Monday, November 15, 2010

Bought: 50 XFJ @ 25.15, 100 SGL @ 11.71, 50 FAM @ 17.37 in both Roth IRA and Taxable Account, 50 BAB @ 25.73, 50 PYB @ 23.69/Sold:100 XLK @ 24.48, 100 PEO @ 26.19, 100 TY @ 13.29

This is a link to a humorous YouTube video that explains quantitative easing and skewers the FED in a cartoon. YouTube

Intel (owned) boosted its dividend on Friday by 15% to 18 cents per quarter.

I view last week's action in stocks and commodities to be a give back of their respective gains occurring after the FED formally announced QE2. The S & P closed on 11/2 at 1193.57, the day before the announcement, and at 1193.57 on the day the FED made its widely anticipated decision public. After initially bouncing up some, the S &   P closed at 1199.21 last Friday. A commodity ETF, DJP, closed at 44.87 on 11/3, rose to 46.71 shortly thereafter, and closed last Friday at 44.86. Some pundits refer to that as a collapse in commodity prices. Apparently, collapse has a different meaning than that ascribed to the word here in Tennessee.

Bonds did decline in value after the FED's announcement, with the severity of the decline clearly linked to the bond's duration. The ETF for the 20 year treasury, TLT, continued its decline in price, falling from a close at $100.98 on 11/2 to its Friday's closing number of $95.81 or a 5.12% decline.

During the same period of time, there was a milder decline of-1.74% for the ETF LQD for investment grade corporate bonds and the iShares ETF for National Municipal bonds which declined 2.2% from its 11/02 closing price. A municipal bond ETF with a shorter duration, and importantly an absence of longer dated maturities, the PIMCO Intermediate Municipal Bond Strategy Fund (MUNI), was virtually unchanged in price, closing at $51.79 on Friday and at $51.96 on 11/02. That suggests that most of the decline in funds with longer durations was due to interest rate risk concerns, rather than any other purported reason. And, the munis performed better than comparable long treasury bonds.

One of the concerns about municipal bonds is a fear of increased defaults, which has some pundits hyperventilating in Seeking Alpha articles. See e.g. Muni Bonds Collapsing; Are Treasuries Next? In a similar vein, an article in the   WSJ with the headline "New Risks Emerge in Munis" refers to three bond issues from three small towns that have defaulted, while failing to mention that the total number of defaults is actually miniscule.

An article in Bloomberg pointed out that only 54 municipalities, whose bonds had been rated by Moody's, had defaulted in the 30 year period ending in 2009, and the default rate during the Great Depression was just 2.7%.     The municipal bond market has about 2.8 trillion dollars in bonds and 99.7% have not defaulted. A more balanced article in the WSJ published on 10/29 noted that defaults on U.S. municipal bonds totaled only 1.6 billion dollars so far in 2010 (or about .53%).      The municipal bond market has 50,000 issuers  While it would be reasonable to assume an increase in the default rate for 2011,  that increase will likely be concentrated in high risk municipal bonds.   The main risk for the long municipal bond remains interest rate risk, same as with any long duration bond or bond fund.  That risk is magnified with bond CEFs that use leverage, which increases interest risk, and whose market prices are often determined by their individual owners reacting to the latest headline in a less than thoughtful manner.   

1. Bought 100 Strategic Global Income (SGL) at $11.71 and 50 of FAM at 17.37 in the Roth IRA on Thursday (see Disclaimer): This bond CEF is managed by UBS. The fund has a managed distribution policy whereby it intends to pay dividends equal to an annualized rate 7% of the fund's net asset value determined monthly. Strategic Global Income Fund, Inc. — Distribution Characteristics for October 2010

This is a link to the shareholder report for the period ending in May 2010 At that time, the fund's credit quality was 23.7% in AAA, 11.2% in AA, 17.2% in A, and 13.3% in BBB. (see page 9). The expense ratio before fee waivers was 1.22% and 1.17% after waivers (page 46). This is a world bond fund with the U.S. weighting around 31%, with 9.68% of the portfolio in U.S. government obligations, as of 5/31/2010. Another 26.5% was in non-U.S. government debt. Recently, this CEF has been trading at between a 4% to 6% discount to its net asset value, closing at a 4.77% discount last Friday (11/05).

