The action on Friday in the VIX is a characteristic of the Unstable Vix Pattern, Phase 1. The VIX closed Friday up almost 24% to 30.69. In this pattern, the VIX will engage in whipsaw movement from the low 20s, or even below 20, to the low or mid 30s. Any movement below 20 is short lived. During the last Phase 1 of the Unstable VIX pattern, which lasted from August 2007 to the end of September 2008, when it was replaced with the catastrophic Phase 2 of the Unstable Vix Pattern, the general idea would have been to pare stocks when the VIX approached or fell below 20 and then to buy some stock when the VIX spiked into the low 30s. Buying a double short ETF when the VIX falls to the low 20s or preferably below 18, would also be a potential trade historically speaking. This would be possible as long as the Phase 1 pattern held, and did not resolve itself into a Stable VIX Pattern of more than 3 months below 20 or fall into the catastrophic Phase 2 of the Unstable Vix which happened last October. Vix Asset Allocation Model Explained Simply With as Few Words as Possible Stocks & Politics: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern
Trading and Asset Allocation in Stable and Unstable VIX Pattern A large number of posts discussing this topic can be found in this Gateway Post: USING THE VIX MODEL AS A TIMING INDICATOR FOR LONGER TERM STOCK ALLOCATIONS
To see how this works, I would suggest looking at VIX historical data from August 2007 thru September 2008, and look for duration of the spikes in the 30s and what was happening to the S & 500 prior to and during that spike, and then compare the S & P 500 average when volatility simmers down and returns to the low 20s or even below for a brief period. ^VIX: Historical Prices for CBOE VOLATILITY INDEX - Yahoo! Finance Anyone interested can go back to prior periods manifesting the Unstable Vix Pattern and check out the same type of numbers. There was a one day spike, for example on 1/22/08 from 27.18 to 31.01 but that was the only reading over 30 for awhile. The VIX did however stay elevated in the 25 to 30 level after that spike. A two day spike occurred in March 2008 followed by a less extended period in the 25 to 30 range before the VIX fell to below 20 on May 2008, which it can do in the Unstable Pattern. It just will not stay below 20 for very long. During this brief period below 20, and as long as the pattern continues to persist, I would pare stocks and possibly buy a double short. I am reluctant to buy the double short stock ETFs now due to the length of the Unstable VIX Pattern now being in excess of two years. On May 1, 2008, the S & P 500 closed at 1409.34. ^GSPC: Historical Prices for S&P 500 INDEX,RTH - Yahoo! FinanceWhen the Phase 2 pattern clearly formed in late September and early October, the S & P was 500 points lower: ^GSPC: Historical Prices for S&P 500 INDEX,RTH - Yahoo! Finance I would seriously doubt that the current spike will elevate to a Phase 2 which requires a decisive break above 40 in the VIX.
Part of the problem today was a WSJ report that CIT may have to file for bankruptcy this weekend, as sources apparently told the WSJ reporters that the tender offer would likely fail. This sort of raised a spectre of events from last September.
1. Progress Energy (own stock & junior bond): Progress Energy beat the consensus estimate by 3 cents reporting GAAP earnings of $.88 per share and earnings from ongoing operations at $1.22. The utility reaffirmed 2009 guidance of $2.95 to $3.15 for continuing operations.
2. NYSE Euronext (own stock): The buy was at $14.76 in March (Buy NYX) and I have been debating with myself what to do with the shares. While NYSE Euronext beat the consensus estimate by 7 cents, earnings will still down 28% from a year ago. My inclination is too put this one in the keeper category as long as NYX maintains its dividend. At my cost, the dividend yield is close to 10%, similar to the Dupont purchase made on 3/7, at about the same time as NYX. It is not that I am enamored with either DD or NYX, but the yield at my cost turns these common stocks into bonds in my mind's eye.
3. Duke (own common): DUK is classified as a core electric utility holding, which means that I will give it a lot of slack and will reinvest the dividends to buy additional shares. And, I will add shares on weakness. Duke Energy beat the consensus estimate by 2 cents and reaffirmed FY 2009 guidance of $1.2 excluding items. Excluding item Duke earned 40 cents per share. Duke said in its press release that industrial sales continued to show signs of stabilization and improved about 11% over the 2nd quarter number.
4. Great Plains Energy (own common): GXP is a non-core utility holding. Great Plains Energy continued with its unimpressive performance reporting earnings of 58 cents per share. It narrowed the full year guidance to $1.1 to $1.18 from $1.1 to $1.4. Weather was mild in its region. This one is on the chopping block for a possible year end disposal.
5. Pepco (POM)(own common): Pepco is a non core electric utility holding which is being held on a short leash tied to the maintenance of its dividend. Unlike other non core holdings, however, the dividend is being used to buy more shares. Pepco Holdings reported earnings of 44 cents excluding items in the third quarter or 56 cents with items. POM earned 59 cents in the 3rd quarter of 2008, so another decline year over year. Revenue declined to 2.54 billion from 3.06 billion.
