Monday, February 28, 2011

Bought 100 of the CEF PEO at 29.77/MOU AEG Vale/Bought AGNC at 29.29-Sold 50 STDPRB at 19.64 in the Roth IRA

The Commerce Department revised down its estimate for 4th quarter GDP to 2.8%. The prior estimate was inflation adjusted growth of 3.2%. The consensus estimate was for a revision up to 3.3%. The revision down was caused by lower estimates for consumer and local government spending. News Release: Gross Domestic Product  It was estimated that state and local governments spent 5.8 billion dollars less than the first estimate.

For reasons that are not clear, the WSJ Dividend page lists the interest payment for the principal protected note MOU under the heading "foreign". This page does confirm the annual interest payment on this $10 par value note as $2.79 per share and the ex date was last Friday.  Interest will be paid on 3/2/2011. So my calculations were correct. MOU Ends Second Annual Coupon Period With a 27.93% Gain.

If I invested in a typical Citigroup fixed coupon senior note with a similar maturity, the yield to maturity would be between 3% and 4%. An example would be 5.5% fixed coupon note maturing in October 2014 that had a YTM at last Friday's closing price of just 3.15% and was then selling at almost a 7% premium to its par value. FINRA MOU is about to pay me almost 28%. Fidelity does not allow their customers to buy exchange traded principal protected notes.

The DJ UBS Commodity Index closed at 165.34, up 2.99 on Friday. I have previously calculated the maximum level on MKZ at 165.8198 on a closing basis for this index. Item # 1  MKZ and MKN Now  It would be a miracle, actually a divine miracle of biblical proportions, if that note avoided a reversion back to its 3% guarantee.  MKN, the other note that I own whose interest payments are linked to this commodity index, is still in a little better shape, though in need of some breathing room since its maximum level is 176.45.  The current coupon period for MKN ends on 3/30/2011.  I bought that one  at $9.85 and received $1.8 in interest on the $10 par value note for its first coupon period.  Item # 7 MKN & MKZ

1. AEGON (own hybrids AEH and AEB/Common as an LT):   Aegon raised last week €903 million to pay back part of the remaining state aid received from the Dutch government in October 2008. This was done by selling 173,604,912 common stock shares at EUR 5.2 per share. SEC Filed Press Release

The repurchase of the junior securities necessary to effectuate this repayment triggers the Mandatory Payment clauses contained in Aegon's prospectuses for its hybrid securities.  I interpret that to mean that Aegon has to pay the next four quarterly dividends, starting with the next payments. More on how the repayment of the Dutch government triggers this mandatory payment, and the period for such mandatory payments, are discussed in several earlier posts.

Aegon and the European Commission (August 2010)

Summary of Arguments for Mandatory Payment Triggers: ING and Aegon Hybrids (8/27/2009)

Aegon Hybrids  

Aegon Mandatory Payment Event? (8/29/2009 Post)

More on ING and AEGON Mandatory Payment Events/Alternative Payment Mechanism (8/27/2009)

Pay Back Dutch Government=Buying Junior Security=Mandatory Payment Event/Bond Investing Process (8/25/2009)  This was a hot issue back in 2009. 

Aegon also reported last Friday that its net income for the 4th quarter was 318 million Euros. SEC Filed Press Release A more detailed report can also be found at  SEC web site.

The remaining 200 shares of the Aegon hybrid AEB were bought between $4 and $8 during the dark period.  The 100 shares bought in the regular IRA have a total cost of $6.05 per share (see first snapshot at Bought 50 MSPRA @ 19.57. The 100 shares remaining in the taxable account, with an average cost of $6.92.

The unrealized gain on those shares, excluding dividends, is $1,543.5 as of last Friday or 223.21%.  And I still own AEH bought at $4.63, up 366.64% as of Friday's close excluding quarterly dividends since the purchase on 3/12/2009.  I have harvested gains in a number of Aegon hybrids including AEH, AEF, and AEB.  I am not interested in any of them at their current prices.

2. Bought 100 of the stock CEF PEO at 29.77 on Thursday (see Disclaimer): The Petroleum & Resources Corporation is a closed end fund that invests in energy and natural resource stocks. The fund is weighted in large energy companies. Exxon and Chevron account for almost 24% of the fund's assets as of 12/31:

December 31, 2010


Market Value
% of Net Assets
Exxon Mobil Corp.
Chevron Corp.
Schlumberger Ltd.
Occidental Petroleum Corp.
Freeport-McMoRan Copper & Gold Inc.
Royal Dutch Shell plc (Class A) ADR
Apache Corp.
Noble Energy, Inc.
Dow Chemical Co.

Financial reports can be found at this PEO web page. The last SEC filed shareholder report report is the 2010 Annual Report. If I want to establish a position in large cap energy companies, at a discount, as a trade, I will frequently consider buying PEO, depending on its relative discount compared to the other CEFs investing in that sector.   

PEO closed at $29.86 on Thursday. The net asset value as of 2/24/2011 was $33.45 per share creating a discount of -10.7.  On Friday, PEO gained back what it lost on Thursday, closing at $30.3, up 44 cents, and had as of that day a net asset value per share of $ 33.96, creating a -10.8% discount.  