Morningstar rates the fund 3 stars. As shown at SGL's page at Morningstar, this fund did sell at a premium to net asset value for several months in both 2006 and 2007. During the Dark Period, the discount expanded, at one point exceeding 20% which was not uncommon then. The fund is not leveraged which is one reason to add it after purchasing several leveraged bond CEFs. The downside of no leverage is less of a yield now. When interest rates go up, I would expect the non-leveraged funds to perform better as a general rule than comparable leveraged funds.

This purchase is part of an ongoing effort to increase my monthly cash flow. By increasing my cash flow, I will be able to buy more securities later on, when the opportunity arises, since all of my cash flow is used to buy securities. The current yield is over 7% annualized according to Marketwatch. As noted above, the distribution level will change from month to month based on the managed distribution policy which is tied to the fund's net asset value. The shares were bought after a 17 cent decline (-1.43%) from the closing price on 11/10.

The sale of CSQ raised just enough funds in the Roth to buy 50 shares of First Trust/Aberdeen Global Opportunity Income Fund (FAM) at $17.37, a bond CEF that declined 2.52% last Thursday, bringing its yield up to 8.98%. The selling pick up steam around 1:28 EST, with the stock falling almost 30 cents between 1:54 to 2:03. The blocks that triggered the waterfall suddenly arrived after light volume in rapid order over 9 minutes, starting with 3,800, and immediately thereafter 3700, 4002, 2998, 3966, 3798, 3406.

I discussed FAM in a post from last Tuesday: Item # 7 Bought: 100 FAM @ 17.9 It is a world bond CEF. First Trust The NAV as of 11/11 was $18.14, with the discount expanding to -4.19 based on a closing price that day of $17.38. The net asset value did decline by 16 cents from my earlier purchase, while the share fell 53 cents.

I also added 50 shares of FAM on Thursday in the taxable account at $17.37. FAM closed at $17.17 on Friday, raising the yield to 9.09% at that closing price. As of 11/12, the net asset value was $18.04 per share and the discount to NAV was at -4.82.

2. Sold 100 of the ETF XLK at 24.48 on Thursday (see Disclaimer): I bought 100 shares of this ETF at 21.89 in February, so that is close to a 12% return. I was certainly hoping for more. Cisco's warning does have a few factors that seem to me to be generally applicable to many technology companies, such as the austerity measures taken by European governments and the fiscal problems among state and local governments in the U.S. Besides, I am really uncomfortable as a rule investing in technology companies, given their cyclicality and frequently unpredictable ups and downs. While that was true in 1999-2000, where I avoided the Nasdaq meltdown, it is more true now as the OG moves closer to eligibility for Social Security.

Cramer believes that the problem is limited to Cisco, and he has turned extremely negative on that stock: Eric Savitz in his Barrons column agrees. While Cisco competitors like Juniper are more upbeat about their prospects now, as noted by Savitz and Cramer, this may of course change in the coming months.

3. Sold 100+ of the stock CEF PEO at 26.19 on Thursday (see Disclaimer): This was another purchase that sank on me immediately after my purchase of 100 shares 24.61 in April, falling to a close at $20.61 in August, PEO Historical Prices, thereby violating one of the HK's sacred rules of stock investing. The shares got a lift yesterday after both Petroleum & Resources Corporation and The Adams Express Company announced their year end capital gain distributions. I still own 581 shares of ADX which owns a significant stake in PEO.

