Bought 50 PBIB at 13.27/Added 50 XKK at 8.98/ Bond CEFs

The preceding table is the latest update on the regional bank stock basket strategy. Needless to say, I took a hit since I lasted posted this table on May 14th: Bought 50 WAIN at 8.72/Added 50 ORHPRA at $25/Bought 50 BACPRW at 22.62 in the ROTH/BDF Acquisition of HSF

Since I characterize the current stock market as a long term secular bear market of unknown duration, I am mostly in an extremely active trading mode. Notwithstanding that overall thrust, I am following some long term strategies. The regional bank stock basket is one such strategy. To date, I have realized approximately $1275 in profits, but the intention is to hold most of the stocks in this basket for five to ten years. I recognize that this strategy has a number of downside risks, but I still view the potential upside as outweighing those risks. I expect to have several periods where several thousand dollars is clipped from my unrealized gains, and I had a couple of grand clipped just in the past week.

Instead of selling any of the securities in this basket, I added late Friday 50 shares to the existing position in Porter Bancorp.

The two other long term strategies involve keeping consumer staple stocks purchased in March 2009 for as long as the firms continue to raise the dividends. This includes purchases of CPB, KO, UN, SYY and HNZ. The only other long term strategy is to keep the investment grade bonds bought during the Near Depression period that have current yields in excess of 10%. There are a few caveats to even a long term strategy. I will not tolerate a major adverse development in the company that shakes my confidence in the firm's long term future.

There are a few other securities being held long term for reasons unique to them. Examples would include PFK, the CPI floater from Prudential, term bond CEFs, and a few stocks held under the dividend growth strategy.

1. Bought 50 PBIB at 13.27 on Friday (Regional Bank Stocks basket strategy)(see disclaimer): I have warmed up to Porter some after its 1st quarter's report. I decided to add to the position for two simple reasons. Porter Bancorp declared its regular quarterly dividend of 20 cents per share on Friday. At 80 cents per year, this gives me about a 6% yield at a total cost of $13.27. This is a permitted purchase under the existing restrictive trading rules since it is a reinvestment of the proceeds realized recently from the sell of EWBC and WIBC.

The second reason was an article in the a Louisville business journal summarizing part of the CEO's discussion at the recent shareholder's meeting. Maria Bouvette is reported to have said that she expects the "credit metrics" to improve during 2010. This last purchase is an average down from the 50 share purchase at $14.1: Item # 2 Bought 50 PBIB at 14.10.

2. Added 50 XKK at 8.98 Friday (See disclaimer): In March, I sold 300 of my 550 of XKK at $9.72: Sold 300 of the 550 of the TC XKK Par value is $10. XKK is a TC containing a senior Goodyear Tire bond, rated junk, that matures in 2028. The coupon on the TC is 8%, higher than the 7% coupon of the underlying bond. (compare FINRA information on the underlying bond and the prospectus for the TC at www.sec.gov)

This particular TC can be extremely volatile during days of extreme market distress. In March of 2009, I bought shares at $3.80: Buys of CPB LQD SYY XKK I was placing orders at around $5 in December 2008: Goodyear Tire TC xkk In a post from November 2008, I was discussing the yield on this one being over 27% at less than $3. Emerson Electric and the Goodyear Tire TC XKK That is just nuts. On May 6th, 2010, the day of the flash crash, it fell to $5. XKK: Historical Prices If I could have accessed by Fidelity account that day, I could have picked up those 50 shares at $7 and change. There can be some benefit to leaving a small GTC limit order well below the market to see if I can catch one of these meltdowns. XKK, for whatever reason, seems to be susceptible to the bottom falling out during times of market stress even if the underlying bond is holding up relatively well.

The yield at $5 total cost would be twice the coupon, or 16%. The yield at a total cost of $8.98 is about 8.9%. The yield on the underlying bond at last Friday's closing price of 85.125 ($7 divided by $85.125=8.22%).

3. Bond Closed End Funds: A reader commented on the widening discount to NAV of the bond CEF GDO over the past few weeks. In periods of extreme stock market turbulence and stress, it is normal for all CEFs to go down in price more than their respective declines in net asset values. During the last week, several investment grade bond CEFs experienced increases in their discounts even though their net asset values increased or held relatively steady. The increase in the discount was accomplished primarily by a decline in the share price, rather than a decline in net asset values. For me, I just look at this phenomenon as a potential buying opportunity, though admittedly it is aggravating when I already own a position.

Unlike the investment grade bond closed end funds, the bond ETFs held their values during the turmoil last week, since their market price is closely aligned with their net asset values. That alignment is not as precise as a mutual fund and can be off by up to 1% and sometimes more intraday. The bond ETFs are an alternative for those who do not care to experience the often irrational pricing prevalent in the closed end fund universe. The irrationality in the pricing of CEF runs the gamut. The most bizarre pricing is in a number of CEFs selling at substantial premiums to their NAV.

