Tuesday, February 15, 2011

Sold 100 of the TC JZH at 24.11/Bought 200 of the Bond CEF IMF at 16.64/Added 50 CSCO at 18.75/Sold STL at 10.5/Bought 1 General Maritime Senior Bond Maturing in 2017/MKZ and MKN Now/

The Obama administration forecasts a 1.65 trillion dollar budget deficit for the fiscal year ending in September 2011.  WSJ.com  This would equal 10.9% of the nation's projected GDP, the largest percentage since WWII.  The increase from the prior forecast is due to the extension of the Bush tax cuts.  Financial Armageddon-Avoided or Just Delayed  Underlying Cause of the Current Long Term Bear Market is Too Much Debt (June 2010) What Will Produce Growth after the Age of Leverage? (Sept 2009) The government's deficit spending has been increasing dramatically since the early Reagan years. In 1980, the entire U.S. debt, accumulated since the founding of the country, was 909 billion. United States public debt The current year's deficit will almost double that number in a single year. The debt grew from that 909 billion in 1980 to 3.206 trillion in 1990 and to 5.628.7 trillion in 2000.  At the end of February 2011, the figure was over 14 trillion dollars.  This can be tracked at a U.S. Treasury web page: Debt to the Penny (Daily History Search Application)(this site has a table of the historical numbers of the U.S. annual deficits as a percentage of GDP since 1900: US Federal Deficit As Percent Of GDP in United States 1900-2010)

J. P. Morgan downgraded Wal-Mart (WMT) to neutral yesterday, and reduced its price target to $54 from $59.   According to the MarketWatch story discussing this downgrade, the analyst does not see any catalyst to drive the price out of the $45 to $60 range bound movement over the past decade.  In my post from last December discussing the purchase of 50 shares of WMT at 53.52, I discussed that range bound movement, which is typical for a large cap company during a long term bear market, as earnings increase and the P/E multiple contracts.  The catalyst for a new long term uptrend cycle will generally be a combination of valuation, continued earnings growth, and a change in sentiment, with more investors starting to focus on the positive characteristics rather than blowing way out of proportion the negative ones. 

I noticed that NAPCO Security Technologies (NSSC), one of my Lottery Tickets, returned to profitability in the 4th quarter, earning 1 cent per share. Bought:  100 NSSC at $1.8 The stock closed yesterday at $2.11, up 9.89%.  I had previously realized a decent percentage gain on this LT: Buy 100 NSSC at $1.02 Sold LT NSSC at $1.96

1. More On the Principal Protected Notes MKN and MKZ (own both): Before Fidelity put the kibosh on buying exchange traded principal protected notes, I had bought two senior notes, issued by Citigroup funding, whose annual interest payments were linked to the DJ-UBS Commodity Index.  Both MKN and MKZ have a 3% guaranteed yield. And there is not much difference between the two securities in the maximum percentage yield payable during each annual period, based on the percentage change of the commodity index.  And, both notes have a par value of $10 and mature in 2014.  The differences in return so far between the two notes has been stark.  In the first annual coupon period, MKN paid me 18% in interest or $180 for my 100 shares bought at 9.85.  I made the following comment about MKN soon after it went ex interest for that annual interest payment:

"This unusual security (MKN) was ex interest yesterday with a $1.8 per share annual interest payment on its $10 par value. I like these kind of principal protected securities. The ones which I own are issued by Citigroup and pay the greater of a guarantee (3% for MKN and MKZ) or some rate tied to the annual percentage gain in an index. The key problem is that the percentage gain can not exceed the maximum permissible level, based on closing prices, on any day during the annual period, otherwise the interest rate reverts back to the guarantee. The notes are short term, both MKN and MKZ mature in 2014 at $10. The worst thing that can happen, assuming Citigroup survives to pay par value, is that the investor will receive a 3% annual interest payment each year until the note matures. I managed to pick up MKN at less than its par value late in January, to my surprise. Bought 100 MKN at 9.85 On 4/7, I will receive my first annual interest payment, a 18% interest rate based on the percentage gain of the commodity index from its starting value to the closing date for the first annual period (commodity index java chart:WSJ.com) The closing value of the index on 3/30/2010 will now be the starting value for the second year. Pricing Supplement No. 2009- I believe, subject to further check, that the closing value on March 30, 2010 of the index was 132.67. Note ON MKN The permissible increase is 33%. This means that the commodity index can never close a single day to and including March 30, 2011 over 176.45, during the second annual period. If there is one day of a close above 176.45, then the interest is 3% for the second annual period, no matter what happens after that maximum level violation.

So assume for purposes of illustration, that the commodity index does not have a close above 176.45 before 3/31/2011 and closes 3/30/2011 at 160. Then the interest rate for the second annual period would be 20.599%. If you had one close at 179, just one day above the maximum level, the interest rate would revert back to 3%."

