Tuesday, June 30, 2009

Sold Sanofi/Aegon Upgrade by Morgan Stanley

1.  Sold Sanofi/Complied with Trading Rules In Effect:  The trading rules in effect required funds to be raised to cover the purchase of 100 IGE.  Mostly, for the past two years, I have adhered to the trading rules. Without a doubt, that adherence has saved me money, by simply avoiding a significant and premature re-entry into this nightmarish stock market.  

I narrowed the potential sale down to three stocks, with one of them being Sanofi, and wrote their respective symbols down on individual pieces of paper, shook the selections in a cupped hand as required, threw them high into the air, and the piece with the SNY symbol was not the closest to my big toe.  I then remembered a back up rule for trying to unfreeze my temporary bouts of indecision.  What is that rule?  When in doubt, just sell the French company! Now, I did receive SNY's annual dividend and did make some money on the shares sold at $29.42 which were bought at $27.53.BOUGHT SNY Along with the proceeds from the Given Imaging sale, and cash flow received today, I avoided the demerit by covering the purchase of IGE in the manner permitted by the trading rules developed in connection with the Vix Asset Allocation Model and the characterization of the current stock market as being in a long term secular bear market.

While Cramer scoffs at anyone who puts such labels on the market, viewing the move from the March lows as a bull market, I just look at it from a longer viewpoint, noting that we have not really done much of anything when measured from 1/1/2009.  Moreover, the DJIA is back to where it was in February 1998. Going nowhere for over 11 years is consistent with my definition of a secular bear market.   In 1982, you could look back 15 to 17 years and see that you had arrived in August 1982 about where you started the journey in 1966.   The movement off the March lows is consistent with the kind of cyclical bull moves seen in a long term secular bear market, as in the 1930s or the late 1960s to 1982.  Ultimately, the events causing the secular bear move abate over time and a new long term secular bull market forms out of the ashes, and then the cycle starts anew.  The seeds of the next bear cycle are planted once again, nothing is learned, the same or slightly different mistakes are made again, and then the bull dies.  Maybe we have turned the corner and started a new bull market, or maybe not.   It would be best to remain cautious here at HQ and follow all of the trading rules (most of the time). 

2. Aegon Upgraded by Morgan Stanley:  I did not notice until last night that Aegon, the Dutch insurance company, had recently been upgraded by Morgan Stanley to overweight from underweight.  MS believes that Aegon's credit losses will be lower than the market currently anticipates. FOX    Market 

I currently own two equity preferred stocks issued by Aegon, with the largest position in AEB, a floating rate, perpetual equity preferred issue that pays the greater of 4% or 7/8% above three months Libor, with a $25 par value.  This is a link to the prospectus:  www.sec.gov 
My last two buys were at $4.8 and $5.5, and some around $8 with a total of 350 shares. AIG: Worse than Worthless/Ford & the UAW/Buy of 50 AEB at 4.8/sold CAT BOND/JPM Dividend Cut

I would like to see a reinstitution by Aegon of its common share dividend which will provide the most legal protection to the continued payment of my preferred dividends. 

I was discussing AEB in this blog when it was below $3-an incredible and bizarre price.  At $3, the 4% guarantee would result in a 33.33% annualized yield.   

I did receive a 1099 covering dividend payments for AEB for 2008, and it was classified as a qualified dividend.  It is also listed at the quantum site as one of the preferred stocks paying qualified dividends, as are the other Aegon preferred stocks that I have discussed in this blog. Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.comAgain, this site is free but registration is required. 

All of the AEGON preferred stocks have had enormous gains since March, many rising more than 300% in value (AEH, AEV, AEB, AEF, AED)


DISCLAIMER
  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.   Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.  Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it. 

Sold ABT in IRA/ FBR Downgrade of AA/Advantages & Disadvantage of Dividend Paying Common Stocks Vs. Bonds/

Apparently, the market is reacting negatively to the consumer sentiment numbers released this morning.  

I do not think that I ever bought or sold anything based on that number. 

