1. Bought 100 GJO in Roth at $16.4 (see disclaimer): GJO is a synthetic floater. I previously bought and sold GJO in a taxable account. BOUGHT NVS AND SOLD GJO My main reason for selling this security was its lack of a guarantee and low float rate of just .5% above the 3 month LIBOR rate. Par value of this security is $25. The underlying security in this Trust Certificate is a senior, fixed coupon bond issued by Wal Mart maturing in 2030. As usual with these synthetic floaters, the float is created by a swap agreement which is currently in effect. However, if the swap agreement is terminated for any reason, then the owner of GJO would receive the interest rate as provided by the underlying security, which is 7.55%. I have no reason to believe the swap agreement will be terminated at anytime in the foreseeable future. The swap counterparty is Wachovia, which was recently acquired by Wells Fargo. I previously discussed another synthetic floater, JBK, that did have a swap termination event caused by the bankruptcy of Lehman.
In other words, this security has to be bought with the expectation that the owner will be paid a monthly interest rate floating at .5% above the 3 month LIBOR rate.
This is a link to the prospectus: www.sec.gov/
This is a link to the FINRA information on the underlying senior bond: FINRA - Investor Information - Market Data - Bonds - Bond Detail I will add this link to my Gateway Post on FINRA.
I view GJO to be one of the worse synthetic floaters. The LIBOR rate is at historically low levels now. This rate is currently around .48%. WSJ.com If this continues for an extended period, I would not be surprised by GJO drifting down in price. The converse may also be true. Once the short rates start to move back up, the interest payable by this security will increase and hopefully the price will follow. This security was selling closer to par value when LIBOR rates were in the 4 to 5% neighborhood. Since September of 2008, most of the trades have been in a channel between $16 to $18 with occasional small spurts out of that channel. From March to September 2008, the trading was in a $18 to $20 channel. Prior to March 2008, the trading activity was mostly in the $20 to $25 range. WM STRATS SRS 2004-5 Share Price Chart | GJO - Yahoo! Finance I would suggest comparing the price since the IPO with historical libor rates: LIBOR Rates History (Historical)
I bought the security today in the ROTH primarily for diversity. The Wal Mart bond is a highly rated credit. In addition, based on history, I would expect the LIBOR rate to eventually return to more normal levels. This site contains historical rates for LIBOR: LIBOR Rates History (Historical) In addition, I bought this security at a discount to par value. If held to maturity, and WMT survives to pay me par value in 2030, I will make over $800 on the security, plus the monthly interest payments. The discount also juices the value to me of the .5% float. At par value, and a .5% 3 month Libor rate, the annualized interest would be 1% or 25 cents annually for 1 share. At a total cost of $16.5, the yield becomes 1.5%, hardly worth buying. But, if and when 3 month LIBOR goes to say 4.5%, then the yield moves to 5% and that is worth 7.57% to me at a cost of $16.5. It does not take much of an average LIBOR rate over the remaining life of this security to beat the current yield on the underlying bond as shown on the FINRA page. If the average 3 month LIBOR rate annualized for the next 21 years is over 3%, then I would be paid more by buying this floater than the underlying bond at a price of over 120. My yield at an average 3% LIBOR would be about 5.3%, starting off much lower in yield than the fixed rate coupon underlying bond of course.
I also discuss this security in this Post: Buy of GJO That purchase was made in a taxable account and later sold. These synthetic securities have some unusual tax issues which is why I hold them now in retirement accounts. Generally, I also prefer to hold bonds paying interest in a retirement account and preferred stocks that pay qualified dividends in a taxable account.
I also have a post on synthetic floaters: Synthetic Floaters
Another related post concerns equity preferred floating rate securities: Advantages and Disadvantages of Equity Preferred Floating Rate Securities
This is a link to a Gateway Post on floaters: Floaters: Links in One Post
I own a large number of floaters, preferring the ones with guarantees that were bought at opportunistic prices.
2. ETW-Closed End Fund (CEF)(see disclaimer): I hold ETW (Eaton Vance Tax Managed Buy-Write Opportunities Fund) in both a retirement and a taxable account. Eaton Vance is the sponsor. EV recently changed the link to its CEFs, and this is the new link: Eaton Vance Investment Managers - Closed-End Funds For ETW, I own all together around 500 shares, with about 100 or so in a retirement account with a cost basis of $8.43 from March 4, 2009. I am under water in the taxable account. Since early March ETW has paid two good dividends and the shares are up over 50%. As of the close yesterday, the discount has narrowed to under 4% to NAV. This is now a candidate for a potential sale in the retirement account, though I may do nothing about it today. ETW is a broadly diversified world stock fund that uses a buy-write option strategy to hedge risk. Eaton Vance Investment Managers - Tax-Managed Global Buy-Write Opportunities Fund That last link contains further links to the annual report. Investors can also find this CEF reports at the SEC: nvq (quarterly holdings) and
Eaton Vance Tax-Managed Global Buy-Write Opps Fund (annual report 12/31/2008). If I decide to sell the shares held in the ROTH, I will keep the shares in the taxable account, probably well into the next secular bull market. Since I have owned ETW, it has been paying a quarterly dividend of $.45 per share. Since I did not mention the buy of ETW in this blog, I will not discuss the sale when and if I actually do it. I am transitioning to more bonds in my retirement accounts.
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