4. ADDED 50 of the Trust Certificate (TC) XFJ at $25.15 on Thursday (see Disclaimer): This TC just went ex interest for its semi-annual interest payment, which always seems to cause some individual selling after the "ex" date. At the time of the ex interest date, I owned 50 shares in a taxable account and 50 shares in the Roth IRA. Bought 50 shares at 25.38 Added 50 XFJ in Roth at 25.3

As previously discussed, this TC contains a senior Motorola bond which matures in 2028. The underlying bond has a 6.5% coupon, whereas XFJ is much higher at 8.375%: I did check on the trades for the underlying bond before buying more shares, and noted that it was mostly trading at a slight premium to its par value. FINRA That page at Finra shows that the underlying bond is rated Baa3 by Moody's, BBB- by Fitch, and BB+ by S & P. Personally, I would rate it more in line with the S & P grade without the plus sign. Still, in the current interest rate environment I am content with a 8.3% yield, at least for now.

5. Sold 100 of the stock CEF TY at 13.29 on Thursday (see Disclaimer): This stock CEF was bought at $12.75 in April 2010, near the peak of the last cyclical bull move. It was sold as part of the ongoing shift to more current income, non-stock, investments.

6. Bought 50 of the bond ETF BAB at 25.73 on Thursday (see Disclaimer): BAB is a bond ETF that owns taxable municipal bonds issued under the Build America Bond program. Dividends are paid monthly. I discussed this ETF in an earlier post when I bought 100 shares at 25.98. I initially discussed the Build America Bonds in connection with a recommendation made by Bill Gross, see item # 1 Build America Bonds. This add was neither an average up or down, but simply part of the ongoing effort to generate more monthly cash flow for future investments.  The expense ratio is .35%, and the fund had 306 holdings as of 11/12.  PowerShares Exchange-Traded Funds | Build America Bond Portfolio | BAB.  The effective duration is 11.08 years.  This is a link to the fund's current holdings:  BAB - Build America Bond Portfolio Holdings

BAB is ex dividend today for its monthly distribution. 

7. Added 50 of the Trust Certificate PYB at 23.69 on Thursday (see Disclaimer): I recently bought 100 shares of this trust certificate containing the 2033 senior bond from Goldman. Bought 100 PYB @ 23.81 Those shares were bought after the owner of the call warrant called another TC with the same underlying bond soon after I purchased it. Bought 100 DKW at 22.86 Bought 50 DKW @ 23.07 Sold 100 DKW @ 25.25 Alert on TC DKW-Exercise of Call Warrant/SOLD 50 OF 150 @ 25.20 That purchase was made in a satellite taxable account for the primary purpose of income generation with a hope that the owner of the call warrant might exercise that right. I decided to add 50 in the main taxable account last Thursday to generate more cash flow. I also bought 50 PYB at 22.83 in the Roth IRA, along with JZS at 22.95. JZS is another TC containing this same senior bond. I sold it on a pop and kept PYB. Sold 50 JZS @24.15 And I have bought and sold yet another TC with the same bond, PJI. Bought 50 PJI at 20.85 Added 50 PJI at 20.17 Sold 50 PJI at 23.52 I am close to playing with the house's money on TC's containing this senior bond when I add the profits and interest payments from the floater GJS, tied to the same bond.

PYB Prospectus:
Finra Information on Underlying Bond: FINRA

As previously noted, in addition to call on DKW, there have been recently partials calls of DKP and HJG, both containing the same 2033 GS bond, by the owners of their respective call warrants.

The trades made on Friday will be discussed in Tuesday's post. I am running way behind due to unusually heavy trading activity.


  1. The 10-yr backed off 2.85%. This release was downright ugly, but ignored by CNBS because they are pumping the GM ipo.

    The Empire State Manufacturing Survey indicates that conditions deteriorated in November for New York State manufacturers. For the first time since mid-2009, the general business conditions index fell below zero, declining 27 points to -11.1. The new orders index plummeted 37 points to -24.4, and the shipments index also fell below zero. The indexes for both prices paid and prices received declined, with the latter falling into negative territory. The index for number of employees remained above zero but was well below its October level, and the average workweek index dropped to -13.0.

