Wednesday, December 8, 2010

Added 50 ARY @ 23.75/Bought 1 Mueller Water Bond & 1 United Refining Senior Bond at 95.5/Bought 50 JZS at 23.37/Bought Back 100 ERC at 15.63

For anyone interested,  the synthetic floater GJL is another TC that is no longer with us. Bought Another 100 of GJL at $20.6  Bought 100 GJL at $20.75 Sold 100 GJL at $23.85  This one was redeemed in an unusual way which is explained in this press release.  The owners of GJL received the $25 par value plus $.043151 in accrued interest plus a premium of $.99163 per certificate for reasons stated in the press release.  If I still owned the TC with the Burlington Northern bond (FINRA), I would be curious why the trustee has not sold the underlying bonds and redeemed that TC for the same reason.   Sold 100 of the TC GJX at 25.9  Sold 100 GJX @ 26.03  More on GJX (see page S-7 of the prospectus:

Yesterday was not kind to bonds.  Notwithstanding Bernanke's comments about inflation, many investors view yet another campaign of fiscal and monetary stimulus as having the potential to cause significant inflation down the road and simply do no believe that the FED will be able to stop it with the same "100%" certainty professed by Bernanke.  The OG was heard to say after hearing that comment by Bernanke that he was not 100% certain about anything, and was not one to engage in idle hyperbole.   LB understood, since it is 100% certain about everything, just like Uncle Ben.

When the long treasury gets hammered, which happened yesterday as TLT fell 2.19% and the 30 year treasury declined by 2 8/32, it is going to be a bad day in bond land.   Municipal bonds were subjected to another price correction, as manifested by the 1.46% decline in the ETF MUB.  Investment grade corporates faired better with the ETF LQD falling 1%.  The yield on the ten year treasury rose to 3.141%, hardly tempting for the Old Geezer who does not share the common belief about the U.S. being a AAA credit.

There was a failure so far to include an extension of the Build America Bond program in the agreement reached by Obama and the GOP.  While the headline in that WSJ article claims that municipal bonds fell due to that development, the decline was less than than treasuries on the long end. There is a rush to sell BABS before year end, which has likely hurt municipal bond prices.

The junk bond market, where I have been concentrating my attention lately, seems to like the something for everybody approach in Washington, as shown by the junk bond ETFS bucking the strong headwinds and actually rising some in value yesterday (see, e.g. JNK up .35%).  Of the foregoing bond ETFs, I own only JNK.   Lately, I have been busy constructing my own little junk bond fund, in amounts of course that will not make the OG a nervous wreck.   The recent buying of small amounts of junk bonds in the bond market, with an exposure limit of $3000 to each issuer, has caused the OG to hook up his IV of chill pills and Maalox.  

1. Bought 1 Mueller Water Products Bond @ 94.5 maturing in 2017  on Monday (see Disclaimer):  I currently own 100 of Mueller's common shares (MWA), with those shares bought in my LOTTERY TICKET category.  I have discussed Mueller in several posts.  My most recent discussion of MWA was a few weeks ago when I added 50 MWA @ 3.04.  I mentioned in that post that MWA had recently sold 225 million of 8.75% bonds maturing in 2020, Form S-4.  The bond that I purchased was an earlier vintage issue, maturing on 6/1/2017, and it has a 7.375% coupon.

The 2017 bond is rated B3 by Moody's and CCC+ by S & P according to  FINRA.  The 2020 bond is rated higher by both rating agencies, with Moody's at B1 and S & P at B+. FINRA The higher grades for the 2020 bond tells me that the 2017 is subordinated to the 2020.  The 2020 bond was selling at close to a 10% premium to its par value when I purchased the 2017 bond on Monday, giving it a current yield of about 7.95% and a YTM closer to 7%.  The 2017 bond has a current yield at a total cost of 7.8% but a YTM over 8%.   I will give more weight to a YTM number for a bond maturing within 5-7 years than a YTM for a long term bond.

