Tuesday, November 16, 2010

Bought: 100 TFI @ 22.33, 50 NBB @ 19, 100 NQS @ 13.7, 100 NPM @ 13.48 /Sold 101 BSCF @ 21.15/

I frequently hear assertions by GOP politicians that a failure to extend the Bush tax cuts for those earnings over $250,000 will retard job creation among small businesses.  The motive for that assertion is to preserve tax breaks for the super rich, their main constituency.  Frank Rich produced some  statistics in his  NYT column that places the GOP argument in proper perspective.  First, as I noted in an earlier post, the Tax Policy Center found that only 2% of all Americans reporting small business income would see a tax increase.   And, for those making $200,000 to $500,000, the tax increase would amount to $700, hardly enough money to hire anybody. PolitiFact 

What is the historical case supporting the GOP's claim that extending the Bush tax cuts for the wealthy will be the source of job creation?  Bush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ Bush Lead During Weakest Economy in Decades  Economy Made Few Gains In Bush Years - CBS News Lost decade for U.S. economy, workers - washingtonpost.com And the statistics described in those columns do not ascribe to the Bush Administration the huge job losses occurring in 2009 which were already baked into the cake.  And to the extent there was any job creation after the Bush tax cuts, most of those jobs were in industries connected to the housing bubble and proved to be temporary to say the least. 

There are far more fundamental and important forces at work, retarding job creation in the U.S. and other developed countries, than tax policy.    

The New York Fed manufacturing survey turned negative in November, declining to a -11.1 reading, compared to a consensus expectation of +15. newyorkfed.org.pdf  The new order component plunged 37 points to a negative 24.4.   This report caused me to add to a double short position when the market rallied yesterday as a hedge for my stock portfolio.    

Two non-leveraged bond CEFs that I own, IGI and GDO, declared their monthly dividends for December, January, and February. ( IGI  &   GDO) There will be a slight increase in  IGI's monthly distribution rate for December due to capital gains, whereas GDO will remain at its 13 cent per month distribution rate. IGI has been paying $.1045 per month, and will continue at that rate for January and February.  The December distribution rate, however, will increase to $.1418. Both of these funds will liquidate in 2024. Bought 200 of the CEF GDO Bought 100 of the CEF GDO at 18.6 Bought 70 of the CEF GDO in Regular IRA at 18.61 Sold 75 GDO at 19.24 Sold 100 IGI at 20.74 and Bought 100 GDO at 18.57 Added 100 of the CEF IGI at 19.78 Bought 100 CEF IGI at $19.89 Sold 100 IGI at 21.26  Bought 100 IGI @ 21.04 Both funds go ex dividend for their monthly distribution on Wednesday, 11/17. 

Telephone and Data Systems filed a bond prospectus with the SEC on 11/15, www.sec.gov, and stated therein that it intended to use the proceeds to redeem some or all of its 7.6% senior note due in 2041.  I own 200 shares of that exchange traded bond (symbol TDA, prospectus at the SEC web site) 

Yesterday was another bad day for bonds and bond funds. The herd apparently made a decision that the bull market in bonds has died,  around the time that the FED telegraphed its intention to engage in QE2.   The long treasury bond continues to be hit hard on a percentage basis (see e.g. TLT), while junk bond ETFs (JNK and HYG) performed better than investment grade corporates and treasuries yesterday, with JNK falling just 7 cents to $40.23. Junk bonds are more sensitive to credit quality concerns. TLT, the ETF for the 20+ year treasury, continued its waterfall decline, closing down $2 or 2.09% to $93.81. That security closed at $105.56 on 10/6/2010. While I came close to buying 30 shares yesterday, I thought better of it on reflection.  

The leveraged bond CEFs continue their decline at larger percentages than non-leveraged funds, reflecting their additional risk flowing from buying depreciating assets with borrowed money. And, it goes without saying that our Head Trader has been nibbling on some of those CEFs which are declining at rapid rates now.  The LB is just naturally contrary, RB noted.   

A tea party favorite, Alan West (R), who beat a two term Democratic congressmen in the 22nd congressional district in Florida (FL22) after receiving an endorsement from Sarah, is up in arms about criticism leveled at his choice for chief of staff. He picked a "conservative" talk show host who, according the  St. Petersburg Times, was proud to be quoted saying the following: "I am convinced the most important thing the Founding Fathers did to ensure me my First Amendment rights was they gave me a Second Amendment," she said at a rally in July. "And if ballots don't work, bullets will."  I saw her video on YouTube and that is an accurate quote.  She is reported to have called for the hanging of illegal immigrants who commit crimes in the U.S.  Miami Allen West blames racism, misogyny for aide controversy West promised to bring the "left-wing vile, vicious, despicable machine" to its knees for daring to mention some of these statements.    

