Sold 100 PHO @ 19.74-Bought 100 JTD @ 13.31/KO/Added 50 GYC at $21.60 in Roth IRA/CISCO

Cramer called VALE the most undervalued commodity play in the world on Monday.  Seeking Alpha  Some of the current weakness in that stock is tied to China raising interest rates.  VALE closed yesterday at $33.5, down 2.59% or 89 cents.  I view this kind of decline to be a knee jerk reaction to China's most recent interest rate increase, as the quick trigger crowd starts to imagine a slowdown starting that would adversely impact Vale's sales to China.  Brazil's government also released a plan to cut spending in 2011 by approximately 30.1 billion, as that country tries to curb inflation which rose to 5.9% in 2010, and jumped in January 2011 by the highest amount in 6 years. IBGE - Instituto Brasileiro de Geografia e Estatística Bloomberg

Zillow  reported yesterday that 27% of American homeowners are underwater on their mortgages at the end of 2010.    Zillow also provides its estimates for percentage changes in home values by city:    Zillow Local Info

1. Sold 100 PHO at 19.74 and Bought 100 JTD at 13.31 on Tuesday (see Disclaimer):  These transactions were made in a satellite taxable account, who primary purpose was to buy bank certificate of deposits.  As those CDs matured, and faced with a negligible reinvestment yield due to the Fed's Jihad against savers, I opened a brokerage account linked to a savings account at that institution and started to invest some of funds in income generating stocks.   The purpose is simply to generate income, hopefully make some money on the shares, and then to start buying CDs again when rates return to a more normal level.   The CEF JTD pays more than PHO.  And, I was able to realize a small gain on the shares of PHO bought recently at $18.97.  PHO is a PowerShares ETF for Water Resources.

The CEF JTD has a managed distribution policy and currently pays a quarterly dividend of 26 cents per share, giving it close to a 7.78% yield at the $13.31 price.   JTD - Nuveen Tax-Advantaged Dividend Growth Fund  As of 2/8/2011, this CEF was selling at a -8.36 discount to its net asset value of $14.59 based on a market close that day at $13.37.  The fund will invest at least 80% of its funds in securities that pay qualified dividends.  As of the last shareholder's report, the fund had about a 73% allocation to common stocks and most of the remainder were in "preferred" stocks.   Nuveen has another fund with a similar objective, JTA, that was selling at a larger discount, with a higher yield than JTD, but I had a more favorable opinion of JTD's portfolio. 

This is the last filed  Form N-Q for the period ending 12/31/2010. When I look at the "preferred" securities, most of them do not pay qualified dividends.  There is an assortment of trust preferred stocks that pay interest of course,    a few exchange traded senior bonds, and at least two First Mortgage bonds.   There are some equity preferred stocks that pay qualified dividends, including two from Zions, one of which is the ZBPRC that I currently own.   

This is a link to the last SEC filed shareholder report for the period ending in June 2010:   Report   The fund does write some calls on index options.  The fund is also leveraged and rated just 2 stars by Morningstar.  The expense ratio shown on that page from Morninstar includes interest expense.   For new investors, it is important to look at the recent dividend history shown at Morningstar to determine whether the fund is supporting the dividend with a return of investor's capital.  This is the case for JTD.  Given what happened in 2008, I am not surprised by that, since this kind of fund needs capital gains to support the dividend, and most funds had their unrealized appreciation wiped out in short order during the Dark Period.   The chart at Morningstar does show that the percentage of the dividend classified as a return of capital has been shrinking since 2008.   Overall I would be satisfied collecting a few dividends and then selling the shares for a small profit. 

I do not expect much, if any, appreciation from the "preferred" securities in the portfolio.  The common stocks are for the most part viewed as good companies. 

2. Coca Cola (owned): I am near my maximum limit of $10,000 for securities issued by one company with my position in the common shares of KO.   I re-initiated a position during the Dark Period by buying shares at 38.72 (March 2009).  I am reinvesting the dividends.  

Coca Cola reported 4th quarter net income of 5.77 billion or $2.46 per share.  Excluding items, KO reported earnings per share of 72 cents, meeting the consensus estimate.   Revenue grew 14% in Eurasia and Africa.  The Pacific region had only 6% revenue growth, dragged down by a 3% decline in China.  Adjusted for foreign exchange and the benefit of cross licensed brands, worldwide revenue rose 8%.   

KO shares rose as high as $64.75 before closing at $63.15, up 28 cents for the day.  

3. Added 50 of the TC GYC at $21.60 in the Roth IRA (see Disclaimer):  GYC is a trust certificate which is classified by me as a  Synthetic Floaters.  I will buy synthetic floaters only in a retirement account due to the complicated tax issues associated with the swap agreement which creates the float.  For as long as the swap agreement is in effect, GYC will pay the greater of 3.25% or .65% above the 3 month LIBOR rate up to a maximum yield of 8% on its $25 par value. 

GYC Prospectus: www.sec.gov  GYC is a trust certificate issued by a grantor trust, and that certificate represents an undivided interest in the assets of the trust which consists of the swap agreement and senior bonds issued by SBC Communications, now known as AT & T.  That bond is a senior debt obligation maturing on 6/15/2034.  When that bond matures, the owners of GYC would receive their $25 par value assuming AT & T or its successor is still around to make the payment.  As with all TCs, the TC matures at the same time as the bonds owned by the trust.  