The 2017 is what lawyer's call a "senior subordinated" note, which does give it a lower priority in the event of a bankruptcy compared to the 2010 bond.  The prospectus for the 2017 bond can be found at Form S-4 Registration Statement.  So, the senior bond is risky and rated junk and the "senior subordinated" 2017 bond is even more risky without question. I would emphasize that I bought 1 bond, and not 2.

My confirmation states that the yield to maturity is 8.327%. 

2. Bought 1 United Refining Senior Bond, maturing on 8/15/2012 at 96.3-Monday (see disclaimer):  United Refining is a privately held company owned by John Catsimatidis, ranked # 238 on Forbes' most recent list of richest Americans. This bond is a senior note maturing on 8/14/2012 and has a 10.5% coupon. This is a link to the prospectus:  Form S-4  Although United Refining is a privately owned entity, it does file reports with the SEC due to its outstanding bonds.  The last filed Form 10-K shows that the company had a loss for its F/Y 2010 of 76.134 million but did manage to earn money in 2009 (38M) and in 2007 and 2006.  URC's 4th quarter, Q/E 8/2010, was negatively impacted by rupture in a pipeline which delivers crude to URC's refinery. Press Release This is a link to the firm's web site that contains more information about it:  URC - United Refining Company

My confirmation states that the yield to maturity is 12.991% and that this bond is rated B3 by Moody's and B by S & P.  

3. Bought 50 JZS at 23.37 in Roth IRA on Tuesday (see disclaimer):  JZS is a trust certificate that represents a beneficial ownership in the assets of a trust. In this case, the trust owns senior bonds issued by the Goldman Sachs company maturing in 2033.   There are other TCs that contain the same bond, including one that I previously owned, DKW, which was called in full by the owner of the call warrant.  Alert on TC DKW-Exercise of Call Warrant/SOLD 50 OF 150 @ 25.20   Bought  50 DKW @ 23.07 Bought 100 DKW at 22.86 Sold 100 DKW @ 25.25 DKW is no longer trading as a result.

Two other TCs (HJG and DKP) containing the 2033 senior GS bond have received partial calls from the owner of their respective call warrants.      Both of those TCs are still trading, but both had both a lower current yield at the ask prices on Tuesday and a lower discount to par value than JZS on Tuesday.    On Tuesday,  DKP was trading at $24.6 which gave it a yield of around 6.1%.  HJG was selling at $24.25, giving it a current yield of about 5.95%.

At a total cost of $23.37, JZS has a current yield of about 6.2%, and was selling at a larger discount to par value.  All of these TCs containing the same 2033 GS bond have $25 par values, and mature on the same day in 2033.  

Of the other TCs containing this same security, I already own 100 shares of  PYB, which was selling at $23.1 last Tuesday, giving it a current yield of 6.24% at a total cost of $23.1.  The only reason for buying JZS with a slightly lower current yield and YTM compared to PYB, was that it most likely has a different call warrant owner.  It is possible for the owner of the call warrant for JZS to exercise it while the owner of the warrant for PYB fails to so so. (see, generally Item # 6 Call Warrants and Trust Certificates; Item # 2   More on the Call Warrant in TCsCall Warrant Exercised on JZE and JZJCall Warrant Exercised on Verizon TC

I have also bought and sold another TC with this same 2033 bond: Bought 50 PJI at 20.85 Sold 50 of 100 PJI at 21.35 Added 50 PJI at 20.17  PJI would have been a viable alternative to JZS last Thursday, but I could not fill an odd lot order at where it was trading.

I have previously bought and sold JZS in the same Roth IRA:  Sold 50 JZS @24.15  Bought 50 JZS at 22.95

JZS Prospectus:
FINRA Information on the 2033 Bond: FINRA
Underlying Bond Prospectus:

The 2033 bond is trading above its par value.  

4. BOUGHT Back 100 of the Bond CEF ERC at $15.63 on Monday (SEE Disclaimer):  This purchase brings me back up to 450 shares of this leveraged bond CEF.  I will generally try to maintain a position of between 100 and 450 shares.   I sold 100 shares at 16.27 in early October.  This bond CEF is listed under the category of "other Domestic Taxable Funds" in the CEF tables at the  As of 12/6/2010, the net asset value was $16.3 per share and the closing price was $15.71.  The NAV increased two cents on Monday from last Friday's close, as the market price fell 6 cents (14 cents based on my $14.63 purchase which was the low for that day).  

