Friday, November 12, 2010

Bought MUNI CEFs: 200 NPF@ 13.55, 200 BKK @ 14.71, 100 MNP @ 13.78/Bought: 50 JNK @ 40.57, 50 KRBPRE @ 25.07/Sold: 200 PGX at 14.38, 100 CSQ @ 9.13, 50 AHLPRA @ 24.65 in Roth IRA

I thought that the stock market did extremely well yesterday under the circumstances. The S & P 500 declined only .42% to close at 1213.54. You wouldn't know anything important happened on Wednesday provided you were not invested in CSCO which was deservedly crushed, declining 16.21% in price yesterday. The ^VIX remained subdued, rising just .15 to close at 18.62. I am not sure the negligible downside action yesterday makes any sense to me. I am certainly more cautious now than I was on Tuesday. The Old Geezer wants to pay a compliment to the LB, our Head Trader, for selling Cisco- again-just before an earnings release. Headknocker refused to extend his gratitude, since the NERD is just increasing his tax bill for 2010 with all of this stock selling.

This is a link to the PDF report from the National Association of Realtors showing the quarterly percent changes in the median sales prices of existing homes. I noted that some of the largest percentage declines year-over-year were in Florida. Ocala had a 20% decline; Palm Bay-Melbourne-Titusville at -15%; Orlando at -11, and Sarasoto-Bradenton at -10%. Looking through this report, there is still a considerable amount of weakness.

Maybe it is time to worry more. It is not just the lackluster recovery in real estate, the persistent high unemployment and under employment, or some of the earnings reports like the one just delivered by Cisco. It is that this anemic recovery is occurring after unprecedented monetary and fiscal stimulus. And, it is troubling that the virtually all members of one political tribe learned absolutely nothing from the Near Depression.

1. Bought 200 of the municipal Bond CEF NPF at 13.55 on Wednesday (see disclaimer): Many of the bond CEFs declined 1% to 3% on Wednesday, and the decline was pretty much across the board among different types of bond funds. I noticed that NPF , a municipal bond CEF from Nuveen, was down almost 2.5% around noon on Wednesday, even after adjusting for the ex dividend that day, so I picked up just 200 shares. This is a leveraged municipal bond fund that pays monthly distributions at the current rate of $.0725: Nuveen Closed-End Funds Declare Monthly Distributions Assuming that rate continues, which is never a given of course, the yield at a total cost of $13.56 would be about 6.42%. JPF was also one of the few Nuveen municipal bond CEFs selling at a discount to net asset value last Wednesday: Nuveen Closed-End Funds - Daily Pricing

As of 11/9, when NPF closed at $13.94, the net asset value was $14.57 per share and the discount was at -4.32%: NPF - Nuveen Premier Municipal Income Fund, Inc. Given the significant decline in price on 11/10, I expected that this discount expanded and it did to -6.02 as of 11/10. As of 10/29, this fund contained 182 holdings, with 18.7% rated AAA, 36% AA, 30.9% A, and 12.4% BBB. This is a link to the shareholder report for the period ending in April 2010:

The leveraged bond CEFs will be more volatile than comparable non-leveraged funds, particularly when investors become more concerned about interest rate risk. The 30 year treasury is in my opinion the security that is the most sensitive to interest rate risk, given its duration and AAA status which implies negligible credit risk. That point was made in a previously referenced article from aT. Rowe Price publication .pdf (page 9). I discussed this topic in a previous post: Quantitative Easing Redux?/More on Investments for Deflation Since 10/6/2010 , TLT, the ETF for the 20+ year treasury, has declined from $105.22 to $96.38, adjusted for a dividend of $.319: TLT Historical Prices During that same brief period, the 30 year treasury has risen in yield from 3.76% to 4.23%. Java Chart - While that may not sound like much, that 1/2 point increase in yield is the result of a very significant loss in value. The Vanguard Long Term Treasury Bond fund (VUSTX) has declined by 6.67% from 10/6 to 11/10. It remains to be seen, however, whether this decline is just another minor correction or the start of something far more ominous for bond investors. I would note that a much larger version of quantitative easing, launched in March 2009, has not yet caused inflation to become a worrisome problem for bond investors.

