Monday, November 29, 2010

Bought: 50 CWHN @ 21, 100 CSQ @ 8.94, 100 XLU @ 30.83/Pared Trade Added 50 ZBPRC @ 25.3-Sold 100 ZBPRA @ 18.95/Sold: 300 FUND @ 7.2, 181 DVM @ 12.76, 100 IGI @ 20.75, 100 TLSYY @ 13.78

Over the past week or so, I have been in a trading mode for small positions in  double shorts. On a recent market dip, I sold one that was recently bought.  I have been timing some of these transactions off one or more of the volatility indexes, including the ^VIX and the ^RVX. While some of that timing is based on movements below or above 20 in the VIX, I bought one index double short on Friday where the volatility index had risen over 8% at a time when the index was virtually unchanged and the double short for that index was close to unchanged for the day. I am using both index and sector double shorts now as small hedges, primarily to keep me from selling more stocks. 

1. Sold 300 of the stock CEF FUND at $7.2 on Wednesday (see Disclaimer):  This CEF was bought in September  at 6.22. I decided to spread the proceeds from this sale to my long term positions in both RVT and RMT, hopefully at lower prices than prevailing now.  All of those stock CEFs are part of the Royce stock CEF family.  I currently own 300+ shares of RVT and 499+ of RMT. All of these funds ceased paying their managed distributions in 2009.  Some of previous buys of RMT and RVT are discussed in earlier posts: Bought RMT at $6.73 Added to CEF RMT at $7.64  Added 50 ADX at 9.7 and 50 RMT at 7.82 with Cash Flow Added to RVT at $ 9.69  

RVT did recently declare a 3 cent dividend,  Royce Value  RMT declared an 8 cent dividend.  I do not believe that either fund has paid a dividend since around March 2009 when they ended their managed distribution policy in order to avoid distributions supported by returns of capital.  These kind of stock CEFs require capital gains to support a managed distribution policy, and the Near Depression removed that option for them.  In the report to shareholders for the period ending  in June 2007, RVT reported a net realized gain of over 85 million for the prior six months, and had an unrealized gain in its positions of almost 487 million. Two years laters (6/2009), the fund had a net unrealized loss of over 19 million and had suffered a net realized loss of over 109 million.  Easy come, easy go.   

As a result of that change in dividend policy, which I support,  the discount to net asset value expanded and is still currently in excess of historical levels. As of 11/26, RVT closed at a -14.42 discount to its net asset value of $15.46 per share.  RMT closed at a -15.28 discount to its $10.6 net asset value per share.  FUND closed at a -11.71 discount.  

2.  PARED TRADE: SOLD 100 ZBPRA at $18.95 and Bought 50 ZBPRC at $25.3 on Wednesday (See Disclaimer):  The Old Geezer was nervous about the exposure to Zions' securities. This pared trade had the effect of reducing the overall exposure by a sufficient amount so as to relieve the OG's anxiety attack. This was done in several ways. First, the sale of 100 shares of ZBPRA netted a 140% long term capital gain on the shares bough at $7.8, plus dividends,  and that gain financed the addition of 50 shares of the higher yielding ZBPRC.

Second, at their current prices, ZBPRC yields about 4% more than ZBPRA. ZBPRC has a 9.5% coupon on a $25 par value. Prospectus Supplement  Both securities are at the same level of priority. If Zions eliminated the dividend on one, it would have to do so on the other too. Both ZBPRA and ZBPRC are at the same level of priority as the governments "D" preferred stock. For Zions to eliminate the dividends on the "A" and "C" equity preferred stock, it would have to defer paying the government on its "D" cumulative equity preferred stock.  Both the "A" and the "C" equity preferred stocks pay qualified dividends under current law and those distributions are non-cumulative.  (see Item # 7: Bought 50 ZBPRB in Roth at $19.9)

 As mentioned in earlier posts, while ZBPRA pays the greater of 4% or .52% over the 3 month Libor, I do not regard the floating rate provision to be worth the current 4+% differential in yield. For one, the 3 month LIBOR would have to increase to over 6.5% for the yield of ZBPRA at $19 to surpass the fixed coupon yield of ZBPRC at a total cost of $25.3. (6.5% 3 month Libor + .52%= 7.02% x. $25=$1.755 per share annually ÷ $19 cost= 9.23% vs. ZBPRC's fixed 9.5% coupon). This kind of comparative analyses has been done at various prices in several posts:  Analysis of Prior Question: ZBPRA vs. ZBPRC OR ZBPRB; Item # 4  ADDED TO ZBPRC AT 23.75)

Third, since I judge my exposure to known risky issues by reducing my current dollar exposure by the amount of realized gains and distributions received, the gain on ZBPRA raised that number to +$1,790 for this grouping of three securities which includes the higher priority TP shares, ZBPRB. When I subtract that number from the total remaining dollars invested in both ZBPRC and ZBPRB, I am back to my comfort level of $3000.

ZBPRC Prospectus:  Prospectus Supplement

ZBPRC  closed at $25.4 on Friday and is ex dividend today. ZBPRA is also ex dividend today. The TP,  Zions Capital Trust B, ZBPRB, went ex interest on 11/26.  

