Tuesday, August 17, 2010

Sold 200 ACG at 8.35/Sold 100 CWHN at $20.57/Added 50 CZNC at 10.46/SYY/Added 50 BMLPRJ at 17.74

Bill Gross is estimating the possibility of a double dip recession at 25 to 35%. NYT This article at Morningstar contains some discussion about the possibilities of deflation.

This is a link to the weekly Bank of America Merrill Lynch weekly economic report that contains a good discussion of quantitative easing and the current status of the U.S. economy. bankofamerica.com/public /economic_weekly.pdf

I would agree with most of the comments made by Thomas Hoenig, the president of the Kansas City Federal Reserve Bank, in a recent speech. Hoenig argues that the current zero rate interest rate policy calls into question the sustainability of the current recovery and adds to the unusual uncertainty noted by Chairman Bernanke. Monetary policy can not solve the problems that caused the Near Depression, and it is noteworthy that low rates during the Greenspan era contributed to the recent boom-bust cycle. It will take time to unwind the excess leverage and to restore consumers' balance sheets to something close to normal after a decade of a spending binge with borrowed money. Hoenig's most recent speech, titled "Hard Choices", can be found at kansascityfed.or hoenig-lincoln-081310.pdf, and his discussion about the Fed's current monetary policy can be found starting at page 4.

I particularly agree with this comment made by him: " The financial collapse followed years of too-low interest rates, too-high leverage, and too-lax financial supervision as prescribed by deregulation from both Democratic and Republican administrations. In judging how we approach this recovery, it seems to me that we need to be careful not to repeat those policy patterns that followed the recessions of 1990-91 and 2001. If we again leave rates too low, too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring. "

The NY Fed's manufacturing survey rose to 2 points in August to 7.1, less than expected, but any reading over zero shows expansion. Empire State Manufacturing Survey The new orders component turned negative.

Maybe bond investors have lost their marbles and have finally gone off the deep end. While I am not a mental health professional, possibly more than a few of those individuals need to be placed in a strait jacket for their own protection. TLT, the ETF for the 20 year treasury bond, rose 2.5% yesterday to $104.85. The 10 year note rose 30/32 in price yesterday to yield 2.573%. EDV, an ETF with treasury strips, rose 4.37%. It is becoming more tempting by the day to at least start a small hedge on my long corporate bond portfolio. I sold my double shorts for the longer term treasury notes and bonds at a profit some time ago, and have no hedges in place now for over a year. Sold TBT at around $45 Besides the tracking problems with these double shorts, the other problem is that the timing of my entry point is extremely important. TBT fell over 5% in trading yesterday.

The impacts of recessionary economic conditions will vary by locality. This article contains a MAP showing areas most at risk.

1. Added 50 CZNC at $10.46 last Friday (Regional Bank Stocks basket strategy)(see Disclaimer): The regional banks in my basket strategy have been moving down at a faster rate than the market recently. Last week, I added 50 shares of CZNC at 11.77. The purchase last Friday of an additional 50 at $10.46 is consequently an average down. Citizens and Northern is a community bank with 24 branches in PA.

2. Sold 200 of 400 ACG at 8.35 on Friday (see Disclaimer): I sold all of the remaining shares of this CEF held in a taxable account, which were purchased $7.98, and will keep for now the remaining 200 bought in the Roth IRA with a lower cost basis. The yield on this leveraged CEF bond fund is around 5.75% at the $8.35 price. I may use the proceeds to buy a higher yielding bond CEF.

2010 ACG 200 Shares +$58.37

I may be one of the few investors worried about the risks of bond funds. I read an article in the WSJ over the weekend that pointed out some of the risks. The author of that article references the investor stampede into bond funds that is just mind boggling considering the current yields. An article in Bloomberg mentioned that PIMCO was receiving a billion dollars a week in its bond funds.

The upward movement of bond prices, occurring after a very long term secular bull market in bonds which I date back to 1982, resembles a blow off parabolic move that is characteristic of the terminable phase of long term secular bull markets in both bonds and stocks. In that respect, it is similar to the parabolic move in stocks in the late 1990s which marked the end of the long term bull market in stocks, and a similar parabolic move in Japanese stocks ending in 1989.