1. FBR Downgrades Alcoa to Underperform: My last add was an extremely timid buy of  Alcoa shares  at $5.6Buys of DKF, AA and a Lottery Ticket in 50 shares of RF/Heinz & its Boston Market Line/  FBR downgraded AA to underperform based on some myopic here and now analysis. Market   StreetInsider  Dividend Stocks I am convinced that the world still needs aluminum and will need more of it during the next economic up cycle. So why exactly would I sell Alcoa at FBR's target of $8 rather than a rational P/E based on a more normalized earnings pattern. Maybe it is best to just be patient sometimes and wait.  This is a link to a London Metal Exchange price graph for Aluminum: Price graphs

2. JNJ Wins Jury Verdict Against Abbott Labs for Patent Infringement: A Texas jury awarded 1.67 billion to JNJ against Abbott Labs accepting JNJ's contention that Abbott's main drug Humira infringed on JNJ's patents. This would be a major blow to Abbott in the event it is upheld on appeal.  This case was filed in a Texas Federal District noteworthy for accepting claims of patent violations, another example of forum shopping. WSJ.com  I own 30 shares of ABT in a Roth. Since this kind of news creates too much uncertainty for a stock position in a retirement account, I sold those shares this morning at over $47 which were bought a few weeks ago at 44 and change. Bought ABT and PGN/Obama Misleads on Projected Budget Deficits

3. Miller Tabak Strategist on Inflation/GS Economist on Treasury Yields/Inflation: Most of the mainstream economists who work in the securities industry do not see inflation as a problem. Dan Greenhaus from Miller Tabak says the market has overestimated the timing an strength of a recovery.   The WSJ also quoted  Jan Hatzius from GS who maintained that treasury yields can be kept low since bank customers are not borrowing much money these days, so there is a "lack of competition" for borrowed money. WSJ.com  In  a Reuters article, Hazius stated an opinion, echoing the Fed, that the slack in the economy will keep inflation at bay.  Reuters The 10 year treasury has rallied in price after recently hitting 4% and was around 3.49% yesterday.  

The general economic theory is that the free flowing money creation by the Fed will pose no inflation threat because the weak economy has sapped the demand for credit by bank customers. So, in theory, the FED has plenty of time to soak up that excess money.  Reuters  And when exactly was the last time that any of these economists had any experience with the U.S. doing what it has done over the past year?  We shall see.  I am a skeptic. But, I am also "illiterate", as the S & P chief economist would say, in the scholarly ruminations of the dismal "science". I have been thinking about reading one of Hayek's books, which would be a first for me, however, after I read his nobel prize acceptance speech about economists making a mess of things. Japan GDP/ Economists: Secular Theologians with a lot of Numbers

4. Duke Energy/General Mills/Advantages of Dividend Paying Stocks over Fixed Coupon Bonds:  Duke (DUK), one of my core electric utility holdings, was started at outperform by Oppenheimer.  One of the consumer staple stocks bought a few weeks ago was General Mills ($48.52). Freedom from Regulations and Irresponsibility/ Sold KXI and Bought GIS   GIS raised its quarterly dividend by 9% to 47 cents a share. YahFin

One benefit of owning a common stock, compared to a fixed coupon bond, is that the firm may raise the dividend continually. Until recent times, it was possible to have a reasonable degree of confidence in a number of blue chip companies raising their dividends virtually every year. While this assumption now has to be constantly challenged on a company by company basis, with  little long term confidence in the dividends of financial institutions as an example, the major consumer staple stocks appear to weathering this financial crisis, and are continuing to raise their dividends. That is one reason I gravitated toward them, starting in early March 2009 with buys of such firms as GIS, KO, PEP, SYY, UL, PG, and many others.  The firms that increase their dividends yearly provide me with an advantage that the fixed coupon bond never will, an increase in the yield on my investment based on my original cost. Over a long period of time, say fifteen years, buying a more or less reliable dividend payor, who habitually raises the dividend, could increase my yield from say  3.5% or 4% to over 10% annually, as my cost basis in the shares remains constant. 

  Many major industrial firms, other than General Electric & Alcoa, have maintained their dividends during this downturn. I am not enamored with a couple of them, DuPont & Avery Denision, bought in early March,  but I will keep them as long as the dividend is maintained, because the dividend yield was really juiced by my low purchase cost. I will lose my affinity for those type of companies in the event my income stream is reduced by any amount. I am staying with General Electric notwithstanding what that company did to its shareholders. 

The recent financial crisis has highlighted the main disadvantage of relying on common stock dividends for an income stream, as opposed to bonds. The common dividend can be eliminated or reduced, and many firms have done so during this crisis as we all know. For the most part, with some notable exceptions, the firms that reduced or eliminated their common stock dividends kept paying the full amount on their bonds.  That highlights one major advantage of bonds. Of course, while a junior bond typically allows for a deferral of interest, most firms have kept paying interest on the junior bonds even after reducing their common dividends to just about nil, at least the ones that have so far stayed out of bankruptcy or kept from being seized by the FDIC. A senior bond holder does not have to worry about a legal deferral, generally speaking, but has to worry about a bankruptcy. I have discussed gravitating to REIT cumulative equity preferred issues rather than the common shares due the common dividend being eliminated or reduced by most REITs.  So, there is a need to always be flexible.  

