Bought 100 SSRAP at $17.25 (TC-Underlying Bond from Sears Acceptance)/Case Shiller-Worrisome/Bought 500 FAX @ 6.71/Sold: 100 XLU @ 31.39, 50 EBTC @ 13, 100 BAB @ 24.78/Bought 1 SuperValu Bond @ 97.8 Maturing 2014

The Case Shiller index for home prices in twenty metropolitan areas declined 1% in October compared to September, representing the fourth consecutive monthly decline.   The decline of 1% was after a seasonal adjustment. Before the seasonal adjustment, the decline was 1.3%.  www.standardandpoors.com  Every metropolitan area experienced a decline in October.  The largest percentage declines were in Atlanta (-2.9), Detroi (-2.5%), and Chicago (-2%).   The 20 metropolitan area index is about where it was in 2003.    These numbers suggest that a double dip decline in housing prices is a realistic possibility.  Rosenberg may end up being right in his prediction of a housing double-dip.  CNBC.com

The long treasury bond ETF, TLT, had another bad day, falling 2.29% to close at $91.61.   Selling accelerated after the five year note auction received the lowest bid-to-cover ratio since June. The yield was 2.149%. Recent Note, Bond, and TIPS Auction Results  The treasury sold 42 billion in five year notes at that rate. Is anyone interested in feeding the beast at 2.149% for five years?  The Fed bought 6.78 billion in treasuries yesterday maturing between July 2013 and November 2014 as part of QE 2. Federal Reserve Bank of New York - Permanent Open Market Operations

1. Bought 500 of the Bond CEF FAX at $6.71 and Sold 100 XLU at 31.39 on Monday (See Disclaimer):  This pared trade was done primarily to increase my cash flow. FAX is a leveraged bond CEF that invests primarily in Australian  government and corporate bonds, though the fund also owns bonds issued by countries and corporations from other countries in the Asia-Pacific region, including South Korea, Singapore, India, Indonesia, Hong Kong, Malaysia, and China.    Asia-Pacific Income Fund, Inc.  As of the market close on 12/27, this bond CEF was selling at a 7.44% discount to its net asset value per share of $7.26.  It went ex dividend for its monthly distribution of $.0301 per share yesterday. 

FAX has a higher current yield than XLU and pays monthly dividends.  At a total cost of $6.71,  FAX yields about 6.25%. I just bought XLU at 30.83  and will receive one quarterly dividend. I also bought FAX to achieve more diversity in my international bond portfolio.  Morningstar rates this fund 3 stars.

This is a link to FAX's last filed Form N-Q that lists its holdings. 

This is a link to the last SEC filed shareholder report for the semi-annual period ending in April 2010: Aberdeen Asia Pacific Income Fund, Inc.  I focused on the overall credit quality of the fund's holdings shown at page 6 of that report.  As of 4/30/2010, 67.9% of the assets were rated "A" or better, with 31.8% at AAA.   (21.1% in junk categories and 11% in the lower tier of investment grade)  

I would add a caveat about this fund.  During the Dark Period, I was able to buy shares of this fund at $3.38 per share.  I calculated then that the fund was selling at close to a 42% discount to its net asset value. Some Nibbles Got Filled: JZE, PJS, INZ and FAX ( Post Dated: 10/10/2008) That fact shows that this leveraged bond CEF was vulnerable to price depreciation due to individual investor panic.

FAX closed yesterday at $6.67, down 2 cents.  The discount to net asset value expanded to 8%. WSJ.com

Part of my rationale for this purchase has to do with my opinions about the potential outperformance of bonds from the Asia-Pacific region.  Some of my opinions on that subject were voiced by Bill Gross in one of his newsletters titled Ring of Fire and by Mohamed El-Erian in a Barrons interview.  Item # 3 El-Erian Interview Barron's &  Bill Gross:The New Normal (see also: Near the End of A Long Term Bull Market in Bonds Staring in the Early 1980s? (July 2010)

2. Sold 50 of 150 EBTC at $13 (Regional Bank Stocks' basket strategy) (see Disclaimer): I placed a limit order to sell 50 of my 150 shares of EBTC at $13 before the market opened yesterday, and the price just blew through it.  EBTC closed at  $13.45 yesterday.   I sold my highest cost shares yesterday, using FIFO accounting, which were bought at 11.75.  I mentioned that this was my plan when I added 50 shares at  $11.27 (Item # 3 Post Dated 12/17/2010). This is what I said then:

"Since I am trading some in the regional bank basket to book profits and to lower my average cost where possible under FIFO accounting, I may at some point sell 50 shares of EBTC purchased at 11.75, the first shares purchased, and keep the shares bought at $10.33 and at $11.27.  While that may sound picayune to most everyone, it is one way that I manage risk in my stock portfolio.   Other risk control measures include of course security selection, the decision on the amount to invest in each security, and the vast dispersal and variety of holdings and asset classes."


I am also keeping the shares purchased at $10.33.