I would like to see an up or down vote on the recommendations made by the National Commission on Fiscal Responsibility and Reform.

Many of the bond CEFs invest in longer term bonds. Those bonds will be the most sensitive to changes in investor perceptions about future inflation and interest rate risk. And QE2 has caused many investors to change their expectations for future inflation. So far, it has been those longer dated maturities, particularly the long treasury bond and the longer dated municipal and corporate bonds, that have lost significant value based on shifting investor expectations of the inflation risk associated with QE2.  The bond correction continued yesterday with gusto. 

1. Added 50 of the bond CEF NBB at 19 on Friday (see disclaimer): On this one, I was just averaging down from my 50 share purchase at 19.67 as well as rounding the lot to a 100 shares. I doubt that I will buy more. This is Nuveen's CEF for Build America Bonds, and it was selling at a small premium to its net asset value. NBB - Nuveen Build America Bond Fund The fund was selling at slightly less than a 2% discount to NAV when I bought the first lot at $19.67. The current distribution rate is $.117 paid monthly. If that rate continues, the yield at a total cost of $19 would be about 7.39%. A quarterly schedule of holdings for the period ending in June 2010 can be found at the SEC's web site. At the closing price of $19.08 last Friday, NBB was selling at a .85% premium to its then $18.92 net asset value.

NBB declined 15 cents yesterday to close at $18.93. 

2. SOLD 101 of BSCF at $21.15 in regular IRA on Friday (see disclaimer): I checked on the dividend yield for this term bond ETF and was just not satisfied with its current yield of 2.6%. I like the concept of buying a corporate bond ETF that liquidates in a particular year, such as BSCF with its 2015 term date. This reduces interest rate risk associated with bond funds in a rising rate environment. The problem is that rates are so low now that these term funds simply do not provide me with an enticing yield. I checked my account and found that the 100 shares of BSCF had generated $20.47 in dividends over five months. I did realize over a $100 profit with those dividends. Item # 7 Bought 100 BSCF at $20.18 I still own BSCE in the Roth IRA, which has a 2014 liquidation date, but I would regard that one as a source of funds too. Bought 100 BSCE at 20.16 So, on the positive side, I would view these funds as less risky than a mutual fund investing in similar securities, but neither that mutual fund nor these bond ETFs are enticing at their current yields compared to alternative investments.

3. Bought 100 NPM @ 13.48 and 100 NQS at 13.7 on Monday (see Disclaimer):  These buys are best described as tip toe investments. Both NPM and NQZ are leveraged municipal bond CEFs from Nuveen, and all of those securities have come under increased selling pressure as investors fret about interest rate risk.  So, I see some value in these securities as they decline in price, and their yields rise. However,  I do not know when or where they will bottom in the current correction, so I will just nimble on the leveraged CEFs in mostly 100 share increments on the way down.   

NPM hit a 52 week high of $15.21 on 9/1/2010 and had fallen over 2% yesterday morning when I entered a limit order to buy 100 shares at $13.48.  The stock continued to slide after my purchase.  The monthly dividend is currently $.074. NPM - Nuveen Premium Income If that is maintained, the tax free yield at a total cost of $13.48 is around 6.59%.  As of 11/12, NPM had a net asset value of $14.66 and closed last Friday at $13.77, creating a discount to net asset value then at -6.07%.   

The average maturity in years is 16.76 and the number of holdings was at 466 as of 10/29/2010, with 4.94% in bonds subject to AMT. (alternative minimum tax). The holdings were mostly investment grade, with 24.7% at AAA; 34.2% at AA; 27% at A and 11.2% at BBB. Another potential downside which will limit my exposure is the concentration of bonds from Florida municipals at 31.6%.   

NPM fell 53 cents yesterday to close at $13.24.  As of 11/15, the discount expanded to a -8.6 based on a closed  price of $13.24 and a net asset value of $14.49 per share.  WSJ.com

NQS hit a 52 week high at $16 on 9/1/2010 and had fallen over 4% early yesterday afternoon when I entered an order to buy 100 shares at $13.70.  The current dividend is $.086 per month. NQS - Nuveen Select Quality Municipal Fund Distributions If continued, and there is of course no assurance that it will not be cut, the TF yield at a total cost of $13.7.  is around 7.53%. NQS is leveraged with an average maturity of 20.09 years.  So it combines the heightened interest rate risk of leverage with the interest risk associated with long bonds. This particular CEF has has 20.28% in bonds subject to AMT.  I am at my limit on this one, recognizing its risk characteristics. But the current tax free yield is tempting. Prior to yesterday, the 52 week low was at $13.63. 

