Friday, June 25, 2010

Claymore Canadian Bond ETFs/Preferred Stock ETFs: Bought 200 PGX at 13.53/

The revised GDP number for the 1st quarter will be released later this morning. If it is 1.5% or lower, LB will not have to worry about the Old Geezer returning from his sabbatical, most likely for the remainder of the summer and into the Fall. Even the RB has simmered down, no longer howling "go all in", apparently content to help the OG in his spiritual pursuits. LB enjoys the peace and quiet, as it turns to playing small ball in the market and turning what only appears to be chaos into order.

Some may say that LB is misrepresenting its appearance with the current profile picture. That is just an outrageous and slanderous contention, having no basis in fact. The LB has not aged since the photo was snapped in 1972 showing its essence. Don't confuse the LB with that balding, over-weight, dilapidated 58 year old structure commonly referred to as the Old Geezer-what an embarrassment! The LB is still razor sharp, capable of running a mile without drawing a deep breath, fit and muscular, with lots of hair, and would prefer reading the Internal Revenue Code to all of that spiritual stuff. In short, LB is not a day over 21 years of age.

Besides LB already knows about all of that spiritual stuff, heaven and all of that. Heaven is where the LB can go about its business 24/7 without being interrupted by that noise problem, the nit wit RB, and no longer has to worry about the OG interfering with its well thought out strategies based on some whimsical, barely coherent thought. Yes, that is the place where the LB can ponder the millions of variables and contingencies in peace and quiet, creating order out of the appearance of chaos.

Out of nowhere, LB heard "What a boring Nerd, let's party".

A reader sent me last night this article written by Doug Kass, who is more optimistic than the general doom and gloom consensus permeating the market which was noted by Cramer last night at the start of his show on CNBC. If the OG was around, acting as the Head Trader rather than reading that spiritual stuff(buy the Old Goat a rocking chair!), the OG would agree with KASS and would be buying right now some large cap blue chips that appear to be undervalued and would hold them for the long term. But the OG is on sabbatical at the Old Folks Home, LB is in charge of the trading desk, and LB is a trader playing small ball now.

Out of nowhere, LB heard "Tunnel Vision Nerd, remember one of the OG's famous sayings, 'take whatever the knuckleheads give you' ".

1. Claymore Canadian ETFs (Canadian Dollar (CAD) Strategy): The two Canadian bond ETFs that I own, CBO.TO and CLF.TO, go ex dividend today for their quarterly distributions. Both ETFs are available on the Toronto exchange but can be purchased on the Grey Market in the U.S. with great difficulty. I am a long term holder of Canadian dollars so I am not concerned by exchange rate risk. Needless to say it would not take much of a decline in the Canadian dollar for the unrealized loss in the currency to wipe out the value of the dividend paid by these ETFs.

By long term, I am talking about maintaining a Canadian dollar position for the remainder of my life. I am therefore concerned about earning interest and dividends on the CAD position rather than temporary fluctuations in the exchange rate. My holding period is not certain, since flexibility is a virtue in investing, and I might be tempted to exchange those CADs back into the USD when I can buy $1.25 for 1 CAD. I can wait for the most advantageous exchange rate before converting the CADs back into USDs, and that point is a key point in maintaining and expanding my CAD position.

If I was a Canadian citizen wishing to invest my CADs, I would like both of these ETFs even more. Both use a ladder approach with equal weights in bonds maturing in 1 to 5 years. When the five year bonds mature and the 1 year bonds mature, the proceeds from the five year bonds are then rolled into buying new 1 year bonds, and so on. Along with the relatively short maturities and the bond ladder, this process substantially reduces interest rate risk to me and to the Canadian citizen who does not have to worry about currency risk. One of the ETFs invests in Canadian government bonds, both from the federal government and the provinces, while the other invests in higher quality corporate bonds. The expense ratios are low:Claymore 1-5 Yr Laddered Government Bond ETF - CLF Claymore 1-5 Yr Laddered Corporate Bond ETF ( CBO) CLF's expense ratios is just .15%.

