Thursday, June 24, 2010

Bought 50 PJS at 23.73/Sold 50 of 100 PJI at 21.35/MKZ/Housing/Sold 100 AXAHY

LB is in a hyper trading mode. And readers will note the abundance of hair in the new profile picture.

The Fed said yesterday that financial "conditions have become less supportive of economic growth on balance, largely reflecting developments abroad", referring to the European sovereign debt crisis and the austerity programs recently introduced or passed by European governments. The FED referred to housing as depressed and noted that employers were reluctant to hire. FRB: Press Release--FOMC statement--June 23, 2010 This statement was a clear downgrade of the U.S. economy compared to its prior assessment, as highlighted in this WSJ article comparing the statement released yesterday with the prior one released in April. The FED reiterated its intent to continue its Jihad against savers and other responsible Americans for an "extended period of time", by keeping the federal funds rate near zero. As noted in this WSJ article on this FED statement, most economists now believe there will be no increase in the federal funds rate until 2011 with some predicting no increase until 2012.

In revising its assessment down of the current state of the economy, the Fed was stating the obvious. And, that is one reason why I have started to increase, ever so slightly, my holdings in long term bonds yielding 8% or greater, in spite of their heightened interest rate risk profile. Hopefully, I will be able to pare some of those holdings before credit or interest rate risks come home to roost.

I mentioned in a prior post that I would start to sell some of the long corporate bond positions when the 10 year treasury crossed back over 4.25%. Item # 1 Bought 100 BDF at 17.2 I am going to lower that threshold to 4% in order to potentially decrease my overall interest rate risk associated with long term bonds. The ten year is currently priced to yield about 3.12%. U.S. Government Bonds I do not expect the 10 year treasury to trade above 4% for the remainder of 2010.

1. Housing Sales and the Expiration of the Government's Bribe to Buy Homes: The most recent tax credit for home purchases expired in April. What exactly did the government accomplish? By granting the tax credit, the government managed to deprive itself of revenue for those buyers who would have purchased homes without the tax credit. Those buyers would have bought due to the substantial fall in home prices and the favorable mortgage rates. For new home buyers with good credit and solid incomes, there was no better time in my lifetime to buy a home than the period covered by the federal government's tax credit for home purchases. The other result is that the government moved some buyers off the fence with the tax credit but this is basically a shuffle in time of housing demand. The demand for a home for those buyers was merely transferred from later in 2010 or 2011 into the period before April. In other words, nothing positive was accomplished of lasting significance for the overall economy.

This conclusion is buttressed by the release yesterday of the dismal new home sales for May by the Commerce Department. www.census.gov/ newressales.pdf New home sales in May were the lowest on record, falling to an annual rate of just 300,000 units. The decline was 32.7% from the revised April number.

2. Sold 50 of the 100 PJI at $21.35 on Tuesday and Bought 50 PJS at $23.73 (See Disclaimer): I mentioned in yesterday's post that I might buy back some of the PJS shares previously sold. Item # 5 PJS The amount invested to buy the 50 shares purchased yesterday at $23.73 represents about 1/2 of the profit realized on this security in prior trades. The underlying security in the trust certificate PJS is a senior bond issued by First American that matures on 4/1/2028. So, this bond has the interest rate risks inherent in long bonds. The TC coupon is 7.55%, paid semi-annually. www.sec.gov The trading information on the underlying bond can be found at the FINRA site. The underlying bond is lightly traded. At a total cost of $23.73, the current yield is around 7.95%. I decided to buy some shares primarily for the sake of diversity in my taxable account bond portfolio.

When LB is in a hyper trading mode, as now, some trades only make sense to it and it is best to just shake your head in disapproval as the RB has said many times rather than trying to understand its rationale. On Tuesday, LB sold 50 shares of the trust certificate PJI at $21.35, realizing a total profit after commissions of $9.08. This TC contains a senior Goldman Sachs bond maturing in 2033. LB is slightly uncomfortable with the total position in GS bonds, which includes shares in JBK, GYB, PYT and PJI. So this concern was alleviated somewhat by selling the 50 of PJI, along with the prior pare of 100 of GYB. The 50 PJI shares sold were the highest cost of the two fifty share lots previously purchased. Bought 50 PJI at 20.85 (Sold using FIFO accounting) Added 50 PJI at 20.17 (kept using FIFO) This in effect lowers the cost basis of the remaining shares thus giving me some breathing room in the event of another downdraft in GS bonds which occurred after the government announced the bringing of civil fraud charges a few weeks ago.

3. Sold 100 AXAHY at $16.66 (see disclaimer): These shares were just bought at 14.69 a few days ago. This was another example of the LB's hyper trading mode. I decided that I would whether own a bond rather than a European insurance company whose shares are priced in EUROs. I am more comfortable holding securities priced in Swiss Francs (e.g. Novartis and Roche) or Canadian dollars. I added to my Canadian dollar position yesterday too which gives me over 3 thousand CADs to fund further purchases of dividend paying Canadian companies or ETFs. Some of the recent ETFS purchases include the Claymore 1-5 Yr Laddered Corporate Bond ETF ( CBO), the Claymore S&P/TSX Canadian Dividend ETF - CDZ , and the Claymore 1-5 Yr Laddered Government Bond ETF - CLF, all traded on the Toronto exchange and purchased with existing CADs in the account.

4. MKZ (own): The principal protected note tied to the performance of the commodity index ended its first annual period yesterday with a thud. The DJ UBS Commodity index fell 1.24 to close at 126.58: WSJ.com That number is both the ending value for first coupon period and the starting value for the second annual period. I can now compute the percentage gain in the index from its starting value of 123.338-not much. The percentage increase is just 2.628%. Since that increase is less than the 3% guarantee, Citigroup Funding will soon pay the 3% guarantee, applied to the $10 par value of this note, as its first distribution ($30 per 100 shares). (MKZ Prospectus: Pricing Supplement) MKN worked out better with a $180 distribution in its first coupon period. In the second coupon period the maximum level for the DJ UBS Index will be 165.8198. If there is one close in the index above that number, then there is a reversion to the 3% guarantee and the percentage gain in the index by the closing date is no longer relevant in the distribution computation. (See Details in Item # 3 Bought 100 MKZ at 9.91 in the Roth IRA; Bought 100 MKN at 9.85) The most recent discussion of MKZ is in Item # 2 Sh-- Happens from the post dated 6/18/2010.

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