  2. Have you ever compared your returns to a more stable (less frequent trading and using ETFs rather than individual stocks and funds) portfolio? When I look at your trades I wonder if you are incurring unnecessary fees & taxes and how you come up with candidates to buy into.

  3. I have a large number of positions that are kept undisturbed, for the most part. My goal is to beat the S & P 500 with a balanced portfolio which includes a cash and bond allocation. I mentioned in a post earlier from 1/1/2010 that I was up 42% in 2009 with close to a 30% allocation in cash.

    A review of the posts over 2009 period will give anyone interested an idea of how that was done, though I recognize that a reader would incur much time in reading those. Some of the readers have been reading these posts almost from the beginning, and I understand that you are new.

    I still own many of the stocks purchased in March 2009, after I made a significant shift out of short term bonds. I am still own several TCs that were bought during the October 2008 to March 2009 period, when a 10% to 15% interest rate on an investment grade bond in TC form was not at all uncommon and floaters like METPRA could be bought for $7 and AEB for $3. All are still owned by the way and have more than doubled in price. I did sell out of the REIT preferred stocks in the IRAs after they more than doubled in price, keeping only GRTPRF bought in a taxable account at $2.9. I would say that there has been no change at all in around 200 positions this year.

    I will not be tax efficient this year given the large number of short term capital gains. I will generally pare some losers during the course of the year to offset some of those short gains, but I have few of those right now. Though, with my recent excursion into leveraged bond CEFs I may have a few losers to sell to offset some of those short term gains if I later choose to backtrack. I was buying some of those today that fell around 4%.

    I will easily beat the S & P 500 again this year, with a balanced approach with a high cash allocation earning nothing. So, yes I keep track of how I am doing versus a benchmark allocation using a security like SPY. I will also do a comparison with a split in ETF allocations such as 60% VTI and 40% BND. I would not be fooling with all of this if I could do better after tax with a dumb ETF portfolio.

    If stocks continue to go up from now, after I have sold into this rally, I will underperform in the coming weeks. Part of the out performance is based on shifts in asset allocations based on my views of relative values in the market.

    I also added a double short during the market rally this morning (11/15) in response to the NY manufacturing report, which you should assume that I have read already in its entirety. When you read the posts from March to July 2009, you will see more stocks being bought based on my analysis of the national ISM manufacturing report and the acceleration back then of the new order component.

  4. Thanks for your reply. I am new and enjoying reading your posts.

    BTW, Here is an interesting adjustable preferred I have been accumulating. SCEDN (Southern Cal Edison) It seems to be one of the highest payors I have found. Most of the others I have seen are LIBOR based which is too darn low to sit and wait for rates to rise (if they do).

  5. Sorry for the question about SCEDN. I found your posts after asking the question. I like it too. You bought it at a great price!

  6. Marty: I bought just 50 shares of SCEDN at $84 and still own it.

    If there is continued upward movement in the 30 year bond, I suspect Southern California Edison will call it and refinance at a lower fixed rate. It timed its call right to the transition from a fixed coupon to the floating rate.

    I have started to nibble again on some of the equity preferred floaters with guarantees, primarily where the guarantee generates more than 5% at the current price. I will trade those however, but hope to have a few in stock when the LIBOR rates turn up. In that category, I would put some of the Bank of America floaters, originally issued by Merrill Lynch, and one from Suntrust, all very small positions. I still own ZBPRA bought at $7.8 but would not touch it at $19.

    I will not add to METPRA or AEB at current prices, and am content to hold what I own.

    I am also hearing more talk from politicians that the Bush tax cuts will be extended for a year which would make the equity preferred floaters with guarantees more attractive from an after tax standpoint.