Tuesday, October 19, 2010

Added: 100 HPF @ 19.14, 40 INTC @ 19.16

I was busy working on another matter yesterday and did not have more than a few minutes to devote to this blog.

1. DKI (own): This recently purchased TC, containing a senior bond from Sprint Capital, has been called by the owner of the call warrant at its $25 par value plus accrued interest. Structured Asset Trust Unit Repackagings (SATURNS) Series 2003-2 Trust Receipt of Notice of Intent to Exercise Call Options in Full The call date is 11/1/2010. I just bought these shares at 24.95. The underlying security was trading recently at around a 10% premium to its par value. FINRA

2. Added 40 to Intel at $19.16 (see Disclaimer): I used the proceeds realized from selling 100 Brooks Automation to add to my Intel position. The $19.16 is at the top of my range for buying Intel shares. My last add was at 18.35. 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 try to remain disciplined about my buy and sell ranges.

The dividend yield for INTC is about 3.26% at a total cost of $19.16, significantly higher than the current yield of a ten year treasury bond which is currently hovering around 2.5%. While the treasury bond has a fixed coupon, Intel has been raising its dividend in recent years. If the dividend raises continue, the current yield differential of .75% will continue to widen. The current price is less than 10 times the consensus estimate for 2010 and 2011. INTC Analyst Estimates The 5 year P.E.G. ratio is .79: INTC Key Statistics

One knock on Intel is the widespread belief that the current up cycle has peaked or is near peaking. This is one of the unknowables. At the current price, I believe that any positive news that calls into question the herd opinion will cause a spike in the price, hopefully into the mid-20s where I would anticipate paring the position. I am reinvesting the dividends.

3. Added 100 HPF at $19.14 (see Disclaimer): This brings me to 300 shares of this bond CEF that has been correcting some after crossing $20 in late September: HPF Historical Prices As discussed in Monday's post, this CEF owns mostly junior and senior bonds, and has only a few securities properly characterized as "equity preferred" stocks. The few equity preferred stocks are from REITs. At the current monthly dividend rate of 12.4 cents, the yield at a total cost of $19.14 is around 7.77%. The fund does use leverage.

As of 10/15/2010, the net asset value was $20.4 and the closing share price last Friday was $19.57. This created a discount at that time of -4.43, slightly higher than the similar CEF HPI. Information about these funds can be found at the sponsor's web site: John Hancock Funds - Closed-End Funds - Daily Prices The discount did expand yesterday to -5.35 based a closing price of $19.27 and a NAV of $20.36.

The discount on BHK is also expanding some, closing at -5.91 yesterday and at -3.72 on Friday. The NAV for BHK was $14.05 per share as of 10/18/2010. The NAV increased by nine cents from last Friday while the share price declined by 22 cents, thereby increasing the size of the discount to net asset value.

The expense ratio for HPI, before interest expense, is 1.29% before fee waivers and 1.2% after waivers. With the interest expense, the expense ratio was 1.8% for the F/Y ending in July 2010, down from 2.55% in F/Y 2011: see page 17, www.sec.gov. The current interest rate paid by the fund is 1 month Libor plus .85%, plus a commitment fee paid annually (see page 24). The 1 month LIBOR rate is around .26% currently: Key Rates Rates - Bloomberg 1 Month LIBOR As of 7/31/2010, the fund had borrowed 205.3 million at an interest rate of 1.155%. So, for now at least, there is a good spread between the cost of borrowing and the yield produced by the securities bought with leverage. But the 1 month LIBOR rate is currently at an abnormally low rate by historical standards. LIBOR Rates History (Historical)


  1. Why are IMF and WIW being chased by investors when the distributions are now well below 4%? TIPS bonds have soared while the Gov't continues to (fraudulently)take out food and energy (always go up) from the CPI thus the TIPS auctions don't have a rising yield. I understand the NAV has soared, but buyers of IMF and WIW can get a 7% yield easily somewheer else. Are they just day-trading or are they positioning for when the CPI can no longer be contained?

  2. I sold out of IMF and WIW based on my opinion that the upward move in TIPS could not be sustained. I prefer buying the 10 year TIP directly at auction in a retirement account and then holding to maturity. But the rates are so low now that I would not bother buying any TIP at auction.

    For those investors who want to buy TIPs now, IMF and WIW do provide a higher current yield to the investor than buying the TIPs on the market. Part of that is due to their respective discount to net asset value. The distribution rate is 3.44% on IMF based on the market price and around 3.17% based on the net asset value.

    The yield on the 10 year treasury inflation protected security bought in the open market is currently under .5%. So compared to that IMF and WIW yields look good.



    When I bought the 10 year TIP at auction in July, discussed in a 7/6/2009, the coupon rate, the real yield component, was at 1.92%. That bond has appreciated almost 10% or so in value.

    I am in a trading mode on all bond CEFs. My only position in U.S. treasuries is in TIPs. I view them as a hedge against unexpected rates of inflation. If inflation spiked to 4%, the ten year TIP with a real yield coupon of .5% will lose value, as investors demand more of a real yield to compensate for a change in inflation expectations. If I bought the TIP directly at auction, I have the option of recovering the principal plus the inflation adjustment to the principal (assuming no overall deflation), but the TIP bond fund may lose enough value that I would never be able to recover my principal in that kind of scenario as the value of the vintage securities fall more in value than the fund is receiving in the inflation adjustment.