Thursday, October 14, 2010

Sold 100 GYB @ 19.4, Sold 50 PFX at 19.02/Bought 50 CWB @ 39.31, 50 of JNK at 40.25, 100 PHB @ 18.5, 50 HEPRU @ 25.05 IRA/Einhorn-ST Joe/SOLD JOE @ 22.24

I thought the following article at Morningstar, written by Axel Merk, provides an excellent summary of the limitations and dangers associated with another round of quantitative easing.

1. Sold 100 GYB in Regular IRA at 19.4 (see disclaimer): The prior sale of 100 GYB in the regular IRA was more profitable, netting a profit after commissions of $691.71. Those shares were bought at $10.95 in April 2009 and sold last April at 18.09, I am attempting to keep my overall exposure to Goldman Sachs' bonds at close to the same level while upgrading to TCs containing the 2033 senior bond. There are several reasons for upgrading including the potential capital gains potential in those senior bond TCs originating from a redemption by the call warrant owner.

In the case of GYB, I suspect it is going to be stuck at its guaranteed rate of 3.25% for many more months. Consequently, the senior TCs with GS bonds would provide me with more interest than any of the Synthetic Floaters, tied to a GS bond, for at least several more months, and possibly for another year or two. I still own 100 shares of GYB in the Roth IRA, and 50 shares of another synthetic floater, GJS, which is tied to the 2033 senior bond with no guarantee. GJS has been bought and sold many times. Bought 100 GJS at 10.5 Bought 100 GJS at 12.25 SOLD GJS at 13.06 Sold 100 GJS at 15.6 Bought: 50 GJS at 14.6

I bought the 100 GYB sold on Tuesday in two lots, one at 17.97 and at 18.49. Part of that purchase was a pared trade involving a similar synthetic floater, PYT, which was sold at 18.66.

The owner of the call warrant does not have to do anything. The call is optional. Possibly, the owner of that warrant may be waiting for a better price for the underlying security before exercising it. All that I can deduce is that it would be profitable for the owner of the call warrant on all of the TCs containing the 2033 senior bond to exercise the warrant, pay the $25 par and accrued interest to the TC owners, take possession of the bonds, and then sell them in the bond market. When the underlying bond is trading at a premium to its par value, and the TC is still trading at a discount, there is at least the possibility that owner of the TC can realize an immediate elimination of the discount by a redemption from the call warrant owner.

2. Bought 50 of the ETF JNK at $40.25 and sold 50 PFX at $19.02 (see Disclaimer): PFX is a deservedly rated junk senior bond from Phoenix Insurance that has been bought and sold, with a purchase as low as $6 and change. Sold PFX at $17.57 Basically, I am selling one of my junk rated securities at a profit and using the proceeds to partially pay for the buy of a junk bond ETF. The PFX shares sold on Tuesday were bought at 16.12 in August 2010, and I will soon receive one interest quarterly interest payment.

There are several junk bond ETFs, and I previously bought 100 shares of one from Powershares that attempts to weight its holdings according to objective criteria relating to the ability of the companies to pay. Bought 100 PHB at 18.15

JNK, the junk bond ETF purchased on Tuesday, makes its selection primarily based on liquidity, limiting the selections to those issues with at least 600 million or more of outstanding face value. SPDR Barclays Capital High Yield Bond ETF The expense ratio is .4, and this ETF currently has 181 holdings. The average maturity is 7.56 years. Distributions are paid monthly: _9.30.2010a.pdf The current yield shown at the sponsor's web site is 8.64%.

This is a link to the the Annual Report for the period ending 6.30.10 in pdf format. The list of holdings for JNK starts at page 142. Other fixed income funds from SPDR are included in the report.

3. Added 100 PHB at 18.5 on Tuesday in Regular IRA (see disclaimer): This purchase was made in the regular IRA and is the replacement for 100 GYB. PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB) I discuss this junk bond ETF adequately in a post from September: Bought 100 PHB at 18.15. Those shares were bought in a taxable account and may be sold when and if the share price exceeds $19. This switch does give me a higher yield and provides me with the option of transferring the shares into a ROTH IRA in the event PHB suffers a significant fall in value, which is not that uncommon in junk bonds.

4. Bought 50 of the ETF CWB at $39.31 on Tuesday (see Disclaimer): This purchase was just a quick way to increase my exposure to convertible securities. =CWB The expense ratio is .4%. This fund currently has 119 holdings. Distributions are paid monthly. A list of holdings can be assessed at the sponsor's web site referenced above, along with the annual and semi-annual reports. The last filed shareholder report can be assessed at the SEC's web site, with the list of holdings starting at page 94.

5. Sold 100 PPH at 66.16 on Tuesday (see Disclaimer): After I bought this ETF at 65.42 in mid April 2010, it immediately sprang a leak on me, falling to $58.18 by 6/4. PPH Historical Prices Since I am in a trading mode, and would prefer to buy at $58 and then sell at $66.16, I elected to sell my 100 shares on Tuesday and hopefully buy them back at a lower price. On the positive side, I collected a few dividends and made more on the shares than I would have on cash sitting in a money market.

6. Bought 50 HECO CAP 6.50% PER QUIPS at 25.05 in ROTH IRA on Wednesday (see Disclaimer): This is another income security that is at best a marginal buy based on the yield, credit rating and long maturity date, but it does provide me with more diversity. HEPRU is a trust preferred issued by HECO Capital Trust III and guaranteed as provided in the prospectus by Hawaii Electric (HE).

This is a typical TP. HE forms a Delaware Trust that sells preferred stock in that trust in a public offering. The proceeds are used to buy a junior bond from HE, and the preferred stock represents an undivided beneficial interest in those bonds. Distributions are taxable as interest. Interest may be deferred for up to 20 quarters. During any deferral period, Hawaii Electric can not pay a dividend on a junior security which means that the common stock dividend would have to be eliminated before HE could defer interest on the junior bond. The underlying bond in the TP and the TP mature on 3/18/2034 at $25. The coupon is 6.5%. Final Prospectus

I also own in the Roth a similar security originating from an electric utility in Florida. Bought 50 Shares of FPCPRA

7. David Einhorn and JOE-Sold All Shares at $22.24 (own): St Joe is one of my four long term real estate plays. Yesterday, the shares fell over $2 in response to a negative presentation made by Einhorn at an investor's conference. Bloomberg A detailed discussion of his presentation can be found at Barrons. While the summary in Barron's was disconcerting, the article in the WSJ summarizing in even greater detail caused me to unload my position at a small profit. The revelations made by Einhorn, while coming from someone who has shorted the stock, appear to me to be reliable . My shares were bought at $15.69 and more recently at 24.57. I replaced JOE with two new contrarian plays that will be discussed in the next post.

I also was able yesterday to buy one of the Canadian REITs that I tried to buy on Tuesday.

The remaining 4 trades from Wednesday will be discussed in the next post.

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