Net asset value information can be found at the Closed-End Funds section of the WSJ's market data center under "Specialized Equity Funds" or at the web site for the Petroleum & Resources Corporation.  

This fund has a large amount of unrealized gain. As of 12/31/2010, the cost of PEO's common stock positions was 381.295 million and the value of those positions was slightly over 733 million.  That unrealized gain number has most likely significantly increased since the end of last year since this fund has a relatively low turnover percentage and the main holdings have increased in value.

I own 357 shares of another CEF, Blackrock Real Asset (BCF). which invests in natural resource stocks, but that CEF closed last Thursday at a 2.5% premium to its net asset value (web page of sponsor: BCF : Fund Profile) Some of my discussions about BCF can be found in the following posts: Added to BCF in Roth IRA at $9.69 (July 2009) Buy 50 BCF at $6.6 (February 2009) Closed End Funds: Energy and Natural Resources Funds (June 2009)

I have bought another CEF that invests in this sector, IRR, which closed at a 5.35% premium to its net asset value last Thursday: IRR BUY at $12.5 (12/2008) Sold 100 IRR at $16.92 (8/2009) Sold 100 IRR at $17.4 (8/2009) (sponsor's web page: ING Risk Managed Natural Resources Fund - Fund Profile)

I regard PEO as a trade.

3. Bought 35 AGNC  at $29.29 and Sold 50 STDPRB at $19.64 in the Roth IRA on Thursday (see Disclaimer): AGNC was viewed as too risky for more than a nibble in the Roth IRA.  Yet, the firm is currently paying a quarterly dividend of $1.40 per share. If continued for an entire year at that rate, the dividend yield would be about 19.12% at a total cost of $29.29. AGNC Stock Quote In the Roth, that would be 19.12% in tax free income. This kind of dividend is not likely to be sustained over either the intermediate or long term. It is highly dependent on the current low short term borrowing cost and the ability of the managers to realize capital gains.

AGNC is similar to Annaly Capital Management  (NLY), in that AGNC borrows a lot of money short term and uses that leverage to buy agency securities with longer terms.   The primary source of income is the interest rate spread between the yield on the purchased assets and the cost of the borrowed funds. AGNC is a REIT. Profile | In January, AGNC sold 23.4 million shares at $28: Key Developments | As shown at the Reuters Key Developments page, this firm was busy selling shares last year. This is a link to a recent discussion on Annaly Capital's share issuance and how that impacts its existing shareholders.

AGNC  reported net income of $2.5 per share for the 4th quarter and a book value of $24.24 per share. SEC Filed Press Release  During that quarter, AGNC's annualized weighted average on its assets was 3.48% and its annualized cost of funds was .9%.  The fund is a beneficiary of the currently low short term rates. A large part of the AGNC's net income for the quarter included gains from trading activities. The firm netted 10.4 million from the sale of agency securities and another 20.6 million on derivative and trading securities.

AGNC is discussed briefly in this article at the TheStreet. The stock has a 3 star rating by Morningstar.

I sold the shares of STDPRB held in the Roth IRA, an equity preferred floater issued by Santander.  I still own 150 shares in a taxable account. It makes more sense to hold STDPRB in a taxable account, since it pays qualified dividends, and to hold a bond or a stock like AGNC in a retirement account.   I bought those 50 shares  at $18.6 about a year ago. I have an  unrealized profit in the remaining shares held in the taxable account:   Bought 50 STDPRB @ 17.96 (January 2011)  50 STDPRB at $18.5 (April 2010)  Sold 50 STIPRA at $20.90 and Added 50 STDPRD at $18.54 (March 2010)

I have had one profitable trade in the taxable account to date: Bought 100 STDPRB at $15.3 (September 2009) Sold 100 STDPRB at 18.11 (August 2010)

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

4. VALE (own):  Vale reported net income of 5.92 billion USDs, beating the consensus estimate of a 5.54 billion dollar net profit.  For the year, Vale's net profit was 17.26 billion USDs.  Vale reported 15.21 billion USDs in revenues for the 4th quarter, up from 6.54 billion in the year ago quarter, and higher than the consensus estimate of 13.96 billion. Average iron ore prices surged to USD 121 a metric ton,  more than doubling the $56 average from last year's 4th quarter.  www.vale. pdf

Vale's shares initially popped in trading on Friday in response to this earnings report, but ended the day up only 6 cents.

The double short for the Russell 2000 had a 1 for 4 reverse split last Friday.  I initiated a position as a hedge. The OG is becoming more nervous than usual, even after staff increased his daily dose of chill pills and Maalox. As previously discussed, I view the large caps to be relatively undervalued compared to the small caps that have enjoyed a robust move since the market bottom in March 2009. I would consequently agree with the opinion expressed by Stephanie Pomboy of MacroMavens to sell or under-weight small caps and to "definitely" overweight the large cap companies compared to the small caps.  Stephanie has a Bachelors Degree in economics from Dartmouth:  Macro Mavens: About

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