For investment grade corporate bond ETFs, there are two low cost alternatives. The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) has an expense ratio of .15% and about 429 investment grade corporate bonds. The other is the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) that has a .15% expense ratio and around 400 investment grade corporate bonds. Those link web sites also provide information on the relationship of the market price to the net asset value. Those two ETFs are intermediate term. These ETFs have been averaging recently between 4 1/2 to 5% in yields.

Vanguard also has a long term investment grade corporate bond fund: Vanguard - Long-Term Corporate Bond ETF (VCLT). A complete listing of the low cost Vanguard bond ETFs can be found at Vanguard ETFs.

These kind of ETFs will generally be priced fairly close to their NAVs which is good and bad from my perspective compared to the bond CEFs. It is bad for two reasons. First, I juice my current yield by buying the bond CEF at a discount to NAV. And, I juice it more by buying at a 10% discount compared to a 5%, sort of like buying a bond at a discount in that respect. Second, I can make money by buying at a discount and selling when the discount narrows, an option unavailable with a bond ETF. I can still lose money, of course, for the same reasons that a bond ETF falls in value, with interest rate risk being the one most feared here at HQ. But, if the NAV increases and the discount narrows, I will make more with a comparable CEF. I just have to be patient and wait for that to happen. If the discount expands, I will consider buying more shares and/or changing my distribution option from cash to reinvestment.

For a term CEF like IGI and GDO, both of which will liquidate in 2024, I know that the discount to NAV will eventually be eliminated. I do not have that assurance with open term CEFs or bond ETFs. So, if the NAV is $20 at the time of liquidation, I will not have to worry about a discount continuing. I will receive my share of the liquidation proceeds after expenses. Assuming the managers for these two term CEFs do not trade too much, and hold the bonds to maturity, the fund will recover any value lost due to credit or interest rate risks impacting the value of the bonds now or in the future, as long as the issuer pays par value at maturity. And that is the key for IGI and GDO. If I see too much trading, I may liquidate my holdings. You certainly do not want to see a bond sold at a loss due to the current fears sweeping the markets now, when the issuer is likely to survive and pay par value at maturity.

Last week, I had one CEF investment grade bond fund actually hold its discount fairly steady and that was IGI. Another one IMF, which holds mostly inflation protected securities, held up pretty good too. I had two bond CEFs experience a large increase in their respective discounts, HSF and WIW, even though the net asset values held up well during the turmoil.

WIW invests in U.S. treasury TIPs which were steady in price last week. The discount however of this staid bond CEF increased by almost 4%. I had just sold 200 shares at 12.5 and tried to buy those shares back at 12 on Friday. Sold 50 of the 150 GJD at 18.59/SOLD 200 of 300 WIW at $12.5 & Bought 300 HSF at 5.76/ While a $100 or so profit on those 200 shares of WIW may not sound like much (Bought 300 of the CEF WIW at $11.94), I am not aiming high with these bond CEFs. I am also wary of them due to my concerns about interest rate risks. I am not a long term holder of the ones with no term dates which includes the recently acquired CEFs BDF, HSF, WIW, and IMF. I would be more tolerant of holding bond CEFs that invest in inflation protected securities during a rising rate environment than one that invests primarily in fixed coupon bonds irrespective of the quality. If I can pocket some dividends and come out even on the shares after moving in and out for the next 6 to 12 months, I will be satisfied with that result. The alternative is to use those funds to buy stocks or to keep the excess funds in money market or short term CDs, both earning far less than what I am paid by these bond CEFs. The bond CEFs do of course entail more risk, but I attempt to reduce the risk by trading them and eventually selling most of them when I become more concerned about interest rate risk which is the primary danger associated with owning investment grade bond funds.

In a linked post in the preceding paragraph, I mentioned buying HSF, another investment grade bond CEF, when its NAV was $6.26 and its discount to NAV was 5.43%. As of the close last Friday, after two weeks of a strong stock market downdraft, HSF had a NAV of 6.23 after paying out its dividend and the discount had increased to 12.04%: WSJ.com So, in effect, it held all of its value during the awful slide in stocks and paid a dividend too. Rationally speaking, you would think investors would buy this CEF during periods of stock market turmoil, but that is not what happened. The irrational occurred instead. I understand why many investors do not want any part of that kind of action. I am use to it, and the irrationality of the pricing dictates my investment strategy in this area.

4. SEC's Case Against Goldman: I have basically come to the conclusion that the only fraud manifested in the SEC's case against Goldman on the Abacus transaction has been committed by the SEC in bringing the case. I have discussed the glaring and obvious weaknesses in the SEC case in previous posts. ITEM # 3 GS; ITEM # 2 Goldman's Defense and Possible Penalties in the SEC Case A recent opinion piece in the WSJ highlights these weaknesses and emphasizes what can only be considered the real motive behind the suit: to assist the administration's effort to pass its financial "reform" package. The timing of the filing, along with the glaring weaknesses in the case, suggest no other explanation.