Investors had second thoughts about buying long term treasuries last Friday. The 30 year treasury fell 3 9/32, and the 10 year declined 1 15/32. TLT, the ETF for the long treasury, declined $3.07 or 2.83%. EDV, the Vanguard ETF for treasury strips, magnified those losses, as one would expect, by losing 4.13% of its value.
The prices for those long term securities assume the existence of deflation interrupted by brief spasms of low inflation for most of the remaining years in our Old Geezer's life. Such an assumption, which flies in the face of the last 70 years of U.S. history, is not rated a mere possibility or even more probable than not, by the denizens of bond land. Instead, to justify the current price of the long treasury bonds, the Japanese scenario for the U.S. economy has to be considered a virtual certainty. When there is an inkling of data which suggests that such a dire future may not after all be quite so certain, just a whiff will do, the bugle is blown sounding the retreat, and the herd starts to stampede out of long treasury bonds.
I suspect that the decline last Friday in the long treasury paper was due mostly to the revised 2nd quarter GDP. News Release: Gross Domestic Product The downward revision to a 1.6% increase in GDP from the 1st quarter's revised number of 3.7% was not as bad as predicted by the pundits and doomsayers. The first estimate for 2nd quarter GDP was 2.4%. A spike in imports subtracted more from GDP in the second quarter than at any time on record. Personal spending and business investment was revised upward. The GDP price increase was also revised up to a 1.9% annualized rate from 1.8%.
Alan Abelson has found a kindred spirit in Albert Edwards who is predicting a fall in the S & P from its current level of 1065 to 250: Barrons.com Apparently, David Rosenberg was not pessimistic enough for Alan causing the wit from Barron's to search the world for someone more ghoulish than David. Alan submits that the market did not find a true bottom after the S & P 500 declined from 1560 in October 1997 to 670 in March 2009, as it did in 1973-1974 when stocks experienced a similar percentage decline. dshort.com: Bear Markets Since 1950 Such a remark by the sage at Barron's caused the RB to ask what was Alan smoking, RB wants some of it. Alan's contention on that point was clearly non-sensical and belied by the data. In every long term secular bear market for stocks, there is one catastrophic phase where there is a decline of over 50%. For the three major long term secular bear markets in the last 100 years, those horrendous declines ended in 1932, 1974 and 2009.
This article from Saturday's NYT summarizes the risks of bond funds compared to owning individual bonds. For those who own funds, the author made the point of checking the bond funds "duration". For each 1% change in interest rates, the fund's value will generally change by 1%. So a duration of 8 years would suggest a 8% decline in the fund's value after a 1% increase in rates. Measuring a Bond's Interest-Rate Sensitivity That would be a rough estimate and the actual amount will vary by the type of bonds owned by the fund. An increase in rates would have the most severe adverse impact on a fund owning U.S. treasuries and possibly less on a junk bond fund where the increase in rates is due to an economic recovery gaining steam.
I bought Amazon's new Kindle last week after reading several favorable reviews. All members of the staff here at HQ are readers, though their interest vary of course. The Kindle's price has come down to $139 and improvements have been made in the device. Apparently, Amazon is being swamped with orders since no promise was made on the delivery date. Instead, I was informed that I will receive an email when it is ready to ship.
Richard Lehmann recommended AEB in his column in this week's Forbes. I have discussed this security in a number of blogs starting in October 2008. Item # 5 LIBOR (Post 10/6/2008) AEB is a hybrid security (bond/equity features) that pays the greater of 4% or 7/8 % above the 3 month LIBOR rate. (prospectus: www.sec.gov & see generally: Aegon Hybrids: Gateway Post Advantages and Disadvantages of Equity Preferred Floating Rate Securities)
1. Added 40 Intel at $18.35 on Thursday (see Disclaimer): Intel is an existing position. I thought that the recent price decline from a close at $21.78 on 7/22 (Historical), based on fears of a slowdown and the McAfee acquisition, was overdone. At $18.35, the current dividend yield is about 3.48%, close to the yield on a 30 year treasury bond now (Java Chart - WSJ.com), and Intel has been raising its dividend in recent years.
The analyst from JMP Securities did maintain his outperform rating on Intel on Thursday with a $30 price target. Barrons.com He cut slightly his 2010 and 2011 earnings forecasts, however, to $2.05 and $2.25 respectively based on softer PC demand and the small dilution expected expected from the McAfee acquisition.
The current consensus is for an E.P.S. of $2.1 in 2011. The stock is selling at a 8.74 P/E on that 2011 price based on the $18.35 price.
I am reinvesting the dividend to buy additional shares, having recently changed my option back to reinvestment from cash payments.
My previous buys of Intel were noted in the following posts: Bought INTC at 14.46 Bought Intel at 15.25 Bought Intel at $15.87 Added to Intel at $19.08
I mentioned in a prior post that I would likely add to my Intel position after selling Cisco earlier this month.
After I made my purchase on Thursday, the stock continued to decline, closing at $18.18.
On Friday, Intel reduced its forecast for 3rd quarter revenues to 11 billion, plus or minus 200 million, based on softening demand for PCs in developed countries. The previous guidance was for revenues in the range of 11.2 billion to 12 billion. INTC reduced its estimate for 3rd quarter margins to 66% from 67%. Intel's Third-Quarter Below Expectations Maybe that announcement was not as bad as anticipated, the stock rose 19 cents in trading on Friday to close at $18.37.
