Tuesday, August 11, 2009

Bought 50 ETF ENY at $13.6/More on IPB/I Never Buy Bonds at More than Par Value or CEFs at Premiums to Net Asset Value/

1. Bought 50 ETF ENY at $13.60 (see Disclaimer): This ETF contains Canadian Energy Stocks (ENY - Canadian Energy Income Index ), some of which I already own, including Enerplus (ERF), Provident (PVX), and Penn West (PWE). Given that I already own some of the constituent companies, I elected to buy 50 shares yesterday, rather than a more normal for me 100 shares of this particular ETF, which I have owned in the past. By buying a limited amount of ENY, I gain some exposure to firms that I do not own, like Suncor, Canadian Oil Sands, Canadian Natural Resources, Encana and Imperial Oil, along with several smaller ones that I would not buy individually. Holdings -Canadian Energy Income Index ETF - ENY. For an ETF, the expense ratio is high at .65%, which is a cap, and that is another reason for limiting my investment in it.

ENY was last sold in early 2008 based on my view that a parabolic move in any asset class requires selling into the move, with the only difficult question being the timing. Energy prices and stocks were having a good run in the first half of 2008, even though the bear market and recession had already started. I believe my last trade was a sell at over $25 in February 2008.

I mentioned in an earlier post, in connection with my discussion about selling shares in the CEF IRR, that I would buy this fund. IRR was trading at over a 6% premium to its Net Asset Value as of the close on Friday. WSJ.com (that page is updated daily) I would never buy a CEF at a premium to its NAV. Instead, I would sell one at a premium bought at a significant discount to NAV. I last bought IRR shares in December at $12.5 when it was selling at close to a 24% discount to NAV: IRR BUY The entire strategy with CEFs is predicated on buying at large discounts and hopefully selling when the discount to NAV narrows while the NAV is also rising, so that money is made in two ways, a narrowing of the discount and the improving market values of the securities owned by the CEF.


2. I Avoid Buying Bonds Selling at Above Par Value: I would also try to refrain from buying any bond selling at above its par value. Instead, I am more likely to be a seller when a bond that I own, bought at a discount to par value, appreciates in value to a price above its par. When a bond is purchased at a discount to par value, I can win in two ways. I can realize a capital gain on the shares resulting from a narrowing of the discount, an early call at par value or simply holding the bond until maturity. I also enhance the value of the coupon. If I bought a bond selling at greater than par, I lose both of those opportunities. And, the coupon loses part of its value and the possibility of a capital loss is enhanced with a guaranteed loss if held to maturity or held after an early call.

I may be a bit of a yield hog, but only for yields enhanced by buying at a discount to par value.

I have just recently divided my bond portfolio into two categories. In the first category, I have bonds that mature within ten years, and bonds that mature in more than ten years purchased at significant discounts to par value. For those, I am inclined to hold those bonds to maturity, possibly trading a few when and if I become worried about the credit. I am more concerned about the credit risk than inflation risk in this category.

In the second category, I have long term bonds, maturing in more than 10 years, that were not purchased at a significant discount to par value. I have to more concerned about inflation risk for these securities. Those bonds will be sold as soon as I become concerned that the market is starting to anticipate significant inflation, the number 1 enemy of a long bond. A significant discount is defined for this classification purpose as 20% or greater. So my buy of DKF at $20 in an IRA would be at a significant discount. My buy of EHL, the First Mortgage Bond from Entergy Louisiana at $22.75 would not be at a significant discount and would fall in the second category. Notable News 10 22 2008 & END OF DAY TRADES (IR, INTC, TE AND EHL) My last buy of the PJL, containing a senior Verizon bond, at $24.50 would be on my sell list at the first sign of trouble. Sold Part of IR/AVY/Sold FRPRJ: Transfer of Risk to IRA/Bought PJL/FBI Interrogator Comments on Torture/ GR, WBS, CB & Bought 50 MSFT at $17.79 On the other hand, my last buy of a related security, XFL, was at less than $20 so it would fall into category one. The buys of JZE and JZJ, AT & T senior bonds, would all be in category one, but the recent buy of GJF would fall into two, and so on.

This is my reasoning. Inflation will hurt the long bond values. For a JZE, I have locked in a minimum rate of 12% for every year until 2031 or early redemption, more in the event of ratings downgrades of the underlying AT & T bond. A high yielding security, providing a steady flow of income, has a lot of value to me. I value the 12% each year more than I do realizing close to a double in the share price now. Buying that security and many others during the credit meltdown, all at deep discounts to par value, juiced the value of their coupons. The PJS bought at $7.2, for example, will yield over 26% per year until 2028 or early call. ISF bought at $4.6 will yield 34% (GRTPRF has a 75% annualized yield at my $2.9 cost) . Others bought in a retirement account, listed in an earlier post (item #7: SOLD 1/2 CBG), have phenomenal yields based on my cost, and I will hold those without being concerned about bouts of inflation since the constant stream of income is already very high. The ones bought closer to par value do not have these kind of high yields, and are more vulnerable to inflation. If we start to run hot at a 3 to 5% CPI for a year, I would suspect that I could buy a bond like EHL back at some point at significantly less than my last purchase price. I may never be able to buy some of these bonds like PJS at $7.2 or ISF at $4.6 again in my lifetime even with serious inflation, unless there is a serious credit event involving First American or ING, respectively.