I will receive my dividends in Canadian dollars which is what I want. I will then use that cash flow to buy more Canadian income producing securities, occasionally buying Canadian dollars directly to boost my CAD position.

I would not buy foreign dividend paying securities in a retirement account due to the withholding tax issue. Canada requires 15% to be withheld from the dividend payment, which can not be recovered as a foreign tax credit when the dividend is paid into a retirement account.

I currently own 200 shares of CLF and 100 shares of CBO. Most likely, I will add to CLF over time.

Previous discussions of these ETFs, and their risks and benefits, can be found in the following posts:

When placed into a taxable account, and for someone who has the financial ability and flexibility to weather the currency risk issue, I would view these ETFs as conservative investments. Due to the currency risk issue, they would not be conservative for those who lack that ability and long term flexibility. This opinion is based on a variety of factors, including the quality of the bonds, their short duration, and the use of the ladder and the roll. But, for me, I also have a favorable long term view of the Canadian dollars value compared to the USD, which is why I have a long term CAD position. Besides, it is best to humor the RB sometimes, who has all of these grand, idiotic plans, and its most secret plan is to acquire Canada, all of it, followed thereafter by a tender offer for Switzerland, all of it. It is embarrassing to the LB to even mention the Lame Brain's plans, fortunately most of them are kept out of the minutes of HQ's operation.

2. Home Purchase Tax Credit: I mentioned in yesterday's post my opinion that the tax credit for home purchases accomplished nothing of lasting value. Item # 1 Housing If I was thirty and looking to buy my first home, the tax credit would have been one of three good reasons to make the purchase, with the other two being low mortgage rates and the decline in home prices.

The USATODAY ran a story yesterday that 1295 prison inmates, who did not file joint returns, claimed a tax credit for a home purchase, including 241 prisoners serving life sentences. What can you say? Maybe the prisoners need to expand their horizons some and open medical supply businesses to bill Medicare for equipment that does not exist. Item # 2 Fraud is Too Easy In America

The 30 year mortgage rate has fallen to 4.69% on average, the lowest level since Freddie Mac started compiling this data in 1971.

3. Preferred Stock ETFs/Bought 200 PGX at $13.528 (see Disclaimer): Over the last few years, several ETFs have been launched that contain "preferred" stocks. There have been for a long time a large number of closed end funds devoted to preferred stocks, which frequently sell at large discounts to their net asset values. Most of the CEFs can be found at this WSJ page, though several of those funds also own some stocks and other asset categories such as JQC and CSQ which I own. JQC - Nuveen Multi-Strategy Income and Growth Fund 2 I certainly would not buy one of the CEFs listed on that page which sell at a premium to its net asset value. This page at the Closed-End Fund Association also contains a list of them. (CLICK HEADING INCOME & PREFERRED STOCK FUNDS)

I have been aware of the preferred stock ETFs for some time but have declined to buy one of them prior to yesterday for several reasons.

First, I like to pick individual securities to buy in this asset category, and I own several trust preferred and traditional equity preferred stocks. These ETFs contain trust preferred securities which are in effect junior bonds and European hybrids which are bonds with some equity attributes. I own a few such hybrids issued by Aegon and ING, but I noted several from other European financial institutions contained in one of these ETFs. (see PowerShares Exchange-Traded Funds | PGX - Preferred Portfolio Holdings) A few traditional preferred stocks are owned as well, depending on the fund. And I saw a few holdings that would more appropriately be characterized as a First Mortgage Bond or a senior bond. (see, e.g. link above, Entergy Louisiana & Entergy Texas are first mortgage bonds and Amerprise Financial issue is a senior bond). So preferred stock is a misnomer in that it conveys the impression to many investors of traditional preferred stocks. Trust Preferred Securities: Links in One Post Trust Certificate Links in One Post Aegon Hybrids: Gateway Post ING Hybrids: Links in one Post

Second, I am able to juice my yield by buying CEFs at significant discounts to their net asset value. The ETFs are priced closed to their NAV.

