Wednesday, April 6, 2011

Bought 1 GMAC 6.25% Bond Maturing 5/15/2019 at 92.495/Sold CEF LDF at 19.45/Revised CEF Table

According to the WSJ, the Republicans are preparing a budget that will end Medicare for those currently under 55 and replace that program with a grant of the first $15,000 in premiums charged by private insurance companies.  The GOP, who are wizards with words, called the elimination of Medicare a "revamping of Medicare".  Medicaid would also be eliminated and replaced with block grants to the states.   The GOP proposal is also summarized in this NYT article.

Michele Bachman is one of the GOP hopefuls for President who is constantly engaged in her own reality creation.  Some would just say that she finds it very difficult to be accurate about anything. documents some of her recent fabrications.  For example, she claimed that the Obama administration had approved only one new drilling permit when the the actual number is more than 200.

Moody's downgraded Portugal's debt noting the new government will need to seek assistance from the European Financial Stability Facility on an expedited basis.   Portugal's Parliament rejected an austerity plan recently and the current caretaker government refuses to request aid as a matter of honor.

Nasdaq is rebalancing its Nasdaq 100 index to reduce the weighting of Apple. It is anticipated that Apple's weight in this index will be reduced from around 20.5% to 12.3%.  This rebalancing will increase the weight some of other large tech companies like Google, Intel, Microsoft and Oracle.  Nasdaq has provided at its website the projected changes in weighting per company:  NDXSpecialRebalancePresentation.pdf  I just looked at how the change impacted Microsoft, Google and Cisco, all of which are owned by HK (see page 22). MSFT goes from a 3.41% weight to 8.32%  GOOG's weight increases 1.59% and Cisco is increased by 2.1%. Google fell 18.59 points yesterday on news that the FTC may launch an an antitrust investigation of the company.

I received several emails over the past several days from retailers (e.g. Best Buy), Verizon and financial firms about the massive breach of security at  Epsilon, owned by Alliance Data Systems (ADS), one of those annoying companies that floods my email box with crap.  I have already grown accustomed to the fact that firms are not careful with my personal information. A number of customers will suffer as a result of Epsilon's carelessness as new sophisticated phishing attacks are propagated by the fraudsters, resulting in an email that appears to come from their bank (e.g. U.S. Bank) that requests the customer provide personal information which would then enable the criminal to steal money.  Given the frequently careless security by firms who have my personal information, I have to be extremely vigilant.

I frequently receive emails that are obvious scams.  Another variety of fraudster wants me to open a folder to download a virus.  All of those criminals have probably obtained one or more email addresses from "respected" companies who are lax in their security.  Generally, the spam filter will catch most of it.  But since the spam filter catches some legitimate emails that I need to examine, I look at the line items in the spam folder. A recent example of a virus attempted delivery had a subject line, allegedly from United Parcel Service. Softpedia I opened the email and saw that the sender wanted me to open a folder about a "delivery".  I then googled "united parcel service fake email" and found that this was in fact an attempted virus delivery. Yesterday, I received two similar spam messages purporting to be from DHL Express. I just deleted those now that I am familiar with this scam. Some of these criminals who send emails even know my name.

1. Bought 1 GMAC 6.25% Senior Bond Maturing 4/15/2019 at 92.495 on Monday (Junk Bond Ladder Strategy) (see Disclaimer): This one filled a hole in the ladder. Prior to this purchase, I did not have a bond maturing in 2019.  This particular bond pays interest monthly on the 15th.  It is currently rated B1 by Moody's and B by S & P.   Those rating are both in junk territory.  I do not intend to purchase another GMAC bond.  Two bonds is 2 too many for the OG.  RB wanted to buy 10.  LB had nothing to do with this buy and disavows it.  In fact, no HT will take the credit for making this buy.  My confirmation states that the YTM at my cost is 7.359%.   For this risk, I needed more current yield and a higher YTM. 

This is a link to the FINRA information about this bond: FINRA 

This is how my junk bond table looks now:

There are two bonds issued by Prudential, an investment grade credit, that are included in this table even though they are not part of this strategy. I can not exclude them from the table prepared by this broker. Those two bonds were purchased in 2007 at par value from the issuer as part of a Corporate Notes program.   Interest is paid monthly at 5.6% and the Prudential bonds mature on 7/15/2012.

The green shown in the table for 2021 and 2022 is $692 per year in interest income from bonds maturing after 2022. My average maturity has been pushed up some, and now stands at 7.18 years. The yield to worst is 9.6% with the 2 Prudential bonds. I am keeping track of the realized gains at Item # 5  Realized Gains Junk Bond Ladder Strategy I will include any realized gains from capturing the spread between my cost and par value at early redemption or maturity.

I am anticipating that one of the bonds will be redeemed this Friday, causing a small short term capital gain. I will consider this strategy a success if my realized exceed by any amount my realized losses. This is the 10.5% senior United Refining bond. I received an email notice from my broker notifying me of the redemption, without giving me a date.  Another broker gave the date as April 8th.

I expect to have losses in this strategy given the extreme credit risks of many issues.  The goal is simply to collect the interest without suffering any net loss on the bonds. I believe that the spread between the YTM's of my junk bonds and BBB rated corporates with similar maturities is in the 4 to 5 per cent range per annum.

2. Group Think on Intel (own):  Over the past several days Intel shares have slid after a number of analysts cut estimates and downgraded their price target based on the belief that the current quarter is tracking below previous expectations.  These downgrades are discussed in this WSJ article.  The analyst from Canaccord lowered his target from $22 to $19 based on his belief that the current quarter's PC production "appears" to be below expectations.  Even if that proves to be true, it provides no basis for valuing the company and is nothing more than another manifestation of the short term group think prevalent among the Masters of Disaster who manage other people's money.

3. Sold 75 of the CEF LDF at 19.45 on Tuesday (see disclaimer): I did not want to add to this position, purchased over a year ago  $17. As of Monday's close the discount to net asset value was -7.17%  based on a closing price that day of  $19.42. I realized close to a 15% gain with the annual dividend.

4. Revised CEF Table: I noticed that I omitted my 250 shares of GGN in the CEF table posted yesterday.  It is becoming harder by the day for the OG to keep track of everything. This is the revised table with those shares included and LDF omitted:

Revised CEF Table 4 5 2011

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