Saturday, July 31, 2010

2nd Quarter GDP/Bought 50 of the TC PZB at 19.85/Sold 200 ATP:TO at 13.14/GIW/Sold 50 USBPRF at 23.94

The Claymore BulletShares Corporate Bond ETFs declared their monthly distributions on Friday. I own BSCE and BSCF in retirement accounts, and BSCH in a taxable account. Considering the product, my positions have increased in value far more than my very modest expectations since those recent purchases. Bought 100 BSCH at 20.13; Item # 4 Bought 100 BSCE at $20.16; Item # 7 Claymore Introduces Term Corporate Bond ETFs Bought BSCF at$20.18. While the yields are not much, I did notice an increase from the last dividend declaration for the 2017 term ETF, Claymore BulletShares Corporate Bond ETFs Declare Initial Distributions. The 2017, the longest term date, declared a 7 cent monthly distribution last Friday, up from an initial distribution of 4.6 cents. The 2014 increased from an initial 1.6 cents to 3 cents. LB dwells on the pennies. The OG could care less.

I would add a caveat to my prior discussions based on a review of this press release about the dividend. Several of these short term corporate bond ETFs are expanding the number of shares to accommodate new shareholders. The exceptions are the 2016 and 2017 term date ETFs. When the manager adds to existing positions during a corporate bond rally, such as the one being experienced now, the newer positions would be at a higher cost than the ones purchased when I made my purchases. Over time, any of those newly added positions, purchased at over par value, will lose value at maturity and could conceivably have a negative impact on original shareholders. This may even out over time, assuming a correction in the ongoing rally and a continuation of new money buying these ETFs.

1. Bought 50 of the TC PZB at $19.85 in the Roth Friday (see Disclaimer): PZB is a trust certificate containing a senior bond from the Limited (LTD) that I previously bought at $16.05 in a taxable account. This TC has a 6.7% coupon and a $25 par value, whereas the underlying bond has a 6.95% coupon. Yet, based on the respective prices last Friday, the TC had a higher yield than the underlying bond. The last trade for the bond was $89.187, which would produce a current yield of 7.79%. FINRA The TC has a current yield of around 8.44% at a total cost of $19.85. And, given the TC's greater discount to par value, it would have an even better yield to maturity which includes the yield realized by receiving par value at maturity. Using the Morningstar Bond Calculator, the YTM for the TC is 9.17% at a cost of $19.85. The underlying bond would have a YTM of 8.3% based on the $89.187 price.

The YTM for the PZB shares purchased at $16.05, which are still owned, is 11.53.%. For those unfamiliar with buying bonds in the bond market, the price for a $1,000 bond is quoted at 1/10 of the par value or "100". So if I placed a limit order to buy 5 LTD.GE (Cusip 532716AK3) at 89, and the order was filled at that price, then the cost would be $4,450. before commission ($890 per bond x. 5 bonds). Actually filling an order for such a small amount in the bond market would be far easier said than done.

I view this last purchase of PZB to be a trade, an alternative to earning zero on my cash in a money market account. It will go ex interest next month.PPlus Trust Series LTD 1, PZB (my 50 share purchase did not register in the volume displayed for Friday) If I can clip that interest payment and sell the shares for a small profit, I will likely do so. The shares bought at $16.05 with the 11.53% YTM will be held until I become rationally concerned about credit risk. Given the yield for the shares bought at $16.05, I am more concerned about credit risk than interest rate risk over the next 23 years. It is conceivable, with the advent of hyper inflation, that I would sell bonds with high yields including the PZB purchased at $16.05.

This is a link to the prospectus:

Before I would buy any bond, I would conduct the same research that I would normally do for a stock purchase. The focus and purpose of the inquiry is ultimately to assess credit risk. I want to know about the amount of debt on the balance sheet and particularly the amount of debt at the same and higher priority. For senior debt, I would be concerned about a lot of secured debt and less concerned about junior subordinated debt. I want to know about the earnings history and recent earnings reports. I am also very interested in the firm's cash position. Limited is showing a lot of cash on its balance. This data can be found at LTD: Balance Sheet for Limited Brands or by looking at the last quarterly report filed with the SEC, which I would always do before buying a bond. LTD Quarterly Report for the Q/E 5/2010 This shows 1.188 billion in cash on the balance sheet as of 5/31/2010. The long term debt is shown at 2.523 billion. I would then go and look at the types of debt and the maturity schedules. The long term debt is set out in Item # 9 in these quarterly reports (page 11). I see that almost all of the long term debt is senior debt with the next maturity due in November 2014. Another 350 comes due in 2033 and, which is the bond that is the underlying security in PZB, and a smaller chunk of 300 million in 2037. I also see that the company successfully sold 500 million of 8.5% notes in June 2009 due in 2019. I then checked the last trade of that bond at FINRA, and it was trading on Friday at a 11% premium to its par value suggesting that LTD could refinance now at a slightly lower rate.

