1. Bought 100 SJV at $9.67 in Regular IRA (See Disclaimer): SJV is a special investment product from Bank of America, similar to SFH which was purchased in late April in the ROTH IRA. While the SIPs have lost some value in the recent squall, they have held up better in most cases than the market. They are now my preferred method to achieve some equity exposure in the retirement accounts. I went ahead and added SJV yesterday even though it appeared the market was continuing to have a nervous breakdown. While it is just my opinion, I view the reaction to Germany's restrictions on naked short sales to be irrational, asinine is probably a better description.
SJV has a "Starting Value" of 1,114.05 on the S & P 500, almost precisely where the index closed yesterday (^GSPC). If the index closes at or above 1,114.05 on 12/28/2010, the first "Observation Date", Bank of America is required to call SJV and to pay $10.925 per share. If the index fails to close above the Starting Value on the first Observation Date, then you move to the second Observation Date on 6/27/2011. If the index closes above the Starting Value on the Second Observation date, BAC will call SJV and pay $11.388 per share. The Third Observation date is on 1/4/2012. If the S & P 500 index closes above 1,114.05, the Starting Value, on that date, BAC will pay $11.85 per share which would represent a 22.54% return of a total cost of $9.67 per share. The return on the First Observation Date at a $9.67 total cost would be about 12.98%, assuming a close at or above 1114.05 on 12/28/2010.
So I have three chances to win on this security provided the index closes on one of the three Observation Dates above 1114.05, and it closed yesterday at 1115.02.
Now, what happens if the S & P 500 fails to close above the Starting Value on any of three Observation Dates. If the S & P index closes above the Threshold Value, which is 1,002.65 on the Third Observation date, I will receive $10 per share. If the S & P index closes below the Threshold Value on that date, then the par value will be reduced on a 1 for 1 percentage basis below the Threshold Value. The example given in the prospectus is an Ending Value in the S & P 500 of 946.94, then SJV would be redeemed for $9.5. Since I paid $9.69 per share, I am almost protected on my original principal investment down to that level.
Prospectus: Term Sheet No. 224
2. Added 100 BDF in the ROTH at $17.10 (See Disclaimer): BDF a closed end fund that invests mostly in investment grade bonds. I have nothing to add to my discussion from a few days ago (BDF), except to note that the discount to BDF's net asset value has expanded some since my last purchase. As of Tuesday, 5/18/2010, the NAV was $19.19 and the discount to a NAV was 10.68% at the then closing price of $17.14. So, during the stock market's decline, the NAV of this bond fund has increased some, and the price has declined. This is typical for times of market stress, even for CEF bond funds that do not use leverage and whose assets are increasing in value during the period of stress.
BDF traded in a broad range for such a staid CEF yesterday, with a low of $17.01, a high of $17.65 and a close at $17.33. At that closing price, the discount contracted to 9.36%. WSJ.com NAV fell seven cents from Tuesday's close. (the HSF discount has expanded since my purchase, closing yesterday at a 10.69% discount). On the foregoing referenced WSJ page, which contains NAV information on "Investment Grade Bond" CEFs, I own BDF, HSF, WIW, ACG, IMF and IGI.
3. Added to Canadian Dollar (CAD) Stash (See Disclaimer): I used the decline yesterday in the CAD to convert $1500 U.S. dollars into Canadian dollars. I am a long term holder of Canadian dollars and will use those funds to buy Canadian securities that pay good dividends. I will keep those distributions in Canadian dollars, which is always the case, in order to buy more Canadian securities as the cash builds back up over time.
4. CASH To BONDS/Preferred Stocks: I am starting to see some individual investor liquidation of exchange traded bonds, creating some significant percentage swings in exchange traded bonds and preferred stocks. I have decided to gradually put some of my cash stash, currently earning next to nothing in a money market fund, into bonds and preferred stocks to capture more yield, at least on down days where I notice significant declines in securities that perk my interest.
After the Lehman failure, and when the financial system was tottering on the brink of Financial Armageddon, I understood the volatility and the severe downdraft in the market averages. The market's reaction to the news in Europe is hyper-sensitive and in my opinion an over-reaction. But, it is what it is. It is not surprising that the market would find a reason to correct after the huge rally off the March 2009 lows. I will use the current craziness to simply increase the cash flow into my account by buying bonds and preferred stocks as their yields increase with declines in their prices.
I may add back some of the equity preferred floating rate stocks with guarantees that are particularly susceptible to periods of investor angst. Advantages and Disadvantages of Equity Preferred Floating Rate Securities However, I doubt that I would add more than 50 or 100 shares of each issue where I previously eliminated my position primarily due to a large percentage gain. I would want the Bank of America and Merrill floaters to fall more in value before buying one of them back. A few of the others have become tempting during this latest squall. One problem is the uncertainty about the tax rate for dividends. One of the advantages of those securities is that their distributions are characterized as qualified dividends, subject to the maximum tax rate of 15%. This tax rate will expire at the end of this year, and it is conceivable that their favorable tax treatment for U.S. taxpayers will end by the end of 2010. Dividend Tax Rate in 2011? If the favorable rate is changed in an adverse way, then this may make these securities less desirable than a junior bond from the same issuer, which at least has a higher priority, a maturity date and distributions which can only be deferred rather than eliminated. An example would be comparing the Goldman Sachs' non-cumulative, floating rate equity preferred stocks with the synthetic floaters that contain a GS junior bond.
5. Limited Brands (own TC PZB only): Limited Brands reported earnings for its first fiscal quarter of 34 cents, which included a 9 cent per share cash distribution from Express. This beat the consensus estimate by 6 cents. Comparable same store sales increased 10%. For 2010, the company expects earnings of $1.60 to $1.8.
I am contemplating adding to my 50 shares of PZB at some point. This TC contains a senior bond from Limited: Bought 50 PZB at $16.05 This is a link to the FINRA information relating to the underlying bond in this TC.
There are two trust certificates that contain this same bond.
PZB with a 6.7% coupon and a $25 par value: http://www.sec.gov: yield of 8.7% at a total cost of $19.25
HJR with a 7% coupon and a $25 par value: www.sec.gov: yield of 7.85% at a total cost of $22.28 per share
I do not view the foregoing pricing as rational. It is not historically unusual in the niche market for TCs, dominated by individual investors, to have functionally equivalent TCs with a 1 percent difference in yield with the one with the higher coupon providing the lower yield. The disparity in yield is not a reason to buy PZB. It does say something about which one to buy once a decision has been made to buy a TC with this Limited senior bond as the underlying security.
Another piece of information that I will always check before entering an order is the current yield information of the underlying bond compared to the TC. I consider that relevant and material, and have taken the time to list the FINRA bond information for each TC: LINKS TO FINRA INFORMATION ON UNDERLYING BONDS IN TRUST CERTIFICATES The Limited bond has a 6.95% coupon and closed yesterday at $93.287. Divide $6.96 by $93.287 to arrive at the current yield based on that closing price and I arrive at 7.46% current yield. PZB is about 1 1/4% higher. I then check the YTM figures using the Morningstar Bond Calculator. The YTM for PZB is 9.3% at a total cost of $19.25. Maturity is 3/1/2033 at $25. The underlying bond YTM using that same calculator, which may have different assumptions than the FINRA YTM number, is 7.72% at $93.287. The Morningstar YTM captures the additional yield representing the profit realized at maturity by buying the bond at a discount to par value and investing the interest at the coupon rate.
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