While this is a tad complicated, the owner of GYC is not entitled to receive the fixed coupon interest of the underlying bond which is 6.45%.  The trust does receive  payment from AT & T at that rate for the bonds owned by it.  The trust then engages in a swap transaction with the swap counterparty, identified in the prospectus as UBS.  The trustee swaps the interest received from AT & T for the amount due to the TC owners, which is currently the guarantee of 3.25%.  So UBS is making money on the spread now, without assuming the risk of a default by AT & T.  Credit risk is being shouldered solely by the owner of the TCs.  UBS does face some risk however, in that the LIBOR rate could rise to such a high level that it has to pay more to the TC owners under the float than it receives from the trustee.  It may have hedged that risk. 

The underlying bond is rated A2 by Moody's and A by S & P.  So, for now, I am not concerned about the credit risk.  Part of the reason for buying more now is the quality of the credit and the possibility that the FED's Jihad against savers will end sometime in 2011.  The float is triggered when the 3 month LIBOR rate exceeds 2.6% during the relevant computation period, which is not a very high threshold from a historical perspective. LIBOR   

I can also calculate the range of yields available to me for GYC at a total cost of $21.6, based on the guarantee of 3.25% and the maximum yield of 8% which would be triggered when the 3 month LIBOR rate rises above 7.35% during the relevant computation period.  My low yield would be the one payable now, approximately 3.76%, and the high yield would be 9.26%. 

I transferred my Roth IRA account to Vanguard since Fidelity will not allow their customers to buy synthetic floaters and other exchange traded bonds.   For some reason, some of my original cost information did not survive the transfer but Vanguard does show the original cost information of the 50 shares of GYC that I bought in the Roth in 2009 which is still owned in that account:

GYC 50 Shares AVG Cost $15.41

I bought those shares  at $15.5 (May 2009). (note: some of the difference in cost is due to adjustments to the cost basis apparently caused by some tax issue connected with the swap agreement,  and that adjustment was done by Fidelity)  So, I have a good profit in those shares which have been pumping out quarterly interest payments at the guaranteed rate since I purchased them.  When I made that purchase in May 2009, I had the following comments about it: 

"At a $15.5 cost, the maximum yield would be 11.8%, okay but not great. The current yield based on the 3.25% guarantee and a $15.5 cost would be 5.24%, barely okay at least to me, an old geezer who started enjoying Frank Sinatra two years ago, given the quality of the credit. I am confident the Young Turks would just sneer at it. But the old tortoise is almost up 15% this year and just about back to where the codger was in October 2007 in my main taxable account. Slow and steady works sometimes."

I have bought and sold GYC in the regular IRA.  


Information about the underlying bond can be found at FINRA.  If the Swap agreement is terminated for any reason, then the owners of GYC would receive the coupon payment of the underlying bond on a semi-annual schedule.  The prospectus for the underlying bond can be found at Final Prospectus Supplement.

GYC closed yesterday at $21.40, down 21 cents.  For this security, volume was heavy yesterday at 13,075 shares with the average volume close to 1500. 

4. Cisco (own): I have been selling out of my small position just before Cisco released its earnings report, and that has worked for the prior two quarters, the one for CSCO's 1st quarter in its 2011 F/Y and its 4th quarter for F/Y 2010 ending in July 2010.   Bought 50 CSCO at $22.45 (June 2010)-- Sold Cisco near the closing price of $24.31 (August 2010); Bought CSCO at 20.39 (Sept 2010) --SOLD 50 CSCO @ 24.42 on 11/8/2010. 

I decided to keep my shares, bought at $19.55, after the release of the 2010 F/Y 4th quarter results last November, which caused a large drop in the stock price on very heavy volume.  (11/19/2010 Post)  Cisco does fit into my Large Cap Valuation Strategy.  Based on the after market reaction to Cisco's report and guidance, I would have been better off selling those shares again just before the earnings release, and then buying them back again when the dust settles some.  

Cisco reported earnings for its second fiscal quarter, which ended on 1/29/2011, of 1.5 billion or 27 cents per share on a GAAP basis.  Net sales for the quarter were 10.4 billion dollars, representing a 6% gain year-over year.  The consensus forecast was for 10.24 billion. The Non-GAAP results were reported at 37 cents per share, beating the consensus estimate by 2 cents.  NYT 

Gross margins declined sequentially. Year-over-year, gross margin fell to 60.2% on a GAAP basis from 64.5%, and to 62.4% on a Non-GAAP basis from 65.6% in the year earlier period. This would be a cause for the market's adverse reaction.

Cash flows from operations were 2.6 billion during the 2nd F/Y quarter, and Cisco ended the 2nd fiscal quarter with 40.2 billion in cash. Long term debt was shown at 12.152 billion on the balance sheet as of 1/29/2011.    Cisco repurchased 89 million shares at an average cost of $20.15 per share. 

In the current quarter, Cisco expects its 3rd quarter sales to rise between 4 to 6%, compared in the year earlier quarter, and estimates a rise in revenues of between 8 to 11% for the 4th quarter.  This would put the current quarter's revenue at between 10.78 billion to 10.99 billion.  The mid-point of both estimates would be higher than the consensus estimate before this guidance.  However, the forecast for 3rd quarter earnings made by Cisco was between 35 to 38 cents, yet another disappointment, since the consensus was at 40 cents.

Chambers expects a majority of state and local governments in the developed world will continue to decrease discretionary IT spending and expects challenges in Cisco's government business to spread to the federal level, saying that he expects the "challenges will worsen over the next several quarters."   

Some of the analyst forecasts made before the earnings release and guidance can be found in Tiernan Ray's column in  Barrons.

Based on all of the foregoing, it looks to me like CISCO stock is likely to be range bound for several more quarters, hovering near the $20 level with limited upside potential above $22 or downside risk below $18.  Even with its problems, the stock is still cheap, and the balance sheet is more than healthy.