyuan stock, which is traded in the U.S. is an ADS, and each ADS share represents 2 ordinary shares:

Purchase of 50 XIN at $2.37-LT Category/Confirmation States that 1 ADS=2 Ordinary 

Lottery Ticket Basket Strategy Added 50 to LT XIN at 2.36 Bought 50 XIN at 2.57-LT

Thus, the company reported 19 cents per ordinary share and 38 cents per ADS share. The expectation from the one analyst was for 33 cents. That estimate is for the ADS shares. The company beat that estimate by five cents.

The author of the Motley Fool article claimed that XIN missed the earnings estimate of 33 cents with the 19 cent number, which is just wrong. He also mislabels the 19 cents as a non-GAAP number whereas it is the GAAP number for the ordinary shares. SEC filed press release

Xinyuan Real Estate Co. announced earlier today that it was switching from an annual dividend to a quarterly dividend. The firm will start paying a 4 cent per ADS quarterly dividend. At a total cost of $3.41, the closing price from yesterday, the dividend yield would be about 4.7%. 

Bond Market: Operated for the Benefit of Dealers and Not Really a Market/Citigroup/Bought 50 FISI at $15.55/TurboTax Form 8949 Problem-Fidelity Not Yet Corrected/

I did check over the weekend to determine whether anyone had corrected the error made on IRS Form 8949 in connection with the TurboTax download of transactions made at Fidelity. There has been no correction. All non-covered transactions, where the cost basis was reportedly not made to the IRS, were placed on the IRS Form 8949 where there was a "x" mark indicating that the cost basis was reported to the IRS.  I performed the test by pretending to open a new tax return in TurboTax and then downloading the Fidelity transactions.

It took me 13 tedious hours to correct the download for my Fidelity transactions. Fidelity and TurboTax Problems-Form 8949 More on IRS Form 8949, Fidelity and TurboTax

Since this is a new form for taxpayers, I suspect that the IRS has already received a very large number of tax returns with transactions reported on the wrong 8949 Form.

Spain's ten year government bonds rose above 6% yesterday. ES 10Y The cost of insuring Spain's debt against default has risen to record levels. Yesterday, the cost to insure $10 million rose to $523,000 annually. The cost to insure Italian government debt rose to $440,000. These credit default swap contracts have five year durations.

Citigroup's long term stock chart shows a stock price now hovering near 1986 levels. C Interactive Chart On a split adjusted basis, the recent high was over $550 per share, and the stock is now trading in the $33 to $35 range. The Masters of Disaster, the most overpaid doofuses in the history of civilization, can do a great deal of damage in a relatively short period of time. I do not own the common shares, but do own 8 thousand in principal amount of Citigroup Funding's exchange traded "principal protected" notes, all of which mature in 2014.  One of those notes, MKN, was discussed in yesterday's post. (see also: Bought 100 MKZ at 9.96; Bought 100 MOU at $10.12; Bought 100 MBC at 9.84; Bought 100 MBC at 9.78; Bought 100 MTY at 10.49; Bought 100 MTY at $10.03; Bought 200 MOL at 9.95 (later sold 100 @ 10.3); Item # 2 Principal Protected Notes

As a owners of those notes, I will review quarterly earnings reports. Citigroup reported adjusted earnings per share of $1.11 per share for the 1st quarter. The Basil 1 Tier 1 capital ratio was 14.2% and the Tier 1 common ratio was 12.4%. Citigroup rose 59 cents in trading yesterday to close at $34

The OG still has a few functioning brain cells. The recently adopted modification of the Lottery Ticket Strategy was implemented last weekend. The first blackjack hand was played with a black chip ($100), representing part of the $176.98 profit realized from the LT selection Terex in 2012. Lottery Ticket Strategy: New Gateway Post I won that hand with an Ace and a nine, just barely since the dealer had 19. The OG managed to win $425 in two hours, and thought that it would be best to quit and head back to HQ. On the next trip, the first hand will be played with a black chip representing part of the $708.86 profit realized in 2012 from the LT GRTPRF.

The OG does believe that life is unfair in many ways. One example of the many inequities is that gambling losses can only be offset against gambling winnings when the taxpayer itemizes. Tax Topics - Topic 419 Gambling Income and Losses I do not have enough deductions to itemize.

