Monday, February 14, 2011

Paired Trade: Sold 50 of 150 BDF @ $17.82-Bought 100 of the Bond CEF GFY @ 16.42/Bought: 50 RTIX as LT @ 2.57, 200 STLPRA @ 10.14, 50 BDGE @ 22.14/Sold: 50 INZ @ 24.01, 50 ORIT @ 12.49, 100 ARY @ 24.6

Andrew Bary has a column in Barrons skewering Cisco's Board for refusing to pay, so far, any dividend to its shareholders.  Although CISCO has promised to start paying a dividend before the end of its current fiscal year in July 2011, it is unlikely to be a meaningful one, or one sufficient to provide some support for the stock.  If Cisco is going to institute a dividend in the 1% range, I would prefer for the company to just keep those funds, and to accelerate the share buybacks using that cash when the share price falls below $20 as it did last Thursday.  Ultimately, that may benefit shareholders more than being paid a miniscule dividend. Bary points out that Cisco has bought back 3.3 billion shares in its current buyback program for 69 billion dollars. The average cost is just $20.81.

He criticizes management for that use of capital.  I would disagree.  I would want the company to buy even more at that price or below and to slow down the buybacks above that price. I do agree with his assessment that investors need to quit valuing tech companies on pro forma earnings.

Several of the individual junk bonds, purchased as part of my Junk Bond Ladder Strategy are owned by the PowerShares ETF Fundamental High Yield Corporate Bond Portfolio (PHB).  In that ETF's top ten holdings, I own the bonds issued by Dean Foods, Edison Mission and Synovus.  

I also own PHB which has a effective duration of 4.12 years, and an expense ratio of .5%:  PHB All of the bonds owned in that portfolio, as of 2/11/2011, mature prior to 1/15/2021. Bought 100 PHB at 18.15 (9/16/2010 Post) Bought 100 PHB @ 18.5 in regular IRA {the shares bought  in the regular IRA were included in last Roth Conversion prior to my transfer of the Roth account to Vanguard from Fidelity after a decline in price to $18.18, the transfer was caused by Fidelity prohibiting new purchases of several types of exchange traded bonds that had been the bread and butter of the retirement accounts since the Fall of 2008, Fidelity Brokerage Extends Denial of Trading Opportunities to Synthetic Floaters and Even an Exchange Traded Junior Bond DFP Fidelity Prohibits New Purchases of SIPs}.

It will mostly be summarizing the trades from late last week for this post and the next one, as I struggle to catch up with the barrage of last week's trading activity.



1. Bought 50 RTI Biologics, Inc. (RTIX) at $2.57 on Thursday (LOTTERY TICKET strategy)(see Disclaimer):  I am not going to devote much effort describing this firm's business.  It has some long term turnaround potential with the usual emphasis on the words "potential" and "long term".  This quote is taken from RTI's 2009 Annual Report:   "We are a leader in the use of natural tissues and innovative technologies to produce orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues and improve surgical outcomes. We process human musculoskeletal and other tissue, including bone, cartilage, tendon, ligament, fascia lata, pericardium, sclera and dermal tissue into allografts, and bovine animal tissue into xenografts, utilizing proprietary . . .  sterilization processes, for distribution to hospitals and surgeons. We process at two facilities in Alachua, Florida and one facility in Germany and distribute our products and services in all 50 states and in over 31 countries worldwide"  

This is a link to the SEC filed Press Release announcing RTI's 4th quarter earnings.

 Reuters shows the price to book ratio at .88 and the price to sales at .85, which explains how this stock came to my attention.

The Key Developments page shows a series of modest earnings disappointments and/or guidances.

The loss in 2010 was due to a goodwill impairment charge of 134.681 million dollars taken in the 3rd quarter of 2010, which wrote down the value of the goodwill to zero. (see note 9 at pages 9-10,   Form 10-Q)

When checking a five year Chart, I noted that the stock closed at $9.64 on 9/23/2008 and then went into a waterfall before hitting $1.55 on 11/20/2008. Since that time, the stock has been meandering mostly in the $2 to $4 range, with occasional spurts over $4.

2. Paired Trade: SOLD 50 of 150 BDF and Bought 100 of the CEF GFY at $16.42 on Thursday (see Disclaimer):  The current yield paid by the bond CEF BDF is slightly more than 2% higher than the current dividend yield of GFY. Neither fund uses leverage.  BDF is mostly an investment grade corporate bond fund that invests in fixed coupon bonds. GFY is a CEF that invests in variable rate bonds, and the fund has a generous helping of junk bonds. This pared trade increased by a very minor degree the interest rate sensitivity of my bond fund holdings.

