The preceding table has been updated to reflect recent purchases and sales, including MSF bought on Friday, as well as adding shares bought with reinvested dividend for a few CEFs. I am currently taking cash distributions on all of them except for ADX, IGR, JQC and SWZ.
1. Bought 100 PMK at $9.7058 in the Roth IRA Friday(see Disclaimer): Normally, I try to round off the cents. I do find these fills interesting. The bid was $9.7 and the ask was $9.71 when I placed my order to buy 100 shares at the market. I wonder how it was decided to fill the order at $9.7058 rather than say 9.7075 or 9.7025, not that it matters on a 100 shares of course.
I have bought and sold PMK several times and the purchase yesterday brings my total to 150 shares, and all of those are in retirement accounts. PMK is a senior bond that pays monthly distributions taxed as as interest. That tax issue is one reason for buying it in a retirement account rather than a taxable account where the interest payments would be taxed at my highest marginal rates. For purchases made in the ROTH IRA, which is now bond heavy, I will never pay income taxes on the income earned in that account even when it is withdrawn, unless Congress decides to change the rules in the future in furtherance of some wealth redistribution social program.
I do not have anything to add to my prior discussions. The bond is a senior bond from PMA Capital (PMACA), an insurance company. Par value is $10; the bond matures on 6/15/ 2018; and the coupon is 8.5% with monthly distributions. This is a link to the prospectus: PMA Capital Corporation Form 424 (B)(5)
Some of my prior discussions about PMA Capital and my trades of PMK can be found at the following posts: Bought 100 PMK at $8.35 Added 50 PMK at $8.21 /Sold 100 PMK at 9.2 I would have been better off keeping that 100 shares sold last November. The reason for coming back to it is the lack of bond alternatives for surplus cash building up in the retirement accounts, resulting from the cash flow generation from dividends and interest.
2. Bought 50 Duke (DUK) at $16.25 (see Disclaimer): This purchase was made in a satellite account where I am attempting to buy stocks with decent dividends as CDs come due. These shares will not be part of my long term hold strategy for DUK, which will only apply to those shares held in another taxable account, where I reinvest the dividends to purchase additional shares. In other words, I will trade the 50 shares of DUK purchased Friday in that satellite account, while keeping the shares owned long term in another account. The primary purpose of this particular satellite account is to buy CDs from an online bank, but nothing being offered now is worth the effort, which is why I have retreated to a temporary fall back position of buying dividend paying stocks in that account. Once interest rates return to normal levels, say 4 to 5% (or more) for a 1 year CD, I am likely to opt for that option rather than to continue owning stocks in those accounts.
Some prior discussions of this large electric utility can be found in the following posts: Added to Duke (DUK) at $13.56 Bought DUKE ENERGY (DUK) at $15.58 DUK Utility Earnings: POM, DUK, GXP,
The current dividend is 24 cents per quarter or $.96 annually, giving an investor a yield of 5.9% at a total cost of $16.25. The current E.P.S. forecast for 2011 is $1.32: DUK: Analyst Estimates for Duke Energy
This is the link to the annual report for 2009, which I had already reviewed as an existing shareholder: Form 10-K
With my electric utility holdings, I am hoping for an average annualized return of around 8%. For purchases made now, the dividend will provide anywhere between 65% to 75% of that hoped for return, at least for the ones that I buy. This means that a very modest growth in the share price will allow me to achieve that objective. DUKE, with a 5.9% yield at a total cost of 16.25, would have to rise 34 cents in price (after commission if sold) to give me that 8% return in the upcoming year. The 8% is reached after commissions with a $1.30 total return, with the dividend providing $.96 of that amount. If the dividend is raised, this makes the objective easier to obtain since less is dependent on the share price increasing.
3. BLOG ON SECURITIES PAYING MONTHY DIVIDENDS: This blogger has a list of those securities that pay income on a monthly basis, always appreciated here at HQ. Most of these securities are closed end funds. And I know of securities that pay monthly that are not on this list. Still, it is fairly comprehensive, at least for the CEFs. While I already own some of the securities on this list, I believe that it is important to check out whether the current dividend payout is supported by a return of the investor's capital, which is a major negative from my perspective. Also, the canadian energy trusts on the list have their own set of issues and potential problems down the road, particularly when Canada starts taxing them as regular corporations in 2011.