2. Sold 200 ATP:TO at $13.14 Friday (see disclaimer): I viewed my shares of Atlantic Power to be a temporary placeholder for some of my Canadian dollars. The stock just went ex dividend, and I was able to sell the shares at a profit. Bought 100 ATP:TO at 11.97 CAD Sold 100 MCQPF at $7.18 and Bought 100 ATP:TO at 13.01 CAD If I buy the shares back at some point, I will buy them on the NYSE and use my CADs to buy another dividend paying Canadian ETF.

Atlantic recently listed the shares on the NYSE under the "AT" symbol. The dividend yield is almost 8.5% at the closing price ($12.95 USD) of the NYSE listed shares on Friday. Atlantic Power Corp, AT Dividends are paid monthly, and an earnings report is due in early August. This stock has been volatile in a 11 to 13 CAD range. ATP.TO: Historical Prices I would hope to pick up the NYSE listed shares at below $12.

Given the rise in the Canadian dollar against the USD on Friday, the NYSE listed shares were up 2.98% when I sold my Toronto listed shares which were then up 1.54%. The Canadian shares ended the day up 3.32% and the NYSE listed shares closed up 3.98%. The CAD rose almost .8% against the USD on Friday. If I took the closing price on the Toronto exchange, which will ultimately govern the ADR price adjusted for the current exchange rate, the price on the NYSE should have been about $13. USD rather than $12.95. Currency Converter

This is an example of how currency conversion will impact the ADR price. It works both ways. At the YF currency converter I went back to March 6, 2009, a recent low point in the CAD's value against the USD. I then converted the ATP:TO closing price from last Friday, 13.39 CAD into USD. This would equal a price of 10.39 U.S.D., a 19.76% decline from the NYSE closing price on Friday at $12.95. Atlantic did trade at that time on the pink sheets. So if the CAD had closed 7/30/2010 at the same value as 5/6/2009, AT's price would not be $12.95 but $10.39. So, there is both an enhanced opportunity and risk associated just with the currency issue. It worked in favor of the U.S. buyer of Atlantic Power on the Pink Sheet exchange back in March 2009, but may go the other way too.

Before buying any ADR of a foreign company, an investor needs to become thoroughly conversant with how currency fluctuations impact ADR share prices. I discuss some of these issues in the following posts: International Trading and Currency Risks ; Bought 100 AXAHY at 14.69 (EURO) ADDED 50 NABZY AT 19.51 (National Australia Bank (AUSTRALIAN DOLLAR); Added 70 RHHBY at 34.07-Completing Round Lot/ Swiss Franc-Euro (SWISS FRANC-subsequently sold the Roche shares Sold 100 RHHBY at $36.2 ); Bought 100 NVS at 49.08 (SWISS FRANC); see also, Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas).

Headknocker was not please with this transaction, noting that ATP.TO closed at 13.39 CAD on Friday, leaving $50 CAD on the table. HK wanted to know whether the OG got the shakes again, which caused this fifty Canadian dollar depletion in HK's capital position. The OG said that he "did not care about $50, or 500 dollars for that matter, and could not remember what happened ten minutes ago, let alone from Friday mid-day."

LB, the author of this minutes of HQ's storied trading operation, wants all readers to know that it views OG's statement about not caring about "50, or 500 dollars" to be SACRILEGE, reconvene the Spanish Inquisition and burn the OLD GOAT at the stake. LB views $1 to be the same as 5 million dollars, every $1 counts. LB wants Headknocker to know that it really, really and truly, cares about every dollar in HK's capital position.

HK was inclined to agree with LB's sacrilege accusation against the Old Geezer but thought that burning the OG at the stake might be viewed as cruel and inhuman punishment for such an offense in this modern age populated by a bunch of liberal pansies.

All of this squabbling about 50 Canadian dollars made the RB wonder whether HQ will ever be in a position to acquire Canada, all of it. If any of the loonies up there read these minutes, it might put them at ease, no need to worry about HQ acquiring their country and renaming it "Greater Tennessee", thinking no doubt that HQ's staff is disorganized and out of kilter, and then RB can spring its trap. Maybe, RB mused, it would be better to work with LB than the Old Goat.

3. Sold 50 of the TP USBPRF at $23.94 Friday (see disclaimer): This TP goes ex interest on August 11, and I bought my 50 shares a few days ago at 22.54. At the $23.94, this TP would have a current yield of around 6.13% with a maturity in 2035. After thinking about that some, I decided that this kind of yield for a TP maturing in 2035 was not worth the risk.

