Tuesday, October 12, 2010

VIX/Sold 100 IND @ 23.92/Bought 100 TLSYY @ 13.29/Sold 50 JBK @ 21.59-Bought 100 DKW at 22.86/Sold: 50 HFFC @10.6, 40 WIBC @ 6.8 & 30 EFSC @ 8.97

The ^VIX closed down 1.75 yesterday to 18.96, its first close below the important demarcation line of 20. In an Unstable Vix Pattern, it is typical for the VIX to move below 20, but such movements are temporary in nature. Something will happen to spook the market and cause another spike in volatility, which would then be accompanied by a market decline. The VIX had several weeks of continuous movement below 20 before the sovereign credit risk issues in Europe, accompanied by a clear slowdown in the U.S. economy, causing both a spike in the VIX to elevated levels and the market to undergo its first serious correction since March 2009. Current Status of The Vix Asset Allocation Model Signal (August 2010). The stock market has been in an Unstable Vix Pattern since August 2007.

Yesterday was the first close below 20 in the VIX since 4/29/2010. I will require 3 months of continuous readings below 20, permitting some minor variations, before declaring an end to the Unstable Vix Pattern, and the likely commencement of the Stable VIX Pattern based on prior historical patterns. The Stable VIX Pattern is generally a longer term investable bull market in stocks, historically lasting several years. The Stable Pattern is a longer term cyclical bull signal, rather than a signal for the start of a long term secular bull market in stocks that may last as long as 15 or more years. Within the contours of that long term secular move, there will likely be at least two major cyclical signals for both the Unstable and Stable Vix Patterns. Vix Asset Allocation Model Explained Simply VIX and S & P Compared 1990 to 1997 VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2 RB just said that the Nerd is too deep a thinker, certainly thinks too much. HK should have followed the RB's advice to go all in back in March 2009 based on the RB's hunch. Did Right Brain Call the Bottom? (March 2009) RB Touts His Horn as HQ Closes for the Evening

The GOP candidate in the 9th Congressional District in Ohio used to dress up as NAZI SS Officer as part of Nazi reenactment group called the Wikings. The GOP certainly has a Big Tent. This republican claims that he is not a Nazi, and wearing a NAZI SS uniform was part of an education effort. USATODAY.com He is another tea party favorite. This tidbit was discovered by Josh Green at The Atlantic magazine.

Senate Republicans are blocking the nomination of Peter Diamond to the Federal Reserve questioning his qualifications. Diamond was just awarded the Nobel Prize in economics. NYT The real reason has to do with the GOP's rigid dogmas, which do not permit variations or even questions.

For an investor, rigidity is anathema. The investor must always be searching for new information, making judgments about its materiality and reliability, irrespective of whether that information is consistent with pre-existing beliefs. In other words, the mind must be open and flexible, rather than operating in a perpetual closed loop system.

1. Bought 100 TLSYY at 13.29 (see Disclaimer): Telstra is Australia's leading telecommunications company, providing more than 8.6 million fixed lines and 10.5 mobile services. It delivers broadband capability that passes 2.7 million homes. Telstra's Network

This is a link to Telstra's financial highlights for its F/Y ending 6/2010. www.telstra.com.au .pdf Earnings per share fell to 31.4 cents for F/Y 2010, down 4.7%. Revenues declined 2% to 24,813 million. Free cash flow increased 42.6% to 6,225 million. All amounts are expressed in Australian dollars.

Telstra is currently paying a semi-annual dividend of 14 cents AUD. The last ex dividend date for 2010 was in late August. Dividends - Telstra The shares trade in Australia under the symbol TLS.AX, and closed last Friday at $2.66 AUD. Based a 24 cent annual dividend, this translates into a yield of 9% at a total cost of $2.66 AUD. Although earnings declined to 31.4 cents per share in F/Y 2010, the ordinary shares were selling at Friday's close at around a 8.47 P/E based on the $2.66 AUD close and the actual earnings for F/Y 2010.

In the U.S. Telstra shares trade on the pink sheet exchange under the symbols. TLSYY. One share of the ADS TLSYY equals five ordinary shares. TLSYY closed last Friday at $13.2 USD or $2.64 for 1 ordinary share. TTRAF is a more lightly traded stock on the pink sheet exchange where there is a 1 to 1 relationship with the ordinary shares.

The AUD/USD exchange rate was at .80 on June 7th and closed last Friday at .9858, a 23.2% increase in the Australian Dollars value against the USD.

On 6/7, TLSYY closed at $12.3, Charts, and at $13.2 last Friday, or a 7.3% gain plus one semi-annual dividend. The ordinary shares, priced in Australian Dollars, closed at $3.04 on 6/7 and at $2.66 last Friday, or a decline of 12.5%.