One problem that I have sometimes is what do I do after buying a company like GIS and then seeing the price rise fairly quickly by 30+%. Then what do I do?  If I think primarily about the next fifteen years, and the dividend stream flowing from increases in dividend over time based on my cost, I might lean toward keeping shares bought at $48. If I bought 200 shares, I might keep 100 and sell 100 after such an advance.  Or, if I start to think about the uncertainty of future events, thinking about all of those potential black swan type events, then I may dump the entire lot. There is never a clear answer in that hypothetical situation, so sometimes I let my magic coin make the decision, just leave the decision to chance, as I recently did for my Disney shares: Disney: Quandary What to do with the Shares Just Bought

5. Closed End Funds: I gave a reader in an email a list of my current owned closed end funds and left some of them out.  This is a current list: RVT, RMT, ADX, EOI, ETW, IGR, IGD, IAE, IRR, SWZ, ERC, ERF, PSY, BCF, GCS, BTO, BDJ, GDV, CSQ, EBI, DVM, FAX, GGT, JQC, JRO, JGT, ESD & OLA.  I think that I got them all this time. I would emphasize that I view my strategy of selling the mutual funds in 2007, and instead going with a bevy of closed end funds, to be the worst mistake that I made in my asset allocation in 2008.
In retrospect, I needed to dump them all.

Just as an example, I mentioned that I sold my small cap mutual funds, as well as my small cap positions in 2007, as my indicators indicated a high probability of a bear market, with multiple confirmations of one for small caps. Corrections Corporation Mention in Barrons/Small Caps and RVX model As a bet against my opinion, I kept RVT and RMT which were then paying good dividends under a managed distribution policy. I figured that I would keep them and reinvest the dividends. If I was wrong about a bear at the doorstep, I would have something going up in a continuation of a bull move in this sector.  Otherwise, I would be averaging down with the dividend distribution, which might look good in the next bull market. Well, it did not work out so well. I was right about the bear and wrong about these funds. The Royce funds ended their managed distributions, their assets under management fell in value far more than I anticipated in 2007, and their discounts to net asset value expanded from a small discount to a large one. The later was primarily due in my opinion to ending the managed distribution policy, as many individuals depend on the closed end funds for income. Prior to 2008, I had been accustomed to winning in three ways with the closed end funds, a narrowing of the discount after my purchase at an abnormally high discount to NAV, the usually generous dividends, and an increase in asset prices, and now I have lost in two ways and in three ways with some of the funds like the two from Royce. I am attempting to dig my way out of this hole. The closed ends are one of my top 10 asset categories, and account for most of the damage to my taxable accounts in 2008. I say top 10, judging from their values now, they probably were in the top five in early 2008. As a class, they were miserable failures in 2008. 

6. What to Sell?:  I can not decide what to sell to raise a grand to offset the funds used to purchase IGE yesterday, as required by my trading rules.  When faced with this kind of quandary of indecision, it is best for me to leave it up to chance.  I have a different method when I have to choose one of maybe 3 to 5 securities. The magic coin can only decide between 2 alternatives, buy and sell, right and wrong, true and false.  So, many years ago, I developed another method to solve my current type of predicament.  I write the symbols down on pieces of paper, shake those pieces in my cupped hand, throw them up into the air, and the piece of paper which falls nearest my big toe on my left foot will be bought or sold, as the case may be. Now, I hear some readers saying something like, "you have got to be kidding". No, that was no joke.   After all, I did select the the 3 or 4 securities to be included in the toss out of 300+ so there was a degree of intelligence, or lack thereof, entering into the equation. I can wait until tomorrow to do this exercise, without earning a demerit for a trading rule violation. 


DISCLAIMER
  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.   Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.  Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it. 

Monday, June 29, 2009

Sold GIVN/Grading Management of Retirement Accounts Since October 2007 at an A

1. Sold Given Imaging:  I was looking through my portfolio this afternoon for something to sell after buying 100 IGE, as required by my trading rules, and did not want to sell anything. Finally I sold the lottery ticket Given Imaging at $10.2 bought at $8.08./Buys: GRT & GIVN   I will have to raise a thousand today after adjusting for cash flow receipts today and tomorrow or I will have to give myself another demerit for a trading rule violation.  

IGE closed with a NAV of $27.9 today, about where I expected it to end the day.iShares S&P North American Natural Resources Sector Index Fund (IGE): Overview  My purchase intraday was at $27.85. 

