Monday, December 13, 2010

"Deficits Don't Matter"/GE/Bought Back 50 shares of GDO at 17.8/Added 50 of CWHN at 20.65

I usually look at the top percentage losers everyday.  Sometimes, I see  something that may be interesting.  On Friday, the two leading losers were the common stock of the Great Atlantic & Pacific Tea Co and its junk rated exchange traded bond, GAJ. The bond closed at $6.12, down 59.34% on Friday.  I have never owned either one.  Apparently, there was a rumor on Friday that A & P was preparing a bankruptcy petition which turned out to be true.  S & P downgraded A & P debt to CCC in July.  A company whose debt rating starts with the letter "C" makes the Old Geezer nervous.    The Great Atlantic & Pacific Tea Company was once the dominant grocery store chain in the U.S. and had over 16,000 stores by the early 1930s.   I mention the foregoing only to highlight the dangers of junk bonds.  While I have done well investing in them, I fully expect to be caught holding one when the bottom falls out.  A debacle just comes with the territory.  

I have occasionally bought and sold Kroger common shares, which is the only grocery store that I have ever purchased.    SOLD 100 KROGER AT $21.9 Sold Kroger at $22.25-bought at $19.95  In the grocery store space,   I currently own 2 Supervalu bonds and would like to see SVU eliminate its common dividend now. (recent article on SVU at  TheStreet)

This is a link to Richard Bernstein's "Eleven Themes" for 2011.  

The Treasury reported last week that the deficit for November was 150.394 billion  If Obama's deal with the "fiscally conservative" GOP tribe members becomes law, an economist from J P Morgan estimated that the current fiscal year will have a 1.5 trillion dollar deficit and another 1.2 trillion shortfall in 2012. The federal government's fiscal year ends in September.   The 2009 deficit was at 1.42 trillion followed by 1.29 trillion in the 2010 fiscal year.   Normally, I would just make a few comments about those numbers, pointing out the irony of the "deficit commission" finalizing its report at the same time the politicians agree to add another 900 billion to the deficit.  Or, I might reiterate the point that the nation's debt was less than 1 trillion when Ronald Reagan, the  "deficits don't matter" GOP President, assumed office in 1980. 

 Instead, when I heard that number, my first thought was a set of memories from my grade school days.  Personally, I thought that I was a model child, but the teachers in grammar school had a different opinion.  I was frequently requested to write certain phrases on the blackboard, like "I will not talk in class", or to stand in the corner facing the rear of the classroom.  When those measures did not work to tame what I would call my independent streak, I was sent down to the principals office for a meeting with his wooden paddle.  I still remember the shape of that paddle and the sound it made reverberating down the hall for all to hear.  And, then it occurred to me why I remembered those incidents from long ago when I read about the November deficit.  Maybe the politicians from both tribes need to write some phrases a few thousand times on a blackboard too, something like "I will be responsible", and then receive a few good pops on the derriere when they fail to comply which is of course a certainty.  

As noted by Peter Peterson  many years ago, "the  Republicans  have become a far more theological, faith-directed party, not troubling with evidence."  And, that is even more true today.   

In his column this week Alan Abelson summarized some of David Rosenberg's current opinions.  Rosenberg is still a bond bull and he calls the current yield curve "insanely steep".  He expects real gross national product to rise 2.25% "or so" next year.  The new tax and monetary stimulus will simply offset the drag caused from the expiring 700+ billion stimulus, passed at the start of Obama's administration.   I would agree with his prediction that unemployment will stay over 9% in 2011.  Rosenberg also references a RealtyTrac prediction that housing will not bottom until 2014.   The comment made by RealtyTrac's Rich Sharga was "We don't see a full market recovery until 2014".    Reuters

In China, inflation rose 5.1% in November.  

1. General Electric (owned):  GE rose 3.44% on Friday to close at $17.72 after raising its dividend for the second time this year, based on the firm's growing confidence in the rebound of its finance unit.   The dividend had been slashed from 31 cents to 10 cents in 2009, and was raised to 12 cents earlier in the year.  The latest raise was to a 14 cent quarterly rate per share.   GE   I have been buying GE shares mostly in a $10 to $16 range whenever the spirit moves me, and have been reinvesting the dividend. If and when the share price reaches $25, I will change the distribution option to cash payments.   My last two purchases, including commission cost, was just 30 shares at 15.64 last June and 40 shares on July 2 at $14.08.  Other adds in 2009, including commission costs, were at $15.48 in December, 50 shares at $12.54 on 1/23; 30 shares at $11.16 on 2/18; and 30 shares at $12.02 on 6/24.  