It is just my opinion that this stampede into bonds will end badly for individual investors. Since I have that opinion, and it is primarily a question of when will the worm turn (not whether it will turn), I am adopting a hyper trading pattern of any new positions acquired in bonds or bond funds over the past year or so. Some of the risk is being alleviated now by the forced redemption of several of my individual bonds. But, in my view, I am still overweight long term corporate bonds and bond funds.

ACG closed at $8.44 yesterday which was a 4.85% discount to its NAV as of 8/16, WSJ.com.

3. SYSCO (SYY)(owned): After reviewing the second quarter earnings report from Sysco, I see no reason to do anything with my shares bought at $19.46. The main reason for keeping the shares is the dividend yield at my cost and the likely increase in the dividend in the years to come. Item # 1 SYSCO Sysco reported net income of 315.3 million or 57 cents per share. Revenues increased 14 percent to 10.3 billion. The results included a benefit of 4 cents per share due to an extra week in the quarter and a 2 cent negative impact connected to corporate owned life insurance. Sysco

4. ADDED 50 BMLPRJ at $17.84 (see Disclaimer): BMLPRJ is a non-cumulative, perpetual, equity preferred stock. All of that is just negative in my view. Originally, it was issued by Merrill Lynch and is now a Bank of America obligation. This security just went ex dividend for its quarterly distribution which should qualify as a qualified dividend. This purchase was an average down from my 50 share purchase at 18.50 earlier this month, shortly before the ex dividend date.

BMLPRJ pays the higher of 4% or .75% above the 3 month LIBOR rate. The current applicable rate is the 4% guarantee. Since the distribution is calculated based on the $25 par value, the yield at a total cost of $17.84 is around 5.6%. The 3 LIBOR float provision will be triggered when that rate increases above 3.25% during the applicable computation period. While I do not expect this to happen for at least a year, a 3 month LIBOR rate over 3.25% can be reasonably anticipated based on historical rates. LIBOR Rates History (Historical) For example, the rate was over 6% between 9/1989 to 7/1991 and over 5% between August 1994 to March 1999. At a 5% 3 month LIBOR during the applicable computation period, the coupon rate moves up to 5.75% which translates into a 8% yield at the $17.84 total cost number.

The LIBOR float provides a measure of inflation protection and the guarantee affords some deflation or low inflation protection. Due to the abnormally low rate environment, which is likely to persist at least for several more months, the 3 month LIBOR rate is currently at around .36%, WSJ.com (look under "consumer money rates" in right hand column). This shows the value of the guarantee. The value of the float will become evident when inflation returns, and it will. Inflation or Deflation: Bond Alternatives

BMLPRJ is not a bond. All of its equity characteristics are viewed negatively by me, such as its low priority, the non-cumulative status of the dividend, and the lack of a maturity date. Advantages and Disadvantages of Equity Preferred Floating Rate Securities. Theoretically, it would be possible for Bank of America to eliminate the common dividend and to continue paying the dividends on all of its equity preferred stocks. However, as a practical matter, an elimination of a 1 cent quarterly dividend on the common shares to "preserve capital" would be indicative of a precarious financial condition and would in my opinion most likely be accompanied by an elimination of all of the non-cumulative equity preferred dividends. Possibly, the trust preferred dividends would also be deferred in such situation. If all of that happened, what would you do if you had CDs at BAC in excess of that covered by FDIC insurance? The market's perception of such move would hopefully keep BAC from actually going that route.

This is a link to the prospectus: Final Prospectus Supplement

It is impossible to say now whether the qualified dividend treatment will last beyond this year.

5. Sold 100 of the 200 CWHN at $20.57 on Monday (see Disclaimer): CWHN is a senior bond issued by Commonweath REIT (CWH), formerly known as HRPT Properties. Par value is $20. I sold the shares bought in the taxable account at 19.15 (symbol was HRPN before the name change). I am keeping on a short leash the 100 shares bought in the ROTH IRA at 19.32. Interest payments are made quarterly. (prospectus: www.sec.gov).

I also own the common shares of Commonwealth, which currently have a higher yield than this senior bond. I may add a few shares to that position. The common pays 50 cents per quarter and went ex dividend on 7/22.

I had some other trades on Monday which will be discussed in the next post.

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