In fact, I earned a boatload of demerits today.  Among the most important had to do with buying the wrong can of diced tomatoes for my mother who has macula.  So I take her grocery shopping once a week, she deals with the butcher, while I motor about the store picking up everything else for her. She is 86, still a good cook, and fixes a gulash with the diced tomatoes. Unfortunately, the can that I bought had chile pepper seasoning or something equally bad, or worse, in it.  I am not clear on that point.  Who would have thought that I had to actually examine the fine print on the can after seeing diced tomatoes splashed all over the front. Everything had to be thrown away.  That was like 100 demerits.  

2. The Volatility Index for the DJIA Closed Today at 22.69:  The VXD is inching closer to the 20 demarcation line.  While I refer to my model as the VIX Asset Allocation Model, the  VXD gave the same bear signals in 2007. VANGUARD ASSET ALLOCATION: IS VANGUARD PROUD? MORE ON VXD The DJIA  is slightly less volatile than the S & P 500 index and I would expect VXD to fall below 20 before the VIX. Also, a Trigger Event for a VXD based model would have to be a few points lower than for the VIX due to its inherent lower volatility (VXD did shoot over 30 intraday on 8/16/2007, which was a Trigger Event under the Model).  Further Discussion of Volatility and Asset AllocationBoth volatility indexes are moving toward stability which is viewed as a positive. Neither have formed what the model labels a Stable VIX Pattern yet.  

The one unusual pattern is for the Nasdaq volatility index.  It is moving toward stability quicker than I would normally expect, with the VXN closing today at 26.47.  I would expect that index to be closer to the Russell 2000 volatility index, RVX, which closed at 31.35.  

 3. Retirement Accounts: Graded at A for Management During this Mess:  In my Roth IRA,  I still intend to purchase directly at auction the ten year treasury inflation protected security in early July and to use my entire 2010 Roth IRA contribution to buy mostly the ten year TIP and some in the 20 year.  Otherwise, I am satisfied with what I currently own in my retirement accounts with several opportunistic buys of bonds and preferred stocks, along with a few stocks like DuPont near $16.   While I could sell all of those securities for a good gain, they are more valuable to me in those accounts just throwing off income, in many cases at 10% to 25% annually based on my cost.  The floaters were bought at what I consider favorable long term prices, providing me with good interest income in either a deflation or an inflation scenario.   At most, I may sell Abbott Labs in the event the share price moves to 50, but I do not plan to do anything else in those accounts for the remainder of the year other than the TIP purchase next month.  These accounts just look really good to me now. 

Some of what happened in those retirement accounts was just luck (e.g. the still unexplained spurt in XFL to over $33 near the close of trading one day), some of it was just good management and superior stock and bond selection,    but the end result has placed me ahead of the account values in October 2007 by almost 10%, after adjusting (adding) the subsequent contributions to the October 2007 market value.  So, under the circumstances, I give myself an A in managing the retirement accounts during this mess, and a B on the much larger taxable account, where I committed virtually all of my mistakes in 2008.   I am also extremely pleased with the results of the five or so Roth Conversions that I did starting in October last year.  

DISCLAIMER

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.   Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.  Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it. 



BOUGHT 100 IGE/Forbes Makes Case for Bonds Over Stocks/PFK Retrospective/S & P Economist: No Inflation Threat for Five Years at Least

1.  S & P Economist-No Worries About Inflation:  In an article in USA Today, David Wyss, chief economist for Standard & Poor's, was quoted as saying that a lot of worries about inflation "are examples of financial illiteracy". He also said that the U.S. will not have inflation for "at least five years" when he expects the economy to "get back"  USATODAY  I readily admit to being an illiterate when it comes to reading economic textbooks, having never read a single one. But I thought that I would make a note of this prediction by an esteemed economist who has apparently read a lot of them.  I flipped my magic coin to see whether Wyss's prediction will come true, and the coin said no.  I hope that Wyss is right, because I do not want to even hear the number for the U.S. debt service cost when rates start to move up significantly.  In fiscal year 2008, 412 billion was spent on interest payments.  Given the abnormally low treasury rates, the interest paid in fiscal 2009 through May 2009 was 214 billion.
Government - Interest Expense on the Debt Outstanding 

 The total public debt outstanding as of 6/25/2009 was $11,363,514,364,365.21. 

Given the parabolic upward trajectory of the debt, you would not want to have to finance it at an average annualized rate of say 7%.   