2. Sold 50 shares of SLGPRC at $24.76 in Roth Thursday (see Disclaimer): I decided to refrain from pressing my luck on large unrealized gains in REIT preferred stocks held in retirement accounts. The shares of SLGPRC were bought in March 2009 at $10.50, so I had a gain just on the shares of over 130%. I still own 30 shares in the regular IRA bought at about the same time which I may keep. SLGPRC is an equity preferred stock issued by S. L. Green (SLG) with a $25 par value and a 7.625% coupon: www.sec.gov I am building up some cash in the ROTH which hopefully will be deployed when an opportunity develops, and I am not adverse to buying a stock CEF or ETF in the retirement accounts provided the fund has a good dividend yield.
3. Sold 100 shares of the TC GJD at $20.20 and Bought 50 shares of the TC XFJ at $25.38 (see Disclaimer): Maybe if the LB keeps moving, it will be hard for the Masters of Disaster to land a solid punch. Movement, for the sake of movement, may be the only rational explanation for this exchange.
I did mention in my posts involving the purchase of TCs containing a Sprint Capital senior bond that I wanted to keep my exposure to less than $2000. Item # 1 Current Yield and Yield to Maturity: Comparison of Sprint TCs I was temporarily over that limit before the recent purchase of DHM, which had a higher current yield than GJD at the prices prevailing at that time of that last purchase. Bought 50 DHM at 22.84 GJD is the security that I tried to sell with a AON order at $20.09 earlier last week, for the purpose of realizing my second trading profit on TCs containing this Sprint Capital bond and to bring myself back into compliance with my maximum exposure limit. I am in a trading mode with the TCs that contain this bond and hope to be playing with the house's money on them within a couple of years.
After selling 100 GJD, I currently own only 100 of DHM. The shares of GJD sold on Friday were purchased in two 50 shares lots at 17.49 and at 17.95, and I held those shares long enough to receive one semi-annual interest payment. To determine when I am playing with the house's money, I will add the realized gains to the dividend or interest distributions received over time. I sold the 50 shares of GJD bought in Roth at at 17.8 on the ex interest date. Sold 50 of the 150 GJD at 18.59
The underlying Sprint Capital bond in the TCs DHM and GJD is junk rated. I partially replaced GJD with XFJ, a TC containing a Motorola bond maturing in 2038 that is rated investment grade. At their respective closing prices on Friday, XFJ has a higher current yield than GJD, but GJD has a higher YTM since it is selling at a discount to par value whereas XFJ was selling at a small premium. GJD matures on 11/15/2028 and XFJ has a 11/15/2028 maturity date.
XFJ has as its underlying security a senior bond from Motorola that has 6 1/2% coupon. This bond is currently selling at a premium to its par value.FINRA XFJ has a higher coupon at 8.375%. At a total cost of $25.38, the XFJ current yield is about 8.25%. Based on the last trade of the bond, its current yield is around 6.25%. While the Finra page shows that all three rating agencies have assigned an investment grade rank to this bond, I would classify this bond as in between high grade junk and the lowest investment grade rating. I am uncomfortable giving MOT an investment grade bond rating.
Motorola has gained some momentum with its new Droid phone. Morningstar has a page that summarizes the maturity dates and amounts of Motorola's debt.
This is a link to the XFJ prospectus: www.sec.gov
The owner of the call warrant for XFJ exercised its conditional redemption right in June. Conditional Full Redemption of Corporate Backed Trust Certificates, Motorola Debenture-Backed Series 2002-14 Trust Class A-1 Certificates (CUSIP: 21988G387; NYSE: XFJ) Class A-2 Certificates (CUSIP: 21988GBX3). The funds were to be delivered to the trustee on 6/23, and apparently this did not happen since XFJ is still trading. The existence of the call warrant does place a cap on XFJ's appreciation. As previously discussed, the rational cap is par value plus accrued interest when the underlying security is trading above par value. So, I would not want to pay much more for XFJ than my purchase price last Friday.
4. Sold 50 NAL at $12.7 and Bought 50 shares of First Niagara at $11.74 (FNFG)(Regional Bank Stocks' basket strategy) (see Disclaimer): NewAlliance Bancshares (NAL) is being acquired by First Niagara. I could wait for the merger to be completed, and then exchange my NAL shares for FNFG shares. Instead, I decided to make the exchange myself now at current prices. I now own 200 shares of First Niagara. (see discussion at Seeking Alpha). I would agree with Cramer that FNFG appears to the following the Fleet Bank playbook from the early 1990s after the S & L crisis. (CNBC) I had bought the 50 NAL at $11.76.
5. Sold 100 of the CEF HPI at $19.5 (see Disclaimer): The bond CEF HPI was just bought last month in a taxable account at 17.76. This CEF will not be paying qualified dividends. So I bought a similar CEF HPF in the Roth IRA with the intent of harvesting a profit on HPI. Bought 100 of the CEF HPF at 19.09 in Roth IRA I am in a trading mode on all of these bond CEFs bought in 2010 due to my concerns about interest rate risk. I believe that inflation is a far greater risk than deflation over the intermediate and long term.
I bought as the replacement for HPI in the taxable account another John Hancock CEF, HTD, that is set up to pay qualified dividends. Bought 200 of the CEF HTD at 14.13 All of the foregoing was done primarily for tax reasons, and secondarily to harvest a small profit in HPI. It just makes more sense for me to hold HPI and/or HPF in a retirement account and HTD in a taxable account, at least for as long as the favorable tax treatment for qualified dividends is continued by the U.S. government.
Two more trades were made on Friday which will be discussed in the next post and hopefully I will catch up on Tuesday.