I view both of these purchases as contrarian plays, and as part of my effort to generate more cash flow on a monthly basis in my taxable accounts. Both of these CEFs  continued to slide yesterday as the bond market correction accelerated into the close.  
NQS closed at $13.72 on Monday, down 61 cents or 4.26%. As of 11/15, discount to the net asset value was at -3.18. The net asset value fell to $14.17, or 18 cents below it close on 11/12. WSJ.com The  market price fell 61 cents, a pretty good percentage lick.  The primary reason for adding NQS was the TF yield at my cost based on the current distribution rate, rather than the expanding discount. There were other leveraged municipal bond funds selling at larger discounts yesterday.  

I will continue to buy the leveraged municipal bond CEFs in small quantities, even with a continued waterfall decline in their prices. As long as the long treasury bond continues its free fall in price, I doubt that the investment grade corporate and municipal bonds of similar durations will find much in the way of secure footing. The 30 year treasury fell 2 2/32 yesterday, increasing its yield to 4.415%. (chart at WSJ.com) Since I have a large realized short term capital gain number so far in 2010, I have the option of selling some of these recent bond CEF buys to pare some of those ST gains for tax purposes. 

Most likely, I will not do that but will instead set them all up to have my dividends reinvested in additional shares. I made a snapshot last night of the WSJ page on the national municipal bond CEFs and will select one or two to buy from that list in the event of a continued decline today. 

Monday was also a bad day for the unleveraged municipal bond ETFs. MUB, a broad based offering from Ishares, fell $1.9 to close at $101. There was recently a decisive break in MUB's 200 day moving average to the downside, which probably provoked more selling. iShares S&P National Municipal ETF Chart I drew a 52 week chart last night of MUB and TLT.  While TLT was doing much better than MUB since June of 2010, and worse during early 2010, TLT's  performance over the past 52 weeks has now converged with that of MUB. iShares S&P National Municipal ETF Chart  

4. Bought 100 of the Muni Bond ETF TFI at $22.33 on Monday (see Disclaimer):  I last bought shares in TFI, a municipal bond ETF, in October 2008, on a day it slid from $19.85 to $18.5. BOND ETFS BWX AND TFI  I sold my entire position in early March 2009 at  $21.71 as part of a shift out of bonds into stocks.   

I did not miss much by selling those shares at that time. The municipal bond market is currently undergoing a correction, mostly tied to increased concerns about interest risk, and TFI has long bond exposure.  SPDR Nuveen Barclays Capital Municipal Bond ETF  Its average maturity in years is 14.22 as of 11/12/2010. The fund had 21.35% of its holdings in paper maturing in 15.01 years to 20 years, and 21.85% in municipal bonds maturing between 20.01 to 30 years. Those durations will make the fund very sensitive to changes in perceptions about interest rate risk.    

The gross expense ratio is just .3% and the current net expense ratio is .23%. So why invest in it when the long bonds are being knocked down in price virtually every day now? I do not know whether the current correction is temporary or the beginning of something more ominous for long bond investors.  I do know that a TF yield of close to 4% looks good to me right now, and it is conceivable that it will look even better in a few months. So I took a small position as a contrarian move to where the herd is moving at the moment, not only with the buy of TFI but with all of the recent bond CEF buys.   

TFI closed at $22.24, down 66 cents or 2.88% yesterday. 

The remaining trades from Monday will be discussed in the next post. I am becoming less positioned by the day for a continuation of a stock rally. 


  1. I agree with your comments about BSCE and having a set ending date. However, my concerns with those funds (and many fixed income investments these days) is that you are presumably buying into a fund that has many bonds that were purchased at premiums and hence locked into a gradual capital loss as those bonds mature. I could not find the information about the purchase prices of their holdings and feared looking solely at the dividend payments might not be telling the whole picture.

    Did you consider this and were you able to do any analysis on it? Thanks!

  2. Marty: I suspect that you are right about those term bond funds paying more than par for many of their positions. I do not know how much or how many. I do not believe the last filed SEC report (8/31) discloses what was paid for each bond but only the then current value of the position. It would be too time consuming to check whether the funds were able to balance those bought at a premium, though probably not too large given the maturity dates, with others bought at less than par, particularly in the financial sector. I would have to go through the FINRA data, bond by bond, and then guess at the possible trade dates from the limited information that I have on possible purchase dates.

    There is also some leeway in trading the positions, selling those bought at premiums at small profits and then buying others selling at close to par. I have noted some trading profits from two closed end funds, IGI and GDO, that have 2024 liquidation dates. Their December dividends are supported by trading profits.

    IGI is getting crushed today so I added to my position in a small increment.

  3. I agree with the too much work to figure out their cost basis. I had looked at their longer (5 & 7 year) funds when they issued them but that premium issue really concerned me. If I seem them ever trading much lower, I will snatch some up.

    Hope your bottom fishing pays off.