Wednesday, April 13, 2011

Bought 50 of the TC PJA at 25.06/AA/Bought 200 of the Bond CEF IMF at 16.81

Goldman has advised its clients to sell a commodity basket that includes oil, copper and other commodities. While GS believes that this basket has potential for further upside in 12 months, it believes the risk-reward no longer supports a long position.  GS believes that a catalyst for the decline will be a rise in the USD. Goldman's call is also discussed in this article from Fortune.

1. Bought 50 of the TC PJA at 25.06 on Monday (see disclaimer): A trust certificate is another security that I will generally explain whenever I purchase one. A trust certificate represents an undivided beneficial interest in the assets owned by a Grantor Trust, administered by an independent trustee who is not under the control of the trust's creator.  The creator of the Grantor Trust will be a brokerage firm. That firm will buy a particular bond in the secondary market and then deposit those bonds into the trust.  The trust will sell trust certificates to the public to pay the brokerage firm for the bonds. The TC will mature at the same time as the bond owned by the trust. Distributions will be taxable as interest.

A TC is classified by me as an Exchange Traded Bond. The certificates are traded just like shares of stock on the stock exchange. The TC will trade "flat", which means that the buyer does not have to pay the seller accrued interest which is required for bonds bought and sold in the bond market.  Par value for the TCs will vary, but most have $25 par values which makes them more friendly to small investor.  Par value for bonds traded in the bond market is generally $1,000 per bond.  Since the TCs are traded in the stock market, it is possible to buy just 1 share, or 50, or 100, just like a stock.  It is also important to keep in mind that most TCs have attached to them a call warrant, probably owned by the brokerage company who originally created the trust, that allows its owner to redeem the TC at par value plus accrued interest, which has happened repeatedly to me over the past year.  I have lost a lot of bonds to calls by the warrant owner, far more that way than calls by the bond's issuer. TRUST Certificates: Links in One Post  

Many TCs are thinly traded, however, with wide bid/ask spreads being common, and consequently I will only use limit orders.  If the spread is narrow, I will frequently place a limit order at the ask price. 

I bought the TC PJA on Monday with a limit order at $25.06.  This trust owns a senior Qwest Capital bond maturing in 2031.   Another TC has the same bond, PKH, but its yield was less than PJA at the available prices on Monday.  I view PJA and PKH to be functionally equivalent, so the primary consideration to me when choosing one or the other is yield at my cost. Both have $25 par values, mature on the same date, and have the same underlying security. PJA has an 8% coupon, PKH is at 7.75%. The issue is not the coupon but the yield at my cost. If the lower coupon security gives me more yield, I would have gone with it.

I would emphasize that the underlying bond is trading at a premium to its par value.  The current price of the Qwest bond makes both PKH and PJA vulnerable to a redemption by the owner of the call warrant. I do receive a better yield by buying PJA compared to the underlying bond, due to the higher premium necessary to purchase the bond. 

This brings me up to 150 shares of PKH. The purchase on Monday brought the total in a taxable account to 100 shares.  The other 50 shares were bought at 19.45  back in December 2009 or at a total cost of $19.61 with the commission, as shown in this snapshot of my account: 

More recently, I bought 50 shares in the ROTH IRA at 24.65 (12/22/2010 Post). I go into detail about this bond in both of those prior posts.

I would just add that Qwest has recently been acquired by CenturyLink. And that had some impact on the Qwest bond ratings.  According to FINRA, the underlying bond in both PKH and PJA is currently rated Baa3 by Moody's, BBB- by Fitch, both investment grades, and  junk by S & P at BB-. I believe that all of the ratings were in junk territory before CTL's acquisition of Qwest. 

This is a link to the prospectus for PJA:

This TC does have a 8% coupon.  My current yield for the last 50 shares will be slightly less than the coupon yield. I do not believe that I have traded PJA in the past.  I did book some profits in a TC, FJA, that contains a senior bond issued originally by Embarq, which was later acquired by CenturyLink.   TC FJA at 15.35  50 FJA at 14.2 Sold 50 of 100 FJA at 24.75 (FINRA)  I still own 50 of that TC at an average total cost per share of $14.36 and a current yield at that total cost number of 12.36% until the bond matures in 2036 or early redemption:

So my total exposure to CTL is now 150 shares of PJA and 50 of FJA.  I doubt that exposure will be increased anytime soon.   

PJA yields 8.01% at a total cost of $24.97, the closing price on Tuesday.