So, if I lose $425 on the next gambling trip, I will still owe taxes on the prior winnings of $425 even though my net would in reality be zero. No sane person would view the practical result as income under this hypothetical.

While I understand that our destitute Uncle Sam is in need of mucho revenue, perhaps this inequity is one that can be corrected when the GOP closes the tax loopholes for the energy industry.  And since I am lobbying for this tax code change, I would like to also request a change allowing me to deduct expenses relating to the gambling trip, including a mileage allowance of 55.5 cents per mile, the 2012 rate for business travel, irs.gov.pdf The nearest casinos are about 170 miles from HQ.  Lastly, if I still have net income, I would request that Congress allow me use any such loss as an offset on my Schedule D.

1. The Bond Market is Not Really A Market-Certainly Not a Transparent One Operated in a Manner Consistent with the Customers' Best Interest: I ran into another example of a bond desk refusing to enter a sell limit order for a bond, notwithstanding an active market for the bond. This is apparently a common practice among many bond brokers. The general idea is to require the customer to submit the bond out to bid where another dealer has the opportunity to nail the customer with a non-market price. Of course, the customer does not have to accept that price, but may just to sell the bonds to avoid another time consuming hassle at a later time.  I view that process to be fundamentally flawed from a customer's viewpoint, though advantageous to the dealers.

Th limitations on a customer's right to place a sell order are not consistent with a fair and open market. If bond dealers wanted to further their customers interest rather than feather their own nests, a true competitive bond could be easily created, where customers could enter buy and sell limit orders, and dealers would be prohibited from tacking on hidden markups on bid and ask prices originating from other dealers. Clearing would be much the same as for stock orders. The reason for operating the bond market in its current format has nothing to do with technology, the interests of brokerage customers and the requirements of a free market in bonds. In its current configuration, the "bond market" is not a free and open market existing for the benefit of facilitating transactions between willing buyers and sellers.

Small investors need to be on high alert with buying and selling bonds. The SEC has apparently allowed bond dealers to run this show without any meaningful oversight to protect bond customers who are certainly in need of protection under the current circumstances. At least the trades are reported to FINRA so dealers can not totally operate in the dark.

In short, bonds need to trade just like stocks. I much prefer buying bonds that are traded on the stock exchange, but I no longer find the prices and yields of those securities worthwhile.

Gateway Posts relating to exchange traded bonds include the following:
Exchange Traded Bonds
Trust Certificates: New Gateway Post
Trust Preferred Securities: Links in One Post
Aegon Hybrids: Gateway Post
Synthetic Floaters

I would be interested in knowing whether any brokers routinely allow limit sell orders for bonds.

I contacted Sunday night by email ZionsDirect, where I have no account, and inquired whether that firm permitted limit orders on bonds. I received a reply back before noon yesterday that ZD does not permit limit orders, but is working to change its system to permit them with no ETA when that will occur. I also inquired whether ZD displayed both bid and ask quotes:

So, at least that firm is making an effort.

2. Bought 50 Financial Institutions (FISI) at $15.55 last Friday (Regional Bank Basket Strategy)(see Disclaimer): Financial Institutions is a bank holding company headquartered in Warsaw, N.Y.. The bank's operating banking subsidiary is known as Five Star Bank, with 50 banking offices located in central and western New York. (Map of Locations: Five Star Bank)

This bank is discussed in an article at TheStreet titled "5 Cheap Bank Stocks".  

The current consensus estimate, generated by 3 analysts, is for 2012 earnings of $1.71 per share and $1.84 in 2013. FISI Analyst Estimates Based on the 2012 estimate and a total cost of $15.55 per share, the P/E would be about 9.36. 

Back in March 2011, the bank raised $43 million in a common share offering and redeemed the government's preferred stock issued under TARP ($37.5 million) and $16.7 million of a junior bond with a 10.2% coupon. The stock was sold at $16.35 per share. SEC Filed Press Release 

For the Q/E 12/31/2011, the bank reported net income of $5.8 million, up from $5.1 million in 4th quarter of 2010.  SEC Filed Press Release As of 12/31/2011, the net interest margin was reported at 4.07%; the efficiency ratio was 60.49%; the tangible book value per share was $13.21; the total risk based capital ratio was 13.45%; the leverage ratio was 8.63%; NPLs to total loans stood at only .48%; and the allowance for loan losses to NPLs was 329%. 

