Tuesday, May 17, 2011

Added 70 BRKL at 8.45/Added 70 NSSC as LT at 2.25/Sold 150 IGI at 20.85 in Roth IRA and 100 HPF at 20.26/Generation of Cash Flow Strategy-One Day's Example/

The NY Fed manufacturing index slumped ten points in the latest report to 11.9. The new orders component fell five points to 17.2, while inventories rose. The prices paid index rose to the highest level since mid-2008.  Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York

Alon's  CEO said yesterday that the refinery at Krotz Springs "should" be safe as a result of new levee construction.

I can confirm now that the PMA Capital Senior Bond, with a 8.5% coupon and monthly interest payments, has been redeemed at par value plus accrued interest by Old Republic, the company that had acquired PMA.  I owned 250 shares and 150 of those were held in the Regular IRA:


I did okay trading this former exchange traded bond, but I would have much preferred to keep the 250 shares until maturity in 2018. (e.g. Bought 100 PMK at $8.35   Sold 100 PMK at 9.2  Added 50 PMK at $8.21 Bought 100 PMK at 9.71 Bought 100 PMACK at 10.01 (PMACK was a one day symbol for this bond when it was being delisted from exchange trading)

1. ADDED 70 to BRKL at $8.45 Last Friday (Regional Bank Stocks' basket strategy)(see Disclaimer):  I recently purchased 30 shares of BRKL at $9.06 under my LOTTERY TICKET strategy. Due to the decline in price since 5/11, I decided to give it a promotion to the Regional Bank Stock's basket strategy, which allows for up to a $3000 investment per bank. Consequently I added 70 shares and may add more with a further price drop. I have nothing to add to my earlier discussion about this bank, contained in Item # 6 Bought 30 BRKL at LT at 9.06 (5/12/2011 Post). The banks had a bad day last Friday.  

In my regional bank table, I do not track the dividends, a main source of total return, or the shares purchased with reinvested dividends. For multiple share purchases, I will use the weighted average cost per share, without the commission in the table. For BRKL, this cost number for 100 shares would be $8.63 per share. However, when I tally up the realized gains and loans, I will use the actual tax information provided by my broker, which includes the total cost number.  In 2010, when I started to harvest gains in this basket strategy to now, I have net realized gains of realized gains of $6,460.67. See Item # 3 Realized Gains Regional Banks 

Currently, I have two significant unrealized losses, both in small positions. One is a small 53 share position in Porter (PBIB), whose management is held in the lowest esteem possible here at HQ, and the other is a 100 share position in Hudson.  I should not have bought back shares in PBIB after selling out for a small profit after seeing some cockroaches back in 2010, which have only multiplied since I bought back the shares.  If I do not see improvement in 2011, I will probably unload those PBIB shares for a loss.  Preferably, some other bank will put the PBIB shareholders out of their misery with a merger proposal.

The odd lot stake in PBIB is currently around a $400 unrealized loss, and HCBK is about $345 in the red.  The major unrealized gains as of last Friday's close are NYB at +$511, WASH at +$368; UBSI at +$402; NHTB at $362; FNFG at +253; CZNC at +$508 and TRMK at +$197.  There are 8 others between +99 to +$175.  As with any large basket, I expect to have losers given the large number of securities held in the basket.  The general idea is to have a positive result overall.   

2. Sold 150 IGI at $20.85 in the Roth IRA and Liquidated HPF at $20.26 in Satellite Taxable Account Last Friday (see Disclaimer): As an investor, I view it as dangerous to be predisposed to believe anything without reliable factual support.  And I certainly strive to form opinions without bias, generally defined as a deviant mental process here at HQ, where information is altered, ignored (particularly reliable information) or created to conform to a  pre-existing belief. Notwithstanding that approach, I may be more predisposed than younger investors in my sightings of the inflation bogeyman.  Right now, I feel inflation coming in my bones, but I realize that may be due to actually living through the 1970s and early 1980s, and starting out as an investor during that period.  In other words, that experience may have made me more likely to see inflation problems on the horizon, and to be jumpy about it, then economists like Bernanke who see no meaningful threat at all.

It is just impossible me to label the current inflation reports as benign or "good", even if I believed in the  government's owner equivalent rent component in its CPI calculation which I do not.  So, possibly due to a latent predisposition to see future inflation problems, I am now a weak holder of bond funds and longer term bonds. Consequently,  I have been paring my exposure in those securities, generating proceeds in excess of 50 thousand over the past few weeks.  I may be premature, or just wrong, both of which occur with some frequency, but I will not willingly be road kill when the worm turns decisively against bonds.

The junk bond ladder strategy is in part a response to those concerns in two ways.  First, an improving economy will result in improved credit risk profiles for many junk issuers, and that fact alone can increase their bond prices even in a modestly rising interest rate environment. Second, typically junk bonds have short terms, as investors do not want to lend money to dicey credits for a long period.  The average maturity of the bonds in my ladder is fluctuating between 7 to 8 years, so I have the option of holding most of them until maturity to collect the principal amount provided the company survives to pay me.  Since the bonds in junk bond ladder strategy are being bought at discounts to net asset value, this will hopefully result in some profits being realized on some of the bonds, hopefully most of them, in addition to their much higher yields compared to BBB rated bonds.  