I would hope that GFY would hold up better than a fixed coupon bond fund during a period of rising rates. I am not familiar with most of the bonds owned by GFY. Typically, the coupon of a variable rate bond will be tied to a percentage over a short rate, such as 3 month LIBOR or the 3 month treasury bill. Both BDF and GFY are selling at discounts to their respective net asset values. On 2/9/2011, GFY closed at $16.45 and had a net asset value per share then of $17.95, creating a discount of -8.35%. BDF closed on 2/9/11 at a slightly higher discount to its net asset value per share of   -10.25. 

Daily net asset values for GFY can be found at the Closed-End Fund Association web site, or at the sponsor's web page: GFY - Western Asset Variable Rate Strategic Fund Inc.

The GFY credit allocation was weighted as follows on 12/31/2010: 


CREDIT QUALITY ALLOCATION (%)As of Dec-31-2010
AAA24.52
AA10.63
A5.79
BBB13.54
BB13.40
B16.92
CCC10.11
CC0.01
C0.34
Not Rated4.72


I would characterize the junk bond weighting as significant. Another issue, which I can not evaluate at all, is the substantial exposure to mortgage backed securities which accounted for over 50% of assets as of 12/31,  GFY -Portfolio Characteristics  Since I am completely unable to even form an opinion on the risks associated with those securities, I will not be buying more than 100 shares of GFY. 

Fidelity has a similar mutual fund that is rated five stars by Mornginstar, FFRHX Fidelity Floating Rate High. I did not see any mortgage securities in its top 25 holdings, FFRHX - Fund Top 25 holdings  This fund had a decent year in 2009, rising 29.9%, and drew in a lot of new investors, but its performance between 2001-2007 was far from inspiring in my opinion.   

A list of the holdings for GFY can be found at  GFY Holdings.  The Morningstar rating for GFY is also 5 stars. The Mornginstar page shows no return of capital distributions in the monthly distributions (data starts 3/17/2010). The current penny rate is $.056 per share.  At a total cost of $16.42, the current yield would be about 4.1%. That distribution level would probably be slightly higher than the Fidelity mutual fund, primarily due to purchasing the CEF at a discount whereas the mutual fund would have to be purchased at its net asset value.   

3. Sold 50 of INZ at 24.01 and Bought 200 STLPRA at $10.14 in the Roth IRA on Thursday (see Disclaimer):  INZ is a hybrid security issued by the large financial institution ING, headquartered in the Netherlands. I sold the 50 shares recently purchased @ 23 in the Roth IRA and will continue to keep the 50 bought during the Dark Period in the regular IRA at $7.82. As with the recent sale of AEF, I am concerned about the yield of these hybrid securities when the spread between their yields and treasuries is gapping narrower by the day. (see discussion at  Sold 50 AEF @ $24.71 from 2/7/2011 post).

If Bill Gross turns out to be right, then long bonds will stabilize since he was predicting that the FED will keep the federal funds rate at around .25% for "at least two year and maybe three". He also anticipates a continuation of low inflation.   Comments on Barrons Roundtable Part II  Well, what can I say?  Bill Gross is not responsible for investing Headknocker's money.

I am far more concerned about incipient inflation pressures building and the FED stoking serious inflation problems down the road with its expansionary monetary policy. In other words, I suspect the FED will keep its foot on the gas for way too long, has already done so in my opinion, and that a repeat of the inflation cycle from the 1960s and 1970s is a realistic possibility. Inflation did not start out as troublesome in the mid 1960s but gradually gained momentum into the 1970s before hitting a crescendo of destruction for bond investors in the late 1970s and early 1980s.

Part of that inflation was due to increases in commodity prices and increasing deficit spending to support the Vietnam War and new social programs adopted as part of LBJ's Great Society initiatives, such as Medicare, Medicaid, and the War on Poverty (food stamps, head start, etc.). What is the saying, insanity is repeating the same mistakes over and over again, and expecting a different result (attributable to Rita Mae Brown in her book Sudden Death at page 68 and to a book by Narcotics Anonymous, Answers.com)  

Since I do not know how this will unfold in the coming years, nor does anyone else, I am trying to swing both ways, as much as I can.  I still own a lot of fixed coupon long bonds, but have started to cut back on them.  I am not inclined to buy any fixed coupon treasury. I have been adding floaters which pay guarantees.  And I have been selling some securities that yield less than 8% that are perpetual junior obligations. 

Instead of keeping the 50 shares of the perpetual junior bond from ING recently bought, I decided to substitute 200 of the TP STLPRA which matures in 2032 and has a higher yield than INZ. STLPRA may be called now but I would lose a small amount on the shares, which have a $10 par value, even if that occurred soon. 

