I am continuing to operate under the thesis that the bull move in the market off the March 2009 low is a short duration cyclical bull market within the confines of a long term secular bear market starting in 1997. This topic was discussed at length in several posts from September 2009. 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? more on 1982 or 1974 This chart depicts a fairly typical long term secular bear market, which I start in October 1997. This chart needs to be contrasted with those showing the long term secular bull market patterns from 1950 to 1966 and 1982 to 1997. (chart from 1982-1997 is the first chart displayed in More on 1982 or 1974; and the 1950 to 1966 chart is the second one in LONG TERM SECULAR BULL PATTERN 1950 TO 1966/ Long Term Secular Bear Pattern from The Great Depression).
I would add that the VIX may be signaling the end of the cyclical bull move, and a resumption of flat to down range bound movement. In the comment section to the post dated May 7, I noted that the VIX gave a warning shot about this change on April 27 when it moved decisively out of its movement below 20 by spiking to 22.81 as of the close that day. The second warning of the transition came after just one day below 20 with another spike to 22.05 on 4/30. Then there was another burst on 5/4, moving from a close of 20.19 on 5/3 to 23.84 on 5/4. That was three warning shots. Then the following occurred:
5/5 24.91
5/6 32.8
5/7 40.95
5/10 28.84
5/11 28.32
5/12 25.52
5/13 26.68
5/14 31.24
While the future is unknowable, this has been more than sufficient to send me back into the capital preservation mode. This is a dangerous pattern. Vix Asset Allocation Model Explained Simply
1. Bought 100 BDF at $17.20 on Friday (see Disclaimer): BDF is a closed end bond fund that invests primarily in investment grade bonds. I discussed it briefly in last Thursday's post in connection with its pending acquisition of Hartford Income Shares, another bond CEF: BDF Acquisition of HSF The last quarterly report filed with the SEC was for the Q/E 12/31/2009: www.sec.gov Dividends are paid quarterly. The yield at my cost is close to 6.7%. The discount to BDF's net asset value was 9.28% as of 5/13/2010. This information can be at the Closed-End Fund Association web site and at the WSJ.com. The discount expanded on Friday to -10.18.
Many of my recent buys signify a higher level of caution about stocks. I am basically keying off the gyrations in the ^VIX since April 27th, decisively reaffirming an Unstable VIX Pattern. The market is signaling more than just a heightened level of volatility but an enhanced state of risk for equities worldwide. While I certainly understand the risk of bond funds, they are more stable than stocks at the moment. My exit strategy is to sell the ones purchased over the past month when the ten year treasury has a closing yield of 4.25% or greater. Based on its recent action, this does not appear to be likely anytime soon.
I have limited my investments in stocks to whatever can be purchased with cash flow. I will be receiving a number of payments on Monday and will be looking at a number of dividend paying blue chips for a possible purchase using those funds.
2. Sold 100 BMLPRH at 17.42 on Friday (See Disclaimer): BMLPRH is a non-cumulative equity preferred stock, originally issued by Merrill Lynch. It pays the greater of 3% or .65% above the 3 month LIBOR. I bought the 100 shares in two 50 shares lots, with the first lot bought at $13.83 in September 2009 and the second fifty shares were bought soon thereafter at $13.25. Given the price at the time of purchase, I came to the conclusion that BMLPRH was a better value than BMLPRJ which had a 4% guarantee and a .75% float over the 3 month LIBOR rate. BMLPRH vs. BMLPRJ
I now believe that the BAC TPs present me with a better value than this non-cumulative equity preferred issue at current prices. The current yield differential is around 4% and the payments from the TPs are cumulative and are higher in priority. I bought a BAC TP on Thursday, BACPRW, which has about a 7.74% yield at my purchase price. Bought 50 BACPRW at 22.62 in the ROTH I also recently bought a TP, originally issued by Countrywide which is not part of BAC, at price to yield of about 8.35%: Bought 50 of the TC CPP at $24.2 I am willing to add 50 shares of another BAC TP to replace the 100 of BMLPRH sold on Friday. (the current yield of BMLPRH is around 4.25% at the closing price last Friday).
I have bought and sold the Bank of America equity preferred floaters several times, and will come back to them when the price is right. Stocks & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities The equity preferred floaters originally issued by Merrill Lynch include BMLPRH, BMLPRG, BMLPRL, & BMLPRJ. I have also bought and sold BACPRE, a floater originally issued by BAC.
I am also doing what I can to increase the cash flow in my accounts. If there is to be a continued downdraft in the market, I will simply be able to buy more shares at better prices than now with more cash flow coming into the accounts. It is sort of a simpleton process but it tends to work during bear markets as long as I remain disciplined about the purchases.
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