Monday, March 21, 2011

Sold 100 of the Stock CEF IDE at 20.3/Sold 100 GFY at 16.93 and Bought 50 of AFE at 24.88/Bought 1 Solo Cup Senior Sub Bond at 85.5/

1. Bought 1 Solo Cup Senior Subordinated Bond at 85.5 on Thursday (Junk Bond Ladder Strategy) (see disclaimer): This is an extremely risky junk bond, like many of the ones bought in the Junk Bond Ladder Strategy.  I am becoming somewhat bolder after tallying up my realized gains from exchange traded junk bonds.

Solo Cup is an international manufacturer and distributor of single use products used to serve food and beverages. This is a link to its website: Home More information about this private company can be gained from reviewing its recently filed 2010 Form 10-K. The company lost 104 million in 2010 on net sales of 1.5829 billion dollars. The debt is discussed at pages 22-27 of the 10-K.

This senior subordinated bond from Solo Cup has a 8.5% coupon and matures on 2/15/2014. This gives me a current yield of about 9.85% and a significantly larger YTM at 14.442%, according to my confirmation. Interest is payable semi-annually in February and August. The yield to maturity includes the additional yield from capturing the spread between par value and my cost.

Given the short time until maturity, the YTM will add a lot to my total return, assuming of course SOLO pays off the note in full and makes all interest payments.  Given the price of this bond, it would be fair to say that bond investors have more than a few doubts about both of those outcomes.  I expect problems in the high risk credits contained in this particular strategy.

When an investor sees the phrase "senior subordinated", this conveys instantly that there is another security more senior in the capital structure. And the more senior security in this instance is a senior secured bond maturing in 2013.  FINRA - Investor Information That bond is rated well into junk at B2 by Moody's and the principal amount is significant and a major cause of concern for the owners of the senior "subordinated" indebtedness. I would have had to pay over par value to buy that one which I am avoiding for this strategy.

With this strategy, I am already living dangerously and might as well go for the higher yield and discount to par value.  I can afford to lose money.

The 2014 senior sub bond is rated lower at Caa2 by Moody's and CCC by S & P, well into junk territory.  FINRA

This is a link to the prospectus for the 2014 bond:

As explained in a previous post, given the wide spread in yields between my junk bonds and BBB rated bonds with similar maturities, I could suffer at least two total losses from the junk bonds and still be ahead on a total return basis. I noted when I looked at that earlier post from January 2011 that I stated my limit for this strategy would be 25 to 27 bonds. Item # 5  Added 1 Edison Mission Energy at 88.75.  I am now closer to 40 bonds.

It is not unusual for me to extend beyond my limit, and then cut back some hopefully by taking a few profits which is what I have done in the Regional Bank Stocks' basket strategy.  After saying that I would quit at 30 banks, I kept buying until I came close to 50 and now I am back to 31. I have booked $5873.26 in gains from that strategy in 2010 and 2011. Item # 3 Realized Gains Regional Banks 2010-2011. Over the past several days the unrealized gains have been reduced significantly, currently hovering around $3500:

Regional Bank Basket as of 3/19/2011

The junk bond strategy is far more risky in my opinion. I anticipate that any gains realized from bond sales, or capturing the spread between my cost and par value, will be offset my bond losses leaving me with at most a net gain from the interest payments.  Maybe that is too pessimistic, or maybe it is way too optimistic.  One thing is for certain, the future will bring many surprises. 

I would have to suffer a total loss of over $10,000 in principal amount to wipe out the total realized gains from 2009 to date arising from all junk bond trading activities, mostly from exchange traded junk bonds.    

2. Sold 100 of the Stock CEF IDE at 20.30 on Thursday during the Market Rally (see Disclaimer): It seemed prudent to reduce my stock exposure by a tad during the market rally on Thursday morning. I elected to sell IDE since I still had a gain over 10% on the shares, after a return of capital adjustment for two quarterly dividends paid. Bought 50 of the CEF IDE at 17.4 (8/24/2010) Added 50 IDE at $16.85 (824/2010 Post) Sold 50 IDE at 18.7 (9/30/2010 Post)  Bought 50 of the Stock CEF IDE at 19.57 (1/6/2011). And, my cost basis for the shares had already been reduced due to this CEF's return of capital distributions.

2011 IDE 100 Shares +$227.25

This kind of transaction is a minor tweaking of my stock allocation. Along with some recent stock ETF sales, however, I have gone beyond a minor tweak to a major tweak. I would define that to mean for me a $20,000 to $40,000 reduction in stock exposure since the VIX spiked in February. A major shift out of stocks for me would require at least a $100,000 reduction, similar to the shift out of short term bonds into stocks in March 2009.  

3. Sold 100 of the Bond CEF GFY at 16.93 and Bought 50 of AFE at 24.88 Last Thursday (see Disclaimer):  I am in the process of improving my bond portfolio's current yield.  This is based on world events, the continued strength of fixed coupon bonds, and the wide yield spread for fixed coupon bonds compared to floating rate bonds

GFY is a low yielding floating rate bond fund that I bought last month @ 16.42. The yield is only 3.97% at a total cost basis of $16.93.

AFE is a senior, investment grade bond issued by American Financial Group (AFG).  Interest is paid quarterly on a $25 par value. Since my purchase with the commission cost was close to par value, both my current yield and yield to maturity would be very close to 7.125% coupon.  This is a long bond so it has a lot of interest rate risk.  The bond matures in 2034.

Prospectus:   American Financial Group, Inc.

I have bought and sold this bond and will do so again based on my assessments of risks and benefits: Bought 50 AFE at 22.87 (June 2010); Item # 2 Bought 50 AFE at $23.17 (June 2010); Sold: 50 AFE at 24.59 (August 2010); Sold 50 AFE at 24.78 (Sept 2010)

I also intend to add to a higher yielding bond CEF with the remaining proceeds from GFY.

I also have traded and currently own a senior bond issued by an indirect subsidiary of American Financial Group that has a higher coupon at 7.5%, with a $25 par value, and a different quarterly interest payment schedule.Final Prospectus Supplement Bought 50 GFW at 22.76 Bought 50 GFW at 22.63 Sold 50 GFW at 25.13 Bought 50 GFW @25.04 Bought 50 GFW at $24.82 Added 50 GFW at 24.9  I currently own 150 shares of GFW.  I do not expect much, if any, capital appreciation in either GFW or AFE, and I am content to clip their coupons after realizing some trading gains.

Exchange Traded Bonds

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