Third, the ETFs are relatively expensive in terms of their expense ratios compared to what I am use to buying. PGX, referenced above, has a .5% expense ratio. Some of the CEFs can be bought generally for expense ratios in the .8% area. I would be more interested in the ETFs when and if they are offered with expense ratios of less than .3%.

Many of the CEFs that invest in "preferred" stocks use leverage which can juice the return in a low interest rate environment provided the securities are going up in value. If securities plunge in value, as these funds did during the Near Depression period, leverage just adds to the woes. Leverage will work in a stable to up period in asset prices, when interest rates are low compared to the preferred stock yields. Leverage would be disadvantageous in a period where the preferred stocks are declining in value and/or the interest paid on borrowed funds starts to exceed the yields of the assets acquired with the borrowed funds. The ETFs do not use leverage.

There are several "preferred" stock ETFs that are currently available.

I decided to take a small 200 share position yesterday in PowerShares Preferred Portfolio (PGX) for several reasons. The fund has to hold investment grade securities. The index is rebalanced on a monthly basis. So if one of the holdings loses its investment grade status, it has to be sold. This is a way to manage credit risk. The overall quality of the portfolio is good recognizing of course that the holdings are mostly junior securities. I estimated that close to 50% of the securities are trust preferred stocks by just eyeballing the list of holdings. There are several European hybrids including issues from Aegon, Deutshe Bank and Allianz. The portfolio has a few REIT equity preferred stocks. As previously mentioned, the Entergy Texas security, with a 7.88% coupon, is a First Mortgage Bond: / The Ameriprise Financial "preferred" stock, with a 7.75% coupon, is a senior bond: I own it. There are a few other senior bonds in this portfolio including the following:

ALABAMA POWER maturing on 4/1/2047;
CBS,, maturing on 3/27/2056
Comcast e424b2, maturing on 9/15/2055
Viacom Prospectus Supplement Dated December 6, 2006, maturing on 12/15/2055
GE Capital, maturing on 11/15/2032
Telephone & Date, maturing on 3/31/2045
AT & T e424b2, maturing on 2/15/2056

I would not be inclined to buy individually most of these senior bonds since the maturity date is just too far out for me. I do not mind so much buying a portfolio of securities that includes them however. They are senior bonds (always preferable to junior bonds or equity preferred stocks from the same issuer) and provide some diversification by industry. Most TPs are issued by financial institutions but this ETF has several issued by electric utilities which is a plus too. (e.g. Dominion, Scana, FPL, Xcel). And some of the TPs from financial institutions are from life insurance and reinsurance companies which is a plus from my point of view since bank TPs have their own issues.

The main disadvantage of this portfolio is its duration and the presence of some securities which have no maturity date. Some of the securities are perpetual. Moreover, many of the ones with maturity dates are way out into the future, maturing when I am unlikely to be breathing fresh air. This simply means that these bonds have a ton of interest rate risk. Most likely, I will sell 100 of the 200 shares when I start to become concern with interest rate risk, possibly before the 10 year treasury note reaches 4% for this particular security.

The purchase of PGX was a low expectation buy. The current dividend yield at my cost is shown at Marketwatch at 6.76% annualized, paid on a monthly basis. The SEC yield shown at the Powershares web page is slightly over 7%. I would be pleased to receive a 6.75% annualized yield for a few months, and then to pare 1/2 of the 200 share position with a $5 gain in the shares.

There are other "preferred stock" ETFs. I am not interested in the other one from Powershares that is focused on securities issued by financial firms. PowerShares Exchange-Traded Funds | Financial Preferred Portfolio | PGF I do not like the narrow focus: Holdings This kind of ETF could conceivably be a way for me to speculate on a turnaround in financial "preferred" stocks in a period similar to the recent Near Depression. I am not interested in it now however.

