Wednesday, November 17, 2010

Sold: 50 PFS @ 14.4, 100 GGN @18.13, 50 DKQ @ 23, 100 MLPI @ 29.93, 200 SFH @ 10.85/Bought 50 IGI at 20.05 & 100 @ 19.85, Bought 50 HPF @ 17.55 and at 17.76

Walmart same store sales in the U.S. declined for the sixth straight quarter, as the company met expectations for its Q/E 10/2010 with an E.P.S. of 90 cents.  I do not own WMT shares, and view the foregoing as important only in what it says about the U.S. consumer.   

The decline in municipal bond ETFs and CEFs has the flavor of manipulation to me, as if some hedge funds were trying to induce a selling panic which has already been successful.  The bond CEFs which will generally have relatively low share volumes are more susceptible to price manipulation than the ETFs.    With my recent capital raises, coming primarily from a shift out of stocks into cash, I have elected to continue buying the bond CEFs, corporate and municipal, leveraged and unleveraged, as they plummet in value.  However, I have decided to change my purchases from 100 share nibbles to 50 shares and to space the buys out more in time.   I will also change my distribution options on some of them, less than 1/2, to reinvestment into additional shares. 

An important part of investment strategy is the shift in asset allocations based on a dynamic, as distinguished from a static,  process.  Instability & Volatility in Asset Correlations  Static v. Dynamic Asset Allocation More on Failures of Standard Asset Allocation Models and Target Funds/Use of Volatility in an Asset Class to Make Adjustments to an Asset Allocation (post from May 2009-I understand GS recently launched a fund using volatility to make asset allocation decisions, see weekend article in  WSJ under "Go Anywhere Funds")

This process also requires a continuous assessment of the relative value of assets in real time.  Back in October 2008, when I started to write this blog, that process led me to a niche type of investment, called trust certificates, that represented an undivided interest in the bonds owned by the trust, as well as floating rate equity preferred stocks with guarantees like METPRA, REIT preferred stocks, Synthetic Floaters, European hybrids and exchange traded baby bonds. Trust CertificatesAEgon Hybrids ING HybridsAdvantages and Disadvantages of Equity Preferred Floating Rate Securities Floaters 

When I first discussed AEB for example, it was selling at $7 per share, LIBOR AND THE AEGON FLOATING RATE PREFERRED STOCK (Oct 2008).  In retrospect, this proved to be an excellent price to initiate a position.  However, in the ensuing months, the price of this security fell to $3.  The moral of that story is that I may ultimately be proven right about the asset class being undervalued and rewarded for my assessment, but it may look like that I made a mistake for weeks or even months.

I was rewarded quite soon for the shift out of short term bonds into stocks in  March 2009 (see posts staring in early March 2009).  These  kinds of asset allocation shifts are absolutely necessary during a long term secular bear market in one or more major asset classes, and needs to be accelerated in periods where the volatility indexes are in what I call an Unstable VIX Pattern. Vix Asset Allocation Model Explained Simply  VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Current Status of The Vix Asset Allocation Model Signal (August 2010 post) The alternative is go nowhere  for fifteen years or so, and to lose ground to inflation. Buy and Hold or Dynamic Asset Allocation/Trading: Long Term Secular Bull and Bear Markets 

While security selection is certainly important,  asset allocation is the key. I mentioned in a comment to the an earlier post that I will underperform the market for the remainder of the year in the event stocks rally into year end. I outperformed in 2008 due to the shift out of stocks into short term bonds and cash. Buy High & Sell Low /Retrospective on the Good & Bad (October 2008) If stocks had continued to move up in 2008, I would have significantly underperformed my benchmark of the S & P 500. As mentioned in that comment and in prior posts, my goal every year is to beat the S & P 500 with a balanced portfolio,  hopefully designing a portfolio that is less volatile and risky than that market average while ultimately performing better. And do that successfully, I have to be mostly right in my asset allocations even if my timing is off some.   

Over the past several weeks, it is apparent to anyone reading this blog daily that I have shifted money out of stocks into cash. I see some value in the closed end bond funds, whose yields and discounts to net asset value are increasing by significant amounts daily. Market pricing of those securities has become irrational in relation to the price movements of the securities owned by those funds, and the precipitous declines in those funds suggest to me price manipulation. So I am adding some shares to those funds each trading day now, and will continue to do so if and when they decline further in their market prices. Based on the price action in the bond CEFs yesterday, you would not have known there was a robust rally in the treasuries as well as a recovery in LQD, the ETF for investment grade corporates.  The thirty year treasury rose 2 12/32, while the 10 year advanced by 1 1/32. TLT jumped $2.33 or 2.48%. VCLT, a Vanguard ETF for long term corporate bonds, rose $1.26 to $77.77. 

The  ^VIX shot up 2.38 to close at 22.58 yesterday, spending only seven days below 20.  So far, the swing trade, which involves selling stocks when the VIX falls below 20, and buying them back on spikes to the high 20s or above, continues to work, which is a characteristic of the whipsaw movement of a Phase 1 Unstable Vix Pattern.  

1. SOLD 100 GGN at $18.13 on Monday in the Roth IRA (see Disclaimer):  I simply can not maintain a bullish stance on the price of gold at current levels.  I bought 100 shares of GGN, a CEF that invests in gold mining and other natural resource stocks  at 17.41 in October and will collect one monthly dividend.  I may buy this one back when and if there is a substantial correction in gold mining stocks.  GGN closed at $18.14 on Monday, and had then a net asset value of $17.57 per share.  I almost bought these shares back on Tuesday in a taxable account.  

