The robust rally in stocks yesterday was beyond my comprehension. Consequently, I added another small double short ETF about a minute before the closing bell as an insurance policy for my significant stock positions. Possibly, investors are just shrugging off the negative news, believing that the spike in oil prices is just temporary and everything will settle down in the Middle East soon. After all Hugo Chavez and Qaddafi have put their minds together, thought through the problem, and have arrived at a reasonable accommodation to present to the opposition forces in Libya who just need to listen better. Now, I am a bit skeptical of that scenario bearing any fruit, since Qaddafi's last proposal was for the youngsters to quit ingesting hallucinogenic drugs provided by al Qaeda and listening to former prisoners from Guantanamo Bay who are inciting them to rise up against the Great Leader. Story Or maybe the raging bulls believe that the unemployment problem is well under way to a resolution, hoping or praying for a robust jobs report later today. The consensus calls for a 218,000 increase in February non-farm payrolls. And housing prices must be on the rebound notwithstanding all reports to the contrary. And, many believe the FED will soon tighten after QE 2 is done, or no later than the end of 2011, and the long treasury bonds continue to be shellacked in price.
Walmart (owned) increased its annual dividend by 21% to $1.46 from a prior annual rate of $1.21. The new quarterly dividend rate will be $.3650 per share with the next ex date on 3/11/2011.
A reader asked me yesterday why I bought another 100 shares of the bond CEF ERC, inquiring whether the net asset value will go down with interest rates rising. My reply to him, modified somewhat to reflect that ERC did cut its dividend from $.1083 to $.10 cents effective with the March distribution (CORRECTING) and a brain malfunction, is as follows, and I added a few additional comments at the end of the quote:
"The short answer is yes to your question.
But, there are at least four other considerations that come into play.
(1) While I believe that rates will rise, I may be wrong. This falls under the heading of who knows what the future will bring.
(2) It is important to look at the bond funds duration and effective maturity. A long term bond fund will be more adversely impacted by rising rates than one with a short average duration. According to the Fact Sheet for this fund, which can be downloaded at the sponsor's web site, the current effective maturity is 4.6 years and the average duration is 3.4 years. This gives the fund some flexibility to respond to higher rates given the number of bond owned with shorter maturities. The fund had 672 holdings. (see FactSheet .pdf)
(3) The current yield of over 7.93% annualized at the current monthly payment rate (at a total cost of $15.13) provides me with compensation to assume the interest rate risk, as does the large discount for a bond fund to current net asset value. And,
(4) I have sold some shares in this bond fund when the price exceeded $16 and will likely do so again. This paring process will lower my average cost over time. In the event I become really concerned about interest rate risk, I have the option of selling some shares at a loss too. Hopefully, if that happens, the dividend will provide me with an acceptable total return.
Under no circumstances would I hold this bond fund when I am sure that a long term secular bear market in bonds is well underway. I believe that one has started but I am not confident yet in that belief. One way to protect myself is to have a trigger for reducing the position in bond funds.
My trigger is a rise in the 10 year treasury note to over 4%. When that happens, and I believe that it will start in 2011, I will start the paring of bond funds without a term date, staring with the ones that have the longest durations."
I also pointed out that a yield of 7.93% is almost 4 1/2% above the current 10 year treasury yield. On $10,000, that would amount to almost $450 per year. When making this kind of comparison, I will also net out the prior profits that I have realized trading in this security. I would also add that this bond fund does have significant holdings in junk rated bonds, and those can rise in value when an interest rate rise is caused by an improving economy due to improvements in their credit risk profiles.
1. SOLD 50 WBS at $22.49 on Wednesday (Regional Bank Stocks' basket strategy)(see Disclaimer): I bought 50 shares of Webster Financial stock in March 2009 at $4.58, or for a total cost of $237 with the commission:
Walmart (owned) increased its annual dividend by 21% to $1.46 from a prior annual rate of $1.21. The new quarterly dividend rate will be $.3650 per share with the next ex date on 3/11/2011.