SPDR has a preferred stock ETF with a slightly lower expense ratio of .45%. My initial reaction to PSK is that it had a greater weight in bank "preferred" stocks than the Powershares product, but I did not do a detailed calculation. It owns many of the same securites as PGX.

iShares has one too with a .48% expense ratio. Again, just looking at the Holdings, I was concerned about the weight to bank issues. Most of the securities are bank TPs.

So I went with the Powershares product primarily due to the presence of its diversification by industry and a the number of senior type securities including a few first mortgage bonds. I viewed the small difference in expense ratios to be a non-issue but would prefer to see all of these ETFs with expense ratios at or below .3%.

This kind of purchase is based in part on a recognition that my money market funds are likely to pay nothing for the remainder of this year and possibly well into 2011. It is also what can be expected from the small ball playing LB who is currently the HT here at HQ.

For individuals who invest in these securities, it is important to keep in mind that their duration and fixed coupons make them particular susceptible to losing value during a period of rising interest rates. And their low priority makes them volatile to the downside due to their low priority in the capital structure and/or time periods such as the Near Depression when market participants have a heightened concern about credit risk.

4. Dividends and Interest: I always check the WSJ dividend page every night. This page is updated daily during the weekdays. I sometimes make a note in this blog of securities that I own which are about to go ex dividend or interest. Every security mentioned in this section is owned. I also look at this page for any securities which may be of interest that I do not own. Some of my ideas start by seeing the name of security on this page that is unknown to me and then I spend some time investigating whether or not to place it on a monitor list for possible purchase.

On Monday June 28, I noted the following securities going ex dividend or ex interest:

1. KVW and KTN, trust certificates containing a Aon TP go ex for their semi-annual interest payments Bought KTN at 13.1 Bought KTN at less than $14 Sold 100 KVW at 24.75-KEEPING 100 bought at $16.08;

2. CBL Properties (CBL) common stock, one of my lottery ticket purchases, LOTTERY TICKET PURCHASES: LINKS IN ONE POST;

3. Glimcher Realty (GRT) and its preferred stock GRTPRF, also both LT purchases, GRTPRF: A WALK ON THE WILD SIDE/ KTN add;

4. Kraft (KFT) common stock Bought 100 KFT at 29.86;

5. the CEF Latin American Discovery Fund;

6. LXPPRD, a preferred stock from Lexington Realty Buy 50 LXPPRD at $7;

7. a Odyssey Re fixed coupon equity preferred stock Added 50 ORHPRA at $25 ;

8. a SL Green Realty preferred stock, SLGPRC Bought SLGPRC at $10.5 Buy SLGPRC at $11.89;

9. GJN, a synthetic floaterBUY 50 GJN, containing a senior AT & T bond as its underlying security;

10. TDA, a senior bond from Telephone Data, Bought 100 TDA at 25.22

11. Winstream (WIN), common stock; and

12. Washington Trust (WASH), part of the regional bank strategy, Bought 100 WASH at $15.26.

This is just an example of my diversification in income generating securities. Some of these securities provide such good yields at my cost that I am unlikely to ever sell them, whereas a security like TDA will be on the chopping block whenever I become more concerned about interest rate risk.

I also noticed a few securities that declared their dividends. Medtronic increased its dividend to $.225 from $.205. I am going to start reinvesting the MDT dividends. HGI, a Claymore ETF, declared its quarterly dividend. This ETF focuses on high yielding foreign stocks. HGI has already gone ex dividend as has ENY. It is normal for the WSJ to publish ETF dividend declarations on the day of the ex dividend or soon thereafter. First South (FSBK) declared its regular quarterly dividend and the WSJ page shows the yield at be 7.02%. Bought 50 FSBK at 10.15 FSBK is also part of the Regional Bank Stocks basket strategy. Campbell Soup bought in early March 2009 also declared its regular quarterly dividend. Buys of CPB LQD SYY XKK Bought CPB at 25.35

1 comment:

  1. Pretty good post. I just stumbled upon your blog and wanted to say that I have really enjoyed reading your blog posts. Any way I’ll be subscribing to your feed and I hope you post again soon.