NPF had another volatile day on Thursday, trading in a range between $13.28 and $13.63, before closing at $13.52. At the closing price of $13.52, the discount to net asset value expanded from -6.02 on 11/10 to -6.37 on Thursday. I attempted to buy more on Thursday at $13.25. The TF yield at a total cost of $13.28 is around 6.55% based on the current distribution rate.

This is a link to the CEFA - Closed-End Fund Association page on NPF.

2. Canadian Apartment (CAR-UN.TO at YF or CAR.UN at Marketwatch)(own 100 shares): LB has been buying Canadian REITs with HK's CAD stash in search for yield, and this REIT is one of three recent buys along with a Canadian REIT ETF. CAPREIT reported a 6.8% increase in net operating income. Average monthly rents increased by 2.3% for the quarter. Operating revenues increased by 4.9% compared to the year earlier period. Occupancy improved to 98.7%. Bought: 100 CAR-UN.TO @ 17.35 As with the other Canadian REITs that I own, this one pays monthly dividends that I take in Canadian dollars. The Canadian dollar has had a robust upward move against the USD since March 2009, and is near parity now, as shown by this chart of FXC, the currency ETF for the CAD: Rydex CurrencyShares Canadian Dollar ETF Chart

3. Bought 50 KRBPRE at 25.07 on Wednesday (see Disclaimer): KRBPRE is a trust preferred stock originally issued by a Delaware Trust created by MBNA, formerly a credit card company. That preferred stock represents an undivided beneficial interest in a junior bond bought by the trust from MBNA. Bank of America later acquired MBNA, and the underlying bond in KRBPRE is now one of its obligations. In connection with another MBNA Capital TP that I recently bought, KRBPRD, the rating agencies place the same grade on the TPs issued by companies acquired by BAC as those originally issued by one of trusts created by BAC. Bought 50 KRBPRD @ 25.14 For example, Bac Capital Trust I (BACPRW) has a 2031 maturity but was yielding 6.98% at its $25.2 price from last Wednesday afternoon. This last purchase brings me up to 100 shares of KRBPRE, with the prior purchase made in the Roth IRA at 24.62 in June.

Interest payments for both KRBPRD and KRBPRE are paid quarterly but at different times. KRBPRE just went ex interest on 11/9, and has declined some as result. KRBPRD went ex interest on 9/28.

As to KRBPRE, it has a $25 par value and a 8.1% coupon. Both the TP and the underlying bond mature on 2/15/2033. I will just link my earlier discussion of this security for anyone interested in more details: Bought 50 KRBPRE at 24.62 in Roth IRA

I anticipate that BAC will pay off one, probably two, principal protected notes that I own prior to 2011. This will reduce my credit exposure to this bank and this latest buy was in anticipation of receiving the proceeds from two of those notes soon.

4. Sold 40 TRC at 25.02 on Wednesday (see Disclaimer): Over the past couple of weeks, I have been looking to sell positions recently bought, since I viewed the up move in the markets since August as temporary. I have been selling with gusto positions with no or negligible dividends. Tejon Ranch (TRC) was a recent buy at $21.83. I suspect the market had a favorable view of TRC's 3rd quarter earnings report, released last Friday after the market closed. Form 10-Q The company did report earnings of 40 cents per share, compared to a loss of 2 cents per share in the year ago quarter, based on what I viewed as unusually favorable production and pricing in its farming operation. But the main reason for selling TRC was the lack of dividend combined with the pop in the share price over the past week or so, all taken in the context of my current labeling of the stock market as being in a long term secular bear market and an Unstable VIX Pattern. The stock closed at $22.52 on 11/3.

5. Pared Trade- Added 50 of the "high yield" ETF JNK at $40.57 & Sold 200 of the "Preferred" ETF PGX at 14.38 on Wednesday (see Disclaimer): I bought 200 PGX at 13.53 in June. 