The bank is paying a 13 cent per share quarterly dividend. SEC Filed Press Release At that rate, the dividend yield would be about 3.34% at a total cost of $15.55.  

The bank is in the process of acquiring 8 branches from HSBC and First Niagara. ESEC Filed Press Release

I have set my average down price at $14.8.

In 2007, this stock was trading mostly between $18-$20, so it has recovered most of the value lost during the Near Depression period The stock did tank briefly below $4 in February 2009. FISI Interactive Chart

Financial Institutions rose 24 cents in trading yesterday to close at $15.77.

Dogs Against Romney-A New Grass Root's Movement/Sold 50 SLGPRD at $25.44/CPI/MKN Ends Its Annual Period With Minimum Coupon Payment/Reddy Ice

CPI rose .3% in March 2012. The core index rose .2%. Over the past 12 months, CPI rose  2.7% before seasonal adjustments. The core rate increased 2.4% over the past year. Consumer Price Index Summary

As noted in this article at MarketWatch, there is concern that Spanish banks, with the exception of Banco Santander, will be rendered insolvent by bad domestic real estate loans. Net borrowings by Spanish banks from the ECB rose to €316.3 billion in March, up from €168.86 billion in February.

China estimated its first quarter GDP growth at 8.1%, lower than the consensus estimate of 8.3%, and down from 8.9% in the 2011 4th quarter.

The VIX rose 2.2 or 12.79% last Friday to close at 19.40. There were two closes above 20 last week. ^VIX Historical Prices

My regional bank basket had a bad day last Friday, falling 2.82% versus the S & P 500 decline of 1.25%. KRE, a regional bank ETF, fell 2.83%. KBWR, an ETF offering from Powershares in this sector, declined 3.05%.

P&G increased its quarterly dividend by 3.7 cents or 7%. The new quarterly dividend will be $.562 cents per share.

Mitt Romney is starting to lose the dog lover vote, as more people become aware of the incident where his Irish Setter, Seamus, was strapped in a dog case and placed on top of his station wagon for a 12 hour road trip at high speed.  The Washington Post A new grass roots organization has been formed, "Dogs Against Romney". The OG found some humor at that website.


1. MKN (own): I noted in a prior post that I am not paying much attention to the "principal protected" senior unsecured notes issued by Citigroup Funding and guaranteed by Citigroup. All of those notes mature in 2014 and have minimum coupons paid on a $10 par value. All of those notes have the potential of paying a great deal more, based on the performance of some index or the price of gold.

MKN pays the greater of 3% or up to 33% per year based on the rise of the UBS commodity index from each start date. Pricing Supplement 

I bought 100 shares of MKN at $9.85. Bought 100 MKN at 9.85 January 2010 

I hit pay dirt for the first annual payment received after my purchase. I received $180 in interest in April 2010. Note ON MKN

 

I hit pay dirt again in April 2011, with an interest payment of $255.53. Stocks, Bonds & Politics:

 

  

I noted that MKN paid only its 3% minimum coupon earlier this month, or $30 for 100 shares: 

                                

Distributions are paid annually. 

Since my purchase of 100 shares of this note in January 2010, I have now received $465.53 in interest based on my original investment of $985 plus commission. 

The phrase "principal protected" note can be misleading to some individual investors. If Citigroup is seized by the FDIC, the principal is not protected, and the owner of that note would be an unsecured creditor. The phrase only means that I will receive the $10 par value at maturity provided Citigroup Funding survives to pay it. 

Exchange traded "principal protected" notes can no longer be purchased by customers of Fidelity. Fidelity Prohibits New Purchases of Exchange Traded Principal Protected Senior Notes It is impossible to reason with them. Why would any brokerage firm want to prevent their customers from buying exchange traded senior notes that have the potential of this kind of reward while providing a minimum coupon that actually looks good in the current abnormally low interest  rate environment?

MKN matures on April 7, 2014. So, I have only two more annual payments left. 