A reader asked me yesterday why I bought another 100 shares of the bond CEF ERC, inquiring whether the net asset value will go down with interest rates rising. My reply to him, modified somewhat to reflect that ERC did cut its dividend from $.1083 to $.10 cents effective with the March distribution (CORRECTING) and a brain malfunction, is as follows, and I added a few additional comments at the end of the quote:
"The short answer is yes to your question.
But, there are at least four other considerations that come into play.
(1) While I believe that rates will rise, I may be wrong. This falls under the heading of who knows what the future will bring.
(2) It is important to look at the bond funds duration and effective maturity. A long term bond fund will be more adversely impacted by rising rates than one with a short average duration. According to the Fact Sheet for this fund, which can be downloaded at the sponsor's web site, the current effective maturity is 4.6 years and the average duration is 3.4 years. This gives the fund some flexibility to respond to higher rates given the number of bond owned with shorter maturities. The fund had 672 holdings. (see FactSheet .pdf)
(3) The current yield of over 7.93% annualized at the current monthly payment rate (at a total cost of $15.13) provides me with compensation to assume the interest rate risk, as does the large discount for a bond fund to current net asset value. And,
(4) I have sold some shares in this bond fund when the price exceeded $16 and will likely do so again. This paring process will lower my average cost over time. In the event I become really concerned about interest rate risk, I have the option of selling some shares at a loss too. Hopefully, if that happens, the dividend will provide me with an acceptable total return.
Under no circumstances would I hold this bond fund when I am sure that a long term secular bear market in bonds is well underway. I believe that one has started but I am not confident yet in that belief. One way to protect myself is to have a trigger for reducing the position in bond funds.
My trigger is a rise in the 10 year treasury note to over 4%. When that happens, and I believe that it will start in 2011, I will start the paring of bond funds without a term date, staring with the ones that have the longest durations."
I also pointed out that a yield of 7.93% is almost 4 1/2% above the current 10 year treasury yield. On $10,000, that would amount to almost $450 per year. When making this kind of comparison, I will also net out the prior profits that I have realized trading in this security. I would also add that this bond fund does have significant holdings in junk rated bonds, and those can rise in value when an interest rate rise is caused by an improving economy due to improvements in their credit risk profiles.
1. SOLD 50 WBS at $22.49 on Wednesday (Regional Bank Stocks' basket strategy)(see Disclaimer): I bought 50 shares of Webster Financial stock in March 2009 at $4.58, or for a total cost of $237 with the commission:
Since WBS is still only paying a 1 cent share dividend, and the percentage gain was so large, I decided to harvest the 400% gain and to re-deploy the proceeds into a stock that is currently paying a decent dividend. I am starting to concentrate on fewer holdings in this basket, focusing on those banks that maintained and even increased their dividends during the Near Depression. I am also changing my dividend distribution option on several of them to reinvestment into additional shares.
At the present time, I have two problem children in this basket, Hudson City and Porter.
I am tracking my realized gains on the stock sales in Item # 3 Realized Gains Regional Banks.
2. HEINZ (OWN:Dividend Growth strategy): HEINZ (HNZ) reported net income of 274 million for its fiscal third quarter, or 84 cents per share. HNZ issued a press release a few days ago, discussed at Item # 3 HNZ, that summarized its expectations for this quarter, which was greater than expectations at that time. Heinz believes that sales in emerging markets may rise to one-third of total sales by its 2016 fiscal year. Heinz also announced yesterday that it had acquired an 80% interest in a Brazilian food company.
I bought Heinz shares in March 2009 at $31.67.
3. Bought 1 Tenneco Packaging 7.95% Senior Bond Maturing 12/15/2025 at 92.8 on Thursday (Junk Bond Ladder Strategy) (see Disclaimer): This is another junk bond, currently rated Caa1 by Moody's and B- by S & P. This bond was originally issued by Tenneco Packaging, later known as Pactiv Corporation. Late last year, Pactiv was acquired by a New Zealand based company called Reynolds Group Holdings, a privately owned company. This company is engaged primarily in consumer food and beverage packaging. This is a link to Reynolds' third quarter report for the period ending in 11/2010: reynoldsgroupholdings.comQ3MgmtPresentation .pdf
The prospectus for this bond dates back to 1999: www.sec.gov As noted in that document, the bond was originally issued at 7.45% and was later exchanged for the 7.95% coupon bond. The current bond CUSIP is 880394AB71. As my price the current yield is around 8.64% with a YTM of 8.93%.