A U.S. purchaser of TLSYY has fared much better than the Australian investor who owns TLS.AX since the Australian dollar began its latest rise against the USD. Of course, currency exchange can work both ways. If the AUD/USD fell back to .8, and the ordinary share price remained constant at 2.66, I would expect TLSYY to priced at $10.77 using a .8094 conversion factor. So, it would have made more sense for me to buy TLSYY when the USD was strong against the Australian Dollar, rather than after a robust rally, which is why I only bought 100 shares.

2. PARED TRADE: Sold Remaining shares of JBK at 21.59 and Bought 100 DKW at 22.86 (see Disclaimer): Yesterday morning before the market opened, I checked my monitor list for exchange traded bonds, and noticed that two more bonds had been called, one by the owner of the call warrant and the other by the issuer. Bear with me on this one.

The trust certificate DKM, which contains a Dow Chemical bond, was called by the owner of the call warrant. CNBC The underlying security had a 7.375% coupon, whereas the TC was at 6.375%. www.sec.gov The underlying bond was trading at around a 15% premium to its par value yesterday (FINRA) , so it would be profitable for the call warrant owner to redeem DKM at its $25 par value, take possession of the underlying securities, and then sell them for a profit.

Entergy Arkansas called its first mortgage bond, maturing in 2032, with a 6.7% coupon. This bond was replaced by one just sold, maturing in 11/2040, with a 5.75% coupon. SEC Form 8-K

So, what does this have to do with buying 100 DKW at 22.86? For one, it is becoming harder to find investment grade senior bonds yielding over 6%. DKW has at its underlying security at Goldman Sachs senior bond maturing in 2033. The par value of DKW is $25 with a 5.625% coupon: www.sec.gov At a total cost of $22.86, the current yield is 6.15% and the YTM would be higher given the purchase at a discount to par value.

While that is one reason, the main reason is that the underlying bond is currently selling, as of yesterday, at over a 10% premium to its par value.FINRA This gives an incentive to the owner of the call warrant to redeem DKW at its par value plus accrued interest and then sell the underlying bonds. It is impossible to know whether or not this will happen. It would just make some sense for it too happen at or above the current premium price for the underlying bond.

If this sounds like a familiar strategy, I have already implemented it with two prior purchases of other trust certificates containing the same GS senior bond. Bought 50 JZS at 22.95 Bought 50 PYB at 22.83

I elected to sell my remaining shares of JBK, which contains a GS trust preferred, to reduce my overall exposure to GS after buying these TCs with the senior bond. Those shares were recently bought in the regular IRA at 19.63. See also, Sold 100 JBK at 21.59 Bought 100 JBK @$16.15

3. Continued Paring Size of Regional Bank Stock Basket: Sold 50 HFFC at 10.6, 30 EFSC @8.97, and 40 WIBC at 6.8 (Regional Bank Stocks' basket strategy )(see Disclaimer): I realized a few days ago that I had far too many stocks in the regional bank basket, after I counted over 50 names, so I decided to eliminate about 10 names to bring this basket down to a manageable size for our LB. Modification Regional Bank Strategy LB refused to read anything on these banks until the list was cut down substantially.

I do have a few criteria for selecting the banks to sell. If I do not want to add shares to the position, then the stock is a candidate for a sell in this paring process. A negligible dividend or a recent cut in the dividend are also relevant in this selection process, along with a gut evaluation of the bank's long term prospects compared to other names in the basket. For the most part, I am selling stocks in the basket where there is a negligible gain or loss.

I bought 50 HFFC at 9.71, 30 EFSC at 8.48 and WIBC at 6.09.

I intend to pare 2 more stocks from this basket, which will still leave over 40 names.

4. Sold 100 IND at 23.92 (see Disclaimer): I somehow managed to navigate the frequently harrowing volatility of the ING hybrids during the Near Depression period. While their movement frequently caused bouts of nausea, the extreme volatility of these hybrids in 2008-2009, provided numerous trading opportunities. I devoted a lot of time to the European hybrids after the EC announced its "burden sharing" policy applicable to these junior securities.

At the current price, IND has about a 7.37% coupon based on its $25 par value and the 7% coupon. I do not find it attractive at that yield, even under current interest rate conditions. IND is in effect a junior bond, though it has equity characteristics for a U.S. taxpayer. ING HYBRIDS: Links in one Post Unlike junior bonds issued by U.S. companies, however, the ING hybrids have no maturity date and are perpetual, making them for that reason alone less desirable than similarly rated securities with maturity dates.

Given the uncertainty of ING's restructuring plans, the availability of some senior bonds yielding more at their current prices (e.g. DFY), and my unrealized profit on those shares, I elected to sell 100 IND, which leaves me with just 50 shares of INZ, bought at $7.82 , in the regular IRA as my sole ING hybrid security.

It would be interesting to me to learn more about what was motivating investors to sell IND for less than $5 in March 2009, when it was being sold by them with a yield of over 35% and there had been no deferrals. IND Historical Prices This is is a matter of interest to me entirely for psychological issues that motivated the selling.

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

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