1. FINRA YIELD INFORMATION: Comparing the Underlying Bond Yield to the Trust Certificate Yield: When comparing yield information of a Trust Certificate and the yield provided by Finra for the underlying bond, it is important to keep in mind that the FINRA yield information includes both the current yield at the last trade and an additional yield calculation based on the holding the bond to maturity. If the underlying bond is selling at a discount to par value, the yield shown will be more than the current yield. One calculation will be done to demonstrate that it is important to make an apples to apples comparison when comparing the yield information on the TC and the underlying bond.
Assume the purchase of the TC GJD containing a Sprint bond in 2028 at $17.54 and the purchase of the underlying bond at $76. FINRA First, I would calculate the current yield that an investor would receive by holding both of those securities.
GJD has a $25 par value and a 6.5% coupon. The current yield at a total cost of $17.54 is 9.264% (.065% x. $25 par value=$1.625 annually for each TC, divided by cost of $17.54=9.264%). For the sake of simplicity, I am not trying to figure out what the yield would be by calculating the return on the interest paid.
The underlying bond ($1,000 par value) has a higher coupon than GJD at 6.875%. At the total cost of 76, the current yield would be 9.04% (simply divided $6.875 by 76).
So the TC GJD would have a slight yield advantage over the underlying bond with those assumptions about the investor's cost. As the investor's cost change, of course, the calculations will change.
The FINRA data on yield includes the yield to maturity which calculates the additional annualized yield by holding the underlying bond to maturity and capturing the spread between 76 and 100 in November 2028. This is why the FINRA site shows a higher yield for the underlying bond than the current yield. To receive that additional yield, the assumptions are that the bond will be held to maturity and Sprint will survive to pay it off in 11/2028.
To arrive at a quick calculation of a comparable yield for the GJD, I would just make an approximation using the calculator at the following linked website and just round off the years to maturity since this site requires a round number for years to maturity: Bond Yield Calculator So I put in the years to maturity as 19 for GJD, a par value of $25, a coupon of 6.5% and a cost of the bond at $17.54. The yield to maturity came to 10.088% with a current yield at 9.265% (both slightly better than the underlying bond based on the 76 price). This site is handy for a math challenged person such as myself. Personally, I would not place much reliance on the yield to maturity number now, since that is not money in my pocket and is based on two long term future assumptions. For a junk bond like Sprint, I would personally put the emphasis on the current yield number. In ten years, assuming Sprint has survived and was then no worse off than now, I would start to give more weight to the yield to maturity number.
To compare TCs with the same bond, which is always important to do, I would need to do the same calculation for all four TCs containing the same Sprint bond as I just did for GJD. I plugged in the DHM that I bought Monday at $21.35 and its 8.125% coupon. The calculator showed me what I already knew. I received a higher current yield with DHM at 9.51% with a lower yield to maturity at 9.853%. The reason for difference in yield to maturity is that GJD is selling at larger discount to par value than DHM and consequently has more to gain on the shares.
I do not have an opinion on whether or not Sprint will survive until 2028 and would just say that their financial condition will need to be monitored closely for anyone owning one of their bonds. My maximum exposure would be $2000. It is possible with a turnaround in Sprints' business, and credit upgrades on its bonds to investment grade, for GJD to deliver a large part of its capital gains potential at some point prior to 2028. I just would not make that assumption now.
2. Sold 100 ETF AOA at 30.25 (see Disclaimer): LB is in a trading mode. It is concerned that the market will falter at its current levels. Since there really is no way to know now one way or the other, a proactive step would be to slightly reduce stock exposure by selling a non-core stock ETF, and then wait and see if those funds can be re-deployed at a lower price. The AOA shares were bought recently at $29.5. If there is a correction, then I would buy those shares back at below $29. On the other hand, a continued rally would cause me to look for an opportunity for those funds elsewhere. Some may say that even the LB is a nervous nellie, which would be deemed per se slander by the LB who has never had a case of nerves.