I now need to compute the starting value and maximum level for the current annual period. The starting value is the closing price of the UBS commodity index on March 30, 2012. The period ends at the close of trading on 4/1/2013. If the index closes one day above 33% over the Starting Value, there will be a reversion to the 3% coupon, no matter what happens thereafter. I call that provision the "Maximum Level Violation".

A chart of the UBS Commodity index can be found at the WSJ.com.

Starting Value 3/31/2012: 141.902 

Maximum Level Violation Number: 188.72966 or 188.73 

Ending Value 4/1/2013= Unknown

If this commodity index closed one day above the Maximum level during the current annual period, then MKN will pay only 3%. However, if there is no Maximum Level Violation, and the index closed at 181.902, then the coupon would not be 3% but 28.19%.

The annual period which ended on 3/31/2012 had a Starting Value of 166.58, so the index lost ground during the prior annual period for MKN.  Any number less than 171.5774 would have triggered the 3% minimum payment as well as one close over 221.55 during that prior period. Stocks, Bonds & Politics April 7, 2011 Post

Citigroup Financial Inc. 3.00% Min Coupon Princ Protected Nts for Dow Jones AIG Community Excess Return Index (MKN) declined 18 cents last Friday to close at $10.03, with 1,300 shares in volume. I would not be interested in buying another 100 shares unless I could pick them up at less than the $10 par value.

2. Reddy Ice Files for Bankruptcy (own 1 2nd Lien Bond): Reddy Ice filed a petition for bankruptcy last Friday as expected. Of course, the rating agencies cut their credit ratings to default. TEXT-S&P

Reddy Ice also filed its 2011 Annual Report with the SEC.  sec.gov

A press release announcing 4th quarter earnings was also filed with the SEC.

For the 2011 4th quarter, the company reported a loss of $33.3 million on revenues of $54.9 million. That quarter included a $1.421 impairment charge.

For 2011, the Reddy Ice recorded a GAAP loss of $69.455 million on revenues of $328.463 million. (page F-9). The loss per share was $3.05.

As of 12/31/2011, the company had $450.8 million in long term debt (page F-24).

Reddy Ice discusses its bankruptcy plans starting at page 60 of its 2011 Annual Report. Subject to bankruptcy court approval, the existing common stock would be cancelled but the existing common shareholders would receive 12 cents per share and another 5 cents in the event the Arctic acquisition is completed.  Arctic is currently in bankruptcy in Canada.

Current holders of at least 25,000 shares of common stock would have the option in receiving stock in the reorganized company. Assuming all converted they would own about 2% of the reorganized company. (page 18).

The plan for reorganization calls for the owners of the second lien bond to receive only common stock and a right to participate in a preferred share rights offering. As a class, the total number of shares allocated to them would be 6,094.327 shares, prorated among those owners according to their bond ownership. The outstanding amount of this bond is $139,407,000. I tentatively estimated that to be 43.624 shares per $1,000 face amount. That is about what I expected, give or take a few shares. The pricing of the second lien note did improve some last Friday. FINRA

Reddy Ice states that this plan for reorganization in bankruptcy court has the support from the owners of 60% of the principal amount of the first lien notes and 58% of the principal amount of the second lien. I own only one of the second lien bonds.

I am skeptical that this plan will be sufficient to right the ship based on its recent operating results. The company will still have $300 million in first lien debt, provided it is successful with the Arctic acquisition. More debt will likely be incurred to finance that acquisition that would apparently be pari passu with the existing first lien debt. If this plan is approved by the bankruptcy court, it would not be surprising to me to see Reddy ICE back in bankruptcy court in a few years.

In the event Reddy Ice is unsuccessful in the Arctic acquisition, then a hedge fund called Centerbridge will exchange $68.18 million in principal amount of first lien notes for the preferred stock with a liquidation preference of $75 million. That hedge fund must have some confidence that it can effectuate that acquisition.

3. Sold 50 SLGPRD at $25.44 Last Friday (see Disclaimer): I am not a long term holder of any REIT preferred stock bought near par value. This security was purchased at $24.7 last October. Bought 50 SLGPRD at $24.7 October 2011 I  received the last quarterly dividend on 4/13/12.