4. Bought 100 shares of the CEF MSF at $14.40 (see Disclaimer): MSF is a CEF containing emerging market stocks. When I bought the 100 shares last Friday, I knew only the net asset value for this CEF as of the close on Thursday which was $15.57 and the discount to NAV as of the close that day was about 7.93%. This information can be found daily at the sponsor's web site: Daily Prices - United States : Individual Investor - Morgan Stanley Investment Management It is also available at the WSJ.com . The net expense ratio is not unusual for funds of this type, with the net expense ratio at 1.54%. Fund Details - United States : Individual Investor - Morgan Stanley Investment Management
I would like to discuss briefly an issue about market timing that all of us already know. To be successful at it, the timer has to make two decisions, and it is not necessary to be perfectly correct on when to sell and when to buy the shares back. I actually made an excellent timing call on when to sell my emerging market stocks. I dumped my emerging market mutual funds in 2007 except for 100 shares of a mutual fund which I still own. SSEMX - Mutual Fund Quote for SSgA Emerging Markets Instl - MSN Money I am playing with the house's money on that one. The expense ratio on that one is also modest at 1.24% for this kind of fund. My reasoning at the time was impeccable. The emerging markets were highly positively correlated with the U.S. stock market with a significantly higher beta. Emerging Market Currencies and Bonds as Non-Correlated Asset Classes Instability & Volatility in Asset Correlations ( see also this article in Seeking Alpha) Since my VIX Asset Allocation model was signaling a sell for U.S. stocks due to the August 2007 trigger event in the VIX , then I needed to sell assets with high positive correlations to U.S. stocks, particularly an asset class with a high positive correlation and a higher beta. {VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern}
Okay, that was the correct decision in retrospect. But I was very slow in adding anything back in this sector from March 2009 to now. I did buy some shares of an ETF PIE, but this was at best a weak-kneed positioning. Emerging Markets Bought 50 PIE at 10.01 10/2008. Bought 50 PIE at 14.04 in 2/2010 I did buy shares in Matthews India fund (MINDX) which had a good year last year, but that position is also way too small. RB just said that thinking small is the LB's modus operandi. It is time to set the RB free, remove that LB ball and chain. And I picked up some exposure to Asian emerging markets when I bought some positions in CEFs and one other mutual fund both of whom have significant exposures to Asian emerging markets. Most of these, however, are recent 2010 buys (CHN,APF, & LDF) or after September of 2009 (e.g. Bought Matthews Asian Growth and Income (MACSX). And, lastly I sold down in 2007 until I hit the point of playing with the houses money my position in MATTHEWS PACIFIC TIGER FUND (MAPTX), which has ASIAN emerging market exposure, and have added to that one in a few small increments of only $250, another weak-kneed response to even building back that fund to where I was in late 2007. So, I did not re-enter the emerging market positions as well as I did my U.S. stock positions which had been sold down also in 2007. So, I made the mistake in not buying back more aggressively what I had sold until prices had moved up significantly from the lows reached in March 2009. Still, I am ahead as a result of those timing decisions.
5. Bought 100 PGEB at $10.67 in the Regular IRA (SEE Disclaimer): This special investment product from Merrill Lynch has to be bought in a retirement account for a U.S. citizen due to its tax issues, otherwise you will be taxed on phantom income. I am not too swift on complex tax issues, but I know to avoid those securities in a taxable account that report income for tax purposes which is not actually paid (see page S-31 to S-32 for U.S. holders and thereafter for non-U.S. Prospectus Supplement). So this one had to go in my retirement account since I do not even want to think about the tax issues.
What I am about to say will cause you head to hurt some.
PGEB is a senior note from Merrill Lynch that matures on 2/12/2012. Par value is $10. No interest is paid prior to maturity. There is no reversion problem like I have discussed with the Citigroup Funding special products MKN, MKZ, MHC, MYP & MOU, all of which I have recently bought and discussed at length elsewhere.
And, Merrill is not agreeing to pay the $10 par value at maturity. Instead, it guarantees that an investor will receive no less than 97% of the par value at maturity, or $9.7 per share, which means my total downside is about $100 on my 100 shares. I do have upside however.
Merrill pays that $9.7 plus a sum calculated by the increase from the starting value of three major indexes, multiplied by a participation rate of 112%. I have excerpted the starting value of each of these indexes and the current value as of 4/9/2010 below (SV=Starting Value; CV=Current Value as of 4/9/2010):
The SV information is found at page S-17. The basket starts out with a 100 number (33.333 points for each index). The multipliers should stay constant but can be revised in good faith in limited circumstances. This is my calculation if the settlement date occurred based on the closing index values as of 4/9/2010:
1194.37 x .030662=36.62 (S & P 500)
11,204.34 x .003062=34.308 (Nikkei)
2,993.54 x. .012415= 37.165 (Europe)
Current Total as of 4/9/2010 = 108.095
108.043-100=8.095 divided by 100= .08095 x 10=.8095 x. 1.12 participation rate=91 cents rounded
Add $.91 to the $9.7 guarantee=$10.61 if the settlement occurred at Friday's closing prices, close to where I purchased my shares. So I know my downside now, the $9.70 guarantee or about a 9% loss in the security. And if the averages close at the same level as now during the computation period in 2012, I will just about break even. If the markets continue an upward path until the settlement date in 2012, then I will participate in the increase in the matter shown in the following hypotheticals.
The possible upside is not known or capped, except in a theoretical sense that the markets will only gain so much in a two year period. The three markets have almost another two years to move up and down before the closing value is set as provided in the prospectus. If the market just returns in two years close to where it was in 2007, the percentage return would be large. For example a 1500 number on the S & P 500 would give me a 45.99 number in the computation. The Europe index was trading at between 4000 to 4500 in 2007: ESTX50 EURP Index Chart A return to 4000 by the settlement date would give me a 49.66 number in the equation for the European index. When added to the 45.99 hypothetical number for the S & P, keeping the Nikkei constant with last Friday's close, the result would be an ending value of 129.96 and a redemption value of $13.055. Now if I increase the Nikkei to say 14000, then its number would increase to 42.87 bringing the total to 138.46, and the redemption value increases to $14. This might be the best case number which would represent a return of 31.45% in less than two years with the shares purchased at a total cost of $10.67, while the downside risk at that cost is 9.1%.
Ideally, I would want to buy this security as close to $9.7 as possible. The investors who bought this security in 2004 at its $10 IPO may be disappointed based on what has happened since that time. The long term monthly chart shows a high in September 2007 at $13.88 and a low of $8.19 in March 2009. PGEB Stock Charts - (NASDAQ) Merrill Lynch & Co Inc NT BSK 97% 2012
The purchase of PGEB was viewed by the LB as a safer way to play the developed world's stock market in an IRA, viewing as important the known downside risk juxtaposed with the potential upside reward given the relatively short holding period.
RB was heard to say that only a a boring, insufferable NERD would buy this kind of security.
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