2. Bought Back 50 of the 75 shares of the bond CEF GDO Previously Sold in the Roth IRA at 17.8-Thursday (see Disclaimer):  I  sold 75 of my 175 shares of GDO held in the Roth IRA last October  at 19.24 and bought back 50 of those 75 shares at $17.8 last Thursday.  If I add anymore it will be in a taxable account where I am reinvesting the dividends to buy additional shares.

GDO closed at $17.8 on Thursday down 32 cents or 1.77%.  While GDO's market price had fallen by just 4 cents from Friday 12/3 to Thursday's close, the market price had declined 55 cents.   The daily net asset value can be found at the and at Western Asset Global Corporate Defined Opportunity Fund Inc..  Since inception the fund has been paying monthly dividends at the rate of 13 cents per share.  GDO  Distributions   The latest disclosure of the fund's holdings can be found at  GDO Holdings.

GDO is  a global corporate bond fund  whose average credit quality is investment grade.  One of the main features for me, as explained in the prior post, is that it will liquidate in 2024.  For my convenience I will just copy some of my earlier comments on this CEF:

"The liquidation date is 12/2/2024. This makes the fund more like an individual bond rather than the typical bond fund which has no maturity date. This can become very relevant in my opinion when and if the bond market enters into a long term secular bear market, similar to the one that started in the late 1940s and ended in the early 1980s.

Unlike an individual bond, most bond funds do not have a maturity date when there is a legal commitment to a sum certain back (i.e. the par value of the bond). If bonds are falling in price over an extended period, which would be the case in a long term secular decline for bonds, the investor in a bond fund may never receive the original principal investment back and could even lose enough to wipe out the value of the interest payments. While GDO does not promise to return the original $20 IPO price, it has a better shot of hitting that bogey with a liquidation date less than 15 years into the future."  Bought 100 of the CEF GDO at 18.6 

I elaborated in a another post as follows: 

"A reader asked me the other day my opinion about whether the rewards outweighed the risks for the closed end fund GDO, which invests in mostly investment grade corporate bonds on a worldwide basis. I think that it is important for investors to evaluate and identity all known risks for a security, and to carefully examine the downside with every investment. GDO has its own risk/reward profile that needs to be assessed by each individual, based on their own particular circumstances. I thought that I would copy my response and then add a few more comments:

How is this for an answer? It is all relative, which is something that your grandmother might have said.

GDO would have less interest rate risk than a similar bond fund with no liquidation date in a rising rate environment.

It is also relative to the individual. There could easily be a period between now and 2024 where intermediate term bonds lose a lot of value due to a spike in interest rates. If an individual has to sell GDO, or panics and sells, during that period, then there is more interest rate risk under those circumstances than for another individual who holds until the liquidation date. The liquidation date in 2024 will reduce but not eliminate interest rate risk.

You still have credit risk, which would be present in any investment grade bond fund. Credit risk may ultimately be more important in a bond fund with a 14 year life than interest rate risk, for those holding for the entire term which I may do.

You also have some foreign exchange currency risk with GDO in that it holds some foreign bonds.

Lastly, for us nerds, there is always the risk of lost opportunity. If your funds are tied up in any kind of bond fund which is going down in value due to interest rates rising, you lose the opportunity of investing in the higher interest rate environment for more yield.

However, assuming the fund is managed competently with the liquidation date in mind, keeping most bond maturities within that 14 year window, this cuts down on interest rate risk compared to an open ended bond fund with no termination date. The later fund will be losing value during a long period of rising interest rates (a long term secular bear market in bonds) with no out for the investor."   More on GDO

Assuming a continuation of the 13 cent per month dividend, the yield at a total cost of $17.8 is around 9%.   

3. Added 50 of the Senior bond from Commonwealth REIT (CWHN) at $20.65 on Friday ( see disclaimer):    This purchase brings me back up to 100 shares of this senior bond.   I bought the other 50 a few days ago at  21.  I also own the common shares of  CommonWealth Reit (CWH).   This senior bond matures on 11/15/2019 at $20.  The coupon is 7.5%.  Interest payments are made quarterly.  At a total cost of $20.65, the yield is about 7.26%.  I decided to go ahead and round up the lot after checking the yields of other CWH senior notes traded in the bond market.  I noted at the FINRA  site another CWH bond with a 2020 maturity and a 5.875% coupon selling at around its par value.   That bond was floated in September:   

I have also previously bought and sold this issue:  Bought 100 HRPN at 19.32 Added 100 HRPN AT 19.15 (symbol change to CWHN in July 2010) Sold 100 CWHN at 21.22 in Roth

Exchange Traded Bonds 

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