I still own 50 shares of the series C preferred stock in the ROTH IRA. Bought 50 SLGPRC at $24.4-Roth IRA October 2011

REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages

SL Green Realty Corp. 7.875% Cum. Redeem. Pfd. Series D (SLG.PD) closed last Friday at $25.44, up 14 cents for the day.

I would consider buying this one back in the ROTH IRA when its current yield exceeds 8%.
SLGPRD pays cumulative dividends at the fixed coupon rate of 7.875% on a $25 par value. www.sec.gov

Bought 1 Albertsons 7.75% Senior Note Maturing 6/15/2026

The U.S. sold 30 year bonds yesterday with a yield of 3.23%. treasurydirect.gov.pdf

Today, I am only going to discuss one purchase made last Wednesday, which I believe to contain some valuable general information to those investors interested in purchasing bonds. I am going to focus primarily on the mechanics of the trade, and the offerings from two different brokerages on the same bond.  

1. Bought Back 1 Albertsons 7.75% Senior Bond Maturing 6/15/2026 at 80 Last Wednesday-ROTH IRA (Junk Bond Ladder Strategy) (see Disclaimer): For the first time, I opened the Order Books for two separate brokerage firms  at the exact same time. I noted a slight difference in the ask price for two separate firms on this bond. 

Both firms showed a quantity of 98 with a minimum buy order of 1 bond. So, there was no question in my mind that both brokerage firms were dealing with the same seller. 

I bought this bond in the Roth IRA account at Vanguard and this is a snapshot of the order just before I placed it: 

                                  

As shown in this snapshot, the price for the bond was 80.  The current yield at a total cost of 80.2 would be about 9.66%. The YTM would be higher due to the discount to par value. 

Vanguard has a slightly different order book display than Fidelity. This is a snapshot of available Albertson bonds taken shortly before I placed the order:

                                  

To click to other quotes for a particular bond, I would need to click "more", but I can not trade online yet based on those other quotes. I could do that at Fidelity. This is a plus for Fidelity since the best quote may have a higher minimum requirement higher than I want to buy. In this case, the minimum order was 1 at the price of 80, and I could have bought up to 98 at that price. 

The difference was that the Fidelity order book showed the price at 80.165:

                                      

Please note the same quantity and minimum as the Vanguard order book.  I did a simulated purchase of that bond, without finalizing the order, and the Fidelity commission would have been tacked onto that 80.165 number bringing the total cost to 80.925 plus accrued interest. I made a snapshot of that simulated trade which I did not complete:

                                   

I actually completed the Vanguard transaction at a total cost of 80.2.

After I completed the purchase, both the Fidelity and Vanguard order books reflected my purchase by showing the quantity then available at 97. There was no question that both books were reflecting the same seller:

Snapshot of just that Seller After my 1 Bond Buy-Fidelity

Apparently, there was a mark-up for some reason at Fidelity. 

Albertsons was acquired by SuperValu. This bond is now a SVU obligation. 

I have previously bought and sold it. I bought this bond at the same price as last Wednesday back in February 2011: BOUGHT 1 Albertsons Bond Maturing 2026 at 80 I subsequently sold it at 88.3 last May. 

Prospectus: www.sec.gov

FINRA Information on this bond.

I discussed SVU's earnings report in yesterday's post.

There were no published bids to buy this bond last Wednesday.

AA SVU FNFG FTE SDIV KWK SYRG/Bought 100 RRD at $11.6

A report for the General Accounting Office casts doubt on the claims made by N.J. Governor Christie (R) for his cancellation of a new train tunnel to relieve congestion on routes across the Hudson River. NYT

France Telecom will pay a €.8 per share dividend. share dividend I own 100 shares of FTE, recently bought back at $14.82 (3/15/12 Post). The stock has slid to below $14 since that purchase, as European markets have declined due to sovereign debt and recession concerns. Both Fidelity and Marketwatch have the ex dividend date as 6/5/12. Fidelity has the payment date as 7/5/12 in the amount of $1.0492 per share. The France Telecom website has the payment date as 6/13, but that may be for the ordinary shares traded in Paris.

Germany sold 10 year bonds yesterday at a record low yield of 1.77%.

