Wednesday, October 6, 2010

Sold 100 ERC at 16.27 and Bought 200 BTZ at 13.14/Bought 100 STLPRA at 10.05/ISM Services Index/WAG MSFT

The preceding table summarizes my current holdings in my closed end fund mini-portfolio that reflects a number of changes since I last posted this table on 8/6/2010: Bought 100 IGD at 10.94. It would be a fair characterization to say that I have been trading in and out of several bond and stock CEFs for several months now, and a number of CEFs have been entirely eliminated from the ownership list. It is probably questionable whether or not I am improving the overall quality of my CEF portfolio with that hyper trading activity. I am garnering several short term gains, a debatable approach given the level of ST realized gains so far in 2010.

Christine O'Donnell starts her new campaign commercial by declaring that she is not a witch. YouTube She then asserts that "I am you". I am not sure what she means by that assertion. She lied about her education on her resume until just recently. Educating Christine O'Donnell The Washington Monthly The Plum Line Maybe that is commonplace in America today. Apparently, being unemployed or under employed is another common characteristic that Christine shares, as she reported income of less than 6 thousand for the past two years. She claims to be from the working class.

According to her former campaign manager, she was living on campaign donations, a charge denied by her. NYT And, she has defaulted on her mortgage and had a federal tax lien imposed on her.

Frank Rich argues in his Sunday's column that Christine is just a tool for the real power in the GOP. While he makes a somewhat convincing case on that point, I really view her simply as extension of the Sarah phenomenon.

I have seen a large number of ads on local TV stations from republican candidates who want to balance the budget but make no attempts to inform voters how they intend to accomplish that task. Once a politician starts to get into those kind of details, they all recognize that they start to lose votes. If LB had dictatorial powers in the U.S. for the next ten years, fiscal sanity would be restored at a cost of course. The issue is not how to do it, but whether the American people have the will to do it. Neither the democrats nor the republicans will ever do what is necessary. I suspect that nothing meaningful will ever be done until it is too late, with the U.S. government having the pedal to the metal, racing toward fiscal Armageddon, where discipline will ultimately be enforced by our creditors in a far larger version of what just happened in Greece. If there is a good explanation for the relentless bull market in gold, I just gave it.

So what will the GOP hopefuls do that their predecessors during the Reagan, Bush Sr. and Bush Jr. years failed to do? The three largest percentages increases in the national debt were during those 20 years. National debt by U.S. presidential terms I would just emphasize that social security, defense, interest on the national debt, medicare and medicaid, and benefits for federal retirees and veterans accounted for 74% of the 2010 budget. Center on Budget and Policy Priorities If I add other safety net programs like unemployment insurance, food stamps and school meals, the total becomes 88%. The remainder goes to education (2 %), transportation and infrastructure (3%), scientific and medical research (2%), international security (1%), and other (4%). The interest on the national debt will most likely become a far more serious problem soon, as the total debt has increased dramatically due in large part to the Near Depression, caused in significant part by the negligence and malfeasance of both political tribes, and the interest rate on that ballooning balance will eventually increase to levels that many can not imagine now. So, where are the 1.3 or 1.4 trillion dollars in annual cuts going to take place? Will the GOP cut defense? Is there some kind of emerging political consensus among either party to slash social security and medicare? Isn't the cost of servicing the national debt ultimately controlled by the market rather than politicians? Maybe the GOP wants to dramatically reduce expenditures for education and infrastructure improvements or to eliminate school meals for the needy children. In the last analysis, the American people do not want to pay for what they believe are entitlements somehow connected with their birth as citizens, and politicians know that the road to their early retirement would be to say no in any meaningful way.

1. Microsoft (owned): After selling out of a small position in Microsoft at $28.11, I made a chicken buy of just 30 shares at $24.54. I read Barrons summary of the Goldman Sachs' downgrade of MSFT to neutral. GS also lowered its price target to $28 from $32 and cut its earnings estimate for fiscal years 2011, 2012, and 2013. One concern, frequently expressed by analysts, is the emergence of tablet computing, raising a fear among some that the tablet will replace the laptop. I doubt that. While it is just an opinion, I view the IPad as a larger, more versatile IPhone without the phone function. It would not have the same functionality as a laptop for me.

If someone asked you, who is the innovator, MSFT or AAPL, what would be your answer? Still, I suspect that for many more years, Windows and Office will be cash cows. The current price is less than 10 times the FY 2012 consensus estimate of $2.63 per year. The 2012 FY ends in June 2012. MSFT Analyst Estimates

MSFT did recently raise its quarterly dividend to 16 cents per share from 13 cents. At a $24 total cost per share, that would translate into a current yield of 2.67%. I would agree with the GS analysts that MSFT needs to pay out a larger percentage of its net income. Paying out $1 per share would still be less than 50% of net income and that would bump the yield to 4.17%, more in line with the lower range of electric utility stocks now and in keeping with my view that MSFT shares many of the attributes of a utility company. Maybe that view will change with new leadership at MSFT, or possibly when elephants learn to tap dance.

2. Pared Bond CEF Trades: Sold 100 of 450 of ERC at 16.27 and Added 200 BTZ at $13.14 (see disclaimer): This particular pared trade was based on the relative current discount to net asset value for these two bond CEFs. BTZ closed at $13.1 on Monday and had a NAV at that time of $14.55, creating a -9.97% discount. ERC closed at $16.22 with a net asset value of $16.5, resulting in a -1.7 discount. Both of these bond CEFs pay monthly dividends.