 2. Sold 50 DKQ at $23 on Monday (see Disclaimer):    DKQ is a trust certificate containing a senior bond, originally issued by May Department stores, now part of Macy's.  The TC has a lower coupon at 6.25% than the underlying bond.  At the $23 price the yield is around 6.79%.  Fitch and Moody's rate the underlying bond in the junk category.  FINRA I bought those shares over a year ago at $15.95.  I have bought and sold this TC, and no longer have a position in it.  When I first started to discuss it, it was trading at around $10.  TRUST CERTIFICATE MACY'S BOND DKQ

3. Sold 100 of the ETF MLPI at $29.93 for a ST Capital Gain in a taxable account on Monday (see Disclaimer):  The purchase of those MLPI shares was made  at 25.9 in July.  This is pure profit taking and a further indication of my increased caution. 

4. Sold SFH at $10.85 on Monday (See Disclaimer):  This is one of those sort of "principal protected notes". Bought 200 SFH at 10.18  When I sold the shares, I was assuming that Bank of America was highly likely to pay off the note, shortly after the first "observation" date on 11/29, at $10.955 per share.  After thinking about it for a few seconds, I did not see any reason to hang around for a few more bucks, particularly when the LB has an itchy trigger finger. 

5. Sold 50 of 100 PFS at 14.4 on Tuesday (Regional Bank Stocks' basket strategy)(see Disclaimer):  I pared this position by selling my higher cost shares, using FIFO accounting, which were bought at 12.74 last August. I am keeping the shares bought shortly after the first odd lot at 11.68.  PFS popped over 5% on Tuesday on news that it would be added soon to the S & P 600 small cap index. I view that kind of pop as artificial and usually temporary, and will generally pare a position whenever it occurs.  

I am keeping track of the realized gains in the regional bank basket in Item # 3  2010 Realized Gains Regional Bank Stock  The unrealized gains have slipped some over the past few days, now standing at $4017.  As I would expect in a large basket, most of the unrealized gains are concentrated in a few issues.  As of yesterday's closing prices, these include the following:

50 WBS at + $ 627
100 NYB at  + $557
100 WASH at + $526
50 UBSI at + $520
100 CZNC at + $433
100 NHTB at + $359
100 FFIC at + $206
50 WSBC at  + $198.5  50 RNST at +$188    50 CCNE at + $179   50 MBVT at + $170   50 STL at + $138 50 TRMK at +$136 and 50 PFS at $107.5  (13 in the green below a $100 and 10 losers with an unrealized loss of $1051 led by PBIB at  -$317 and VLY at  -$242)

6.  Bought 50 of the investment grade term corporate bond CEF IGI at $20.05 in the Roth IRA and 100 shares at $19.85 in a taxable account, both on Tuesday (see Disclaimer):  Before buying this CEF again, I checked on the price of LQD, an ETF which also contains U.S. investment grade corporate bonds.  At the time of my trade, LQD was up 37 cents.    IGI, an investment grade bond CEF, which is unleveraged, had fallen 77 cents or over 4% when I made this purchase.  This was occurring at a time when I believed the value of the underlying bonds had increased in value during the trading day, up to that time.   Later, I noticed a small loss in LQD at around 10:30 and then bought 100 IGI at $19.85, down $1.05 per share at that point.   It was at that time that I decided to spread out my orders more in time and to reduce the size to only 50 share odd lots.

I have previously discussed this unleveraged bond CEF in detail. Bought 100 CEF IGI at $19.89 Sold 100 IGI at 21.26 Bought 100 IGI @ 21.04

As of the close on 11/15, IGI had a net asset value of $21.43 per share.  Legg Mason - IGI - Western Asset Investment Grade Defined Opportunity Trust Inc.  Dividends are paid monthly. A list of the current holdings can be found at the sponsor's web site: IGI Holdings

At a total cost of $19.85, the yield based on the current monthly dividend rate of $.1045 would be about 6.32%.  The dividend will be a tad higher in December due to some capital gains realized by this fund. /press_release/ -IGI_Dividend_November_2010.pdf

IGI closed yesterday at $20.34, down 46 cents or 2.21%, and traded as low as $19.83.

The net asset value rose on Tuesday to $21.49 from $21.43.  The discount expanded to -5.35.

IGI is ex dividend today.

7.  Bought 50 shares of the leveraged corporate bond CEF HPF at $17.55 in the Roth IRA and at 17.76 in a taxable account (see disclaimer):  I strongly suspect that this CEF, along with many others, has been subject to price manipulation to the downside, at least during the past several trading days.   When I added 50 shares on Tuesday at $17.55, this CEF, with mostly investment grade bonds, had declined from yesterday's close of $18.68 to $17.55, a $1.13 decline or 6%.   PGX, an ETF with similar holdings, was down less than 1% when I placed that trade.  At a $17.55 price, the yield on HPF at its monthly current distribution rate of $.124 per share is around 8.48%.   

I thought that the pricing in HPF yesterday, as well as most other bond CEFs, was most likely due to market manipulation by one or more funds, deliberating driving the price down.  Given the relatively low volume in these securities, and their heavy concentration in ownership among individuals, the nefarious lot can work a lot of mischief with a couple of million dollars, or even less.      During the day,  HPF   fell as low as  $17.51 from its Monday close at $18.68 (a 6.26% decline intra-day).  The net value was at $20.36 on 11/15, with the discount then at -8.25.  There was a small decline in NAV on 11/16 to $20.22, a 14 cent drop from Monday's number (.00687% actual decline in NAV vs. market price decline of .0626% intra-day). Based on the closing price on 11/16, the discount to net asset value expanded to -9.05. 

The remaining trades from Tuesday will be discussed in the next post.    This kind of volatility will cause me to do more trading, selling some positions for gains and re-allocating capital to new positions viewed as potentially more rewarding. 

No comments:

Post a Comment