Monday, April 11, 2011

Zealots and the Budget Process/United Refining/New Bond ETF CBND/Bought 300 of the Bond CEF ACG at 7.63/Pared Trade: Sold 50 ZBPRB at 25.68 and Bought 200 of the TC XKK at 10.02

The government avoided a shutdown last Friday as the ideologues withdrew demands to cut 363 million in funding to family clinics including those operated by Planned Parenthood. ABC News NYT The ideologues maintained that it was a matter of principle, since some of those clinics might entertain a discussion about abortion or birth control, though no federal dollars are used to perform an abortion. If funding had been cut off, the GOP would have managed to increase the number of abortions, as studies have indicated that family planning averts unwanted pregnancies and abortions. NYT So, to reduce the number of abortions, you would actually want to keep funding for clinics providing birth control information. I know that it is hard to understand for many, but not every person is up to speed on birth control. But, that is just way too many facts for the True Believers to process.

When making a decision to go to war that ended up maiming and killing tens of thousands of human beings, those same ideologues were virtually unanimous (Iraq Resolution) in their desire to attack a country that had not attacked us based on clearly fabricated reasons. Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent?  Trust the Government? (discussion on the aluminum tube fabrication)(see also Curveball:  The Guardian Curveball (informant) - Wikipedia)("Curve Ball"  60 Minutes)  (Niger uranium forgeries - Wikipedia).  

The ideologues are simply not capable of engaging in the introspection and thought necessary to see the inconsistencies in their "principles".  {Six GOP Congressman voted against the IRAQ resolution, Reps. Duncan (R-TN), Hostettler (R-IN), Houghton (R-NY), Leach (R-IA), Morella (R-MD), Paul(R-TX), and 215 in favor of it.}  The cost of the IRAQ war, currently around 750 billion dollars and counting, will probably end up being financed with more than 1 trillion of borrowed funds, when all of the costs are finally added to the tally. And, that sum will have to be financed and re-financed for generations to come, most likely for as long as the U.S. remains a viable nation. 

While the True Believer's base would have stood with the republicans in the House, just shut down the government or cut federal assistance to Planned Parenthood, independents would not have supported such flagrant irresponsibility.  

In a way, it is too bad that the government did not shut down by virtue of the House republicans refusing to bend on that issue. It would highlight an obvious personality characteristic that would cause individuals, capable of independent fact based thinking, to pause before giving the republicans more power in the next election.  They are at least coming out of the closet, with their desire to bust the unions, at least those who fail to support GOP candidates, and to end medicare/medicaid.

I would agree that a nation running annual deficits, which start with the word "trillion", has to cut or eliminate a large number of programs. Neither party seems seriously willing to engage  in such necessary action, as opposed to posturing and talking about it. It is equally apparent that only irresponsible zealots would have interjected this 363 million dollar expenditure as a make or break issue in the budget process. The elimination of funding support for family  clinics can be addressed in specific legislation,  and passed into law, when the republicans have enough votes in both the House and the Senate, as well as a republican President. If abortion is still a constitutional right, such action would increase the number of abortions.   

GE Asset Management has been selling riskier assets including commercial mortgage securities, junk bonds and emerging market debt.  According to a report at Bloomberg, GE is increasing its exposure to long term treasuries.  The head of fixed income investment at GE Asset Management, who oversees 53 billion dollars, believes that the growth will remain sluggish, federal stimulus is near an end, a renewed housing slump may be upon us, unemployment will remain a problem, and wage growth will continue to remain anemic.  In short, that kind of economic forecast is not positive for riskier fixed income assets. LB agrees with the foregoing economic forecast while RB just said go "All In".

I find it impossible to buy long dated U.S. treasuries at their current yields. I do not view the U.S. government as a "AAA" credit risk, more like a "BBB" or a BBB+ when our LB is feeling liberal which last happened for about ten seconds thirty years ago.  My gut tells me to short long treasuries but so far I have nixed that impulse.  The OG just said that the guy from GE Asset Management may be right about the long term treasuries, possibly some exposure to longer dated treasuries is warranted since the OG does not want to spend the remainder of his days sleeping under a bridge and eating at the soup kitchen. HK told staff to hook the OG back up to his IV of chills pills. 

The EU is showing Portugal some tough love. The citizens in Portugal do not want to make any sacrifices while receiving a bailout estimated at 115 billion. The EU wants Portugal to make more cuts than those rejected by the Portuguese parliament in March. Bloomberg The natural tendency of humans is just to say give me the money because I want it and therefore deserve whatever I am receiving, or more, from the government, certainly not less. Some would just summarize that trait as a belief that one is entitled to something for nothing. 