In a recent posts discussing a purchase of BTZ at 12.05, I mentioned that this fund recently changed its focus to owning more investment grade bonds. As of 4/30, the date of the last semi-annual report, the fund had 78% of its holdings in investment grade bonds. Semi-Annual Report file with the SEC (31% at A)

This brings me to 400 shares of BTZ, evenly dividend between the Roth IRA and a taxable account. The shares in the Roth were bought last month: Bought 200 BTZ in ROTH IRA at 13.23

I sold 100 of my 450 shares of ERC, which were my highest cost shares using FIFO accounting. In effect, I lowered my average cost. I have discussed this CEF in several prior posts: Added 100 of the CEF ERC at 15.25 Added 50 of the CEF ERC at $14.14 My lowest cost shares were purchased in July 2009 at $12.96. I noted in the post discussing the purchase at $14.14 that the discount was then -9.42.

Based on its last filed semi-annual report, ERC had about 52.2% of its assets in investment grade bonds, lower than BTZ, but ERC had 39.8% at AAA. (see page 28 I have been taking my dividends in cash since taking a position in ERC.

BTZ closed yesterday at $13.16, a -9.8% discount to its $14.59 per share net asset value. At its closing price of $16.28 yesterday, ERC was at a -1.57% discount.

3. Walgreens (owned): Jefferies upgraded WAG to buy from neutral yesterday and raised is price target from $29 to $45. WAG also reported better than expected same store sales for September. Analysts were expecting a -1.1 and the company inched into positive territory with a +.4%. At best, I am still lukewarm on this stock.

WAG closed at $33.98 yesterday, up 2.63%. My last purchase was 50 shares at 30.15 in June 2010. My last disposal of all of my then existing WAG shares was at $38.55 in October 2009

4. ISM Service Index: The consensus estimate for September was for a reading of 52. The ISM reported yesterday that its non-manufacturing index rose to 53.2%. The new orders component rose to 54.9 from 52.4 in August. Employment crossed the 50 demarcation line, rising to 50.2. Any reading over 50 indicates expansion.

5. Iron Mountain (own): LB just wants to say that the RB was responsible for the purchase of IRM shares, proving once again that the Lame Brain needs to be kept in check and in chains 24/7. IRM warned yesterday that it now expects 2011 earnings of between $1.17 to $1.26. The analysts were expecting $1.32. The revenue forecast at 3.20 to 3.27 billion was below the consensus of 3.33 billion. And, IRM said that it expected the 2010 revenue to fall into the low range of its prior guidance. The company did add that its Board increased its buyback authorization of up to 200 million dollars. SEC FILED PRESS RELEASE

It does not need to be repeated, since it so well known, but LB will say again anyway . The Stock Stud has never made a mistake, other than possibly concentrating too much on its trading rule book, thereby becoming so distracted performing its duty to advance Headknocker's capital position that the Old Geezer or the RB, or some unholy amalgamation of those two, are able to seize control over the trading desk and do something stupid. Of course, all of the mistakes made here at HQ are attributable to the OG and/or the RB.

6. Bought 100 STLPRA at $10.05 (see Disclaimer): STLPRA is a trust preferred security that has as its underlying security a junior bond issued by Sterling Bank (STL), maturing in 2032 at $10. The coupon is 8.375%, so my current yield will be close to the coupon rate.

I have bought and sold STLPRA. Prior to yesterday, I still owned 50 shares bought in November 2009 at $8.99 I previously bought and sold shares, as previously noted in the blog: Added 50 STLPRA at 8.69 Bought 100 STLPRA at 8.87 Sold 50 STLPRA at $9.4 Sold 100 of the TP STLPRA at 10.25 I am coming back to this kind of security almost entirely due to a lack of alternative income investments after the Fed's ongoing JIHAD against savers and other responsible Americans, now in its third year. Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans & the Potential Major Correction in Bonds Down the Road

I also own the common shares as part of my Regional Bank Stocks' bank basket strategy which has over 50 banks in it: Bought 50 STL at 6.58 The realized gains and losses from that strategy are being tallied in Item # 3, 2010 Realized Gains Regional Bank Stock.

I have discussed this bank in several other posts: Item # 4 STL & Item # 3 STL.

Sterling sold 8.625 million shares in March 2010 at $8 per share. This offering resulted in net proceeds of 64.9 million dollars. The bank sold 42 million in preferred stock to the government, which pays 5% for the first five years and 9% thereafter. 8-K (letter agreement: EX-10.1) This stock is classified by me as equity preferred stock which is more junior than the bond contained in the trust preferred. Consequently, for Sterling to defer payments to the owners of STLPRA, it would first have to eliminate the common stock dividend and then defer the government's cumulative preferred dividend. The stopper provision in STLPRA is typical and can be found at page 35 of the prospectus. At the present time, I would review the interest rate risk associated with this 2032 maturity bond to be more worrisome than the credit risk issue.

The common shares rose 4.94% yesterday to close at $9.14. The bank is currently paying a 9 cent quarterly dividend, and has not yet redeemed the government's preferred stock, which is still shown on the balance sheet as of 6/30/2010 (see page 3 sterling-10q.). The capital ratios are in excess of well capitalized levels (see page 50).

Prospectus: Interest payments are made quarterly, and this security just went ex interest last month. If there is a lawful deferral of interest, the deferred payments accumulate and earn interest at the coupon rate, compounded quarterly. (see pages 4-5 and pages 19-20

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