Wednesday, September 1, 2010

Added 50 XFJ in Roth at 25.3/Bought 100 CHW at 7.2/PSEC HNZ/Sold Remaining SLGPRC at 25.01/Added 100 ERC at 15.23

I was arguing in September 2009 that the then cyclical bull run looked more like a correction to the catastrophic phase of a long term secular bear market, rather than the start of another long term bull market. In that respect, I thought the bull move starting in March 2009 was a repeat of what happened after the market experienced another catastrophic phase in 1973-1974 in the prior long term secular bear market lasting from 1965 to 1982. 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (Sept 2009); More on 1982 or 1974/Barclays Raises GDP Forecast (Sept 2009); Continued Discussion on 1982 or 1974 (June 2010); ITEM # 4 Historical Perspective on S & P Gain Since March 2009 (March 2010); Death of Buy and Hold? (Nov 2008).

There was a similar cyclical bull move off the catastrophic low in 1974 that lasted into September 1976 with a 72% gain. While the bottom was hit in 1974 for that prior long term secular bear market, the cyclical bull move off that bottom was not the start of a long term bull market. The underlying problem in that prior long term cycle was inflation and that problem had not been solved in 1976. In fact, it was about to get a lot worse. Until that problem was solved by Paul Volcker, the next long term bull market could not be born. Similarly, the problem in the current long term cycle is too much debt and the use of excessive debt to stimulate economic growth. The process of deleveraging and finding new avenues for growth will just take more time.

The stock market had a negative reaction yesterday to the content contained in the Fed's meeting on August 10, and the following quote may have been somewhat troubling to someone unfamiliar with the news over the past few weeks:

" Weighing the available information, participants again expected the recovery to continue and to gather strength in 2011. Nonetheless, most saw the incoming data as indicating that the economy was operating farther below its potential than they had thought, that the pace of recovery had slowed in recent months, and that growth would be more modest during the second half of 2010 than they had anticipated at the time of the Committee's June meeting." FRB: FOMC Minutes, August 10, 2010 Is that a surprise to anyone?

1. Added 50 of the TC XFJ at $25.30 in the Roth IRA on Monday (see Disclaimer): This was the replacement for the 50 shares of PZB sold on Monday by our new HT. I discussed this TC in last Monday's Post, dated 8/30/2010, after buying 50 shares at 25.38 in a taxable account. The underlying security is a senior Motorola bond maturing in 2028. The TC has a higher coupon than the underlying bond. XFJ has a 8.375% coupon and a $25 par value, giving the purchaser a yield of about 8.28% at a total cost of $25.3. More information about the underlying bond can be found at FINRA. The bond is lightly traded but is currently selling at over its par value even though the coupon is only 6 1/2%. This brings me to 100 shares of XFJ and I do not have enough confidence in the long term viability of this company to buy more of its senior debt.

One of my first discussions of XFJ was in November 2008, when it was trading at $13. Article in this Week's Forbes on Trust Certificates

RB will admit that it is not a whiz with numbers like the Young Stock Stud LB, but isn't $13 a lower number than $25.3?

As mentioned in the prior post discussing XFJ, a potential purchaser needs to keep in mind the existence of the call warrant in deciding what to pay for this security. The underlying bond is selling at a small premium to its par value. The mere existence of that call warrant will restrain XFJ's appreciation above its $25 par value. On the positive side, XFJ has a 8.375% coupon, higher than the 6.5% for the underlying bond. At yesterday's closing price for the bond, the current yield at its 6.5% coupon was about 6.27%. The TC had a current yield of about 8.28% at a total cost of $25.3.

