Friday, December 3, 2010

FRD/Added 50 XFB @ 25.39 & Sold 50 NBB @ 19.24 and 50 GJN at 22.08 in the Regular IRA/Bought: 50 ARY at 24.2, 50 ARCC at 16.89

The stock market continued its bullish move yesterday after better than expected reports were released on housing and retail sales.  The National Association of Realtors reported an unexpected 10.4% rise in pending home sales for October. The Thomson Reuters same store sales index increased by 6% in November, compared to an estimate of 3.6%.

Goldman Sachs also released a bullish 2011 forecast for stocks, forecasting a year end target of 1450 on the S & P 500 by the end of 2011. WSJ The GS forecast can be found at Seeking Alpha and at the zero hedge blog.

Friedman Industries (FRD), a purchase in the LOTTERY TICKET category, declared a special 50 cent per share dividend payable in December and increased its quarterly cash dividend to 11 cents per share. The firm had doubled its dividend to 8 cents earlier in the year. Item # 5 FRDI also discussed FRD in a recent post, Item # 3 FRD, and noted that my purchase at $5.76 was probably below the firm's liquidation value.

1. Sold 50 NBB at $19.24 and Bought 50 of of the Trust Certificate XFB at $25.39 in Regular IRA on Wednesday (see Disclaimer): NBB is the Build American Bond CEF sponsored by Nuveen. I discussed the TC XFB in a post from a few days ago. BOUGHT  50 XFB at 25.5. The TC represents a beneficial interest in the assets of a trust.  In the case of XFB, the assets of the trust are senior bonds issued by News America and guaranteed by News Corp. I will just copy my earlier discussion of this TC:

"The underlying security in XFB is an investment grade senior bond issued by News America, a wholly owned subsidiary of News Corporation. The TC has a greater coupon at 8.125%, compared to the underlying bond's coupon of 7.75%.  he underlying bond is selling at a significant premium to its par value. FINRA  I suspect that XFB would be selling at a higher price now without the call warrant attached to the TC.

As discussed in many earlier posts, the owner of the call warrant has the option, not the obligation, to redeem the trust certificate, pay par value plus accrued interest to the TC's owners,  and take possession of the bonds. When the underlying bond trades at a premium to its par value, as is the case with the News America bond, it would be profitable for the owner to exercise this option. The mere existence of that option, in my judgment, will restrain the price appreciation potential of XFB above its par value plus accrued interest.  Since XFB just went ex interest, it is really not carrying any meaningful accrued interest at the current time. That is another reason for limiting my purchase now to just 50 shares. I would not fool with buying even 50 shares of this TC, particularly at above par value, unless I had just run out of alternatives. 

The underlying bond in XFB was originally issued in 1995, and I could not find any filings at the SEC's web site for either News Corp or News America that far back. I therefore could not read the guarantee reportedly given by News Corp in that original indenture for this News America bond. As described in the prospectus for XFB, News Corp and certain of its subsidiaries guarantee News America's obligations. The News America bonds are listed by Finra under the News Corp bonds in the Search Results.

This is a link to the trustee's last filed distribution statement, 
Trustee's Distribution Statement, and to all of the SEC filings for XFB."

The TC XFB has a higher yield than the bond CEF NBB. With NBB, I am in effect charged with management fees every year and have the risks associated with a CEF buying securities with leverage. Those risks include the double whammy of higher interest rates lowering the value of the bonds own by the fund that is compounded by buying those securities using borrowed funds whose interest cost is rising as the value of assets purchased with those borrowed funds decline.  The triple whammy is when the discount to net asset value increases as a result of the foregoing. With XFB, I face heightened credit risk associated with owning a bond from a single issuer, as distinguished from a diversified bond fund. 

However, I do not incur any ongoing expense after my initial small brokerage commission, and I am not exposed to some of the risks inherent in owning any leveraged bond fund. I do have interest rate and credit risk.  I am not now concerned about the credit risk. I am more concerned at the moment with a call by the owner of the call warrant. 

I just bought the NBB shares @ 18.4. I also own 100 shares of this bond CEF in a taxable account.  NBB closed yesterday at $19.47, a 2.53% premium to its net asset value of $18.99.

2. Partial Call of the Exchange Traded Bond TDA (own):  I previously noted that I expected a partial call of this exchange traded bond after Telephone and Data Systems recently sold another bond, with a lower coupon and a longer maturity, that is also traded on the stock exchange under the symbol TDE.

TDS did announce yesterday that it will redeem $217.5 million of the 500 million aggregate amount of TDA outstanding on 12/27/2010. The redemption price will be the $25 par value per share plus accrued interest.  TDS Announces Partial Redemption of 7.6 Percent Series A Notes 

3. BOUGHT 50 of the exchange traded senior bond ARY at $24.2 and 50 common shares of the BDC ARES Capital (ARCC) at $16.89-Main Taxable Account on Thursday (see Disclaimer): ARY is a new exchange traded bond. I am familiar with the issuer, a business development corporation (BDC) by the name of Ares Capital Corporation. I also bought 50 shares of the the common stock, ARCC, at $16.89.  Both purchases are part of an ongoing effort to raise my cash flow into my brokerage account. All cash flow is devoted to buying additional securities.   

ARY has a 7.75 coupon on a $25 par value. It matures in 2040. Interest payments are to made quarterly. The current yield at a total cost of $24.2 is around 8%.   

Prospectus: According to the QuantumOnline site, this bond is rated investment grade by S & P at BBB and junk by Moody's at Ba1. The first record date is 1/1/2011 with the interest payable on 1/15/2011.  

ARY closed at $24.06 on Thursday, down 12 cents.

Exchange Traded Bonds:

I also bought 50 shares of ARCC at $16.89, the common shares of ARES Capital. 

This is a link to its web site: ARCC This BDC is currently paying a dividend of 35 cents per share, with the next ex date on 12/15. That works out to about a 8.29% yield at a total cost of $16.89. In the last quarter, ARES reported net investment income of 37 cents per share and a core E.P.S. of 38 cents. The net asset value per share was reported at $14.43 as of 9/30/2010, up from $11.16 as of 9/30/2009. FORM 10-Q  In that 10-Q, the company lists its investments starting at page 3.

Ares Capital Corporation acquired another BDC called Allied Capital Corporation on 4/1/2010, thereby becoming the largest BDC. 

ARES recently sold 11.5 million common shares at $16.50. 

The current consensus estimate is for $1.26 in 2010 and $1.5 in 2011. ARCC closed yesterday at $16.90. 

4. Sold 50 of the synthetic floater GJN at $22.08 in the regular IRA (see Disclaimer):  GJN turned out to be an excellent investment considering the dullness of the security.  GJN was bought in April 2009 at $12 and has made monthly interest payments since that purchase. GJN is a trust certificate that I classify as a Synthetic Floater. It pays the greater of a 3% guarantee or 1% above the 3 month treasury bill rate, but no more than 8% per annum. Since the applicable rate is 3% now applied to the $25 par value, I am not receiving much in the way of interest. I consequently decided to harvest my profit and to invest in another bond with a higher current yield or an unleveraged bond CEF. 

S & P downgraded my two Dean Foods bonds to B+, four notches into junk territory yesterday, based on the firm's poor performance in the current competitive environment for milk products.

The remaining 5 trades from Thursday will be discussed in the next post. I am continuing to increase by cash flow by purchasing securities that generate income.  

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