MKN just might just have another good payday.  There has been no close yet above the maximum permissible level, so there has not yet been a reversion back to the 3% guarantee.  Time is short until the end of the second coupon period.  And, the index is hovering now just above 160, closing at 162.975 on 2/14/2011, WSJ.com.   As I mentioned in that quote from the earlier post, a close at 160 in the index on 3/30/2011 would trigger about a $206 interest payment on my 100 shares for the second annual period.  The market recognizes the potential for another good payday and the price of MKN is now trading at over $11 per share, though on an infrequent basis.   Citigroup Funding Inc, MKN Stock Quote 

My position in MKZ has been a dud.  That note closed its first annual period by paying the minimum guarantee of 3%. I noted in a prior post that I would consequently receive the 3% guarantee or $30 for my 100 shares bought at $9.96

"The commodity index rose in MKZ's first annual period by less than the 3% guarantee. Item # 4 MKZ Ends Its First Annual Period with A ThudThe ending value was 126.58, and I previously calculated the new maximum level at 165.8198, though I would recommend any interested person to check those calculation for themselves. So MKZ illustrates another problem with these notes, in that there may be no gain in the index above the guarantee in addition to a possibility of a reversion due to too much of an increase during the period. While those are negatives, I view them as one reason for having two of these notes tied to the same index, dividing up my investment in at least two parts for each index. One may hit while the other pays the guarantee, just based on their different time periods and terms. MKZ has a 31% limit. Pricing SupplementStocks & Politics (post 11/8/2010)

Just based on the different time periods, the commodity index rose less than 3% for MKZ's first annual period.  There was no reversion.  The index just did not gain much during that 1 year period.  Now, as previously noted, MKZ is skating very, very close to its maximum level, one day's close above that maximum level would trigger a reversion back to 3%. Item # 4 Stocks & Politics (post 1/3/2011).  So in the first period, the commodity index did not rise more than the guarantee of 3%.  And in the second annual period, it most likely will rise too much, triggering the reversion back to 3%.  Still, given the potential upside with this security, I am satisfied with the 3% provided I have a shot at more.  MKZ came within a whisker of a reversion on 2/2/2011 when the index closed at 165.338.  Consequently, given the current level of the index and the time left before the second annual period ends, it is not surprising that MKZ is trading near its par value of $10.  

Of course, a principal protected note is still an unsecured senior note of the issuer.  If Citigroup implodes and goes into bankruptcy, I am just screwed.  Apparently, some individual investors claim that they do not understand the difference between an unsecured note from a bank and a FDIC insured bank account.   Item # 2 Principal Protected Notes 

2. Bought 1 General Maritime Senior Bond at 95.7 (96.5 with concession) on Friday (Junk Bond Ladder Strategy) (see Disclaimer): General Maritime is a shipping company that provides transport services for crude and refined petroleum products. This is a link to the  Reuters profile page and to its Key Developments page. 

The common stock symbol for General Maritime Corporation is GMR.  Price to book is .5 and price to sales is .68 according to Y F.  Due in large part to the Near Depression and its aftermath, GMR has been losing money and is not expected to be profitable for 2011, with the current consensus estimate at -.31 cents per share. Analyst Estimates

Needless to say, the bond is rated junk, Caa2 by Moody's and CCC- by S & P according to FINRA, and that feels about right for this credit.  The coupon is 12%, and the bond matures on 11/15/2017.  At a total cost of 96.5, the current yield would be around 12.44%  ($12 divided by $96.5=12.44%).   I came up with a YTM of 13.46% using the  Morningstar Bond Calculator.

This note is described in GMR's last filed   Form 10 Q at page 11.

I am going to stop buying junk bonds for the time being.  I have enough already in this particular basket strategy.  Part of the rationale for this basket strategy is explained in more detail in Item # 5 Stocks & Politics (1/18/2011 Post).  

3. Sold 50 STL at $10.5 on Friday (Regional Bank Stocks' basket strategy) (see Disclaimer): I mention in the prior post that I might sell STL after adding to my position in this bank's TP, STLPRA.   I purchased 50 shares of  Sterling Bancorp over a year ago at $6.58, so I realized over a 60% gain with the dividends.  I am paring the number of stocks in my regional bank basket to a more manageable level.  This will involve eliminating some positions and adding to existing ones.

I have been adding some regional bank stocks in the LOTTERY TICKET category.  This will not add to my workload since I am not going to pay any attention to them for at least five years.Bought 30 FHN as an LT at 11.34  Bought 30 HBAN @ 7.25 as LT Bought 30 KEY at 8.75 as LT  For some LT's I will occasionally review briefly an earnings report.  At most, I spend a few minutes a month on those LTs.    For the banks being added to this category, I am just going to forget about them, and any discussion about them in this blog will occur only when I initiate the miniscule and totally irrelevant position.  Hopefully, one or more of these banks will surprise me in five years or so and have their act together more or less.