The warrant holder has to give 30 days notice of its intent to redeem the TC at its par value plus accrued interest, and there is a date certain when those funds have to be deposited with the trustee. After giving such notice, the warrant holder is not under an obligation to complete the transaction, and this apparently happened with XFJ. On the date given in that prior notice, XFJ had fallen back below par value and it would not make sense to follow through under those circumstances. But that recent history does highlight that the warrant holder is looking for an opportunity to redeem XFJ and to sell the bonds. This needs to be kept in mind when deciding how much to pay for XFJ. (Prior Attempt to Redeem XFJ: 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)

2. Started Position in the CEF CHW with 100 shares at $7.2 on Monday (see disclaimer): CHW is the symbol for the closed end fund Calamos Global Dynamic Income Fund. This CEF closed on Monday with a net asset value of $8.08 and at a discount of 10.77% to that NAV. The current distribution rate is 5 cents per month. Distributions If continued at that rate for 1 year, the yield at a total cost of $7.2 would be about 8.33%. I would call this CEF a balanced fund with close to 60% in stocks and 40% in bonds Portfolio Allocation Part of the bond allocation is in convertible bonds and convertible preferred stock. I reviewed the list of corporate bonds and most of them appeared to be below investment grade. I then noticed in the latest report to CHW's shareholders that this was the case, with around 20% of the bond position rated investment grade with the rest in the junk categories or unrated. The fund does use leverage: CEFA . This is a link to the last filed shareholder report with the SEC.

NAV information for this fund can be found at the foregoing linked sites from the fund and the CEFA. It is also available in the CEF section at the WSJ under "World Equity Funds".

3. Prospect Capital (PSEC)(owed): Prospect Capital continued its disappointing reports by reporting net investment income of 25 cents for its 4th fiscal quarter. Analysts were expecting 28 cents for the fiscal 4th quarter. PSEC was expected to earn 30 cents in its fiscal 1st quarter. The company has forecasted net investment income for that quarter of 26 to 30 cents a share.

4. Heniz (own): HNZ was bought near the end of the Dark Period at 31.67. I am keeping the shares primarily for the dividend. Heinz preannounced better than expected earnings of 75 cents per share based on sales growth of 3 to 4%. The estimate was for an E.P.S. of 73 cents.

5. Case Shiller: Seventeen of the twenty metropolitan cities showed increases in home prices in June compared to May. Lss Vegas experienced the only decline with Seattle and Phoenix at break-even. Three metropolitan areas had 2.5% gains: Chicago, Minneapolis, & Detroit. The largest percentage one year increases were in San Francisco at +14.3% and San Diego at +11.2%. Nationally, home prices have increased 3.6% year- over-year.

6. Sold Remaining Shares of SLGPRC at 25.01 in Regular IRA on Tuesday (See Disclaimer): I have now sold all of my REIT preferred stocks in the retirement accounts. All of them performed extremely well, each of them rising well over 100% in value. The shares of SLGPRC were bought at $11.89 in 2/2009. REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages

7. Added 100 of the CEF ERC at $15.23 (See Disclaimer): This brings me to 450 shares of this bond CEF. This add was a response to the continuing parabolic rise in bond prices. The 30 year treasury rose 1 1/2 yesterday to yield 3.52%. The ten year treasury close yesterday with a yield of 2.474%. Personally, I think that the denizens of bond land have lost their marbles.

By buying another 100 of this bond CEF, I will at least receive a decent current yield, paid monthly, and the CEF is still selling at a discount to its NAV. Based on its current monthly distribution of $.108, the yield at a total cost of $15.23 is about 8.51%. I last discussed this CEF in a post dated 8/18 and having nothing to add to that discussion: Item # 3 Added 100 of the CEF ERC at 15.25 Given my uneasiness about interest rate risk and bond funds, I may trim my position in ERC at anytime, though I am likely to keep some shares until I really become spooked about a rise in rates.

ERC closed at $15.3 yesterday, with a NAV at $16.06 per share, and the closing price was at a 4.73% discount to that NAV. CEFA - Closed-End Fund Association Wells Fargo Advantage Multi-Sector Income Fund - Wells Fargo Advantage Funds

The USD rallied some against the CAD yesterday so I use my USD cash flow from yesterday to add to my CAD position.

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