PKH yields 7.8% at a total cost of $24.8, the closing price yesterday.  This is a link to the PKH prospectus:

The underlying bond in both TCs is a 7.75% note issued by Qwest Capital Funding, and the prospectus for that bond is available at

2. Alcoa (own): I have over a $1000 unrealized gain in my AA shares, mostly long term:

Unfortunately, I only bought 30 shares at the height of pessimism, using cash flow into the main taxable account:   Buy  of  AA at $5.6 (March 12, 2009 Post).  My last purchase was 40 shares, again with cash flow, a few weeks ago at $15.75 (1/18/2011 Post).  I am not adverse to adding to the position in small increments provided there is a substantial price drop from current levels. I currently own 163.349 shares.

Morningstar gives the common shares a 3 star rating.

The general plan is to sell the common shares and to buy an Alcoa bond with the profit, preferably when the yield is higher than what is available now.  I have to go out to 2037 to pick up a 6.3% YTM on a Alcoa bond..  FINRA List of Alcoa Bonds  So far, I have yet to experience an urge to buy many long term bonds with that kind of yield, the 2033 GS senior bond being an exception and I have pulled back on that one.  

And for reasons that are not capable of being understood, the Old Geezer is reinvesting the dividends paid by AA to buy additional shares.  Before AA cut the dividend, the annual rate was 68 cents per share, and possibly that would be worthwhile to reinvest at a sufficiently low share price.  The annual dividend now is 12 cents. For those who are as challenged in math as the OG, or worse, that works out to 3 cents per quarter.  The last dividend bought .289 shares.  Well, what can you say, sometimes it is just better to humor the Old Goat. 

Alcoa reported 1st quarter earnings after the close on Monday.  Income from continuing operations was 309 million or 27 cents per share on 6 billion in revenues, a 12% increase in sales compared to the first quarter of 2010.  The company reaffirmed its estimate of a 12% increase in 2011 global demand for aluminum.  Aluminum prices have risen about 14% to $2628 per metric ton so far this year.  Alcoa expects demand in China to grow about 15% in 2011.  Since it takes AA about 60 days to feel the impact of any rise in price, the full impact of the recent rise did not show up in this recent quarterly report.  Notwithstanding all of that the market took AA shares down yesterday since the revenues for the 1st quarter missed expectations of 6.07 billion.

Alcoa shares had a bad day yesterday, falling $1.07 to close at $16.7.

3. Bought 200 of the Bond CEF IMF at 16.81 on Tuesday (see Disclaimer):  While some may disagree, I view this bond CEF, which invests mainly in U.S. government inflation protected securities, to be functionally equivalent to Western Asset/Claymore Inflation-Linked Opportunities Income Fund (WIW), and have bought and sold both of those funds repeatedly over the past several months.  Bought 300 CEF IMF at 16.51 (May 2010) Sold 200 IMF at $17.15 (Oct 2010 Post) Bought 200 of the Bond CEF IMF at 16.64  Sold: 300 IMF @ 17.23 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) Needless to say based on my trading history with these two bond CEFs, I am not a long term holder and do not view the current yields for TIPs to be attractive. I will start to buy again 10 year inflation protected securities in my Roth directly at auction when the coupon moves close to 2%.  I still own those TIPS discussed in this blog bought at auction in the Roth {see e.g.   10 Year TIP Auction (July 2009 Post)}.

I would refer anyone interested in these bond CEFs to those posts. Both CEFs pay monthly dividends, and the yield is slightly over 3%.  IMF closed on 4/11 at a 8.14% discount to its net asset value.  This bond CEF was also recently discussed in this Morningstar article: CEFs for Inflation Protection

On Tuesday, IMF closed at $16.81 and had a net asset value per share of $18.4, creating a discount to net asset value of -8.64, identical to that day's closing discount for WIW. 

Most of the leveraged bond CEFs have experienced a widening of their discounts this year. As shown at the Morningstar page on IMF, this fund uses some leverage. 

This is a link to the 2010 Annual Report filed with the SEC.  As of 12/31/2010, the fund had 91.1% of its assets in U.S. government inflation protected bonds.  Of the remaining holdings, 2.5% was in Australian government inflation protected bonds and the remainder was mostly in a variety of corporate bonds and mortgage backed securities. 

IMF is managed by Legg Mason and this is a link to the main page for the LM  Closed-End Funds

This is the link to the sponsor's page on IMF.  As of 12/31/10, 94.28% of the fund was invested in "AAA" rated securities.  The effective duration of the holdings was 7.58, and the weighted average life was 8.85 years.   CIMF Portfolio Characteristics.

I will discuss two more trades made on Tuesday in tomorrow's post. 

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