Tuesday, February 16, 2010

Added 50 of the CEF ERC at $14.14/Sold 100 GJP at 22.42 & Bought 50 PJL at 25.48 in the Roth/Sold LT DK at $7.31/MRO ATP:TO/Richard Lehmann & AEB

Maybe I could have waited a day until late today rather than last Friday to add a small hedge for my stocks. I did have another small order below the market to buy another double short ETF this afternoon, but the order did not fill. I do not regard those type of positions as a bet on the direction of the stock market but as a form of insurance. I would agree with the comments made by Chuck Jaffe that most individual investors probably need to avoid the double and triple short ETFs. MarketWatch I will avoid only the triple short ETFs, and will use the double short ETFs as hedges (rather than buying put options which I am not set up to do anyways). I will use the double short ETFs only in small quantities over relatively short durations. My limit on them is 10 grand in total original outlays.

1. ADDED 50 of the CEF ERC at $14.14 Today (See Disclaimer): ERC is a closed end bond from from Evergreen. Today's purchase brings my position to 250 shares. The last 100 shares were bought were bought at $12.96 on 7/30/2009. I discussed ERC in a post discussing that prior purchase without mentioning the symbol which was an oversight.

The Evergreen Multi-Sector Income Fund Fund ( ERC ) pays dividends monthly, which I like, and the current yield is about 9.18%. As of 2/12/2010, which was the latest data available to me when I made the purchase today, ERC was selling at a 9.42% discount to its net asset value. Closed-End Funds by Category - Markets Data Center - WSJ.com This is the link to its last shareholder report filed with the SEC: www.sec.gov ERC is a large CEF bond fund which uses leverage and invests in bonds across a broad spectrum of sectors and categories.

The discount narrowed somewhat on the 16th to 8.89%, with a closing price of $14.15 and a NAV of $15.53.

2. Sold 100 GJP at $22.42 and Bought 50 of the TC PJL at 25.48 in the Roth IRA TODAY (see Disclaimer): This is my second round trip for GJP. The last purchase of GJP was at $18.97 in the Roth IRA in October 2009: Bought 100 GJP at $18.97 I mentioned at the time of my last purchase that this was a "low expectation" buy. While I am comfortable with the credit risk, I was not enthusiastic about the guaranteed yield at my cost of 3.947% at a total cost of $19 per Trust Certificate. While this one has a float, the float has a maximum yield of 8% which would be hit when and if the 3 month treasury bill rate exceeded 6.85%, since the float is 1.15% over the T Bill. This would cap my interest at 10.526% at the $19 cost no matter how high rates went in the future. If this security did not have a cap, I would have been more inclined to keep it. All of the foregoing is explained in greater detail in the preceding linked post. So, I elected to take the $325 or quick gain after commissions on the shares plus a few monthly interest payments. I will now, however, have to substitute another bond for this one.

I have discussed the Trust Certificate PJL on several occasions. Par value is $25 so this purchase today was at a premium to par. The coupon is 7.625% with a maturity in 2030. www.sec.gov The underlying security in the Trust is a senior bond from Verizon Global Funding guaranteed as provided in the prospectus by Verizon. Since I am paying a small premium to par value, my current yield will be less than the coupon by a tad. I first discussed this TC soon after starting this blog in October 2008: Trust Certificates PJL and XFL: Verizon Bond Information about the underlying bond can be found at FINRA - Investor Information - Market Data - Bonds - Bond Detail

3. New York Manufacturing Survey: The Federal Reserve Bank of NY reported the number for its February manufacturing survey at a healthy 24.9: Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York The new orders index, however, fell 12 points to 8.8, which is viewed as a negative.

4. Marathon Oil (MRO)(owned-core natural resource strategy): Bernstein upgraded Marathon Oil yesterday to outperform from market perform with a $35 target. That upgrade, along with a more upbeat view of commodity stocks in general, resulted in a $1.1 gain in MRO's share price yesterday.

5. Atlantic Power (owned): ATP.TO, a Canadian company, was a recent addition to my portfolio, primarily to generate income with the possibility of modest capital appreciation. Bought 100 ATP:TO at 11.97 CAD The company announced its regular monthly dividend of $.0912 per common share. The press release from Atlantic Power Corporation highlights some important details about this dividend, noting that it is a qualified dividend under U.S. tax law and that the dividend is subject to a 15% withholding tax.