2. Prudential CPI Floater (PFK):  My recent buys of the senior bond issued by Prudential maturing in 2018 that pays monthly interest is an example of being too timid when a much better opportunity was presented to buy this security.  I noted several discussions in my blog about PFK from the 4th quarter of 2008.   First, I noted that I passed up buying PFK at $12.5 during one of the darker periods last Fall when I just had a deer in the headlights look (Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSM).  After missing it at $12.5, I was not about to buy it at $16 a few weeks later, and my post from December shows a form of buyer's remorse. CPI FLoaters PFK AND OSM/ Warnings by Chip Companies/FDX  And having passed it up at $12.5 and $16, I end up buying it in the 18 to 19 range.  To the extent that I have  reasonable excuses, they  revolve around the sheer magnitude of events from last Fall which caused me to question the survival of many of our largest financial institutions.  So, my buying of senior bonds was primarily limited to senior bonds from non-financial investment grade companies.  I did buy at even a greater discount to par value a long term senior bond issue from Pru in Trust Certificate form-JZH, buying at below $10 for a $25 par value bond.  TRUST CERTIFICATE JZH: PRUDENTIAL SENIOR BOND I also had to consider that I had acquired by December 2008 250 shares of JZH, and I also owned some short term bonds from Pru.

So, I was concerned about my total exposure.  Still, it was a mistake not buying 100 PFK at 1/2 of par value.  I do not view it as a mistake based on the fact that PFK rose from $12.5 to almost $19 before I did buy it, but that I did not analyse the financial condition of Prudential appropriately last Fall.   I was listening more to the market noise than to my own brain and judgment.  

3. Forbes Makes Case for Investment Grade Corporate Bonds Over Stocks: I received my issue of Forbes today. The lead article in its Money & Investments section, written by Bernard Condon, attempts to make the case for buying investment grade corporate bonds over stocks. Forbes.com In dynamic asset allocation, it is important to know when an opportunity arises, which means the investor can not be focus exclusively on just one asset class. There is a chart in this story which shows the historical spread of investment grade corporates over comparable treasuries since 1989.  In the Fall of 2008, the spread hit 6%, which was unprecedented. At the FINRA site, which contains charts on individual bonds, you can look at  virtually any investment grade issue and see a parabolic move down in price during October 2008.  This was the opportunity.  The author notes that the average spread is 1.2% over the period shown in the chart, which does not include the late 1960s and early 1970s when inflation was a serious problem for all longer dated bonds. The spread is now around 3.1% according to Barclays Capital.  But, that is due in no small part to the low yields of the treasuries.  The assumption being made by the author is that the future will look like the immediate past.  The key assumption is a continuation of low rates of inflation which would be beneficial to the bonds in general.   If that assumption is wrong, then neither the treasury or the comparable maturity corporate long bonds will prosper. 

The case against stocks hinges on their current earnings and forecasting that as the norm going forward. The author relies on investors, who are rarely enthusiastic about much of anything, to support an argument for an anemic growth scenario for years to come, quoting Jeremy Grantham's prediction for seven lean years.  The author also relies on David Rosenberg who advised investors to load up the boat on 10 year treasuries yielding 2.65% back in early April, and to avoid stocks back then (Item # 2: Afternoon Comments after Digesting the Saturday Papers/ How reasonable is a prediction of a 2% 10 year treasury yield and 475 on the S & P 500)  So the key for the author's recommendation is anemic, low inflation growth continuing for more than the next few months, but for the next 7 to 10 years. If that is the most reasonable prediction, then my bond investments will continue to outperform.  I am inclined to keep the fixed rate long corporate bonds until I see the whites of inflation's eyes.  I am not inclined to accept, however, forecasts from perennial pessimists.

There is an ETF for investment grade corporate bonds that I no longer own, having bought  and sold it twice recently, LQD. The web site for the sponsor shows a 30 SEC yield of 5.82% as of last Friday with a weighted average duration of 12.27 years and 104 holdings. iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD): Overview


4. Dividends and Interest: I did notice that JZH, the TC with the long term Prudential bond, will go ex interest for its semi annual interest payment on 7/10. AT & T declared its regular quarterly dividend which will go ex on 7/8.  At Friday's closing price, the dividend yield is 6.61%. I also own 200 of a junk rated senior bond issue in TC form issued by John Malone's company, Liberty Media, PKK, which goes ex interest  on 7/10. Sysco goes ex dividend tomorrow with its regular quarterly dividend.  I picked that one up in March at the $19.46 which would produce about a 5% yield at the current dividend level. Buys of CPB LQD SYY XKK/Regressive Taxation-Cap & Trade/Two closed end funds that pay good quarterly dividends that I own, IAE and IRR, also go ex dividend tomorrow.  This information can be found daily at the Dividend Page at the WSJ. Dividends - Markets Data Center - WSJ.com  