3. Australia: The Australian central bank raised its benchmark rate by .25% to 4%, noting that economic conditions "have been stronger than expected". This impacts the amount of the dividend paid by the currency ETF for the Australian dollar, FXA. RBA
4. VIX: The ^VIX closed below 20 yesterday for the third straight day. ^VIX: Historical Prices for VOLATILITY S&P 500 Under the VIX Allocation Model, there needs to be 3 months of continuous movement below 20 before I would conclude that the Unstable VIX Pattern has ended in favor of a Stable Vix Pattern. Phase 1 of the Unstable Pattern is defined to a whipsaw movement in the VIX between 20 and 30 with short duration moves below 20 and above 30. This was the pattern between August 2007 through September 2008, the first phase of the bear market after the Trigger Event in August 2007. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX PatternThe second phase of the bear market is called a Phase 2 Unstable VIX Pattern, which started in late September 2008 with a decisive break in the Phase 1 pattern with a spike to over 40, the beginning of a catastrophic phase of a bear market. SEPTEMBER 2008: FORMATION OF THE DEADLY PHASE 2 OF THE UNSTABLE VIX PATTERN The Phase 2 pattern was broken in May 2009 with movement back into the 20 to 30 range. Since May 2009, the pattern has been a phase 1 Unstable Vix Pattern, meaning movement mostly in the 20 to 30 range with temporary movement below 20 and above 30. The brief movement of the VIX below 20 in late December and early January, followed by a burst to 26 is consistent with this pattern. It is positive that the phase 2 pattern of the Unstable Vix has been broken with the VIX moving toward stability, defined to mean continuous movement below 20. Vix Asset Allocation Model Explained Simply With as Few Words as Possible
What does all of this mean? The VIX Model is best at signaling an exit point after several years of a bull market. The signal is the Trigger Event, a decisive break in the Stable Vix Pattern by a burst in the VIX to 30 or close to it. When the Stable VIX Pattern of continuous movement below 20 has been in effect for years, which was the case in the cyclical bulls ending in 2007 and in the prior cyclical bull move between 1991 to October 1997, the Trigger Event is a signal to change one's allocation to stocks.
The model is simply flashing caution now. The movement toward a Stable VIX Pattern is positive. Eventually, based on the action in the VIX as the market makes a transition from cyclical bear to bull markets, the VIX will eventually fall below 20 and then stay in the Stable VIX Pattern for months. In prior patterns, this would mark the beginning of an investable bull market lasting several years. The long continuous movement below 20 is as close to a green light as the model will ever give. I do not use the word "safe" to describe that kind of steady movement. Instead, I would just say "safer" than an Unstable Pattern for individual investors who do not care to constantly make trading decisions, moving in and out like the LB here at HQ who loves extreme volatility.
The bull and bear patterns reveal themselves by looking at a long term chart of the VIX, recognizing when the S & P was moving up steadily as in 1991 to 1997, or down as in 2000-2002. VOLATILITY S&P 500 Index Chart Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2 VIX and S & P Compared 1990 to 1997 More on VIX AND ASSET ALLOCATION Multiple Confirmations of VIX Model-Canary in a Coal Mine
Since the current movement is consistent with the start of a Stable Vix Pattern coming out of a Phase 1 Unstable Vix Pattern, and with a continuation of the Unstable Pattern, the model is simply flashing caution now.
5. DIVIDENDS AND INTEREST: In today's WSJ dividend page, I noted the following declarations involving securities owned by me. Winstream declared its regular 25 cent dividend with an ex date on 3/29. Two closed end funds from Blackrock, PSY and BTZ, declared their monthly dividends with an ex date of 3/11. Several other Blackrock CEFs which are owned declared their quarterly dividends including BDJ, BCF, BDT and BDV. Several Nuveen closed end funds will also go ex on 3/11 with their quarterly distributions including JQC, JTD, JGT, JPC, JSN and JDD, all owned.