1. Jobs: Nonfarm payrolls fell by 36,000 in February. Employment Situation Summary The expectations was for a loss of 75 thousand jobs. WSJ I have read several articles suggesting that the nation would have to add close to 100,000 jobs per month just to provide work for new entrants into the work force. WSJ The unemployment rate stayed at 9.7%. The number of workers who are working involuntarily part-time increased to 8.8 million from 8.3 million in the prior month. About 2.5 million individuals were "marginally" attached to the labor force. These are people who are not in the labor force but want to work and have looked for a job in the past 12 months. Table A-15 of the Labor' Department's report contains the U-6 number which includes those unemployed, marginally attached to the work force and working part time involuntarily, and that number rose to 16.8% in February from 16.5% seasonally adjusted. The non-seasonally adjusted U-6 number for February was 17.9%.
The December and January numbers were revised higher by 35,000 jobs.
Layoffs and firings have slowed but hiring has not really started yet. The next two months will be helped by the temporary hiring of census workers. I certainly did not become enthusiastic after reading this report from the Labor Department. I do not share Brian Westbury's enthusiasm: /www.ftportfolios.com
2. Sold 100 FPO at 14.75 and Bought 50 of the TC DKK at 24.78 in the Roth (See Disclaimer): In this exchange, I went for current income. I bought the 100 shares of First Potomac at 13.81 on 2/2/2010, and collected one quarterly dividend payment. At my cost, the yield was close to 6% for FPO. The DKK fixed coupon is 8% with a $25 par value (www.sec.gov), so my current yield at my total cost would be slightly over 8%. This is a link to the underlying bond information at FINRA. The FINRA sites shows that the underlying bond is rated at the lower rung of investment grade, currently rated Baa3 by Moody's and BBB- by S & P.
The TC DKK has as its underlying bond a Trust Preferred (TP) issue from Aon Capital, guaranteed as provided in the prospectus by Aon. As with other TPs, the trust preferred "stock" is basically a certificate representing an undivided interest in the assets of the Delaware Trust (hence trust preferred stock) which is a junior bond from Aon. For my purposes, and to simplify my life some, I would just view it as a junior bond from Aon. This is a quote from the prospectus:
"Although the Securities are issued pursuant to a multi-stage legal structure, the Securities are effectively unsecured and fully subordinated obligations of the Security Guarantor"
I have bought and sold DKK several times. My last transaction in the Roth was a buy of DKK at $23.34 in November 2009. Added 50 of the TC DKK/Bought 70 PYT at $15.75/Sold All Shares TIP ETF /Added 50 of ABWPRA So the purchase on Friday was an average up, bringing the total in that account to 100 shares and raising my average cost some. Interest is payable on 1/1 and 7/1. So, I have received one semi-annual interest payment on the shares bought last November.
As with other junior bonds, interest is cumulative and may be deferred for up to five years provided no payment is made on a junior security like a common stock dividend. AON does pay dividends on its common stock. The bond matures on 1/1/2027.
I also currently own 100 KTN in the regular IRA, another TC with the very same AON TP in it (www.sec.gov) That one has a 8.205% coupon and closed today at $25.69. I was fortunate to buy it during the meltdown at around $14. I also bought 50 KTN at the same time and price in the main taxable account, which is still owned along with 100 KVW bought at around $16. KVW has a 8% coupon like DKK and was selling at a slightly higher price than the functionally equivalent DKK today. I also own 50 DKK in the main taxable account.
When I started to trade the 4 AON TCs in the Fall of 2008 with the same bond in each of them, there was frequently huge discrepancies in yield between them that led to a number of trading opportunities. And the dysfunctional pricing manifested itself in the TCs selling at large discounts to the value of their underlying bonds as those were being priced in the bond market, sometimes presenting the investor in the fall of 2008 and into early 2009 with a 3 to 5% per year yield advantage by buying the TC rather than the underlying bond. The extreme level of dysfunctional pricing in the TC market has either totally disappeared with many issues or has become small and relatively insignificant now.
3. Bought 100 Ameren (AEE) at $25.8 (see Disclaimer): Ameren is an electric utility serving Illinois and Kentucky. I suspect that most investors would view the regulatory commission in Illinois as unfavorable to electric utilities operating in that state. Ameren has had a tough couple of years. As recently as December 2007, the stock was trading at around $54 and it has been pretty much downhill since then with the stock hitting a bottom of $23.02 in April 2009: AEE Stock Charts Fortunately, I have never owned it until it was purchased today.
Ameren is a holding company and owns several operating subsidiaries including Union Electric, Illinois Power Company, Central Illinois Public Service Company, and CILCORP, along with a generation and a transmission company. Reuters
The company issued guidance for its fiscal year 2010 at between $2.2 and $2.6 for its core earnings. Press release Part of the problem is the merchant power business: Press release
The quarterly dividend is currently $.385 per share and goes ex dividend on Monday.
Rolling through the Key Developments page, I see a number of earnings warnings in 2008 and 2009 which had to contribute to the stock's downdraft. Reuters In 2008, the dividend was at $.635 which was not sustainable and it was subsequently cut to $.385. At the current rate, the yield would be close to 6% at my cost.
Part of the problem is reduced demand from customers due to the recession. Ultimately, that demand will return-hopefully. (see page 29: Form 10-K)
Ameren reported earnings of $2.88 in 2008 and $2.78 in 2009. Ameren earned 34 cents in the last quarter.
So when I look at Ameren now, I suspect that a lot of bad news is already baked into the price. It is down about 50%. Even after the dividend cut, it is still yielding close to 6% at my cost. And I would hope that the Near Depression's impact on demand will gradually fade into a bad memory.
Price to book and price to sales are both currently less than 1. AEE: Key Statistics for Ameren Corporation
4. Christine Benz Interview with Roger Ibbotson: I am not sure why Ibbotson finds it hard to acknowledge that traditional asset allocation failed in 2008. When virtually all asset classes go down a lot in tandem, except for cash and U.S. treasuries, then I would call that a failure of standard asset allocation theory. More importantly, he seems oblivious that stocks, a major asset class, have failed to advance the buy and hold investor's returns for more than a decade. I do agree with him that stocks will outperform bonds in the upcoming decades given the current low yields of U.S. treasuries and government bonds from other developed nations, as well as investment grade issues now. It would be unreasonable to expect the same kind of returns from bonds going forward starting from a base of 3 to 4% in ten year treasuries compared to a period starting in 1981 when longer term bonds were yielding over 10%. I mentioned in a post from yesterday that the 30 year treasury was yielding almost 10% in 1987, hitting 10.13% in October 1987. The yield on that 30 year bond hit 15.07% on 10/2/1981 after posting several weeks over 14%: www.federalreserve.gov If an investor had bought that bond at 15.07% and another had invested in the S & P 500 on the same day, who would have come out on top? It is an obvious point but the 10 or 30 year treasury bonds are not 14%, or 10% or even 6% now. It will not take much of a rise in rates to wipe out the interest paid at 3% or 4% with the loss in value from the bond.
5. Long Short Strategy: Near the close today, I added a small amount to a sector double short ETF. The Vix closed down 1.3 to 17.42, the 6th consecutive day below 20. A close below 15 would be viewed as positive in the VIX Asset Allocation Model. Vix Asset Allocation Model Explained Simply With as Few Words as Possible
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