Thursday, April 7, 2011

Sold 100 of 200 of the TC PYB/Sold 50 ED at 51.30/Brazil's Government & Vale/SOLD 100 VALE at 34.6

I thought that this was a good article at Morningstar on the outlook for consumer staple stocks, a favored sector here at HQ. 

I received yesterday the annual interest payment made by MKN, the "principal protected" note issued by Citigroup Funding, that has a $10 par value and matures in 2014:


This brings the total interest payments to $435.53 for the first two annual periods. As previously discussed in nauseating detail, which is of course the only way LB can discuss anything, this note will pay the greater of 3% or up to 33% on this note's $10 par value, based on the percentage change of the DJ-UBS commodity index.

There are two ways that an investor can receive 3%. If the index fails to increase by more than 3% during the pertinent annual coupon period, the investor will receive 3%.  And, if the index has one close during the annual period above a 33% increase, then the investor will also receive 3%, no matter how much the index gains during the annual period. MKN Closes with a 25.56% Gain Bought 100 MKN at 9.85

For the current period, the third annual period for this note, the starting value is 166.58 in the commodity index. The annual period ends on 3/30/2012. A single close in the index above the maximum permissible level of 221.55 will also trigger a 3% payment for the third annual period (starting value of 166.58 multiplied by maximum percentage increase of 1.33=221.55).

So, assuming Citigroup survives for another year to make the interest payment, I will receive either 3%, the worse case, or some yield between 3% and 33%. This index closed at 171.44 in trading yesterday.  An owner of this note wants to see a good increase in the index during the annual period but not a single close above the maximum permissible limit.

The  ISM services index for March was reported at 57.3. This was lower than the forecast of 59.5.  Bloomberg Any number over 50 indicates expansion. The new orders component was 64.1%.

Portugal has formally requested a bailout from the EU. The country may need as much as 80 billion Euros or about 114 billion USDs. The after shocks of the Near Depression are still with us. 

1. Sold 50 PYB at 23.1 in Main Taxable Account and 50 PYB in Roth IRA at 23.07 on Tuesday (see Disclaimer):  This TC represents an undivided beneficial interest in the 2033 Goldman Sachs senior bond, a frequent topic of discussion in this blog. The TC has a lower coupon than the underlying bond. This TC has a 5.75% coupon on its $25 par value. The underlying bond owned by the trust has a 6.125% coupon. That fact alone makes the exercise of the call warrant less likely.

When I bought PYB again, I thought that there was a reasonable chance of a redemption at the $25 par value by the owner of the call warrant. The underlying bond was then trading in a range between 105 to 107.  It is now trading at close to par value. FINRA 

After receiving one semi-annual interest payment, I decided to pare my PYB position since I do not believe a redemption is likely at this point and I am uncomfortable with my current exposure to lower yielding long term bonds. At a total cost of $23.07, the current yield on PYB is around 6.2%. This transaction was close to break-even with the interest payment. Item # 7 Bought 50 PYB @ 23.69 Bought: 50 PYB @ 23.69

For now, I am going to hold the 100 shares held in a satellite taxable account bought last October.  I received the interest payment on 2/15. Item # 2  Bought 100 PYB @ 23.81

2. Sold 100 VALE at 34.6 on Wednesday (see Disclaimer):  Brazil's government sacked the highly regarded Vale CEO, who had refused to follow government directives to pursue social and political projects that would lose money for the company. It now appears that Vale will likely become a source of funds to achieve political goals for the leftists in Brazil.  MarketWatch Forbes I am never comfortable in any government having such control over a publicly traded company. This recent event is a such a sufficient cause of concern that I no longer want to own stock in the company and consequently sold my recently acquired position at a small profit.  Bought 100 VALE @ 34 (2/7/2011 Post)

I placed a limit order at 34.6 before the market opened yesterday, based on pre-market trading, and the opening price was the high price. VALE closed at $33.6 in trading yesterday, down 67 cents.

3. Sold 50 ED at $51.30 with a GTC Limit Order on Wednesday (core electric utility strategy)(see Disclaimer): I pared my position some in Consolidated Edison (ED) by selling 50 shares with a GTC limit order entered a couple of weeks ago.  These were my highest cost shares using FIFO accounting. I booked a profit on the shares and lowered my average cost for the remaining shares. I am reinvesting the dividend.

This is a typical trading pattern for core holdings. Those positions invariably pay good dividends and are well established companies. Dividends are reinvested to buy additional shares until I view the price as unattractive, which recently caused a change in my reinvestment option for Coca Cola shares.  While I will add to or subtract shares from the position, the primary purpose is to lower my average cost over time, with a secondary reason being the desire to book some profits.

To lower my cost in ED shares, I would have to purchase shares at below $45. Some of the reinvested dividends bought shares at less than $40 starting with the December 2008 quarter and continuing through the September 2009 quarter. A number of shares were bought in the low 40s with dividends. So all of those shares could be sold profitably and have contributed incrementally to the overall size of the dividend.  

Several of my core electric utility holdings have increased in value this year, permitting me to pare positions profitably and to lower my average cost. Pared 50 DUK at 18.42 A typical trading pattern is also shown by two recent trades of FirstEnergy shares. SOLD 50 FE AT $40.7 (2/3/2011)  Bought 50 FE at 36.75  (3/4/2011 Post) Since I am a long term holder of these securities, it does not matter to me when the next opportunity to buy occurs. For FE, it occurred soon after the pare.

For Duke Energy it may not occur for years since any subsequent purchase must lower my average cost. My average cost for the DUK shares held long term is $15.03. My last market purchase was in May 2009. Added to Duke (DUK) at 13.56 I am reinvesting the dividends for all core electric utility holdings.

ED closed at $51.22 yesterday and traded as high as $51.35 which was a new 52 week high.  At that price, the yield is around 4.7%.   

I also bought two more junk bonds on Wednesday that I will discuss in the next post. Headknocker let it be known that one more junk bond purchase by any HT will have serious repercussions, reminding all HT's that HK's ass kicking ability, his most endearing quality, is known and respected throughout the known universe. 

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