A senior bond Macy's bond, originally issued by May Department Stores, is the only bond purchased in my junk bond ladder strategy that is now rated investment grade. S & P raised it to BBB from BBB- earlier this week. TEXT-S&P When I bought this bond in January 2011, it was rated BB+ by S & P. Bought 1 Macy's Bond Maturing in 2030 @ 99.5 The bond is not actively traded and that last trade was at 117+.

The recently bought CEF WIW was ex dividend yesterday for its monthly distribution.

I missed it, but the Global X SuperDividend ETF (SDIV) declared a $.213375 per share monthly dividend, going ex dividend on 4/4/12. The dividend will be paid on 4/12/12. This ETF will be paying a variable monthly dividend. Distributions

Yesterday, natural gas futures fell below $2 per million British thermal units, the lowest price in over a decade. Under those circumstances, it is not surprising to see a stock like Quicksilver Resources declining in price, falling to about where it was in 1992. Quicksilver Resources While KWK does have too much debt for a company so dependent on natural gas, it does have some emerging oil plays that will take time to develop.  Bought 50 KWK at $5.3-LT Category Anyone buying KWK's stock will have to be focused on the long term potential, meaning somewhere in the neighborhood of 3 to 5 years. There is an abundance of natural gas, and it will simply take a long time for new uses of that supply to soak it up. A primary driver of demand will be as a fuel to produce electricity, particularly as more coal fired generating stations are closed due to the EPA's new emissions standards. That movement may accelerate in the event Obama wins the upcoming election, whereas the new EPA standards of coal plants would likely be reversed entirely or severely curtailed in the event Romney wins. The GOP has made it clear that it wants to emasculate the EPA.

Synergy Resources reported earnings yesterday for the Q/E 2/2012. At the end of that quarter the company had 38.852 million in cash and cash equivalents. Operating income was reported at $2,875,295 on revenues of $6,118,805. GAAP net income was $6.118+ million or 12 cents per share, but that included a tax benefit of $3.241 million.  For that quarter, oil revenues were $5.153+ million and gas was at $1.065 million (page 21Form 10-Q)

1. Alcoa (AA) (own common): For the 1st quarter, Alcoa reported adjusted earnings of 10 cents per share on revenues of $6 billion.

The consensus was for a loss of 4 cents on revenues of $5.77 billion.

China is increasing aluminum production even as prices decrease. Bloomberg Morgan Stanley's analyst estimates that China's aluminum production will grow to 44% of global production from 33% in 2008.

AA rose 58 cents  or 6.62% in trading yesterday to close at $9.9, still below my recent add at $10.18. I mentioned in that post that any stockholder of AA will likely need a lot of patience. I would add to that observation the need for a longer term time horizon than normal among the trading class of investors.

A positive article appeared about Alcoa appeared last night in Barrons. 

2. SuperValu (SVU)(own 2 bonds: Junk Bond Ladder Basket Strategy and common as Lottery Ticket): For its 2012 4th fiscal quarter, SUPERVALU reported adjusted earnings of 38 cents per share on revenue of $8.231 billion. Same store sales fell 1.9%.

The consensus estimates were for 35 cents on $8.31 billion in revenues.

The GAAP loss for the quarter was $2 per share which included non-cash goodwill and intangible asset impairment charges of $2.32 per share and 6 cents per share relating to a workforce reduction.

Fiscal 2012 net cash flow from operating activities was reported at $1.1 billion.

The company estimates fiscal 2013 earnings at between $1.27 and $1.42. The Street consensus was for $1.19 Reuters. That estimate is on a GAAP basis. Same store sales, excluding fuel, is estimated to decline 1% to 2%. The company estimates debt reduction of approximately $400 to $450 million.

SuperValu's common shares rose 15.23% last Tuesday, the day of the earnings release, notwithstanding the big down day for the stock averages. I mentioned in Monday's post that there could be a pop with positive news given the Street's extreme negativity. Stocks, Bonds & Politics 4/9/12 Post

As noted in a WSJ article, the shares have been weak due to concerns about the firm heading toward insolvency. It is difficult to rationally justify that concern with a near or intermediate term perspective. Over the long term, the company has to address both declining same store sales and its mountain of debt.

After this earnings report, Barrons published a favorable article on SVU, noting that its days as a "value trap" may be over. A lot will depend, however, on the company actually hitting its estimates for the current fiscal year.

