Sold ESD and Bought 50 PYT in Roth/SBGI

RB told LB to chill out about the EC. It is not difficult to see how the paper pushers spend their days toiling away in Brussels. Arrive at work at 10, leave for lunch at 11, discuss Camus and Sartre while smoking a pipe filled with tobacco or more likely some other substance while eating their croissants and sipping their lattes, commiserate with one another about the evils of capitalism and the immorality of paying one's debts, and then return to work for thirty minutes to implement whatever cockeyed idea was generated in all of that smoke.

1. Sold ESD and Bought 50 PYT in ROTH IRA (see disclaimer): The Lehman debacle last September threw a very large wrench into my usual strategy of buying closed end funds (CEF) at large discounts to Net Asset Value and selling them after the discount narrowed and net assets increased in value as a result of a bull move in the owned assets. This is what I call a twofer strategy, which has worked most of the time since I started using it back in 1983. Money can be made in two ways, the improvement in value of the assets owned by the CEF and the narrowing of the discount to NAV.

Unfortunately, I had made the mistake of keeping my CEFs in 2008, so I was in no mood to add to my positions after the market meltdown last October. During that period, the CEFs suffered a double whammy, sometimes a triple whammy, other terms of art used to graphically explain what happens in the real world sometimes. The double whammy is that the discounts to NAV started to expand and the value of the assets plunged, not a good deal after all. The discounts to NAV for some CEFs expanded to over 30% to NAV, while the market tanked. he triple whammy adds the deleterious effects of leverage into the mix, which occasioned greater losses, as leverage magnified the losses, and caused some CEFs to liquidate positions at the worst possible time. We did feed off that some, in relation to the leveraged REIT CEFs, by buying some of the securities being dumped by them. Otherwise, LB put the kibosh on any significant buying of CEFs during those dark days.

All of this is mentioned as a prelude to the sale this morning in the Roth of ESD. This position had a total cost of around $12 from October. I do not recall the discount back then but I believe that it traded for a time at over a 30% discount to NAV, and it was yielding over 10%, paying dividends monthly. I sold it when it burst over $16 after collecting almost a year of dividends. That is how the CEF trade is supposed to work, and explains the criticism leveled against myself on failing to jettison the CEFs along with most of the mutual funds prior to 2008.CLOSED END INVESTMENT COMPANIES: Hopefully Lessons Learned and To be Applied

Buy High & Sell Low /Retrospective on the Good & Bad

The frequent readers of my posts, and there are few, know that I am buying synthetic floaters in my retirement accounts. I added 50 shares of PYT in the Roth this morning at $13.34. This would be an average up from my last buy at around $11 back in April. Bought 50 PYT PYT just went ex interest, an event that sometimes causes individuals to sell a security. As long as I am not paying too much, I like the synthetic floaters in a retirement account that pay interest based on the higher of a guarantee or a percentage above a floating rate. They give me a measure of low inflation and high inflation protection in a single bond. PYT pays the greater of 3% or .85% above the 3 month LIBOR rate, which is a good float and a below average guarantee. http://www.sec.gov

At my blended average cost for 100 shares, which is about $12.3, the guarantee of 3% is worth about 6%. At a 5% 3 month LIBOR, then the yield jumps to 11.9% (5% + .85% spread=5.85% x $25 par value= $1.4625 for 1 per year divided by $12.3 total cost=11.89%). There is a cap and that will come into play when the interest payable hits 8%. This means that the interest will be capped when the 3 month LIBOR exceeds 7.15%. At the 8% cap, the maximum yield is 16.26% at a $12.3 total cost. So, as you can see, I know that my minimum yield is around 6% and my maximum yield is 16.26%, and I would anticipate that the actual numbers will be all over the place in that range over the next 25 years. Of course, the yields go up as the price paid for the security goes down. So a purchaser now at a total cost of $13.34 would have a lower range than me, but anyone can do the computation at their own purchase cost, whatever that may be.

If GS survives to pay me all the interest payments until maturity in 2034, which is the credit risk embodied in buying a bond from a single issuer, then I also receive sort of a bonus, the payment of the $25 par value in 2034.

Maturity of the underlying TP junior bond, a fixed rate coupon issue from Goldman Sachs, will be in 2034. The floater is created by a swap agreement. The swap counterparty, in this case Merrill Lynch, receives the payments of the fixed rate coupon bond, and then pays the trustee whatever is owed under the float provision. The trustee collects and disburses the payments. The last quarterly payment would be at the 3% guarantee, so Merrill pockets the difference. If the swap agreement is terminated for any reason, then the owner of PYT would receive the fixed coupon payment. This recently happened with JBK, where Lehman was the swap counterparty.

The reason for putting these securities in a retirement account has to do with an issue, largely beyond my comprehension, relating to taxes that is connected to the swap agreement.

In my Gateway Post on synthetic floaters, Synthetic Floaters, I compare the relative advantages of two floaters, one synthetic tied to a Goldman Sachs' bond, and the other is a non-cumulative equity preferred issue from GS.

2. New Home Sales: The market got revved up by the new home sales figure for July. New home sales jumped 7.2% in July at an annualized rate, the highest monthly increase since data started to be collected by the National Association of Realtors in 1999. The inventory of existing homes for sale is still a worrisome figure.

3. Sinclair Broadcasting (SBGI) (owned): Sinclair was a lottery ticket purchase at $1, with the shares bought in an IRA and sold at around $2. Sold SBGI in IRA/ In that post, I mentioned that I would keep the 150 shares in the taxable account. I take less risk with the Lottery Tickets in the IRA. Frequently, I will keep shares bought in the taxable account and sell the shares bought in the IRA after a pop. This has been done repeatedly as discussed in this blog, with some other examples being CBG (bought at $2.39 and sold at $9.73 SOLD 1/2 CBG ) and the lottery ticket bond PFX. My main concern about Sinclair was its debt. Recently the shares plunged back to below a buck when SBGI disclosed the holders of convertible debentures could require SBGI to buy them back (called a put) before the maturity date. The problem was that SBGI would have difficulty, to say the least, repurchasing those debentures. The news today, which caused a pop to around a $3, was that a tentative agreement had been reached between SBGI and an ad hoc committee representing the holders of about 50% of those securities. The "tentative" agreement is described in this news release: Sinclair Reaches Tentative Agreement with the Ad Hoc Committee