5.  Bought 100 IGE:  This is an Ishares sponsored ETF for North American natural resource stocks that I mentioned in a post from last night.  I bought 100 at $27.85.  Before buying an ETF, I will always check the NAV at the sponsor's web page. iShares S&P North American Natural Resources Sector Index Fund (IGE): Overview  The NAV last Friday was shown as $27.66.  Many of the natural resource stocks are up today, so I would anticipate that my purchase was reasonably close to the current NAV value.  The expense ratio is .48%. This ETF currently has 127 securities in it and the list is provided at the sponsor's web site:  iShares S&P North American Natural Resources Sector Index Fund (IGE): Holdings

I will now have to find something to sell under my trading rules in effect. I can subtract the cash flow about to be received on 6/30 and 7/1 from the cost of the IGE purchase. I will not make that decision until later.  One option would be sell Conoco.


DISCLAIMER
  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.   Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.  Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it. 

Sunday, June 28, 2009

Closed End Funds: Energy and Natural Resources Funds

A closed end investment company is similar to a mutual fund but with several important differences.   Unlike the mutual fund, the shares of a closed end fund trade on the stock exchange at either a discount  or a premium to its net asset value. So, the price of the shares is determined by both the rise and fall of the assets under management, and by  supply and demand for the shares by investors. During the Fall of last year, the discount for numerous closed end funds expanded to over 30% during widespread investor panic. The fund has a fixed capitalization after its original IPO, except that some funds occasionally raise additional funds by a rights offering to existing shareholders usually at a discount.   

I have been investing in closed end funds at least since 1984.  Prior to 2008, my investment strategy for this category worked reasonably well and was simple.  I would buy them when they were trading at large discounts to their net asset value, and then sell shares once the discount narrowed to an atypically small amount.  I would generally only reinvest the dividends during down markets.  I also used them to supplement my asset allocation particularly in areas where I would normally not buy large individual positions. I previously discussed how this strategy failed during 2008. CLOSED END INVESTMENT COMPANIES: Hopefully Lessons Learned and To be Applied

Also, as a general rule, I prefer those that pay monthly dividends over those that pay quarterly.

One purpose for owning them is to generate cash flow.   

Tonight, I just wanted to discuss briefly the closed end funds that I currently own, or have owned in the natural resource sector.

When making decisions in this area, it is always important to look at the relationship between the current share price and the net asset value. I will not buy a fund selling at a premium to its NAV. NEVER.  This data can be checked daily at sponsor's web site or at the closed end fund section of the WSJ.  The funds that I am about to mention can be found at WSJ.com . These are the five funds in the natural resource area, along with the Premium/Discount percentages as of Friday's close (6/26/2009):

Blackrock Energy & Resources (BGR) (not owned):  -5.95
Sponsor's web page:BlackRock Internet

Blackrock Real Asset (BCF)(owned)  -10.99
Sponsor's web page: BlackRock Internet

DWS Global Commodities (GCS)(owned) -7.93: 

ING Risk Managed Resources (IRR)(owned)  +3.43
Annual Report 2/2009 LinK: Prospectuses & Reports > Annual Reports >

Petroleum & Resources (PEO)(not owned)  -11.81

None of these funds are selling at a large enough discount to cause me to add shares with the possible exception of BCF and then only if I sell another closed end fund in this sector. The ING Risk Managed Resources fund is selling at a premium to its NAV and would not be bought for that reason.  If that premium continues to expand some, it would instead be a candidate for a sell, possibly with the proceeds used to buy more shares in BCF.     

As with mutual funds, it is important to pay attention to the firm's expense ratio. Petroleum and Resources has the lowest expense ratio in this group at  .51% for 2008.  I do own it primarily due to its concentration in energy production and service companies. When I invest in this sector, I prefer investing in a fund with much broader exposure to natural resource stocks. 

I like the diversity of Blackrock's Real Asset fund.  It pays quarterly dividends, and has a total expense ratio after fee waivers of 1.09% (1.29% before waivers, as of 10/2008, see page 75 of Annual Report).  It also sells call options to manage risk and to generate additional income.  That strategy could be a negative during a major bull move in this sector since positions might be called away prematurely or the option contract settled for a loss. BGR, another offering from Blackrock, has an expense ratio of 1.07% after fee waivers (p. 70 annual report). I own BCF rather than BGR because it is more widely diversified in the natural resource space (pp. 45 et seq).  

