KRH-Exercise of Call Warrant/SGL/Bought 50 GFW at $24.82/EXC

I have recovered enough to write a small post for today.  

Back in August, I randomly selected five blue chip stocks whose dividend yields then exceeded the yield of the 30 year treasury bond.  The purpose of the selection was to compare their performance to the long treasury bond which was then being recommended by David Rosenberg.  More on Barron's and David Rosenberg I used the ETF TLT as a proxy for the long long treasury. I hypothetically invested $50,000 in TLT and $50,000 in the stocks.  As of yesterday's close, the stocks were valued at $56,181.84 and TLT had fallen in valued by over $6500.  In this comparison, I am not keeping track of the dividends which would favor the five stock selection.

TLT vs. 5 Blue Chips: The David Rosenberg Test 

   

Since August, TLT has been in a downward waterfall which has only accelerated since the FED formally announced QE 2. The selling picked up some steam after Obama and the "fiscally conservative" members of the GOP agreed to extend the Bush tax cuts for everyone and to add new ones. TLT closed at $105.56 on 10/6/2010 and at $92.14 yesterday, down 1.46%. The decline in the longer dated treasury paper is taking down all investment grade debt, taxable and tax free, and is contributing to the current downdraft in bond CEFs.  Even after that large decline in the longer dated treasuries, I still have zero interest in them.  

Bank of America Merrill Lynch has a price target of 1400 on the S & P 500 for 2011. Reuters

Barrons.com has a favorable article on one of my core electric utility holdings, Exelon (EXC), that is currently under water.  Given that EXC has a large merchant power business, operating the largest fleet of nuclear power plants in the U.S.,  the company will hopefully prosper when electricity demand returns. The author of that article argues that EXC could return 40% over the next 18 months, given its current 5.2% dividend yield and a 10 P/E (a 17% discount to the broader electric utility index ) "if" electricity demand returns. I discussed the same issues when I initially purchased shares and when I averaged down thereafter. I am reinvesting the dividends. Bought 100 EXC at 44.25 (Feb 2010) Added 30 EXC @ $41 (11/2010).

1. The Owner of the Call Warrant for the TC KRH Has Been Exercised (own): I currently own 100 KRH shares in a taxable account and 50 shares in the ROTH IRA.  On Monday, the owner of the call warrant exercised its right to redeem the shares of KRH at their $25 par value plus accrued interest. The closing date is 12/22/2010, cortstrustafccaptrusti-8k.htm This security pays interest semi-annually and went ex interest on 8/11.  So, it is carrying some accrued interest.  

As with all of these option  exercises  the call warrant owner is under no obligation to carry through, but the redemption proceeds must be deposited with the trustee in order for the warrant owner to acquire possession of the bonds owned by the trust which are in effect junior bonds issued by Hanover Insurance. Fifty of the remaining 100 shares were bought in the taxable account on 11/11/2009 at $19 , with the remaining shares bought last November at $24.3 to replace another bond that was in the process of being called by the call warrant owner.

I previously realized a $283.02 share gain on 50 shares sold in the Roth IRA in late September. Sold 50 KRH at 24.6  Bought 50 KRH in IRA at $18.62

I also own the TC PKM which has the same underlying Hanover bond, currently owning 150 shares after some profit taking in that security. Bought 150 TC PKM at 17.8 & 17.5 Bought 50 PKM at 24.84Stocks & Politics: Pared PKM-Sold 50 at $20.11

Trust Certificates: Links in One Post

More on the Call Warrant in TCs

Call Warrants and Trust Certificates

Call Warrant Exercised on JZE and JZJ
    

2. SGL (OWNED):  The bond CEFs have certainly been subjected to downward pricing pressure and the Strategic Global Income Fund has been going down since I purchased 100 shares at $11.71 in mid-November.  Those shares were purchased in the ROTH IRA. The shares recovered some on Tuesday after the fund announced its dividends for December. In addition to the monthly dividend of $.0723 per share, the Fund will distribute an annual ordinary income distribution of $.5016 per share, primarily related to foreign currency transactions, a short term capital gain of $.3413 per share, and a long term capital gain of $.1728 per share. Taken together, the dividend equals $1.0882 per share and goes ex on the 17th. I would much prefer owning a fund with this kind of large, tax inefficient distribution in an IRA, where there are no tax consequences to the dividend. SGL did buck the carnage in bond land yesterday by rising 2.3% to close at $11.10. 

3. Added 50 GFW at $24.82 on Tuesday (see Disclaimer): Most of my exchange traded bond buys now are simply replacements for the ones being called by issuer or the owner of the call warrant in the case of some TCs. I discussed this senior bond in an earlier post in connection with a purchase of 50 shares at 22.76 and will simply copy that discussion: 

 "GFW is a senior bond from AAG Holding, which is a wholly owned subsidiary of Great American Financial (GAF) (History), who guarantees this note, and GAF's major subsidiary is the Great American Life Insurance Company. Great American Financial Resources, Inc. - Home Great American Financial is in turn a subsidiary of American Financial Group (AFG), a insurance holding company. AFG is the only public company in this litany. This is a link to its last earnings report for the Q/E 12/31/2009. ex991020910.htm

GFW has a maturity date in 2033 and has a coupon of 7.5%. . . .  This is a link to the prospectus: Final Prospectus Supplement The quantum site shows that this bond is rated investment grade, and I did not attempt to verify that claim as either accurate or current. Quantum 

American Financial Group is controlled by the billionaire Carl Lindner and his sons."

Those 50 shares bought at $22.76 were later sold  at 25.13.

This security pays interest quarterly and just went ex interest. I also own 100 shares of GFW in the ROTH IRA.  Bought 50 GFW at 22.63 Bought 50 GFW @25.04 There is another exchange traded bond issued by AAG Holding, guaranteed by Great American Financial Resources, with the symbol GFZ.  It has a 7.25% coupon, also makes quarterly interest payments though on a different schedule, and matures on 1/23/2034. Final Prospectus Supplement A related bond, AFE, which I have owned in the past, is an issue of American Financial Group, and it has a 7% coupon with a 2050 maturity. Prospectus Generally, GFW will have a slightly higher current yield in this grouping.

  
This is a link to the last quarterly report for American Financial Group for the quarter ending in 9/2010: Form 10-Q
The company earned $1.21 per diluted share in that quarter, up from $1.09 in the year ago quarter.  All of the exchange traded debt securities mentioned above are set forth at page 24 in that 10-Q filing. The consensus estimate for AFG  is currently $3.87 per share in 2010.