This bond tarted out as a 7.45% bond issued by Tenneco. In 1999, as a result of the spin out of the packaging segment from Tenneco, this bond was exchanged for another with a 7.95% coupon. This is the link to the FINRA - Investor Information page for the 7.95% coupon bond.
4. Sold 50 PFS at 14.88 on Thursday (Regional Bank Stocks' basket strategy)(see Disclaimer): This sale was the result of my ongoing pare of stock in this basket as I consolidate my position in fewer names. I will wait for a correction in price before adding to one or more of my existing holdings.
The PFS dividend yield on this one was good at my cost, which was at $11.68, though the yield at my sales price would be much lower at around 3%. This is a link to this bank's last quarterly report: form8k
5. Bought 50 WIN at $12.46 (see Disclaimer): This purchase is entirely an income play. Based on the current dividend rate of 25 cents per share, the yield at a total cost of $12.46 is around 8%. Windstream, WIN Stock Quote
I last purchased shares in WIN on 3/3/2009 at a total cost of $6.53 per share:
I briefly mentioned that purchase in this Post: Windstream. This brings me up to 250 shares and I am taking the generous dividend in cash. I do not anticipate a dividend raise. The main issue on the dividend is whether or not it will be cut. I reviewed the most recent S & P report before adding to my position. The analyst pointed out that WIN's dividend was supported by free cash flow, with the company using about 55% of its free cash flow to pay the dividend. S & P currently rates the stock 4 stars with a $14 price target. The stock recently rose to a high of around $13.25, WIN, but then fell to its current price after reporting 4th quarter earnings report that apparently disappointed some investors. Reuters
Windstream recently announced its intent to issue 600 million in unsecured senior bonds maturing in 2023 which was rated BB+ by Fitch. This bond was privately placed and has a 7.5% coupon: SEC Filed Press Release My after tax yield would be higher with the common stock than with this bond.
This is a link to the recently filed 2010 Annual Report: Form 10-K
6. BOUGHT 50 FE AT $36.75 on Thursday (Core Electric Utility Strategy)(see Disclaimer): I noticed yesterday that FE had declined over 1% during the robust stock rally and had fallen into my buy range. Although FE is a core utility holding, I will buy and sell some shares to book profits and to lower my average cost. I recently sold 50 of FE at $40.7 (2/3/2011 Post). I noted in yesterday's post, at ITEM # 4 FE, that I was looking to buy back those 50 shares at a price which would lower my average cost per share which was then $38.32. The decline in price yesterday to $36.75 intra-day was sufficient under my trading system to buy back those shares.
The dividend yield at a total cost of $36.75 is around 5.99%. FirstEnergy Corp.- Investor Relations - Dividend History The current quarterly penny rate is $.55 per share.
FE recovered some from its morning downdraft and finished down 21 cents to close at $37.11.
7. UNITED REFINING TENDER OFFER (own 1 2012 senior bond): I discussed the offer made by United Refining to purchase its 2012 bond in yesterday's post. I reviewed last night the paper solicitation received in the mail yesterday. At page 5 United states that it "intends" to redeem the remaining bonds after a successful indenture under the terms of the Indenture.
I will discuss the remaining trades in the next post.
FE recovered some from its morning downdraft and finished down 21 cents to close at $37.11.
7. UNITED REFINING TENDER OFFER (own 1 2012 senior bond): I discussed the offer made by United Refining to purchase its 2012 bond in yesterday's post. I reviewed last night the paper solicitation received in the mail yesterday. At page 5 United states that it "intends" to redeem the remaining bonds after a successful indenture under the terms of the Indenture.
I will discuss the remaining trades in the next post.
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