State Street Global Advisors (SPDR) has launched a new corporate bond ETF with the symbol CBND. This bond ETF has a .16% expense ratio and an average maturity of 8.28 years.  It will pay monthly dividends.  The average credit quality is BAA1.  I have owned another investment grade bond fund with a similar average maturity, the ETF  Investment Grade Corporate Bond Fund (LQD) from iShares, which has a .15% expense ratio and a current average maturity of 11.89 years. The new product from SPDR is not market weighted like the LQD ETF. Instead, the SPDR weights holdings based on fundamental criteria such as return on assets and interest coverage.  This will lead to dramatically different weightings between the two funds. This is a similar approach to one utilized for junk bonds by the PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB) that I own: Item # 2 Bought 100 PHB at 18.15 

1. United Refining: United Refining did call the 10.5% senior bond maturing in 2012.  The bond was called at par value plus accrued interest of $15.46 per bond.  This resulted in a small gain. Bought  1 United Refining Senior Bond at 95.5  I am tracking the realized gains in my in gains in my Junk Bond Ladder Strategy strategy in Item # 5  Realized Gains Junk Bond Ladder Strategy. As long as that number remains in the green, I will view this strategy as a success.   Since the bonds are being purchased at discounts to par value, I will have a gain whenever the company survives to pay par value.  I will also have some trading gains. I am also certain that there will be at least one default and several realized losses.  

After adding a couple of junk bonds late last week, my average yield is 9.5%. The average maturity is 7.41 years. The five year treasury closed last Friday with a  yield of 2.3%. Markets Data Center Home  I am picking up about 7.25% in yield over the 5 year "AAA" treasury. I seriously doubt that I could buy "BBB" bonds with a YTM of 5% since many purchases would have to be made at over par value. The CBND ETF, mentioned above, has a low expense ratio and the average price is over 106 with an "average yield to worst" as of 4/7/2011 of 3.79% and that was with an average maturity longer than the bonds in my junk bond ladder.   

2. PARED TRADE: SOLD 50 ZBPRB at $25.68 and Bought 200 of the TC XKK at $10.02 on Friday (see Disclaimer): For exchange traded bonds purchased within the past year or so, I am no longer attempting to make money on the shares.  Prices have moved up so much that there is no longer any realistic potential for capital appreciation.  For those positions acquired in the past year, I am satisfied now to exit the position with any gain provided I can harvest one or more interest payments when doing so.  Such was the case with my 50 shares of ZBPRB, a trust preferred security issued by Zions Capital Trust B. I received two interest payments and made a small amount on the shares. It would not be rationale to expect more. 

This particular TP represents an undivided interest in a junior bond issued by  Zions Bancorp that matures on 9/1/2032. This security is loaded with both credit and interest rate risk.   My last purchase of this TP was at $25.05 in November 2010. Based on the ratings provided at (free site, registration required), this Zions' junior bond is currently rated at Caa1 by Moody's and B by S & P.  I hold this bank in low esteem and consequently go with the Moody's rating.  I have bought and sold this TP at lower prices:  Bought 50 ZBPRB in Roth at $19.9 Sold 50 ZBPRB at 24.38  I do not intend to buy it back at above its $25 par value again.  I still own 120 shares of the fixed coupon equity preferred stock ZBPRC which has a 9.5% coupon. 

The coupon on ZBPRB is 8% on a $25 par value.  The TC XKK has a 8% coupon too but the par value of that TC is $10.  So my purchase of 200 of XKK will have a higher current yield.

Trust Preferred Securities: Links in One Post

As previously discussed going back to the earliest days of my blog, the underlying bond in XKK is a senior Goodyear Tire bond maturing in 2028. The underlying bond has a 7% coupon, lower than the TC at 8%.  That means the trust which owns the bonds has to have more bonds to support the higher coupon. The underlying senior bond from Goodyear is currently rated B2 by Moody's and B+ by S & P according to FINRA

There are four reasons for making this pared trade. XKK has a higher yield at $10.02 than ZBPRB has at $25.68.  The underlying bond in XKK is a senior bond, compared to the junior bond owned by the trust in ZBPRB. This is important since the interest payments on ZBPRB may be deferred for up to five years provided no distributions are made on junior securities. That is not an inconsequential risk for a banking institution like Zions.   XKK matures sooner than ZBPRB, which means that it has slightly less interest rate risk for a long term bond. And, XKK has a credit rating which I believe is deserved, so there is less credit risk of a default.  

