Bought RJA and RMT/Kroger/CIT bonds/ING CDS for its Junior Bonds

1. Bought 50 RJA at $7.02 (see Disclaimer): Recently I have added some commodity ETNs and have had some luck with RJZ and RJI, with about a $400 unrealized profit as of Friday's close. The 200 shares of RJZ, which includes only the metals, is doing better than my 300 shares of the broader RJI index. 

May 26 2009/ Bought MSPRA RJZ & ADX/ COMMODITIES AS AN ASSET CLASS

Bought RJI, Sold DKQ, Bought Google/Pared BWX

BOUGHT RJI

I had taken a smaller position previously in RJA, the one covering just the agricultural commodities, and have a small unrealized loss on 100 shares. Added RJA I really don't have a clue about the future course of commodity prices, and I doubt anyone else can predict the future either. As one person recently said about me, I sell what goes up, and buy what goes down. That is a little simplistic of a description of LB's mental powers. All of these commodity ETFs and ETNs took a pretty big hit prior to March. So, I try not to over think this to death, buy when the prices have been shellacked and sell when they recover.

Instability & Volatility in Asset Correlations

Cramer Discusses Parabolic Rises/My Prior Discussions of Selling into Parabolas

A FEW MORE COMMENTS ON DYNAMIC ASSET ALLOCATION

Is it conceivable that I might pare RJZ some, trading corn for gold so to speak.

2. Digging Myself Hopefully out of the CEF Hole-Bought RMT at 6.73 (see disclaimer) After jettisoning my small cap positions, and my small cap mutual fund, in response to the signals being given by my indicators, I kept two CEFs as a bet against my judgment that small caps were on the verge of a bear market. Corrections Corporation Mention in Barrons/Small Caps and RVX model I had done well with those two funds, RMT and RVT, over the years, and decided to stick with them.

That is my tendency, unfortunately, to hedge my bets, no matter how strongly my opinion may be on a subject. One reason for staying with these two Royce funds was that I viewed the managers to be capable in the small and micro cap categories. Another reason had to do with the distribution policy, which would have provided a steam of income that could be reinvested in additional shares. If I was right about the bear coming, then the generous dividend could be a way of averaging down, that would benefit me when the bull returns. If I was wrong about the bear coming, then I would still have some small cap exposure. It did not work out as I planned. These two CEFs dropped their distribution policy, eliminating their dividends, and the discount to NAV expanded rather than contracted over the course of this bear market. Undoubtedly, many individual investors dumped their shares when the dividend was eliminated, or suspended if you want to be nice about it. The discount to NAV now is hovering in the 16 to 17%, which is historically high for this fund, at least before it eliminated the dividends. This is an article about the Royce CEFs.

RMT generally focuses on firms with a market capitalization of less than 500 million, an area where values can be found due to a lack of interest by large institutions. This is a link to the main page on the 3 Royce closed end funds. Closed-End Funds I also own RVT. The main entry page for RMT is Royce Micro-Cap Trust.

3. ING Credit Default Swaps: The cost to insure ING's junior debt issues from default climbed to 138,000 euros to protect 10 million in euros of these hybrids for five years. Bloomberg.com SACREBLEU. I have never read one of those contracts, and do not know exactly what is being protected when there is a right to defer interest payments. If the CDS contracts are protecting against a default caused by something like a bankruptcy, then it is somewhat disconcerting that it would cost so much to protect against that possibility. I may be the only person that I know that actually reads insurance contracts.

4. CIT InterNotes: This is a link to an interesting article in Bloomberg about how CIT, mostly cut off from selling its bonds to institutions, turned to selling 827 million of their securities to individual investors, just between December 2007 and March 2008, while it still had an investment grade rating, but institutions knew enough to stay away. I did buy just two bonds, prior to December 2007, with one maturing in December and the other in March. I still expect to lose money on them, and would be pleasantly surprised to receive full principal value at maturity. I recall writing in one of my emails that those buys were timid for a reason. I did not know specifically why at the time, but noted that the market was pricing those bonds at a price inconsistent with their credit rating. The difference in yield might have been as high as 1 to 2% over other similarly rated bonds. That was a warning signal. My mistake was buying even 2 bonds, after noting that institutions were already wary of CIT. Normally, I would pay more attention to the caution police. While the caution police kept me out of more gains with a security like DKR, I have saved more money by heeding that siren call.

5. Kroger (owned): Jefferies had an upbeat report, summarized in Barrons, on both Safeway and Kroger. Jefferies prefers Safeway, as did Andrew Bary who included Safeway among the large cap, quality stocks, left behind in the current rally. I do not see much difference, except Safeway issued a significant earnings warning recently. Both are selling at low P/Es, though SWY has a slightly higher net margin from 2006 to 2008. Kroger on the other hand had the higher return on equity, with both firms having similar figures for return on assets. Safeway is selling closer to its book value, and both firms have low P/S ratios as you would expect for grocery store chains.