6. Richard Lehmann Article in Forbes: I suspect that a recent Richard Lehmann article in Forbes sent AEB up today by $.72 to close at $17.79. I received my copy in the mail today.

Lehmann believes that the long term impact of the extraordinary measures to save the financial system will be to generate inflation. I agree with that assessment, provided I can frame the answer in terms of more probable or not scenarios and to give it some time to develop into a serious problem. He recommends that income investors position themselves for inflation. His recommendations include floating rate equity preferred stocks which he mentioned in a previous article, GSPRA and MSPRA, and I have recently sold both of those stocks. bought mspra at $12.88 SOLD 100 MSPRA at 21.43 /Sold GSPRA at $21.9 I was critical of his recommendations at that time, arguing that there were several other floaters including several tied to a Goldman Sachs' bond which presented better values. See Item # 7 NYB/Added to CEFs IGR & SWZ/Bought Stock: NAL & WL/Bought ETF FVL/ Bought bond FCY

His new recommendation in the current Forbes magazine is AEB, the adjustable-rate "preferred" stock from Aegon which was selling at $18 at the time he wrote the article. He believes that AEB can make it to its par value of $25 once 3 month LIBOR hits 4%. I would question that opinion. He gives the rating for this security as Baa2/BBB.

For the long time readers of this blog, including some who bought a couple of thousand of this security when I was discussing it at less than $5, AEB will be a security recognized as a topic in numerous of my posts starting in October 2008. LIBOR AND THE AEGON FLOATING RATE PREFERRED STOCK My buys were in the $4 to $8 range. I am not a buyer of AEB at the current price level. If it got close to $25, I would have to be a seller. When this security was bought by me at a substantial discount to its $25 par value, it provides both inflation and deflation protection for an income investor. The dividends, which are currently classified as qualified under U.S. tax law, are paid quarterly and calculated based on the higher of 4% or 7/8% above the three month Libor rate. (prospectus: /www.sec.gov)

The applicable rate now is the guarantee of 4%. However if you were fortunate enough to buy this security at a total cost of $5, the guarantee would become 20% at that price ( .04% x. $25 par value=$1 annually in dividends per share divided by a total cost of $5=20% per annum). And at the 4% 3 month Libor, and a $ 5 cost, the yield would be 24.375%. As explained in prior posts, the guarantee is the low inflation or deflation protection in this kind of security. Inflation or Deflation: Bond Alternatives/ The inflation protection component is the float above the 3 month Libor rate, which will start to increase from its current abnormally low level of .25% when the central banks end their extremely low benchmarks rates and inflation starts to increase. The historic data for the 3 month Libor can be found at this site: LIBOR Rates History (Historical) A 4% 3 month Libor rate would not be unusual historically.

AEB is not really a preferred stock, as Lehmann says, at least in the way American investors understand a preferred stock. It is a hybrid security. It is in effect a junior bond that is treated by the Europeans as equity capital for regulatory purposes. This is explained in more detail in my gateway post for Aegon hybrids and the posts referenced therein: Aegon Hybrids: Gateway Post In that last referenced post, I discuss some of the risks with the Aegon hybrids.

AEB is one of two publicly traded floating rate securities with a guarantee that pay qualified and cumulative dividends.Advantages and Disadvantages of Equity Preferred Floating Rate Securities The other is HBAPRD, which I also own. Most of these floating rate securities that pay qualified dividends are not cumulative. I say there are two because I am not aware of another. If anyone knows of another, please leave a comment or send me an email.

Another category is the synthetic floaters, which are tied to bonds, and do not pay qualified dividends at all: Synthetic Floaters The ones tied to junior bonds would be cumulative.

7. China Reduces Holdings in U.S. Treasuries: When I really want to scare myself, I start thinking about who is going to buy all of our government's paper that needs to be floated to finance trillion dollar plus deficits. The treasury department reported yesterday that China, one of the primary financiers of America's fiscal irresponsibility, reduced its holdings of treasury debt by 34 billion in December. That decrease put Japan in first place in the list of enablers with treasury holdings of 768.8 billion compared to China at 755.4 billion.

