Thursday, November 18, 2010

Sold: 100 BSCE @ 20.85, 50 PYS @ 24/Bought: 50 NBB @ 18.4, 50 BDF @ 17.73, 100 MMT @ 6.67

The Adams Express Company (ADX), one of my larger stock CEF positions, went ex dividend yesterday for its year end distribution of 36 cents (27 cents LT capital gains).

I look at the  WSJ.com dividend page every night.  I noticed that the Aegon and ING hybrids, which I own, declared their regular quarterly distributions (own AEH, AEF, AEB, and INZ). Aegon Hybrids: Gateway Post A few of the trust certificates that I own declared their regular interest payments (KTV, FJA). OSM, a senior note whose monthly interest payments are tied to a calculation based on CPI, (www.sec.gov), declared a $.0647 payment for December.  This payment has been trending down as expected.  The payment in July was at $.0886 per share.   (to see how the penny rate is calculated, one of the more recent posts explaining it is in Item # 9,  Bought 50 OSM at 15.74).  When I first started talking about this security, shares were available at less than $10. Item # 3  CPI FLOATER: OSM (12/2008).

CPI increased .2% on a seasonally adjusted basis in October.  The increase over the past 12 months was 1.2% without seasonal adjustment.   Excluding food and energy, the index was unchanged in October.  Consumer Price Index Summary  The bond market seemed to like these numbers initially, but the 30 year treasury bond sold off later in the day.

Most of the American electorate believes in meaningful spending cuts by the federal government only in theory. The average republican is no exception. A campaign commercial, where the candidate professes to be a conservative and a staunch believer of fiscal responsibility and balance budgets, can help that candidate win based on those generic statements, without delving into any details about how to do it.  This of course requires the listener to be quite gullible, which is unfortunately often the case, or just plain ignorant, more frequently the case.  It is all of those budget details, after all, which would lose those candidate votes, and cost them an election, when and if anything was actually done to pare spending to levels necessary to restore some semblance of fiscal responsibility.   It was hardly surprising to see GOP political commercials during the last election attacking Democrats who voted for legislation that attempted just to reduce future increases in medicare spending.  And, a recent poll showed that a significant majority of Americans have no stomach for the initial recommendations made by the National Commission on Fiscal Responsibility.  The republican respondents were even more negative on those recommendations than the Democrats.   WSJ   The recently newly elected GOP representatives know that their supporters will respond to cliches and talking points about fiscal responsibility, but would abandon them in a heartbeat once the representative actually supported the necessary cuts to restore fiscal responsibility.   It is really easy to be a hypocrite, and ignorance is a form of bliss.   

1. Sold 100+ of BSCE at $20.85 in the Roth IRA on Tuesday (see Disclaimer):  There are just too many alternatives for more income emerging by the day, so I eliminated this ETF with a 2014 that was paying close to 2%.  This shares were bought at 20.16 in June and I had been reinvesting the dividend.

2. Sold 50 of the Trust Certificate PYS at $24 on Tuesday (See Disclaimer):  This trust certificate contains a R.R. Donnelley bond as its underlying security.  It was bought   at 19.59 last June.  Its coupon is 6.3% on a $25 par value. www.sec.gov I would not buy this bond at $24 and would characterize the yield at that price to be unattractive.  Consequently, I decided to take my profit.   I certainly would consider buying it back somewhere south of $20.  This TC went ex interest for its semi-annual payment in October:  PPLUS TRUST SERIES RRD-1, PYS

3. Bought 50 of the bond CEF BDF at $17.73 on Tuesday (see disclaimer):  On Tuesday, this unleveraged bond CEF closed with a net asset value of $19.95 per share and at a -11.18 discount to that NAV.  BDF is classified as an investment grade bond ETF.  It recently completed the acquisition of another closed end investment grade bond fund (Hartford Income Fund-last filed sec report).   The holdings for BDF for the period ending in June 2010 can be found at www.sec.gov.  Those holdings would not include those acquired by virtue of the merger with Hartford.

The last SEC filed shareholder report is for the period ending in March 2010.  The expense ratio for the year ending in March 2010 was shown at page 13 as .85%.  This is the link to the CEFA and Morningstar pages on BDF. Dividends are paid quarterly, and the current rate is $.2875 per share.  At a total cost of $17.73, that equates to a yield of 6.48%.