As previously discussed, ERC is a multi-sector bond fund that uses leverage.  Wells Fargo Advantage Multi-Sector Income Fund   Dividends are paid monthly at the current rate of $.1083.  At a total cost of $15.63, this works out to a 8.31% yield.  I have always taken the dividends paid by this CEF in cash.  And, I will trade the shares some to book profits and/or to lower my average cost.      

This is a link to the last filed Form N-Q: 

I discussed some of my prior purchases in the following posts: Added 50 of the CEF ERC at $14.14 (Feb 2010, also noting that the last prior purchase was 100 at  $12.96 on 7/30/09); Added 100 of the CEF ERC at 15.25 (Aug. 2010);    Added 100 ERC at 15.23 (Sept 1 2010)

This fund was formerly known as the Evergreen Multi-Sector Income Fund.  Wells Fargo acquired the Evergreen funds.  

This is a link to the last  SEC filed shareholders' report for the semi-annual period ending in April 2010.

Morningstar has a three star rating for ERC.

ERC closed at $15.63 on Tuesday.

5. AVERAGED DOWN on the ARES Capital Senior Bond ARY at $23.75 on Tuesday (see disclaimer):   ARY is a new exchange traded bond issued by Ares Capital, a business development corporation, that has a 7.75% coupon on a $25 par value.  The bond matures in 2040.   So there is significant credit and interest risk.    I discussed Ares Capital and this bond a few days ago:    Bought: 50 ARY at 24.2, 50 ARCC at 16.89

I had an email discussion with a reader about BDCs and ARY in particular.  Before the Near Depression, I thought that BDCs were riskier than banks for several reasons.  While both BDCs and banks make loans,  I thought that BDCs were making riskier loans, frequently to borrowers who would have trouble lining up the necessary bank credit for a variety of reasons. If Moody's was rating those private loans, many of them would start with the letter "C".  And, the BDC loans were also frequently unsecured loans.   Another difference was that the BDCs had to pay out at least 90% of their net income in dividends, so there was little in the way of capital retention.   The banks also had a low cost source of capital-customer deposits-and many could issue trust preferred securities at rates lower than a BDC's cost of capital.   While those are valid distinctions, past and present, the most important criteria is the judgment of those making the loans.   The Near Depression proved that the ability to avoid making bad loans is the most critical factor determining success or failure.     Many banks have proven that they are in a league by themselves in making improvident and reckless loans, and some BDCs needed to be rescued as a result of the Near Depression.  And, who could argue now that a bad loan is somehow remedied by having a security interest in the debtor's property?

For those interested in some recent articles about Ares and BDCs in general, there is an author, Nicholas Marshi, who has a large number of articles about them.

ARY declined 30 cents or 1.26% yesterday to close at $26.5.  But that decline is not bad compared to what happened to the long treasury.  I am not going to buy more of ARY, but may round my lot in the common to 100 shares.

I will discuss the remaining trades from Tuesday in the next post. 


  1. Leave it to John Stewart to expose Ben Bernanke as a liar, despite you wanting to call it something else, enjoy, everyone.

  2. Stewart's video is available at his web site:

    I had forgotten that Uncle Ben admitted the FED was printing money in his prior interview on 60 minutes. The FED creates money to buy the securities but Bernanke has refined his pitch on the meaning of printing money to include only money that is created and in circulation, as distinguished from sitting in some bank vault gathering dust.

    Randall Forsyth in his Barron's column aptly noted that Ben's new definition, which includes only money in circulation, was the least relevant factor in determining "money stock" , more important to drug dealers and other sorts who favor cash transactions, and was just a "silly" assertion.

    So rather than saying that our Uncle Ben has lied, I would just say that he has further refined his views after much reflection. Besides it needs to be called something else other than money creation to keep those foreigners buying out debt.