3. Sysco (owned): Sysco is another stock bought in March, with the buy at $19.46. Buys of CPB LQD SYY XKK/ At that price, my current yield, without any dividend increase, is around 5%. This is another one, like Kraft, DuPont and Unilever, that I will keep as long as the that dividend is maintained and increased. As the dividend increases, with my cost remaining the same, my yield will increase, and that is currently a tax advantaged yield. Yesterday, Sysco reported a 6.6% decline in revenues and earnings declined 3% to 53 cents, compared to the year ago quarter. The earnings beat the consensus forecast of 49 cents. This is okay under the circumstances.

I looked at the Value Line dividend data on Sysco. The data starts in 1993 and shows dividend raises for every year since that time. The annual dividend was 7 cents in 1993 and will be 92 cents for 2009. Similarly, Kraft has raised its dividend every year after its initial public offering in 2001, starting at 54 cents in 2002 and now at $1.16. I always look at that kind of data. If I can purchase the stock at a low enough price, which juices the the starting point of my dividend yield, that fact alone will have a significant impact on my decision to continue holding the stock.

4. More on IPB: I had a question about whether GMAC was included in the GM bankruptcy. I do not believe that GMAC was part of the bankruptcy filing. The GM bonds are no longer trading but there is still an active market in the GMAC bonds. There are several GMAC exchange traded bonds: GOM, GKM, GMA, AND GJM. I HAVE NO INTEREST IN BUYING ANY OF THEM. However, a buyer of IPB, a TC that includes 15 corporate bonds and Treasury Strips, has no choice but to buy the package. And this package does include a GMAC bond. The last SEC filing from the Trustee shows that all of the corporations are current paying interest on the corporate bonds contained in IPB: www.sec.gov Also, I did a google search and came up with these articles which claimed that GMAC was not included in the bankruptcy of GM: The Sun News NYTimes.com

In my FINRA Gateway Post, I have links to the trading data for many of the bonds contained in IPB. LINKS TO FINRA INFORMATION ON UNDERLYING BONDS IN TRUST CERTIFICATES

This would be a few of them:

IPB also contains a U.S. Treasury Strips maturing in 2030. I checked on the prices of a strip maturing in the WSJ in 2030 and one maturing in May 2030 was quoted at 38. So that will account for some of the IPB's current discount to par value. The strips do not pay interest which hurts the current interest yield of IPB. An investor in IPB would receive a pro rata share of the principal amount only of the Treasury strips in IPB at maturity. I roughly figure that is worth $2.87 a share at maturity. I did that computation by dividing the total assets of the IPB by the par value of $25, coming up with 1.5 million shares, and then dividing the principal amount of the strips. 4.305 million by the number of shares. Using that same approach, I figured that the principal amount per share of both the Ford and GMAC bonds are $1.475 each.

Someone with a lot of time, and an inclination to run numbers, could take all of the FINRA trading information for the underlying bonds in IPB, and calculate the precise discount.

GMAC Bank recently changed its name to ALLY, and their commercials with those young children are ubiquitous. For obvious reasons, you would not want to advertising campaign for a bank named GMAC right now.

5. Productivity: The seasonally adjusted annual productivity change in the second quarter rose a greater than expected 6.3% in business sector and 6.4% in the nonfarm business sector. Productivity and Costs, Second Quarter 2009, Preliminary This was the largest gain in productivity in almost 6 years. Unit labor costs fell at an annualized rate of 5.8%. These numbers are subject to change. The government revised down the productivity change for 2008 from 2.8% to 1.8%.


6. Ex Dividends/Ex Interest on Wednesday (owned):
Monthly Payments: PSY, OSM, ISM, GJO, GJK, GJL,
Quarterly: GYB, EMR, DD, DUK
Semi-Annual: MJT, PKM,KRH, JBK

I would not even consider buying a security just prior to an ex date in a taxable account, unless there is a decline in the security that more than compensates for the value of the payment and no discernible news explains the fall.


7. Extremists and Health Care: I am opposed to the Democrats' health care plan for what I view as intelligent and rational reasons. I would like to distinguish my criticisms of this plan, based primarily on costs and my ingrained fiscal conservatism, from the rants of a Sarah Palin who refers to the Obama health care plan as "downright evil" and assorted nonsense. washingtonpost Watching some of these videos where extremists disrupt intelligent discourse of this program is disheartening. The NYT recently ran a story on who was organizing these boisterous and rude shout downs, and it was the GOP and affiliated organizations, as you would expect, along with their publicists at Fox like Sean Hannity. NYTimes I think Peggy Noonan missed the mark widely in her column about these recent Town Hall meetings. WSJ.com There also appears to me to be a great deal of deliberate misinformation being circulated about the plan to frighten people.

8. VIX: The VIX is spiking up this morning to around 26.07.

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