A non-leveraged investment grade fund will have a lower payout now than a similar leveraged fund, since the leveraged fund is currently earning a good spread between its cost for borrowed funds and the yield paid by the bonds bought with those borrowed funds.  The non-leveraged fund, on the other hand, does not have the interest rate risk of the leveraged fund linked to several factors: increases in borrowing costs due to a rise in interest rates, a decline in bonds bought with those borrowed funds due to a rise in rates, and the increased volatility (and concomitant discount expansion) for the leveraged fund compared to the non-leveraged one caused by a change in perception about interest rate risk

4. Added 100 MMT at $6.67 in regular IRA on Tuesday (see Disclaimer):  I made an exception to the 50 share adds on bond CEFs for MMT given its single digit price. MMT is another  closed end bond fund that closed on Tuesday at $6.69 with a $7.73 net asset value, creating a discount of -8.73.  MFS Multimarket Income Trust  As previously discussed, the current monthly distribution rate is $.045, which equates to a 8.1% yield at a total cost of $6.67.  I discussed this CEF in more detail when I bought 300 shares in a taxable account   at 6.95 last October. (item # 1).  The fall in price (adjusted for dividends) since that purchase was due to an increase in the discount, a common phenomenon for the past week or so in bond CEFs.

5. Added 50 NBB @ 18.4 in the regular IRA On Wednesday (see Disclaimer):  I mentioned a few days ago, after buying this bond CEF at 19 last Friday, that I was not going to buy anymore.  Well, that was then, and LB pulled the trigger yesterday morning on another 50 at $18.4.  LB noticed that the ETF for Build America Bonds, BAB, which is also owned here at HQ, was rising in value at the time this trade was made by the Nerd.  The municipal bond ETFs, like MUB and TFI, were also rising.  So, the LB reasoned that the decline in NBB, which raised its yield to over 7.5% with monthly distributions, looked more attractive at $18.4 than it did a few days ago at $19, and who could argue with that line of reasoning.  Besides, if it continues to decline, I put it in the regular IRA and there is always the option of including those shares in a Roth conversion when and if there is a significant decline in value. I adopted that Roth conversion strategy in October 2008, with considerable success given the rise in values after the conversion, and consequently  moved most of the funds out of the regular IRA into the ROTH IRA at depressed prices.    

The monthly distribution rate is currently $.117.  This fund is leveraged. Even though NBB owns municipal bonds, it is okay to put it in a retirement account since those bonds are taxable municipal bonds.  I would of course never buy any security that pays tax free interest or dividends in a retirement account.   NBB is in effect an investment grade taxable bond alternative to a corporate bond CEF.  I did note the closing NAV information for 11/16 before placing the trade.  The NAV was at that time $18.99 per share which created a discount of -1.9 at the closing price of $18.63 on Tuesday.  WSJ.com

The Build America Bond program is set to expire at the end of this year.  If it is not extended, which is possible,  NBB will be liquidated in 2020 provided there are no BABS or similar U.S. treasury subsidized taxable bond sold for any 24 month period prior to 12/31/2014. NBB - Nuveen Build America Bond Fund So, it is possible that NBB may turn into a term bond CEF, which is preferable from my point of view. 

NBB closed at $18.43 on Wednesday, down 20 cents or 1.07%.  The ETF BAB rose 21 cents or .83%.  MUB, a national ETF for TF municipal bonds, rose 21 cents, and sold off its high of $101.25 to close at $100.61.  An article in WSJ pointed out that MUB has recently been closing at a discount to the value of bonds owned by this ETF.   The NAV can be checked daily at the sponsor's web site: iShares S&P National AMT-Free Municipal Bond Fund (MUB): Overview - iShares  The discount mentioned in that WSJ article narrowed some on 11/17, as the NAV fell $1.05 to $101.26 and the shares closed that day at $100.54.  Part of the recent weakness is probably due to a surge in supply this week: Bloomberg David Rosenberg has given his two cents worth in his Breakfast with Dave column for 11/16/10, calling the fear of default risk overblown (see page 2).

There has been a considerable amount of negative commentary about municipals by those who view themselves as pundits.  Most of that negativity centers around credit concerns, as local and state governments in many areas of the country are still feeling the sting of the recession and have never really brought their spending in line with the lower revenues.  A typical negative opinion was expressed by Chris Whalen, who opined  in an interview at Tech Ticker that California will default on its obligations.

  After rising in early trading yesterday, the long treasury bond fell 9/32 in another volatile day of trading, closing with a yield at 4.289%  Possibly, the decline into the close was a delayed reaction to Robert Rubin's comment that quantitative easing and the U.S. budget deficit were placing the U.S. in "terribly dangerous territory", and the government was risking an implosion in the bond market.  This could be accelerated- by those who believe that the Bush tax cuts were proven to be the magic elixir for job creation between 2003-2010 and their Tea Party allies- refusing to increase the nation's debt limit.

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

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