KVW Called by Owner of Call Warrant/Bought 1 Edison Mission Bond Maturing in 2017/SOLD 50 FE AT $40.7/Sold 50 of 250 of FNFG at 14.67

I am glad that the Masters of Disaster are back on their feet. The WSJ reported yesterday that the denizens of Wall Street earned a record 135 billion in 2010. Perhaps the FED can now end its Jihad against savers and responsible Americans who have done far more than their fair share to return the Masters of Disaster to compensation levels deemed barely adequate by them. At least Bill Gross knows that he is not doing GOD's work.

Gross opines in his February letter that maybe treasuries need to be "exorcised" from model portfolios.  That has already been done here at HQ.  He further notes that one investment bank paid each of its 26,000 employees an average of $370,000 in 2010, almost ten times the average take home pay of an American worker.    

The  ADP employment report for February showed a 187,000 increase in private payroll jobs from December 2010 to January 2011 on a seasonally adjusted basis.  The consensus forecast was for a 145,000 gain in private sector jobs.   Small businesses, defined at those with less than 50 workers, added 97,000 jobs.  Large companies, those with over 500 employees, added 11,000.  The medium size firms added the remaining 79,000.  

TransGlobe Apartment REIT, one of my Canadian REITs, completed its acquisition of 20 residential properties containing 3100 residential suites principally located in Quebec and Ontario.  Added  100 TGA-UN:TO at 10.3 CAD This stock is traded on the Toronto exchange. I own 200 shares.

1. KVW Called by the Owner of the Call Warrant:  The trust certificate KVW contains as its underlying security a trust preferred issue from Aon Capital, a Delaware Trust, which owns a junior bond issued by the insurance broker AON (AOC).    I previously lost the TC DKK, which contained the same bond as its underlying security, to a call by its call warrant owner.  The owner of the call warrant, most likely the brokerage firm that originally created the grantor trust, has the option to pay the owner of the trust certificates par value, plus accrued interest, and to take possession of the bonds owned by the trust.  This has been happening with some regularity over the past year, as it has become profitable for the owner of the call warrant to pay off the TC owners and then sell those bonds at a guaranteed profit in the bond market.  I have had four bonds called by the owner of the call warrant over the past week (MJV, MJT, PKM and now KVW) 

The notice states that the warrant owner for KVW intends to pay the TC owners $25 plus $.231423 in accrued interest on 2/14/2011: Conditional Full Redemption of CorTS Trust III for Aon Capital A  

I still own 100 shares of KVW purchased during the Dark Period at an average cost of $16.16:

The Old Geezer is becoming most annoyed by all of these calls. The OG is one of those people who are being whipped by our Uncle Ben, and these calls resulting from a prolonged period of abnormally low rates are just one   of the many marks inflicted on responsible Americans.

The OG starting crying Uncle a couple of years ago, but so far those pleas have been in vain, as the FED continues to "rob" savers of their money with negative real interest rates. The OG was looking forward to receiving interest on this bond until he was a much older OG in 2027. My current yield based on that total cost number of $16.16 was 12.38%, and the bond is investment grade. I would much prefer receiving 16 more years of interest before receiving par value. 

This leaves me with KTN as the only TC containing this same Aon junior bond.  KTN does not have a call warrant attached to it.  My KTN shares were also bought during the Near Depression at a lower price and a higher yield than the 100 of KVW that is about to be called at its $25 par value plus accrued interest. TRUST CERTIFICATE AON BOND KTN ORDER FILLED AT 13.10  KTN add at less than $14 Sold 50 of 150 KTN at 28.17 (SEE ALSO: Functional Equivalence in Bond Trading; Managing Risk in an IRA: KTN and KVW; DKK-Called by Owner of Call Warrant;  TRUST Certificates: Links in One Post, and FINRA for trades and prices of underlying bond)

It looks like TCs, which have been a lucrative niche for me since September 2008, are rapidly moving to the endangered species list.  

2.  Bought 1 Edison Mission Senior Bond Maturing in 2017 at 82.55 (83.55 with concession/commission)(Junk Bond Ladder Strategy) (See Disclaimer):  I was not planning on buying more than 1 Edison Mission bond, given the risk, but that was before I had 4 bonds called in the past week.  It is difficult, to say the least, to find a suitable investment grade bond to replace a KVW or the two DPL junior bonds (MJV and MJT).  All of those bonds were investment grade.   I thought the Hanover junior bond, contained in KRH and PKM, was the best quality junk bond in my portfolio.  I have already lost KRH and am about to lose PKM.   I went ahead and sold 100 of the 150 PKM:    Sold 100 of 150 PKM at 25.93 

I discussed Edison Mission when I bought its 2016 bond:  1 Edison Mission Energy at 88.75  Part of my rationale for the Junk Bond Ladder Strategy can be found in Item # 5  of that post.  I recognize that is highly likely that I will experience at least one default among this grouping of bonds.  