3. Sold 181+ of the CEF stock fund DVM at $12.76 and pared 100 of the 300 bond CEF IGI at 20.75 on Wednesday (see Disclaimer): The DVM discount to net asset value has narrowed considerably over the past few weeks.  As a result, and due to DVM's concentration in U.S. REITs which appear to me to be overvalued now after a very robust rally since March 2009, I elected to sell the entire DVM position. (see last filed Form N-Q showing 48.6% weighting in U.S. REITs,

In an interview in  Barron's, the President of Green Street Advisors and its director of research are slightly more positive about U.S. REITs, arguing that they are near the "upper end of a fair valuation range". In their view, U.S. REITs are "fairly expensive" relative to stocks and are "fairly priced" compared to Baa corporate bonds. The Vanguard REIT ETF  (VNQ) currently yields about 3.43% according to Marketwatch. It has risen from a low of $21.15 on March 6, 2009 to close at $53.81 last Friday, with those prices unadjusted for dividends: VNQ Fund Charts In early October 2007, VNQ was trading near $77. s

DVM closed at $12.83 on Wednesday, 11/24, and had a net asset value as of that date of $13.63 per share. The discount to net asset value based on those numbers was then -5.87. I intend to buy another CEF that has a broader selection of common stocks which is also selling at a greater discount to net asset value than DVM.   

I sold my highest cost shares of the term bond CEF IGI in a taxable account for a small profit, and kept the shares recently bought a few days ago at 19.85, IGI closed on Friday at $20.76 with a net asset value per share of $21.37. 

4. BOUGHT 50 OF CWHN AT $21 on Wednesday (see Disclaimer): CWHN is an exchange trade bond issued by Commonwealth REIT, which I have bought and sold at lower prices.  Bought 100 HRPN at 19.32  Sold 100 CWHN at 21.22 in Roth The symbol on this bond was HRPN when this REIT was known as HRPT Properties. The coupon is 7.5% on a par value of $20. The bond matures on 11/15/2019 and may be called on or after 11/15/2014 at its par value plus accrued interest.  Interest payments are made quarterly. I also own the common shares of CommonWealth Reit (CWH). At a total cost of $21, the current yield is around 7.14%. 

Due to a large number of bond calls, I am having to return to issues previously sold to reinvest the redemption proceeds.   I am also taking into account bonds that I own which will likely be called soon. In some cases, there has not been a formal announcement, but another filing made by the company indicates an intent to call all or part of a bond using proceeds of a new issuance. An example is the recent issuance of 200 million in a 6.875% senior note due in in 2059 by Telephone and Data Systems. In the prospectus, TDS says that it will use the proceeds to redeem part of the 7.6% coupon senior note, which I own, that matures in 2041 ("We expect to use the proceeds to redeem some of our 7.6% Series A Notes due 2041, of which $500 million in aggregate principal amount is outstanding.") The 2059 senior note is a newly listed exchange traded bond, symbol TDE with a $25 par value. 

5. Sold 100 TLSYY at $13.78 on Friday (see Disclaimer): Since the USD appears to be gaining strength, I decided to unload TLSYY recently bought at 13.29.  On Friday, FXA, the currency ETF for the Australian dollar, fell 1.86%.  The value of TLSYY will depend in part on the relative value of the Australian dollar against the USD which is starting to look overextended to me: CurrencyShares Australian ETF Chart 

6. Bought 100 of the ETF XLU at 30.83 on Friday (see Disclaimer):  I have bought and sold this ETF in the past. Bought 100 XLU at $29.14 Sold 100 XLU at 31.25/Bought 100 SO at 33.27 This ETF owns the utility stocks that are part of the S & P 500. The expense ratio is .21%: factsheet XLU.pdf This is a link to the sponsor's web page on XLU and to its components. This is the current weighting for the top 16 holdings as of 11/24/2010: 

1Southern Co.SO8.52%
2Exelon Corp.EXC7.09%
3Dominion Resources Inc. (Virginia)D6.69%
5NextEra Energy Inc.NEE5.78%
6PG&E Corp.PCG4.99%
7American Electric Power Co. Inc.AEP4.68%
8Public Service Enterprise Group Inc.PEG4.23%
9Consolidated Edison Inc.ED3.71%
10Entergy Corp.ETR3.66%
11Progress Energy Inc.PGN3.51%
13PPL Corp.PPL3.33%
15Xcel Energy Inc.XEL2.94%
16FirstEnergy Corp.FE2.91%

I also own EXC, DUK, ED and FE.  Possibly, one reason for adding this ETF was to keep me from averaging down on either FE or EXC, or both.  XLU's distributions vary by quarter.  In 2009, this ETF paid $1.27309 in distributions from ordinary income and no capital gains distributions. Distributions At that rate the yield would be 4.13% at a total cost of $30.83. So far in 2010, with one quarterly dividend left to be paid, the fund has paid out $.9003 per share.  The fact sheet shows that XLU has a .5 correlation with the S & P 500 and the portfolio has a P/E of 12.3. XLU.pdf at page 2. 

7.  Added 100 of the CEF CSQ at 8.94 on Friday (see Disclaimer): I recently sold my 100 position in this CEF in the Roth IRA at  9.13, as part of a risk reduction move. Those shares were recently bought at 8.49. CSQ is a leveraged CEF which by itself entails more risk than a similarly invested non-leveraged fund. It is a balanced fund, with around a 51% weighting in stocks, 22.7% in corporate bonds, and 20.5% in convertible bonds and preferred stocks. Calamos Investments- Composition Dividends are paid monthly at a current rate of $.0525 which was reduced from $.0625 in November 2009.  Assuming a continuation of the existing rate, the dividend yield at a total cost of $8.94 would be about 7%.   The fund is selling at over a 12% discount to its net asset value.  On 11/26, the net asset value was $10.15 per share and the discount to NAV based on a closing market price of $8.93 was a -12.02. 

The last filed form N-Q which contains the list of holdings for the period ending in July 2010 can be accessed at  the SEC's web site. With the 100 share purchase on Friday, I now own 200 shares in a taxable account, and I changed my distribution option from cash dividends to reinvestment into additional shares.  

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