1. Possible S&P Downgrade of SLM debt: I currently own 200 shares of OSM, a debt issue from SLM, and those shares slid today on news that S & P may cut its ratings on Sallie Mae's debt, based on what S & P views as the increasing likelihood that SLM will soon not be able to generate federally guaranteed student loans. I view that prospect as close to a certainty. A House Committee recently passed a bill that would eliminate the federal guarantee of student loans originated by private lenders by June 2010. Sallie is currently rated investment grade by S & P at BBB-, so I would anticipate a possible downgrade to junk which Moody's has already done. Market While I do not want to downplay my concerns about SLM's prospects, and I am certainly concerned about being paid par value at maturity, there are some positive aspects to the Sallie story including the run-off of existing federally guarantee loans, and revenues from servicing the government's loans. Another issue involves a contract which may be awarded relating to the origination of government student loans. I discussed these issues in prior posts: SLM News Sallie Mae Upgrade Cramer & Sallie Mae:/ OBAMA SALLIE MAE & MY HOLDING OSM
2. Bought 50 KRH in ROTH (SEE DISCLAIMER): I decided to skip the auction for the 20 year TIP on Monday, and will instead focus on nibbling on some bonds. I raised some capital this morning by selling CBG after a huge run up and another non-dividend paying stock, Tejon Ranch (TRC). I bought 50 KRH at $18.62. This Trust Certificate contains the same underlying bond as my earlier buy of PKM in a taxable account. Bought 150 TC PKM The only material difference is that PKM has a 8% coupon and KRH has a 7.75%. This does not matter. For functionally equivalent securities, with an identical maturity date and originating from the same firm, the only relevant consideration is the yield to maturity at the prices those securities can be purchased at the moment a decision is made to buy one of them. KRH provided a slightly higher yield and more capital gains potential this afternoon, and it had a narrow 2 cent bid/ask spread. PKM closed at $20.13 to yield 9.94%.
The underlying bond in both KRH and PKM is a Trust Preferred issue from AFC Capital that is guaranteed by Hanover Insurance Company. The bond matures on 2/3/2027. At my price, the current yield is around 10.25% plus 6.3 dollars per share at maturity assuming as usual survival of the firm. (see above linked post for more information about Hanover). If purchased at a total cost of $18.62, the current yield calculated at MarketWatch.com is 10.41%.
The underlying bond is rated junk. It is the only junk rated bond currently in an IRA (other than 50 OSM rated junk currently only by Moody's), several are found in the main taxable account, where I will take more risk. The underlying bond is a 8.207% junior deferrable interest bond, with the usual right to defer for up to five years provided no distributions are made on a junior security (see p. S-12) . The interest payments are cumulative and interest is payable on any deferred payment at the coupon rate (see p. S-14).
This is a link to the prospectus: www.sec.gov
3. Sold Google at $447: (see disclaimer) I just bought some shares at $395 Bought Google/Pricing American General Finance bonds/OSM & Sallie Mae/Pared BWX, and decided late in the day to take my small profit. This is not due to any concern about Google's last earnings report. Instead, I just developed more concern over the past week about the long term moat for Google's business. Sure, it is top dog now, but it just seems to me that Yahoo and Microsoft might just gradually eat into Google's bread and butter business. I have tried "Bing" several times during the past week on my last remaining Windows computer. While I still prefer the Google search, I understand how BING may gain some traction. Also, not being a tech guy, it just seems to me that Google is a one trick pony as far as revenue generation goes.
4. Sold FRPRJ in IRA (see disclaimer) I have been in the risk reduction mode all week, just a queasy feeling. I own two cumulative preferred issues from First Industrial (FR) in a regular IRA account. This REIT has eliminated its common dividend so the preferred shareholders are in a state of enhanced danger of a deferral with the removal of the security blanket. So I sold the 50 shares of FRPRJ at around $11.5 for a small profit with a dividend and will keep the lower cost FRPRK bought at $8.40 in that same retirement account.
If this queasy feeling does not go away early next week, I would not rule out buying a small hedge for my stock positions, using either TWM or SDS, or some combination of those two double short ETFs. I have a barrel full of short term gains in the taxable account so far in 2009, which gives me my "mental" leeway to buy a double short ETF, and then place a stop loss maybe 10% or 15% below what I paid for it, or some version of a trailing stop loss. If I suffer a loss then it will just offset some of the short term gains already realized this year.
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