These funds also file their reports with the SEC: 
BCF:  SEC Filing
PEO:  www.sec.gov
GCS:  www.sec.gov
BGR:  SEC Filing
IRR:  www.sec.gov 

GCS pays an annual dividend and I am currently unlikely to add to it. I did not care much for a very large capital gains distribution last year.  Currently, if I was going to buy shares I would be adding to my holdings in BCF, particularly if the discount to NAV increases some, while I may trim IRR due to its premium price over its NAV. I am not likely to buy PEO and BGR due to their more narrow focus in this space.  If I wanted exposure to large energy production and service names, I would just buy XLE which is an ETF with a lower expense ratio.  Energy Select Sector SPDR Fund 

Another ETF that I will consider as an alternative to closed end funds in this space is IGE: iShares S&P North American Natural Resources Sector Index Fund (IGE): Overview

 I have owned all of these funds, but I currently own only BCF, IRR and GCS. 

Saturday, June 27, 2009

IS GDP About to Accelerate in the 3rd and 4th Quarters?/Lantus & Sanofi: Cancer Risk/SEC's Incompetence/OSM/ Added RJA

1. Investment Grade Bond Yields and Dividend Yields from Some Issuer:  I mentioned in a post from a few days ago that the rally in investment grade corporate bonds over the past several weeks had reduced the bond yields to below the common stock dividend yield for both AT & T and Verizon, except for the longest dated debt where the yields were fairly close. (item # 2:Bought PFK in IRA/Bank of America/ Verizon & AT & T/Jim Rogers/Added 30 GE with cash flow)    Michael Santoli made the same point in his column this week in Barron's about AT & T.  Barrons.com He also mentioned that Merck recently issued some ten years bonds to yield a tad over 5% while its common stock is yielding more.  For high income U.S. taxpayers, the dividend is taxed as a qualified dividend, whereas the bond's interest will be taxed at the highest marginal tax rate (or that is how I would view any  investment income which is not taxed at the 15% capped rate).

One reason for this phenomenon is the widespread eliminations or reductions in common share dividends by many blue chip companies, including virtually all of the banks and other financial institutions and other large companies most notably General Electric.  So, it is not surprising that investors have lost confidence in the safety of a dividend income stream.  With a senior bond, reducing, deferring or eliminating the interest payments are not options available to the issuer outside of a bankruptcy court.  When you hear the word deferral mentioned in connection with a bond, then you know that it is a junior bond, and those instruments generally allow the issuer to defer payments as long as no payments are made to holders of more junior securities such as common and equity preferred stock.  While that concern is justified for those companies that have cut shareholder payments while keeping management pay at the same levels, or even providing more compensation to reward failures, I  would at least question that assumption as applied to the companies that have not only maintained their dividends during this crisis but also raised them.  Maybe those companies deserve the benefit of the doubt now. 

I do not have a position in Merck.  But I would not buy one of its 10 year bond yielding 5%.  If I had to buy that bond or the common stock, I would pick the stock.  

2. J. P. Morgan Estimates 3rd Quarter GDP at 2.5%:  I also noticed in Barron's that  J P Morgan's chief economist raised his forecast for 3rd Quarter GDP to 2.5% from 1%.    Barrons.com  This economist predicts a powerful turn in the industrial cycle starting in that quarter.   The firm's market strategist urges purchase of cyclical stocks during this sideways to down spell.  Barclays Capital also raised its forecast for GDP in the 3rd quarter to 2.5%, and further raised its 4th quarter estimate to 3.5% from 3%.    Forbes.com These are not 2010 estimates, but for 2009.  Maybe that needs to sink in some. 

I have mentioned that the most likely surprise about the economy is not a further slide into the abyss but the strength and timing of the recovery which could catch the Fed flat footed with way too much monetary stimulus.  Will this happen?  Who knows about the future, but a 2.5% GDP growth in the 3rd quarter followed by 3.5% in the 4th would be consistent with the thesis of a more rapid recovery than currently anticipated by the Fed and investors in general.  

3. Nocera's Column about the SEC Enforcement Division: Incompetence and abusive use of power can be a dangerous combination.  It is already well documented that the SEC ignored repeatedly warnings about Bernie Madoff, a colossal failure by the enforcement division at the SEC that cost Madoff's innocent victims billions of dollars.   It was not only a refusal to listen to the warnings given by  Markopolos.  SEC EnforcementWeekend Reading Recommendations on Financial articles  The SEC also ignored much earlier warnings. NYTimes  And, then you have the situation where the person who raises a red flag about a company is given the third decree by a SEC lawyer who later goes to work for the firm that is the subject of the inquiry. NYTimes  And then you have the situation of what is clearly an abuse of governmental power by the SEC, as described in Nocera's column , where the SEC uses the brunt power of the government to ruin individuals where the SEC enforcement division did not even have a decent circumstantial case against them.  NYTimes.com   And notwithstanding all of the examples of incompetence and abuses, the SEC enforcement chief, Linda Thomsen, goes before Congress and touts how effective her division has been.   Banks: Forget About Long Term Holds/Simulus as Transformational/More Discussion on Black Swan and Taleb's book/Bankruptcy of Ideas in the GOP