I have discussed this TP is several prior posts. It has a $10 par value and a 8.375% coupon. www.sec.gov  In effect this TP is a junior bond issued by Sterling Bank (STL), and is senior to the government's cumulative equity preferred stock still on Sterling's balance sheet. I discussed Sterling's last earnings report in Item # 3 STL.  

I believe that this brings me up to 310 shares in my IRAs.  I have received several quarterly interest payments since I started a position in this TP back in November 2009. I have also booked trading profits in it.  Bought 50 of the TP STLPRA at $8.99 Added 50 STLPRA at 8.69 Sold 50 STLPRA at $9.4 Bought 100 STLPRA at 8.87 Sold 100 of the TP STLPRA at 10.25 Bought 100 STLPRA at 10.05 Bought 50 STLPRA @ 10.21

I also own 50 shares of the common, STL, that I bought over a year ago  at $6.58, currently selling at over $10 a share, and I may dispose of that position as part of my current paring of positions in my Regional Bank Stocks' basket strategy.  


4.  SOLD  50 ORIT at $12.49 AND BOUGHT 50 BDGE AT $22.14 Last Thursday (Regional Bank Stocks' basket strategy) (see Disclaimer):  As part of my ongoing paring of stocks in the regional bank stock basket, due almost entirely to fatigue from reading too many earnings reports, I decided to sell the 50 shares of ORIT recently bought  @ 11.58 for a small gain plus one quarterly dividend, and to increase my position in Bridge Bancorp by averaging down from my recent purchase of 50 shares at at $23.11.  One way to cut down on the workload for this basket is to concentrate more money in existing positions which I have been doing recently, while eliminating several others. 

Actually, I did not exactly buy 50 of Bridge at $22.14.  I bought 10 shares at $22.01 with an odd lot limit order that was partially filled, and then I entered a market order for 40 shares at $22.14 on Thursday to round up my position to 100 shares.  Generally, to avoid those kind of fills on odd lot limit orders, I will just hit the ask price with my odd limit order.  But Bridge had a very large bid/ask spread on Wednesday, so I place a limit order at the ask price and paid for it with a fill of 10 shares out of 50. I have had a 50 share limit order filled with 1 share. So that is why I will hit the ask price when the spread is relatively narrow. 

I do not have much to add to my prior discussion of Bridge.  The only recent news is the announcement of its acquisition of a small bank in Long Island called Hamptons State Bank. SEC Filed Press Release  I have never been to Hamptons and being from the hinterlands would have to look at Google Maps to ascertain its location. Bridge expects the acquisition to be accretive to earnings after it closes and to add to Bridge's tangible book value.  The Hamptons State Bank has only one office with around 68 million in total assets.    

5. SOLD 100 ARY at $24.6 on Thursday (see Disclaimer):  The main reason for selling ARY, a senior note from the BDC Ares Capital (ARCC) maturing in 2040, was that the shares were bought in a taxable account and I would prefer to own it in a retirement account.  I also would like to buy it at less than $23 in the retirement account. An opportunity to buy at a lower price may present itself soon with a continued decline in the 30 year treasury bond. On Thursday, when I elected to sell 100 of ARY, the 30 treasury bond continued its precipitous decline, and fell 26/32 in price and rose in yield to 4.767%. Of course, a fall in a bond's price will increase its yield based on a constant coupon and par value.

ARY has a 7.75% coupon on a $25 par value. I received one quarterly interest payment and made a small profit on the shares. Added 50 ARY @ 23.75 Bought: 50 ARY at 24.2  I still own the common shares of this BDC that provide me with a higher yield than the bond at my cost. Bought  50 of the BDC ARCC at 16.17  Bough 50 ARCC at 16.89

I am also doing a slight shift out of fixed coupon bonds with long maturities and into floating rate securities. This has been ongoing in dribs and drabs for about 2 months now. See, e.g., Bought 50 GSPRA at 21 (Dec 2010) Bought 50 GSPRD at 21.58 (Jan 2011) Bought  50 BMLPRL @ 17.35 (Dec 2010) Bought 50 BMLPRG at 16.04 (Jan 2011) Bought 50 STDPRB @ 17.96 (Jan 2011) Bought 50 MSPRA at 19.71 (Dec 2010) Bought 50 MSPRA @ 19.57 (Jan 2011) Added 50 MSPRA at 19.54 (Jan 2011) Bought 50 HBAPRF at 20.69 (Jan 2011) Bought 50 HBAPRG at 23.31 (Jan 2011) Added 50 GYC at $21.60 in Roth IRA (Feb 2011) Bought 50 PYT at 18.06 (Jan 2011)   Bought  50 GYB at 18.63 in the Roth IRA (Jan 2011).  All of those securities are floaters with guarantees.

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