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To: Kapusta Kid who wrote (75)8/3/2010 12:55:48 PM
From: Kapusta Kid of 187
 
The other mandatory convertible preferred that caught my eye was the PPL 9.5%. It's callable in 3 years and the premium is a bit higher than for the LM/LMI conversion. Current rate is 8.37%, while the common pays 5.1%. Break even purely on the conversion is @32.66, almost a 5pt. move.

The common traded for north of $50 in 2008. Morgan Stanley likes PPL because it has 'meaningful exposure' to changes in power prices. PPL has raised its dividend the last 8 years while the payout has grown at an 11.2% compounded rate over that time. That works out to doubling in less than 7 years. ROE slipped to 8.5 last year, but the 10 year average ROE is 18.6.

A better case for the common? I might have just talked myself into it.

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To: MCsweet who wrote (77)8/3/2010 1:06:48 PM
From: Kapusta Kid of 187
 
You're right, of course. Thank you, Mc.

I got so greedy for the dividend, I tried hard to make a case for the convert and overlooked the obvious. In the case of LM/LMI, I would also give up time, which I'd rather have on my side. Illiquidity of converts is another problem; some trade by appointment, others not even that often, especially on OTC.

I'll continue to watch the LM common (I do like the buyback factor) and screen plain-ole commons and preferreds for dividends.

I think the time to jump on these converts is when the stock is way down (e.g., spring of 09). If you like the stock to recover, then play the convert. Get the higher divvy and the capital gain. LMI would work for me if the call were in 2013. Eleven months isn't enough time.

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To: MCsweet who wrote (77)8/3/2010 1:34:55 PM
From: Kapusta Kid of 187
 
In the scenario I proposed where the stock remains flat for the year, my mistake was mixing apples and oranges. Instead of subtracting a 2.75/shr capital loss from 3.50/shr dividend gain, I subtracted 2.75% from the 12% dividend rate.

Might be due to a lack of Vitamin D. I'd better get outside.

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To: Kapusta Kid who wrote (79)8/3/2010 3:43:31 PM
From: deeno of 187
 
the problem with most mandatory converts is that you are trading a good deal of the upside and keeping 100% of the downside. your trading upside for a yield (think covered call writing). Yet if you really like the stock, why limit yourself and if you dont, why buy it in the first place. They can make sense from time to time so I appreciate your effort.

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To: deeno who wrote (81)8/3/2010 7:39:36 PM
From: Kapusta Kid of 187
 
As much as I like the buyback program and the fact that Peltz bought a ton of stock, after a little DD, I'm not exactly hot to trot on the common anymore. Legg's equity funds performed poorly over the last 3 years and shareholders left in droves. It's not the kind of thing an asset manager can turn around very quickly. LM is now on my watch list, but the share price would need a major haircut for me to buy in.

As for the convert, I don't think it can work, certainly not in less than a year. I do appreciate the feedback from deeno and McSweet.

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From: Kapusta Kid8/12/2010 12:57:22 PM
of 187
 
Yesterday, I picked up shares of MS-PA, a floater from Morgan Stanley with a current yield of @5%.

This AM, I moved into AEF, an AEGON 7.25% fixed rate preferred. Yield at today's cost is @7.9%.

I already own AEB, an AEGON floater recommended by Richard Lehman in Forbes a while back. I also hold floater STD-PB from Santander and a couple of fixed rate preferreds I bought last spring: DTK from Deutschebank and AZ.GA from Allianz SE(they de-listed from the NYSE after my purchase). The latter two are fully valued, but it's tough to give up 25% money in a 0.25% world.

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To: Kapusta Kid who wrote (83)8/14/2010 11:55:54 AM
From: MCsweet of 187
 
Pete,

Pete,

Thanks for the mentions. I am always looking for ideas.

I am not so big on floating rates right now, as it looks like short rates will stay low indefinitely. When that looks to turn around (or if fixed-rate yields go down further), I'd be looking to floaters.

However, if you like floaters, a Goldman Trust Preferred GYB has current yield of 4.65% and YTM of 5.54%+. The coupon is max(3-month Libor+0.85%,3.25%).

GYB doesn't have 15% tax advantage that the MS-A does, but in a tax-sheltered account I'd probably rather own GYB. It is cumulative, with a fixed maturity and better protections.

In a taxable account, the MS-A probably works better, at least until the Bush tax cuts are repealed.

MC

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From: Kapusta Kid9/8/2010 11:14:58 AM
of 187
 
Here's a tricky one.

At Forbes, Richard Lehmann writes the Fixed-Income Watch. In his latest column, Lehmann proposes a few floaters, including AEB, which I already own.

forbes.com 

Another of his ideas is JPM-PZ, which is a fixed-floater. The $25@par issue now trades for @$27 and pays a $2 annual dividend until May 2013. After that date, it pays a floating rate of the 3-month LIBOR (@0.30% now) plus 4.12%. This security is NOT eligible for the 15% tax rate. Current yield is @7.408%.

As a rule, I don't buy preferreds selling for more than par. If it's called, that's an automatic capital loss. If/when rates rise, the share price will certainly drop. After May 2013, even if the 3-month LIBOR rises substantially, it seems that a buyer at today's price will certainly be under water. The above mentioned AEB, e.g., has a 4% floor, but yields 4.82% at the current price of $20.75. If rates rise, I suspect that the share price might too.

JPMorgan Chase gets high ratings from Moody's and S&P (A1 and BBB+ respectively), but it seems to me that Lehmann is all wet on this one and that JPM-PZ is a very bad idea. Or am I missing something ?

Here's a link to the Quantum Online page for JPM-PZ.

quantumonline.com 

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To: Kapusta Kid who wrote (85)9/8/2010 11:33:39 AM
From: Jurgis Bekepuris of 187
 
JPM-PZ at $27 seems like a bad idea to me.

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To: Kapusta Kid who wrote (85)9/8/2010 12:26:33 PM
From: deeno of 187
 
"but it seems to me that Lehmann is all wet on this one and that JPM-PZ is a very bad idea. Or am I missing something ?"

Depends on what you looking at this for. 11 dividend payments - 2.00 premimum = 3.50. over 2.6666 years its about a 4.5% return.

Now what are the chances of NOT getting called and if NOT called would thinges be better or worse.

I would guess that its not tier one capital anymore. JPM doesnt need to pay libor plus 4.12% and they arent likely to not pay the dividend. So where would you put less than 3 year money paying 4.5%?

If they dont call it 4.12% + libor floater backed by JPM doesnt look to bad.

Its not my cup of tea, but when your scrounging for short term yield its not to bad.

Only real fear I'd have has to do with the orginal terms of the PFD. Some of these pfd's had extrordinary call provisions if there was a change in tax structure or capital definitions. You have to assume that Lehmann did his DD when he made his reccomendation or do your own if you were putting serious money into it.

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