I am wary of these long term bonds yielding in the 5% to 7% range. I discussed my longer term forecast in an email to a reader on Friday:

"I would view the data about Baa bond prices ( to indicate that yields for those bonds are at or near their lowest yield, with some potential upside potential in the near term.

If inflation remains low for several years, or the feared disinflation or deflation scenario comes to fruition, then there would be substantial upside possible, particularly as investors continue to pay up to receive some kind of yield, which has been occurring for some time now. I do not view that as a likely scenario.

I would view some further near term appreciation in BAA debt to be likely, as in more probable than not, but the outlook for two to five years is tilted toward a major correction in bond prices in my view. I suspect that the long term secular bull market in bonds, which I date back to 1982, will continue for a awhile longer, maybe for as long as a year or two, and will take prices to levels that will be as absurd for bond prices as stock prices were in 1999. It is from that level that I suspect the start of a long term secular bear market in bonds, that will crush and annihilate their values over time. This change in the long term trend will develop gradually at first, as yields start to creep higher as prices fall. Many new bond investors will stay the course, wondering why their bonds are losing value, and ultimately the losses will accelerate. So I am thinking longer term with my views. I still own most of my long term bonds. I do not believe that new investments in them are warranted given my longer term views, and my inability to time the change in trend with any preciseness.

The 10 year treasury is currently below 3%. A rise to 4% would cause a serious price adjustment in that 3% paper. (see T.RowePrice discussion of impact of a rise in rates on price starting at page 8:"

4. GDP Report-Consistent with an Economic Recovery: I would add that the recent GDP report and the 1% upward revision to the 1st quarter GDP does not justify a bond rally or the kind of complacency that currently exists among bond bulls. How many revisions did the government make in the initial estimate of 1st quarter GDP before revising it again by 1% last Friday, raising the growth rate from 2.7% to 3.7%? News Release: Gross Domestic Product The first estimate for the 1st quarter was released in April and the government pegged the number at 3.2% then. In June, the estimate was revised down to 2.7%. The first estimate of 2.4% for the 2nd quarter was close to the 2.5% predicted by the economists. Final sales rose at a 1.3% rate, faster than the 1st quarter rate of 1.1%. Business investment rose at a 17% rate. Real disposable income rose 4.4%. Imports grew much faster than exports, and imports had a record negative impact on the GDP number. In-Depth: 2nd Quarter GDP Growth - There was a 29% increase in imports. Imports are a subtraction from GDP in the government's math, even though those goods are going to be sold and used in the U.S. They do not just disappear.

In a year or so from now, looking back to the present, I would expect many of those now predicting a continued bull market in 10 year treasuries to be doing a flip-flop that would make a politician blush. The current extreme bullish consensus on bonds will shift to a criticism of the Fed for keeping its foot on the gas for too long. The 10 year treasury will rise to over 4% and inflation will have already started to accelerate. And the Federal Reserve, still fearful of a slide reminiscent of what happened after 1936, more worried about deflation than incipient inflation, will still be holding the Federal Funds rate at or near zero. I suspect that this will be how the long term secular bull market in bonds (born in 1982) will end. The end will be the result of a number of factors coalescing including a fundamental miscalculation by economists on the strength of the rebound from the recession, coupled with record low yields across the spectrum in bonds as well as the extraordinary amount of fiscal and monetary stimulus (including money creation), with the monetary stimulus remaining in effect for far too long a period.

Then again, there is risk, which I recognize and try to plan for, that I will be proven wrong.

5. Wilber (own- Regional Bank Stocks basket strategy): Wilber, a micro-cap bank in upstate NY, reported earnings of 10 cents per share for the quarter, down from 15 cents in the year earlier period. The decrease was "largely" driven by loan loss provisions. The bank transferred 9.06 million in loans to five commercial borrowers to nonaccrual status. It is conceivable that more is to come based on this comment in the press release: "Although the level of impaired loans increased to $22.148 million at June 30, 2010, we have only been able to specifically identify $1.142 million of potential losses against these loans based on our estimates of collateral value or anticipated payments from the borrower. This represents approximately 11% of the total allowance for loan losses at June 30, 2010. By comparison, impaired loans totaled $12.957 million at December 31, 2009, with specifically identified reserves of $721 thousand. This represents a $9.191 million increase in impaired loans, but only a $421 thousand increase in specifically identified reserves for the allowance for loan losses. Our analysis has shown that there appears to be relatively strong value in the underlying collateral held against these loans."

The one analyst following this bank estimated earnings at 11 cents.

GIW has been one of the losers in the regional bank basket. I do not intend to add anymore shares, nor sell what I now own until I see further serious problems.

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