4. Bought 50 Cisco at $18.75 on Friday (see Disclaimer):  As I mentioned in the prior two posts, I thought that the market's pounding of Cisco, while deserved, was overdone.  I bought 50 shares at $18.75 in a satellite taxable account and will sell those shares when and if the shares close above $22 per share.  I will keep the shares bought a few weeks ago at $19.55 in another account.   Previously, I had successfully traded a small 50 share position by simply selling just before Cisco reported earnings, but neglected to do that for the last quarter.   Bought 50 CSCO at $22.45 (June 2010)-- Sold Cisco near the closing price of $24.31 (August 2010); Bought CSCO at 20.39 (Sept 2010) --SOLD 50 CSCO @ 24.42 on 11/8/2010 I am comfortable holding the shares, given the cash on the balance sheet and valuation at the current price.   

5. Bought 200 of the bond CEF IMF at $16.64 last Friday (see Disclaimer):  I am underweighted in treasury inflation protected securities. I have bought the ten year TIP at auction in the IRA and will simply hold that security until maturity in 2019. 10 Year TIP Auction (April 2009 post)  10 Year TIP Auction (July 2009).   A recent five year TIP auction had a negative real yield,  Negative real yields on US Treasury Inflation-Protected Securities (TIPS) Count me a no show at the treasury auctions for the foreseeable future. (see also  the Devil’s Bargain written by Bill Gross).

I have sold out of the ETF "TIP" based on my view of its attractiveness of their current price.  I have only a small position in Vanguard's  Inflation-Protected Securities  mutual fund, and I have sold that position down to almost $3000 for the same reason.  Instead of buying the TIPs at auction, or buying  the iShares Barclays TIPS Bond Fund (TIP) again, I have elected to trade two closed end funds that invest in treasury inflation protected securities.  I am able to buy these funds at a discount to their net asset value, which juices the yield some.  The yield is still unsatisfactory but less so than buying a TIP ETF or mutual fund, or buying a TIP  at auction directly from the U.S. treasury.  If I get caught holding one of these CEFs due to a price decline, then I am I will rationalize it as an addition to my TIP allocation, which may work out fine in the long term.  Besides, I have made several profitable trades in the two CEFs, IMF and WIW, and those gains and prior dividend payments would offset any price decline after my latest foray into one of them.

Most of my trading has been in the Western Asset/Claymore Inflation-Linked Opportunities Income Fund (WIW):   Sold 300 WIW at $12.61(2/1/2011 Post)-- Item # 5 Bought Back 300 of the CEF WIW at $12.17 (1/20/2011 Post)/Bought 300 of the CEF WIW at $11.94 (March 3/2010 Post)--- SOLD 200 of 300 WIW at $12.5 (5/13/2010 Post)/ Bought 200 WIW at 12.29 (6/30/2010)-- Sold 300 WIW at $12.53 (9/2/2010 Post)/ Bought 300 of the Bond CEF WIW at $12.14 (12/10/2010 Post)--Sold 300 WIW at 12.43 (12/23/2010 Post)  The primary reason for buying WIW rather than IMF was WIW's greater discount to net asset value.  The two funds are similar.

I bought 200 IMF last Friday because it was selling at the larger discount to net asset value.  I had also previously bought 300 IMF at $16.51 and flipped those shares too.  Sold: 300 IMF @ 17.23 (10/8/2010 post).

IMF is known as the Western Asset Inflation Management Fund Inc..  Over 90% of the assets are in inflation protected treasury securities: IMF - Portfolio Characteristics  This is a link to the firm's holdings:   IMF - Holdings

The current distribution is paid monthly at 5 cents per share.  If continued, which is always open to doubt of bond CEFs, the yield at a total cost of $16.64 would be about 3.6%, granted, that is not much, but still better than the alternatives for TIPs.

On 2/10/2011, the market price was $16.7 and the net asset value per share was $17.59, creating a discount of -5.06.  IMF rose 15 cents on Monday to close at $16.80, and the discount narrowed to -4.98.  As of Monday's close WIW was selling at a larger discount (-5.92  WSJ.com)

IMF is scheduled to go ex dividend on 2/16/11. Western Asset Inflation Management Fund Inc. (“IMF”) Announces Distributions for the Months of March, April and May 2011 

6.  Sold 100 of the TC JZH at 24.12 last Friday (see Disclaimer):  This sale involves my last lot of this TC which has been good to me.  Of the 100 shares sold last Friday, 50 shares was bought at a total cost of $9.91 during the Dark Period (11/24/2008) and the other 50 shares were bought at a total cost of $21.17:

I also sold some low cost shares in 2010 to buy PFK, the Prudential CPI floater.Pared JZH by Selling 50 at $20.2 Sold 50 JZH at 24.45 (bought total cost $14.81 in 9/2008)/ Bought PFK in IRA at 18.94 in IRA Added 50 PFK at $17.83 Added 50 PFK in Roth at 20.88-Averaged UP Bought 100 PFK AT $18.47  Although PFK is now selling about its $25 par value, I am more inclined to hold it since it matures in 2018 and its interest payments are linked to a CPI computation, thus filling a niche in a bond portfolio.  I would definitely not buy it at the current price. 

The yield on JZH is just a tad over 6% at the price of my last sale.  The bond matures in 2033.  I will be interested in buying this security back, assuming it is not called, at a much lower price.  I am no longer believe that 6% is adequate compensation for the risks associated with a long bond maturing in about 22 years.   

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