4. Sanofi and Lantus:  Analysts were falling all over themselves late last week to downgrade Sanofi based on a yet to be published study that allegedly connected use of the drug Lantus with  increased cancer risk.   I am always cautious around people prone to hyper-ventilating.  Since I own 50 shares of SNY, I looked at the issue more over the weekend, and I would admit an inability to see any conclusive proof of such a link.     Health  The studies are summarized at the Diabetologia Journal web site:    Diabetologia homepage

Part of the problem in drawing any firm conclusion has to do with ruling out other factors at work.  Those patients taking Lantus were generally older, overweight,  with high blood pressure. WSJ.com  But there is enough disclosed in the studies to cause concern about this drug's long term safety.  The German study did show a statistically significant link between use of Lantus and increased cancer risk. 

5. Governor Sanford:  Hypocrisy is common among those who take on the mantle of preacher politicians. At least the Democrat philanderers are less likely to give us sermons.  But politicians are salesman and many are inclined to accept their sales pitches without nary a question.  I found it interesting that Sanford's wife found out above his affair with  the woman from Argentina (Maria Chapur) several months ago.       Jenny Sanford apparently told him to end it.Yah    And then he goes to see his mistress anyway with some cover story about going a camping trip NYTimes.com 
The largest S.C. newspaper knew about the story last December and did nothing.   csmonitor.com

It is interesting to me that the politician detested by the "social conservatives" is the Beanpole, who is by all accounts a faithful husband, much in love with his wife, and a good parent for his two children. So walking the walk, as opposed to just talking the talk, is not good enough for the pillars of virtue.  A Newt Gingrich, who was castigating Clinton for the Monica Lewinsky matter, is held up as a beacon by those self-proclaimed "social conservatives" even though he was cheating on his own wife at the time he was lambasting Bill. FOX  Governor Sanford and Senator Ensign called on Clinton to resign after his affair became public.    Los Angeles Times  Having said all of that, it is hard to get the imagined picture of Bill and Monica together in the Oval Office out of my head, possibly I should not have read the relevant passages from the Starr Report. The Starr Report

6.  Added 100 RJA:  I mentioned in a post from yesterday about Jim Rogers recommending exposure to agriculture.  Bought 100 PFK/Hertz/Sallie Mae Upgrade/Sanofi-Lantus Diabetes Drug/Rogers-Agriculture/  I already own 300 RJI and 200 RJZ, and I added 100 RJA at $7.35 just to give more weight to agriculture than I have already in RJI.  This is a link to the web sponsor's page: ELEMENTS ETN Products

7.  OSM a Double in the Price of the Shares Alone in Less than 8 Years, Plus Monthly Interest Payments:  Assuming SLM survives to pay the $25 par value of its exchange traded bond, OSM, in March 2017,   the investor purchasing OSM now at $12.5 would double their money in less than eight years just on the shares.  If I bought a bond a par value now, and wanted to know how much interest would I need to double my investment in 8 years, before tax, the answer is 9.05% (use the second calculator:   Compound Interest) 
Maybe I am missing something.  Maybe I am just an old fogey. But a 9% annualized return looks good to me.  And, this bond pays monthly interest. While it is impossible to predict inflation, and the actual numbers over the next eight years will probably be all over the place, I assumed a 2.5% average rate which would give me an annualized average return of over 9% from the interest payments based on a purchase of OSM at less than $12.(item # 3:Late Afternoon Buys and Sells 6 9 2009    Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSMCPI FLoaters PFK AND OSM/ Warnings by Chip Companies/FDXSo, I am curious, why are people scoffing at a potential 18% or so annualized return for the next eight years?  I own 200 shares of OSM.   

OSM closed at $12.4 last Friday. OSM: Summary for SLM CPI LKD NT  

I understand the doubts about SLM, and have shared many of them myself.  There are certainly risks to the main payday for owning this security, which is being paid par value in March 2017. But a number of analysts are starting to become comfortable with the firm's potential even if the government ceases to support its student loans.   And a lot of what they are saying makes sense to me. Bought 100 PFK/Hertz/Sallie Mae Upgrade/Sanofi-Lantus Diabetes Drug/Rogers-Agriculture/

I may add another 50 shares to my position, probably in the ROTH.  

DISCLAIMER

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.   Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.  Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it.