3. Sold 100 of 150 of of the ETF BAB at 24.78 and Added 1 SuperValu Bond at 97.8 maturing in 2014 (see Disclaimer):  I decided to take a small loss on my recently purchase shares in BAB.  This bond ETF owns Build America bonds which have not been faring well lately due to the significant correction in long treasury bonds which is continuing and the increasing concerns about municipal bonds. I bought those 100 shares in July at 25.98.  I substituted an individual bond purchase that will provide more yield and a far shorter maturity than the average duration of the bonds owned by the BAB ETF.

Interest rate risk for the SuperValu bond, which matures in 2014, is practically non-existent.  There is a risk, associated with interest rate risk, that I call the risk of lost opportunity. If interest rates continue to rise, this bond may fall in price some, all other variables impacting price remaining the same.  Consequently, if that happens, I lose the opportunity to buy the bond at a lower price, creating more of a current yield and YTM, with the funds deployed yesterday.  I view that risk to be minor and immaterial for such a short term bond.

The most important risk is the credit risk associated with the junk rated SuperValu bond.  And, I just increased the risk some to me by extending my exposure from 2 to 3 SuperValue bonds, with one being a long bond originally issued by Albertson's that had a tempting yield for the OG.   Item # 3   Bought: 1 SuperVaLu Bond at 98.73 (5/1/2016 maturity); Item # 6   Bought 1 Albertsons Bond (now part of SVU) at 77 (8/1/2029 maturity).

The bond purchased yesterday has a 7.5% coupon.  It is rated B2 by Moody's and B+ by S & P according to the information at FINRA.   The bond matures on 11/15/2014.  Interest payments are made semi-annually in May and November.  It is a senior bond according to the prospectus:  Final Prospectus

My confirmation states that the current yield at my cost is 7.668% and my yield to maturity is 8.169%.

I read a report in  Barrons yesterday that grocery stores will be a principal beneficiary of the Durbin amendment, which will have the effect of lowering interchange fees for debit cards.

I would feel better about these  SVU bonds if the company eliminated its too generous common stock dividend and sold more of the stores acquired in its Albertson's acquisition.  There was a report at Reuters a few days ago that SVU had not found any takers for the Shaw grocery chain, more than 175 stores in New England, that it acquired in 2006 as part of its buyout of Albertson's.

Hopefully the earnings estimates for SVU are not pie in the sky wishes. The consensus estimate for FY 2011, ending next February, is for an E.P.S. of $1.48 according to YF. 

4. Bought 100 SSRAP at $17.25 (see Disclaimer): For the past year, I have periodically placed a limit order to buy 100 shares of the trust certificate SSRAP which contains a senior bond from Sears Roebuck Acceptance Corporation as its underlying security.   I had reached the point many months ago where I had no expectation of a fill when I placed an order and was shocked to see an execution yesterday at $17.25.  

This security was  delisted from the NYSE in 2005 and now trades on the "Grey Market", where there is no transparency. Suspension of the obligation to file reports was made under Rule 12(h)-3: Rule 12h-3 -- Suspension of Duty to File Reports under Section 15(d)  Bid and ask prices are not displayed in the grey market, and there are no market makers.  The trades are shown at the pink sheet exchange under the  SSRAP symbol.  Volume was heavy yesterday for this security at 4,970.  Some days, it does not trade at all.  Needless to say, market orders can never be used for a Grey Market listed security. 

This TC has a 7.25% coupon on a $25 par value.  The bond and the TC mature on 6/1/2032.  At a total cost of $17.25, my current yield is around 10.5%.  Interest payments are made semi-annually on 6/1 and 12/1. 

This is a link to the prospectus for SSRAP: www.sec.gov 

The underlying bond is rated junk at Ba3 by Moody's and BB- by S & P.  

This is a link to the FINRA information on the underlying bond.  

Although SSRAP was delisted, the trustee still collects interest on the bonds owned by the trust and distributes those funds to the owners of the TC SSRAP.  I actually checked that information at the trustee's web site, since nothing is being filed at the SEC anymore as a result of the delisting.    I found that data at www.etrustee.net, and just entered the Cusip Number 80411A201.  This is a snapshot of the recent distributions: 

The yield to maturity at a total cost of $17.25 is 11.15% according to the Morningstar Bond Calculator.  

The prospectus for the underlying security can be found at www.sec.gov, originally a debt issue of the Sears Roebuck Acceptance Corporation (SRAC), then a wholly owned subsidiary of Sears. There are some requirements in the prospectus that SRAC maintain a ratio of earnings to fixed charges of at least 1.1 in every fiscal quarter. If it falls below that amount, Sears is obligated to make up the difference (See page. 8 of prospectus) . Sears Roebuck is now part of Sears Holdings, Form 10-Q, along with Kmart Holding Corporation.

Given the difficulty in purchasing or selling this security, it is not surprising that it provides a much better yield than the underlying bond, which I could have bought yesterday.   Based on a trade of 82 in the bond market, the current yield of the underlying bond, which has a lower coupon than the TC, is around 8.53%. FINRA The YTM would be higher of course. 

Sears common stock trades under the symbol of SHLD.  Sears is expected to earn 91 cents in its F/Y ending in January 2011.  

SSRAP closed at $16.73 yesterday, down 52 cents, trading in a range of $16.73 to $17.5.

Trust Certificates: Links in One Post