I have bought and sold several SVU bonds, either those originally issued by SVU or by Albertsons. Currently, I own just two long term bonds originally issued by Albertsons that are now SVU obligations. Bought 1 Senior 8.7% Albertsons' Bond Maturing 2030 at 85.75 (March 2011);  Bought 1 Albertsons 7.11% Senior Bond Maturing 7/22/27 at 73 (February 2012)

FINRA information links on long term Albertsons previously or currently owned are:

Albertsons 7.75% 2026 SOLD: 1 Albertsons 2026 at 88.3
Albertsons 7.11% 2027
Albertsons 7.45% 2029 Sold 1 Albertsons' 2029 Bond at 84.125
Albertsons 8.7% 2030

SVU closed at $5.13 last Friday and at $6.42 yesterday, a two day gain of over 25%. SVU Historical Prices

3. First Niagara (FNFG)(own: REGIONAL BANK BASKET STRATEGY): First Niagara announced earlier this week that it received the last regulatory approval necessary for it to close the acquisition of HSBC branches. This transaction will cost $1 billion dollars in cash. While the CEO of FNFG called this acquisition a "home run", the appropriate baseball analogy would be that FNFG hit itself with a baseball in the groin. First Niagara This acquisition caused a 50% reduction in the dividend and other negative consequences likely to restrain the growth of the dividend for years to come. I do not anticipate a dividend increase in 2012. First Niagara: Just Another Incompetent Bank Board of Directors First Niagara Dividend Slash I am using the reduced dividend to buy additional shares.

There is no reason for shareholders, who owned the stock prior to FNFG's announcement of this acquisition, to rejoice in its consummation.  For those buying the stock now after the destruction in shareholder value, it is conceivable that the total return for a long term hold will be satisfactory. The Jefferies analyst has FNFG as one of his top five long term holds, TheStreet, and that is not a spurious recommendation. His target is $12.

Citigroup started FNFG with a hold and a $10 price target. The stock was trading over $14 in the 2011 first quarter before the acquisition announcement, FNFG Interactive Chart. The stock is now trying to keep its head above $9.   

4. Bought 100 RRD at $11.60 Last Tuesday (see Disclaimer): This limit order was placed before the market started to tank last Tuesday.

R.R. Donnelley & Sons is a large commercial printer. It prefers to call itself "a global provider of integrated communications". About Us As noted in the preceding link, the company has more than 60,000 customers and 58,000 employees. For 2011, revenues were reported at $10.611 billion. Form 10-K

I referenced in a February 2012 post a positive article appearing in Barrons about RRD, where the author argued that the company can continue its generous dividend and stock purchases, while reducing its outstanding debt. I hope so. More than a year earlier, I noted that Barrons ran a favorable article when the price was higher. Stocks, Bonds & Politics 1/13/2011 Post 

The RR Donnelley Board recently declared its regular quarterly dividend of 26 cents per share. I have argued that this company needs to eliminate its dividend. Since it apparently intends to keep it, at least for now, I might as well receive it. At a total cost of $11.6, the current dividend yield is about 8.96%.

I have a strong tendency toward value investing, which also means that I am susceptible to falling into value traps on occasion. RRD is currently selling at a November 1987 price. RRD Interactive Chart Price to sales is .19.

The current consensus earnings estimate for 2012 is $1.81 per share and $1.88 in 2013. RRD Analyst Estimates  Based on the current calendar year estimate, the P/E would be 6.41 at the $11.6 price.

Morningstar has a four star rating on RRD with a $15 fair value estimate.

R.R. Donnelley & Sons rose 58 cents in trading yesterday to close at $12.05.

I am not likely to be a long term holder. Since last December, the chart shows some resistance close to $15. RRD Stock Chart 

Sold 1 RRD Senior 8.875% Bond Maturing 2021 at 100/Sold 150 of the Synthetic Floater GJN at $23.02-ROTH IRA

I can confirm that Novartis withheld 15% of its annual dividend to pay Swiss withholding taxes. The distribution on 100 shares was $248.21. The net was $210.63 which also included a $.35 fee.