6. Glimcher Realty (LT category: own preferred and common): Glimcher reported a modest loss per share and FFO at 40 cents for the 3rd quarter compared to 46 cents in the year ago quarter. Occupancy rates at the core malls declined to 91.9% from 93.1%. The GRTPRF has been the most successful lottery ticket over the past year. The purchase was made at $2.9 and has been generating a 75% annualized dividend at that cost since my purchase late last year. It is currently trading near $17.
7. Personal Income and Spending: Personal income and disposable personal income for September were basically flat with August. News Release: Personal Income and Outlays, September 2009 I regard the failure of these numbers to increase over CPI to be a core structural type problem for the U.S. Source of Problems: No Real Wage Growth Spending decreased .5% as the cash for clunkers program expired. Some economists attribute the 3.5% gain in GDP to be fueled by these special items and consequently expect a significant decline in the 4th quarter GDP compared to the third quarter.
8. Chicago PMI: This manufacturing index rose to 54.2% in October from 46.1% in September. www.ism-chicago.org .pdf
9. Bought 100 of the TC JBI at $25.1 on Friday (see Disclaimer): I mentioned in a post a few days ago that I would be revisiting some bonds sold at or near par value in my current pursuit for some yield. I sold JBI at $25.02 earlier in the year, viewing that it had little upside, which is still my view. SOLD 100 JBI AT PAR VALUE I bought this TC back for the yield which is close to 7.8% at my cost. When I started to discuss JBI, it was selling for around $17. TRUST CERTIFICATES JBI DUKE
The underlying securing is a senior bond from Duke Capital, which used to be part of Duke Energy (DUK). As a result of a spin-off Duke Capital is now part of Spectra Energy (SE), which is still rated investment grade. The underlying bond has a 6.75% coupon, and this is a link to the FINRA data and trading information for it. FINRA - Investor Information - Market Data - Bonds - Bond Detail The TC has a coupon of 7.875%. The underlying bond is trading at a slightly greater premium to par value during Friday's trading than the TC. So the TC was a better buy at $25.10. The underlying bond matures in 2032. So, as with all long term bonds, there is a lot of interest rate risk and a long time to monitor the credit risk.
The TC was originally a Lehman ABS issue and this will scare some people since Lehman ABS is bankrupt. This may be due to a lack of understanding about these TCs. Lehman ABS purchased the underlying securities in the market and deposited the underlying securities into a Grantor Trust administered by an independent trustee, who then collects the interest paid by Duke Capital and distributes the interest to the owners of JBI. JBI is a Trust Certificate which indicates a beneficial ownership in the assets of the trust, i.e., the underlying senior bonds from Duke Capital. The Trust owns the securities. Upon maturity, and assuming Duke Capital is still around and able to pay the notes off, then the Trustee will collect the par value of the notes and distribute the proceeds to the TC owners. This legal structure allows the bond to be divided into $25 par value units rather than $1000 par value units, and then permits the security to be sold on the stock exchange exchange. The underlying security may be bought in the bond market in $1,000 increments (1 bond =$1,000).
This is some language from the prospectus that describes the ownership issue:
"The Class A-1 Certificates, along with the Class A-2 Certificates, represent in the aggregate the entire beneficial ownership interest in the Trust. The property of the Trust will consist of (i) the Underlying Securities and (ii) all payments on or collections in respect of the Underlying Securities received on or after the Original Issue Date. The property of the Trust will be held for the benefit of the holders of the Certificates by the Trustee." Page S-15
"A separate trust will be created for each series of trust certificates. Lehman ABS will assign the Deposited Assets for each series of certificates to the trustee named in the applicable prospectus supplement, in its capacity as trustee, for the benefit of the certificateholders of such series. See "Description of the Trust Agreement--Assignment of Deposited Assets." The trustee named in the applicable prospectus supplement will administer the Deposited Assets pursuant to the trust agreement and will receive a fee for these services."
Since the Lehman bankruptcy, the trustee has been collecting interest payments from Duke and distributing those payments to the owners of JBI:
But I understand why many would prefer to steer clear of any security that has LEHMAN ABS in its name, to each his or her own. Everyone has to make their own judgments.
JBI pays semi annual interest payments, with the last one going ex in August so the next ex date will be in mid February 2010.
I believe this is the link to the original prospectus of the underlying security, which I always try to find and examine:http://www.sec.gov/Archives/edgar/data/1051116/000095013002000874/0000950130-02-000874.txt
I would be content with one or two interest payments and a $5 profit on the shares, so expectations are very low. Basically, I am trying to net a 8% annualized return by a combination of interest payments and share appreciation in whatever combination.