2010 Sold 200 PGX +$155.56
I view both PGX and JNK as subjecting me to interest rate risk associated with long bonds, while JNK has more credit risk. Both of these ETFS pay monthly dividends. The main difference to me now is the yield at their respective prices. JNK is close to 10%, whereas PGX would be slightly less than 7% at the $14.38 price. I also own individually many of the securities contained in PGX, and own several bond CEFs that duplicate its holdings to some degree. (e.g. BTZ, PSY). I also clipped a few dividends from PGX and netted close to a $200 gain on the shares. The purchase of JNK brings up to 135 shares with 35 of that total owned in the Roth IRA. Bought 50 of JNK at 40.25 Added 35 JNK @ 40.72 in the Roth. The expense ratio is .4%. The list of holdings as of 6/30 can be found starting at page 142 of this report: Annual Report for the period ending 6.30.10 in pdf

6. Sold 50 of the 150 AHLPRA at 24.65 on Wednesday (see Disclaimer): The shares sold were the remaining shares owned in the Roth IRA, part of a 100 share lot purchased at 22.54 in early September, before the quarterly ex dividend date. I still own 100 shares in a taxable account, bought at at $19.75 and at 22.35. AHLPRA is a fixed coupon, non-cumulative, equity preferred stock issued by Aspen Insurance. It turns into a floater in 2017 unless redeemed.

7. Bought 100 of the municipal bond CEF Western Asset Municipal Partners Fund (MNP) at $13.78 (see Disclaimer) This is a link to the MNP shareholder report for the period ending in May 2010. This is a link to the sponsor's web site: Legg Mason - MNP - Western Asset Municipal Partners Fund Inc. The current distribution rate is $.0675 paid monthly which was raised from $.065 in February 2010: Distributions - MNP The next ex dividend date is 11/17. Western Asset Municipal Partners Fund Inc. ("MNP") Announces Distributions for the Months of September, October and November 2010

As of the close on 11/10, the last information available to me at the time of purchase, the net asset value was $14.94 per share, and the closing market price was $13.89. This created a discount to net asset value of -7.03. I suspected that the discount was widening on Thursday based on both the decline in the share price and a more or less stable pricing in the bond market. The net asset value as of the close on 11/11 was $14.94, unchanged from the day before, while the discount to NAV expanded to -8.3 due to the lower market price of $13.7. So the wildness in share price has nothing to do with any change in net asset value, at least for now.

This is a link to the CEFA - Closed-End Fund Association page on MNP.

8. Added 200 BKK at $14.71 on Thursday (see Disclaimer): This was an average down from a 200 share of this municipal bond CEF purchased a few days ago @ 15.11. The selling pressure in these bond CEFs has been relentless for most of this week on above average volume. While this is a leveraged bond fund, which makes it more risky, some of that increased risk is mitigated by its term liquidation date in 2020. This makes the fund somewhat analogous to buying a 10 year municipal bond with some borrowed money. BlackRock - Individual Investor - Products - Fund Profile - BKK I did place these shares in a different account. And, due to a large number of stock sales, I have a lot of fire power now to nibble at these bond CEFs during the current selloff. I doubt that I would add more than 200 shares to BKK however.

The trading action in these bond CEFs has become volatile. BKK traded in a range yesterday between $14.69 and $14.99, closing at $14.87. At that closing price, the discount to net asset value was at -1.33% based on a NAV of $15.07 as of 11/11. BKK went ex dividend for its monthly distribution on 11/10.

This is a link to the CEFA - Closed-End Fund Association page on BKK.

9. Sold 100 CSQ in Roth IRA at 9.13 on Thursday (see disclaimer): I substituted a bond CEF which I will discuss in the next post for the mostly stock CEF CSQ, as part of my more conservative positioning based on my view of the sustainability of the stock market cyclical bull move. The CSQ shares sold were recently bought at 8.49.

While I will participate in any continuation of a stock market rally, I am not exactly position to robustly participate.

As the market rallied off the lows during the afternoon, I bought some protection for my stock portfolio. That is an overstatement. Those purchases were more of a salve to the Old Geezer who was starting to replay those visions of sleeping under a bridge and eating his meals at the homeless shelter, residual impacts of the traumatic stress experienced by the OG during the Dark Period.