I left HQ yesterday morning for my annual physical. The OG's blood pressure was 110 over 70 at the Doctor's office. The market was then positive. Since it is not possible to complete a physical anymore in less than two hours, mostly waiting for the doctor or the lab technician, I did not return to HQ until shortly before 1:00 and noticed that the DJIA was down 180, and the VIX had spiked to over 20. Apparently, selling had accelerated after the S & P 500 pierced to the downside its 50 day SMA at 1372, looking at a daily chart.

The trouble started in Europe, as the sovereign debt crisis reappeared after a few days of relative quiescence. Spain's 10 year bond moved closer to a 6% yield. ES 10Y Italy's stock market declined 4.98%, FTSE MIB Index. I did not take my blood pressure after reviewing the foregoing.

Before leaving HQ yesterday morning, I had placed a limit order slightly below the market price for a stock. Needless to say, there order was filled in the downdraft. I will discuss it tomorrow.

Prospect Capital (own) announced after the close yesterday an offering of senior convertible notes maturing in 2017. I would anticipate that this offering will place some downward pressure on the stock.

1. Sold 150 GJN at $23.02 Last Monday Roth IRA (see Disclaimer): GJN is an exchange traded Synthetic Floater in the Trust Certificate legal form of ownership. The underlying security owned by the trust is a J P Morgan Capital 5.85% Trust Preferred maturing in 2035. 

GJN pays the greater of 3% or 1% over the 3 month treasury bill rate on a $25 par value, with a cap of 8%. Prospectus Due to the Federal Reserve's Jihad against the Saving Class, the applicable coupon will likely be 3% for "an extended period of time". 

I will likely buy this security back when and if the price falls below $20. 

The 150 shares sold last Monday were bought in three fifty share lots. Added 50 of the Synthetic Floater GJN at $19.1-Roth IRA (January 2012) Bought 50 GJN at 19 In Roth IRA (August 2011);  Bought 50 GJN at 21.95 (May 2011).

I had a realized gain on these shares of $422.44 on these shares. 

2012 GJN 150 Shares +$422.44

I had one prior trade of this security, a 50 share lot sold for a $460.53 gain in 2010: 

2010 GJN 50 Shares +$460.53

That lot was bought at a very favorable price. BUY 50 GJN at $12 (March 2009);  Sold  50 GJN at 22.08 in the Regular IRA (December 2010)

Floaters: Links in One Post

This security is thinly traded, usually with a large bid/ask spread. When I entered the order, there was a 200 share bid at $23.02 and the ask was at $23.33. I entered a day limit order at the bid price which was immediately filled by Vanguard. 

Fidelity does not allow its customers to buy exchange traded synthetic floaters. Fidelity Brokerage Extends Denial of Trading Opportunities to Synthetic Floaters and Even an Exchange Traded Junior Bond DFP Due to the tax complexities associated with the swap agreement which creates the minimum coupon and the floating rate out of a fixed coupon security, I will only buy synthetic floaters in retirement accounts. I moved my ROTH IRA from Fidelity to Vanguard due to Fidelity's trading prohibitions on a number of securities that were my bread and butter in retirement accounts. Fidelity Prohibits New Purchases of Exchange Traded Principal Protected Senior Notes 

Synthetic Fixed-Income Securities Inc. Fltg. Rate STRATS Ser. 2005-2 for JPMorgan Chase Capital XVII  (GJN) rose 26 cents yesterday to close at $23.32. Volume was 700 shares.

2. Sold 1 RRD 8.875%% Senior Bond Maturing in 2021 (Junk Bond Ladder Strategy)(see Disclaimer): This bond was sold at 100. The confirmation adjusts that price to 99.2 to reflect the brokerage commission, which is different than stock confirmations. I will also receive accrued interest from the buyer of $43.64:

This bond was bought a few weeks ago at 92.69. Bought 1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 at 92.69

My goal with the junk bond ladder strategy is to break-even on the bonds and to simply collect the interest without suffering a net loss on the bonds. Since I am suffering a higher than expected default rate among the selections in this basket strategy, I have resorted to trading some for profits, particularly those purchased at discounts to par value that pop to par value or more long before their maturity date.

This company is paying in my opinion a too generous common stock dividend given its earnings, debt load and maturity schedule. The Board just declared a regular quarterly dividend of 26 cents per share. RR Donnelley Board of Directors Declares Quarterly Dividend