I also have modest goals with I buy a bond closed end fund now.  The goal is simply to collect a few payments and then to dispose of the position at a profit, no matter how small.  For the long term bonds CEF HPF, and the similar fund HPI, I have net realized capital gains of $375.01 plus their monthly dividend payments, and no longer have a position in either of those funds. So, I am not trying to shoot the lights out and view that outcome as a successful result given the modest goal.  My peak ownership of HPF was 400 shares, and 100 for HPI.  

The bond CEF IGI was also liquidated last Friday, with a similar profit trading this CEF.  The discount to net asset value narrowed to -3.48 at Friday's close.   I have not yet sold a share in GDO (except for a small pare in the Roth Sold 75 GDO at 19.24 in the Roth Bought at $18.63, which I had forgotten about).

GDO is a similar fund to IGI, except GDO buys corporate debt from both foreign and domestic issuers, and my exposure to that CEF is material at close to 10 thousand. Bought 100 of the CEF GDO at 18.6 (March 2010);   Bought 70 of the CEF GDO in Regular IRA at 18.61 (March 2010 Post); Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) (March 2010 Post)  Bought 100 GDO at $18.57 (April 2010 Post)  Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 (December 2010 Post), see also Managing Interest Rate Risk.  GDO closed yesterday at $18.60, so I am near break-even on the shares.  The net asset value as of yesterday's close was $20.34 per share, creating a discount to net asset value of -8.55%.  Dividends are paid monthly at a current rate of 13 cents per share.  GDO Distributions  This is a link to GDO's current holdings,  GDO Holdings, and to the last SEC filed shareholder report for the period ending in October 2010.

3. GENERATION OF CASH FLOW STRATEGY: Throughout this blog, I have mentioned that my most basic strategy is to generate a constant stream of cash flow from dividends and interest payments.  I then aggregate those distributions to buy more income producing securities, creating a compounding effect over time.  The cash flow also gives me the option, mostly psychological, to invest during bear markets, even during one of the worst bear markets in my lifetime.  In other words, without that stream of money flowing into the accounts, I would not have been as aggressive during the most recent catastrophic phase of a long term secular bear market. The cash flow purchases made between September 2008 through the Spring of 2009 were the most rewarding investments that I have ever made, with a large number of them doubling or more in value over a short period of time.

To give readers an idea of some of the securities that generate this cash flow, I have taken two snapshots of distributions made into one account for Monday May 16th.  The first snapshot consists of interest payments made by bonds purchased in the bond market (except for PMA Capital which was originally an exchange traded bond):


As previously discussed, this snapshot shows that I did lose the PMA Capital 8.5% senior note to a redemption. For the most part, all of the distributions do not make any difference to me in isolation.  I am focused on the aggregate number flowing into the account.

The second set of distributions received Monday comes from a hodgepodge of securities, including several CEFs that pay monthly distributions, trust certificates (DHM, JZV, JZJ), an exchange traded bond CWHN since sold, REIT preferred stocks, and OSM which is a floater tied to CPI that pays monthly interest.  No stock dividends were paid on Monday:



4. Added 70 shares of NSSC at $2.25 on Monday (LOTTERY TICKET Strategy)(see Disclaimer):  LB is a stickler for details and compliance with all of its 2,282,230,474,908 trading rules.  Recently, when the OG was Head Trader of the storied trading operation here at HQ, the OG gave a "dispensation" to permit the RB to violate rules, which is the only thing the RB is good at. It was rumored thereafter, and the LB does not comment on rumors, that the Stock Stud used that dispensation to finish some business in the restroom. 

Since the RB had already been allowed to buy 100 NSSC  at $1.8, LB had to do a detailed computation of the amount allowable for an additional purchase under the LT rules.  Some staff members called this time consuming computation picayune and to those Nitwits and Lame Brains, our 10 year old LB would only say "stick it where the sun don't shine" which statement was the last straw for HK who wanted to install a more mature LB as the new HT here at HQ.   


1. Maximum Limit for LT=$300 plus prior total gains in same security +$77.99=$377.99 allowable for NSCC
2. Shares Owned as a LT=100 at cost, excluding commission, of $180
3. Maximum allowable investment now allowable in NSSC (1 minus 2)= $197.99
4. At a price of $2.25, the LT RULE permitted the purchase of up to 88 shares.  
5. After considering no variables, and just to shut up the RB, LB bought 70 more shares at $2.25. 

NSSC reported results before the market opened yesterday, and LB will not discuss that report except to say the company did report a profit.  Form 10-Q for the Q/E 3/31/201 The shares closed at $2.2, Napco Security Systems Inc, NSSC Stock Quote. This is a link to the Press Release announcing results found at Business Wire:  NAPCO Reports Results for Quarter Ended March 31, 2011 

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