The remaining trades from Thursday will be discussed in subsequent posts. There were probably 10 or so more trades on Thursday, so it may be a week before I summarize most of my trades from Thursday and today. I may end up with around a 100 trades over the past two weeks, and I can not discuss all of them. The short term gains for 2010 are growing in exponential fashion. For the most part, I have been reducing my stock allocation, and adding to my bond allocation, mostly in bond CEFs and some additions to TCs. I have always maintained a larger stock position than a bond allocation.


  1. I will buy the synthetic floaters only in a retirement account due to tax issues and I have less than $300 in cash in those accounts. I would consider doing a paired trade in a retirement account, if I still owned PYT. PYT has a bid of $19 right now, and has a 1/4% lower guarantee than GYB. Both pay the same spread over 3 month LIBOR when that float exceeds the guarantee. So, in a perfect world, I would not see any reason for PYT to sell for more than GYB, as now.

  2. HPF at 19.03 is around 7% discount/+/-8% yield all income no roc, really volatile down from almost $20 pre-ex div, no? I see 10-yr 2.68%, but these CEFs were trading higher with rates higher.

  3. The bond CEFs have been under consistent selling pressure this week, particularly those which are leveraged and went ex dividend for their monthly distributions such as HPF.

    I would expect the leveraged bond CEFs to be more volatile than the non-leveraged ones, given the heightened level of risk associated with the leverage. While that leverage continues to work in their favor, due in part to the abnormally low short term borrowing costs, they are susceptible to increased volatility when some investors perceive a possible change in interest rate risk. Many investors believe that QE2 will ultimately be bad for bond investors, in that it will cause inflation. This sentiment has bee expressed by Bill Gross for instance. If that proves to be true, it could result in a triple whammy for leveraged bond investors, as the borrowing cost go up when the assets purchased with borrowed money go down in value, and that lethal combination will frequently result in a widening of the discount, the third whammy in that trilogy of horrors.

    Yet, the decline can not be explained under current conditions. Bonds are rallying some today and it is likely that short term borrowing costs will remain low for many more months. So I would anticipate that the NAV for the leveraged funds will be going up some today, creating an even wider discount to their net asset values based on current market prices.

    If I could predict the future, I would know whether this was a buying opportunity or a warning about events to come.

    I would add that some have the rational belief that deflation is still the biggest threat. And, while QE2 would be inflationary at virtually anytime during the past 100 years other than the Great Depression, their argument now is that the Masters of Disaster incinerated far more money than the Fed has created with both quantitative easing programs. And, the larger QE1 did not create inflation, at least yet.

  4. Good explanation. BHK & HPF seem oversold. BHK paid an extra dist last Dec.(.226)

  5. maybe problem is 5-yr T-Bill $FVX up 1.60 ?

  6. There is a small increase across the board in treasury notes and bonds today. I do not view that as the explanation since those bonds rallied yesterday and the bond CEFs declined in value.

    A close proxy for CEFs like HPF would be the ETF PGX which is unchanged today. That ETF invests in similar bonds, and there is an overlap in holdings. While it is not an exact proxy, it will give you a better idea of the intra-day value of HPF's holdings, as well as BTZ, HPI, and PSY. I doubt that there will be much change in the net asset value for those CEFs today and today's action marks another day where their discounts to net asset value widened.

  7. thank you- got hit hard on BHK, HPF.
    Look at the 30-yr closing above the 200-dma though.


  8. The expansion of the discount to net asset value is a known risk with CEFs. I wrote down the net asset for HPF as of 11/11 and it was 20.42. The NAV as of 11/12 fell 1 cent to 20.41. If you adjust for the ex dividend during the week of $.124, the net asset value fell 8.6 cents from 11/5 but the market price fell 61 cents, expanding the discount to NAV from -4.51 to -6.86. This is not unusual price action in CEFs as the discount shrinks and expands, which is one reason why I do not take an entire position at one time. I may buy another 100 of HPF somewhere south of $19. Eventually, the expansion of the discount will stop and reverse, when there are more potential buyers than sellers, with the buyers attracted to a 8% yield and monthly dividends.

    There is a short interest in these securities. Some of the selling after the ex dividend dates may have been short sellers piling on, accelerating the declines in these securities, after one or more institutional or other large seller emerged. The short sale statistics are available at Yahoo Finance under "key statistics".