8. Sold 50 DK at $7.31 (see Disclaimer): This Lottery Ticket was recently bought at 5.75. I will trade refiners for small profits on small positions.

9. Greece and the EU: I am glad to see that the EC is not going to throw money at Greece before the Greek government actually takes concrete steps to reduce its deficit. MarketWatch After reading some comments from Greek officials last week, they expected the money first, as in take the money and run.


  1. It's interesting to see that ING had a loss over 2009 and isn't paying a dividend on the common stock or the stake that the government has (the government failed in the negotiations here).

    I think this quarters payment is guaranteed because ING bought back some of the government's shares. But after that I don't know. Personally I wouldn't mind if the payment is deferred so I can buy more at a lower price.

  2. The securities issued to the Dutch government in 2008 were "Junior Securities" to the ING hybrids. When ING bought 1/2 of those securities back, and made a dividend payment on them, it triggered a Mandatory Payment event on the hybrids. The issue is whether the mandatory period covers one or 4 quarterly payments for the hybrid. The first hybrid payment after the mandatory payment event was in December 2009. Since I view the Junior Securities issued to the Dutch government as "annual" payment securities, I would argue that the repurchase of those securities triggers four mandatory hybrid quarterly dividend payments. (the duration of the mandatory payment event is tied to the payment period of the Junior Security). This would take the mandatory payments through the 3rd quarter of 2010.

    Normally, payment of a common share dividend would stop ING or Aegon from deferring payment on their hybrids. Both companies have, however, eliminated their common share dividends. So the only stopper applicable for both companies now is their recent repurchase of securities junior to the hybrids.

    This is a fairly complicated issue. If you are interested in it, I would focus on the stopper provisions in the prospectuses and possibly read some of my posts on the subject:

    item # 2 http://tennesseeindependent.blogspot.com




    The operating number for ING's 4th quarter was okay. What concerns me with these large financial institutions are the problems lurking on the balance sheet. ING Americas loaded up on mortgage trash from the U.S prior to the recession. " The net loss in the quarter reflects an accrual of additional future payments to the Dutch State for the Alt-A facility as part of the agreement with the European Commission which we announced in October."

    The company is still writing down the value of their investments.

  3. I notice AED which I own, is on a tear as well. A thought crossed my mind that these hybrid preferreds paying a 6.5% coupon might look pretty good to institutional investors, probably a safer place to park one's money than the sovereign debt of certain European nations at the moment.

  4. Cathie: This is just my opinion but we are in a phase now when investors are searching the world for anything resembling investment grade debt paying a decent yield. Even after its run up, your Aegon hybrid still yields 8.34% to a new buyer at tonight's closing price of $19.42. Eventually, this will run its course, prices for bonds will be driven up to a point where interest rate risk has been priced out, central banks will start to raise their benchmark rates, inflation will return to become an issue, and a perpetual junior bond selling a near par value will not look so hot and have only one direction left to go under those changed circumstances, which will happen.

    This assumes no further credit issues or some new EC burden sharing problem for Aegon, but just focusing on the interest rate risk in your Aegon hybrid. Those issues can have a deleterious impact irrespective of interest rate risk issues.

    The decision on the time of that transition to downward price pressure due to interest rate risk is an important issue for all owners of fixed coupon perpetual hybrids, particularly those approaching par value and yielding near their respective coupons of 6 to 7% for many of them for new buyers. It does not matter in this analysis what you paid for it, but whether someone else will want to pay that future price or a much lower one. So I may keep an AEH bought at less than $5 notwithstanding my view of a pending long term secular bear market in bonds on the horizon, just due to the huge yield at my cost, but not an IGK which was bought at much closer to par value.

    Most of the rally in Aegon hybrids since last March has to do with a lessening of the credit risk issue and no further concerns about some forced deferral by the EC. A lack of concern about interest rate risk, a failure to price it appropriately or to recognize that current conditions are closer to then game rather than the beginning, are now the dominant factors in virtually all bond and bond like pricing decisions, which is why so many individuals who bought bond funds last year and sold their stock funds will most likely be in for a rude awakening about interest rate risks.