This article at Seeking Alpha, summarizing John Paulson's recommendations, is worth reading. While I am in general agreement with him on the relative valuation of stocks versus bonds, I am not as bullish about gold. Paulson believes that gold could hit $2400 just on monetary expansion and $4000 with significant inflation.
China's purchasing manager's index for manufacturing rose to 53.8 in September from 51.7 in August.
Personal income and disposable income rose .5% in August, while personal consumption expenditures increased by .4%. News Release: Personal Income and Outlays, August 2010
The ISM reported a small decline in its manufacturing survey for September. The PMI declined from a reading of 56.3 in August to 54.4 in September. The new orders component continued to decelerate, falling to 51.1 from 53.3.
I lightened up on stock exposure some more last Friday. The following summaries of my trades do not include the last 6 trades made last Friday which will be summarized in Tuesday's post.
I find myself agreeing with Robert Johnson's column at Morningstar. The recent economic numbers do not make be feel giddy either.
Part of the recent euphoria may have more to do with a growing belief that the FED will undertake more quantitative easing. The market did take off when the FED announced a large scale QE program in March 2009. FRB: Press Release--FOMC statement--March 18, 2009 I discussed in a post from March 2009 how the market took off in 1933 when the Fed launched a large scale QE program. Stock Rallies and Quantitative Easing This increase in odds of more QE was tied to remarks made by the NY Fed President William Dudley. NYT
1. Bought 300 MMT on Thursday at 6.95 (see Disclaimer): Over the past two weeks, I have probably added around 20 grand to a money market account with no yield. I added two securities on Thursday as a temporary placeholder for some of those funds. One of those securities was the bond CEF MMT and the other was a TC containing a senior Sprint Capital bond, DKI.
MMT has a mixture of junk and investment grade bonds. It is a multi-market bond fund. This is a link to the last SEC filed N-Q, MFS MULTIMARKET INCOME TRUST, which contains the funds holdings as of 7/31/2010. The last shareholder report for the period ending in June 2010 can be found at the SEC's web site. At page 2 of that report, U.S bonds have the greatest weighting at 59.2%. Foreign bonds make up the remainder. As to credit quality, 19.8% of the bonds are rated BBB, 6.8% at A, 6.2% at AA and 10.6% at AAA. So, about 43.4% of the bonds are investment grade quality. When scrolling through the list of holdings, I do see a number of bonds that I recognize as junk rated securities.
This is a link to the sponsor's web site: MFS Closed-End Funds The fund is currently paying a monthly dividend of $.045 per share which was increased from $.038 for the November 2009 distribution. Distribution History for MFS Multimarket Income Trust At a total cost of $6.95, the yield at that penny rate would be 7.77% assuming that penny rate of $.045 per month remained in effect for an entire year.
Net asset value information can be found at the WSJ.com and at the Closed-End Fund Association web site. On Wednesday, the day before my purchase, the NAV was reported at $7.33 and the closing market price for 9/29 was $6.94, resulting in a -5.32 discount as of that date. The NAV increased to $7.35 on 9/30. The discount at last Friday's close was -5.03.
The expense ratio is around 1.02%.
This is a link to the Morningstar page on MMT, rated 4 stars. MMT is one of the few CEFs covered in the Value Line Investment Survey. I subscribe to both services.
2. Bought 50 DKI at 24.95 on Thursday (see disclaimer): This was the second income security purchased in the a taxable account last Thursday in an effort to soak up some of the excess cash recently generated. DKI is a trust certificate containing a Sprint Capital bond maturing in 2032. This is not the same bond that is the underlying security in the trust certificates GJD and DHM, previously bought and sold. Sold DHM at 24.4 Bought 50 DHM at 22.84 Bought 50 of the TC DHM at 21.35 Bought 50 GJD at 17.49 (March 2010) Bought 50 GJD at 17.8-Roth IRA Sold 100 GJD at 20.2 The Sprint Capital bond in GJD and DHM matures in 2028 whereas the underlying Sprint Capital bond in DKI has a 2032 maturity. There are four TCs containing the same 2028 Sprint Capital bond.
Of all of the TCs containing Sprint Capital bonds, DKI had the highest yield last Thursday by a significant amount. DKI has a current yield of close to 8.69% at a total cost of $24.85. The next closest yield was DHM at 8.2%, followed by PYG at 7.43%, all yields as of last Thursday's closing prices. GJD was around 7.19% when I placed my order. Since GJD is selling at a larger discount, the YTM would add more to its current yield than the much narrower discounts for the others.
DKI did recently go ex interest whereas the 2028 TCs went ex interest in May (i.e. carrying about 4 more months of interest).