    I do not trade CEFs using charts. I do note that HPF is selling above its 200 day moving average even after this week's decline, and some of the selling was probably profit taking. The shares were available for $16 in May so $19 looks good to those buyers after collecting several monthly dividends. When some individuals see their profit slip away fast, they will sell. The price also seems to be at the lower end of the Bollinger bands after peeking over $20 last week.

    I am not concerned about it. I am just glad that I have raised a lot of cash recently to take advantage of opportunities that develop during the remainder of the year. I am primarily a stock investor. I expect more problems with stocks over the next several weeks than bonds including bond CEFs. I would not be surprised to see a move back to bonds with another or a few more bad days in the stock market.

    The discount on BHK expanded to 6.16% as of 11/12. A similar CEF from Alliance, ACG, has a 8.38 discount now.

  9. Thanks again for the explanation. I noticed ETO and 2 other Eaton V. CEFs lowered their dist. by about 1/2 cent, if I read correctly.(a trend?) I found several articles on the collapse of munis and theories(comments) as to why.

  10. I have owned TFI, one of the municipal bond ETFs mentioned in the articles that you referenced and I sold my position in early March 2009 to raise funds to buy stocks along with many other bond sales for the same purpose in 2/09 to 3/09.

    I noticed some mild down movement in TFI on Thursday. I considered buying it before choosing to buy the leveraged municipal bond CEFs.

    TFI bounced back 46 cents on Friday to close at 22.9. If you adjust the current price for dividends, then the current price is higher than most of the June and July prices for TFI. (see historical price information at YF). I would not call this kind of action a collapse. If the price rises to 23.40 by the end of next week, is that a "surge"? I sold at around 22 in March 2009.

    I wonder if those individuals who place so much reliance on charts are adjusting the MUB price by the monthly dividends which go ex dividend on the 1st of the month. If not, then their charts are distorted to advance their bearish views.

    While I would expect an increase in municipal bond defaults, it is pure hyperbole to elevate that potential issue in the manner as one of the authors. A study by Moody's found that there were a total of 54 defaults in municipal bonds that it rated over a 30 year period ending in 2009. And the default rate during the Great Depression was just 2.7%.

    Municipal bonds are subject to interest rate risk and there has been some increase in rates recently across the board in bonds. It remains to be seen whether this is just another temporary decline or a portent of things to come. Eventually, the long term secular bull market in bonds, which started in 1982 will end. And then the time will come to either avoid longer term bonds altogether or to severely under weight their allocation. As I have said, I would not want to own any long term bonds, or any bond fund, during a period similar to 1966 to 1982. And that is a possible scenario for our future.

    With unemployment high and with ample slack production capacity, it is hard to see a sustained and troublesome rise in rates soon. The leveraged funds have at least several more months of being able to borrow money at abnormally low rates, maintaining a large spread between the cost of borrowed funds and the interest paid by the bonds bought with that borrowed money.

  11. I would add that an intermediate bond ETF from Pimco (MUNI) is close to unchanged in price during November, which indicates to me that the authors of those article in seeking alpha do not have a clue. In fact, MUB and TFI performed better than the long treasury ETF TLT. While both TFI and MUB have intermediate term bonds, they also have a significant number of long dated maturities, and it is the long dated maturities that have been the most sensitive to increased concerns about interest rate risk in the wake of QE2.

    It is obvious to me that these two authors are not capable of distinguishing the difference between bond declines caused by changes in perception about interest rate risk and credit risk issues. The long munis performed better since 11/2 than the long treasuries. How can that be unless both the long munis and treasures declined due to more investors having concerns about the longer term inflation impact of QE 2 on the bonds whose duration causes them to be the most sensitive to those changes. And it is the long treasury bond, due to its lack of credit risk, that will be the most sensitive to those changes.

    I think that the topic is important enough to discuss in a few posts starting with the introductory section to Monday's post.

    I would note almost no change in several muni term bond ETFs such as the one with a 2016 term (MUAE).

  12. Ran across this story hit on 11-10, right as many CEFs went ex-dividend, this may have had an affect.