Intuitively, an investor has to know that buying a bond maturing in 2017 with a 10.7% YTM is dicey.   In the current low rate environment, there is no free lunch for that kind of yield.  Obviously, there is significant risk of some principal loss that a buyer has to assume in exchange for that kind of yield with such a short maturity.  

This bond is rated junk, B3 by Moody's and B- by S & P.  The coupon is 7%, and the bond matures on 5/15/2017.  My confirmation states that the current yield is 8.398% with a YTM of 10.707%. (prospectus: www.sec.gov) 

The Edison Mission (MISSION) bonds are listed at  FINRA under Edison International (EIX), the holding company for both Southern California Edison and Edison Mission, both wholly owned by EIX.  Please note that Southern California Edison is rated A1 by Moody's while Edison Mission is struggling to stay above a C rating.  It is my understanding that EIX does not guarantee the obligations of Edison Mission and consequently would have the option of bankrupting its subsidiary without the Mission bond owners having recourse to the parent.  And that is the assumption that I am making when purchasing the Edison Mission bonds.  Who knows what may happen if and when that event occurs and lawyers start to make ingenious or some would say disingenuous arguments?  

MISSION does have a lot of assets, so I would also be confident of receiving some sum north of zero in the event of a default.   The problems are manifold, however.  One is the reliance on coal fired generation that has caused MISSION, or one of its subs, to become embroiled in environmental litigation with state and federal governments. 

Another problem is just the amount of debt and the relatively short maturity schedule.  A 500 million dollar note comes due in 2013, FINRA. I already own the 2016 bond, another 500 million.  The 2017 bond has a principal amount of 1.2 BILLION DOLLARS,  FINRA.    The 2013 bond has recently been selling at a small premium to its par value, indicating the market currently believes that the owners of that bond will be paid off at maturity.  More doubt is expressed about a favorable outcome for those owning the 2016 and 2017 bonds, just judging from the current prices of those bonds.      

Lastly, the Near Depression, and its aftermath, have had a negative impact on all of the merchant power companies.

This is the graph of my current junk bond ladder:

I do have 2 long bonds (2029 & 2030) maturing after 2020 that will be generating some green in 2021 and 2022, barely detectable in this graph.  For the most part, the bond maturities are being kept short, and the average duration of this basket is just 5.87 years with a 8.99% yield to worst.   I can not find an acceptable bond in either 2015 or 2019.  By acceptable, I am referring to what I consider to be an adequate compensation for the risk, primarily credit risk, and importantly, capable of being purchased by me in a small lot.  

3. Sold 50 FE at $40.7 (core electric utility strategy)(see Disclaimer):  While FirstEnergy is viewed as a core electric utility holding, along with DUK, ED, and EXC, I will pare core positions to reduce over time my cost basis and to take profits at the same time.  FE shares popped yesterday, so I took that opportunity to sell my highest cost shares at a small profit.  I am reinvesting the dividend, which is the case for all core holdings.  FE is scheduled to go ex dividend for its quarterly distribution today, and that may explain the rise yesterday.   FirstEnergy closed yesterday at $40.63, up 2.24% or 89 cents.  My last purchase was  @ 36.1 last October.

4. SOLD  50 of the 250 FNFG at $14.67 (Regional Bank Stocks' basket strategy) (see Disclaimer): Late in the trading day yesterday, I noticed that FNFG was moving up and I decided to pare my position by selling 50 of my higher cost shares..  The first 50 shares were purchased  at $13.7. (February 2010)  This is a typical trading pattern, as I lower my cost basis while taking a small gain on a good dividend paying stock.  I intend to hold the remaining 200 shares and will buy back those 50 shares provided such a purchase would lower my current average cost per share.  The 50 shares sold were in the account where I am not reinvesting the dividend, which now has only 50 shares bought  at $12.62 (May 2010).  A satellite taxable account has the lower cost 150 shares, bought in 3 fifty share increments, along with reinvested dividends. Bought 50 FNFG at 11.7 (August 2010) Bought 50 FNFG at 11.74 (August 2010); Added 50 FNFG at 13.97 (Jan 2011)

I am keeping track of the realized gains from this strategy in Item # 3 Realized Gains Regional Banks.