DKI prospectus: www.sec.gov There is a call warrant attached to this TC.
The underlying security is rated junk, one reason for my light exposure to Sprint Capital TCs. The underlying bond trades can be found at FINRA. Recently, it has been trading above its par value.
The prospectus for the underlying bond in DKI can be found at www.sec.gov.
3. Bought 100 BDSI at 2.93 on Friday ( LOTTERY TICKET strategy) (see Disclaimer): There is nothing in my background or my current state of knowledge that would give me any insight into biotech companies. Occasionally, I read an article that perks my interest sufficiently to invest a small amount in one of them. My track record in this area is just abysmal but I keep trying.
I came across BioDelivery Sciences International (BDSI) last week by using at screen at Joel Greenblatt's Magic Formula Investing web site. BDSI was one of the 50 stocks displayed with market caps over 50 million.
I then did some research and read this article at TheStreet that discusses some compounds in Phase III clinical trials. The author of that article also mentions that BDSI's first approved drug for treating cancer pain, Onsolis, had a poor launch due to the FDA's requirements on risk-management for this drug. Other drugs used for this purpose do not have the same restrictions, thereby placing Onsolis at a disadvantage. The company hopes the FDA will level the playing field later this year by requiring the competing drugs to follow a risk-management plan too.
I also briefly reviewed sections of BDSI's last quarterly report: Form 10-Q
4. Sold 100 JTD at 12.38 on Friday (see Disclaimer): It is hard to keep up with the return of capital distributions made by CEFs that I own. Periodically, I check the cost number displayed at my brokerage account and that will sometimes give me an idea. The broker has been adjusting my cost basis down by the amount of the dividends classified as returns of capital. I noticed that my cost basis for 100 shares of JTD, purchased over a year ago, was $9.95, and that number may not include an adjustment for this year's return of capital distributions. I then checked my blog, which is the main way that I keep track of what I have done and why, and found that I bought those 100 shares at $10.13 or close to $10.22 with the commission cost. While that is not too bad on the return of capital, I also do not believe that the 2010 adjustment is baked into my cost basis yet. I decided to go ahead and take my long term capital gain having just received the third quarter dividend distribution.
I also previously did a trade on JTD in the Roth IRA: Sold 100 JTD at 12.25
5. Sold 200 HTD at 15.42 on Friday (see Disclaimer): I just bought this CEF at $14.13. Bought 200 of the CEF HTD at 14.13 This is just profit taking, based on too much of a percentage gain for this type of investment over a short period of time. In an Unstable Vix Pattern, I will not hesitate to book that kind of profit and then look for another opportunity to buy the shares back at a lower price.
6. Bought 100 GGN in the Roth IRA at $17.41 on Friday (see Disclaimer): Normally, I would not buy a CEF selling at a premium. As of Thursday's close, GGN was selling at a 3.19% premium to its net asset value. NAV information for this fund can be found at the Closed-End Fund Association web site, at the fund sponsor's web site or at the WSJ.com. The premium fell some on Friday, with the closing share price of $17.49 representing a 2.58% premium to a NAV of $17.05 per share.
Another issue that I do not like is that a significant part of the dividend distribution represents a return of capital. GAMCO Investors, Inc. The current dividend rate is 14 cents per month. If that was actually earned, through dividends and security gains, it would certainly be a plus since the yield at that rate would be 9.65%. The current data at the GAMCO website shows that around 46% of the monthly dividend is not being earned and represents a return of capital. Those figures could change by year end. With improving markets for the securities owned and more optimal conditions for the fund's option writing strategy, the fund could return to earning that dividend. If this does not happen soon, it needs to be cut in my opinion.
The last shareholder report is available at the SEC's web site. This fund invests in natural resource stocks. For the period ending in June 2010, the fund had a 28.4% allocation to energy and energy service stocks and 53.2% to mining.
Morningstar does not care for this fund, rating it just two stars. And the expense ratio is high. So why buy it at all with all of these negatives.
I really have almost no exposure to gold stocks. This purchase was just a quick way to gain exposure, and possibly Paulson may end up being more right about gold's future prospects than me.
I have been increasing my exposure some to commodity stocks. One plausible scenario for the future is a replay of the 1970s, a decade where stocks and bonds failed and commodities shined. Between 1/1/1970 to 12/31/1981, the annualized inflation adjusted return of the S & P 500, with dividends invested, was -1%. Between 1970 thru 1982, inflation averaged 7.88%. Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis The ten year treasury had an average rate for those years of 8.36%, using annual data from the FED: www.federalreserve.gov
The remaining 6 trades from Friday will be discussed in the next post.