I have previously bought and sold XKK with my lowest purchase being in an IRA  at $3.8 in IRA during the Near Depression period.    Prior to making this last purchase in a taxable account, I owned 100 shares at a total cost of $8.02 per share after selling several hundred shares in that account.  The remaining shares would have been the last shares bought: 

With the 200 share purchase last Friday, I now own 300 shares in this account and have in the past owned as many as 550.   If I need to, I can hold the 300 shares in the main taxable account until the bond matures in 2028.  Due to having strong hands, I do not face the same interest rate risk of a long bond as someone who might have to sell the bond before maturity. 

XKK just went ex interest for its semi-annual interest payment in March.  The next payment is due in September.  On 300 shares, the annual payment would be $240 or $120 semi-annually.   

This is a link to the underlying bond information from FINRA.  That bond is generally available for purchase in 1  bond lots.  The TC provides me with a slightly better current yield. 

XKK Prospectus:

Underlying Bond Prospectus:

This is a link to the 2010 Goodyear Tire  Annual Report. The maturity schedules of Goodyear's long term debt is set forth at page 85.  The 2028 senior bond is the longest dated maturity. 

As you would expect, GT will be adversely impacted by rising oil prices.  The common stock, traded under the symbol GT, has never been owned.   At a $15 share price, the market cap is around $3.65 billion.  The current consensus estimate is for an E.P.S. of 56 cents in 2011 and a $1.9 in 2012. 

3. Bought 300 of the Bond CEF ACG at 7.63 Last Friday (see Disclaimer):   This bond CEF was bought to pacify the Old Geezer (OG) last week, who just kept saying, over and over, that he was too old to start living under a bridge in downtown Nashville.  While the weather is nice now, and there are several bridges providing a ceiling for those less fortunate souls, the OG started to shimmer when he started to think about the conditions for outside living during the summer and winter. Sure, the OG is a little soft now, accustomed to air conditioning and steaks, but is that grounds for criticism?  Besides, as the OG has noted many times, the price of gold does not exactly confirm that all is right with the world and the rise in oil to over $110 per barrel is more than a little disconcerting. 

While buying the bond CEF ACG did have a pacifier effect on the OG, it probably will not last for long.  Left Brain (LB) has become weary, long ago, of the OG's worry wart fantasies, noting that  the OG is becoming worse than the bird brain RB. LB is embarrassed to be part of this operation and wants a divorce.

Buying some ACG shares last Friday did give the LB some peace and quiet, the importance of which is a cherished commodity to the LB given the variety of noise problems that have to tolerated minute by minute. Besides, spending a couple of grand on ACG shares was far better than the alternative, suggested by the OG, the purchase of 1000 shares of the  20+ Year Treasury Bond ETF when the shares slid below $90 last Friday.  It is becoming harder by the day for the LB to advance HK's capital position in a rational and precise manner.  

And, LB would remind readers that it successfully traded ACG in the past. Added 400 ACG at 7.85 (5/6/2010 POST) Sold 200 ACG at 8.35 (8/17/2010 POST) SOLD 200 ACG 8.45 (August 26, 2010 POST)  So, I made a few bucks and collected a few monthly dividends.  If a dollar can be made on the ACG shares after collecting a few monthly dividend payments, this last purchase will be classified as a success.  

From LB's perspective, ACG has issues. The most fundamental problem is that the fund borrows short term to invest mostly in low yielding treasury debt.  Holdings ACG   While short term rates are now low, many believe that the trend will soon be up, up and away. A rise in short term rates will not only raise ACG's borrowing cost, but will hurt the value of the longer dated treasuries owned by the fund. Recognizing these issues, LB sold out of ACG at a profit, before the precipitous price decline from around $8.4 to $7.6 which is large for this kind of fund.

Part of that decline in market price over the past several weeks was  due to an expansion of the discount to net asset value,  which is now well in excess of the normal level.  On Thursday, 4/7/2011, the fund was selling at a -12.4 discount to its net asset value of $8.71.   This data can be found each business day at the, the Closed-End Fund Association website, and the sponsor's at AllianceBernstein Income Fund, Inc.  

This is a link to the last SEC filed shareholder report: AllianceBernstein Income Fund, Inc.

The current monthly distribution rate is still 4 cents per share (see data at Morningstar). 

The yield at a total cost of $7.63 is about 6.23%, which is fine given the quality of the portfolio.  The main risks are the leverage and the interest rate risk associated with longer dated treasuries at this point in the interest rate cycle.  The only reason to buy shares is that those predicting an economic slowdown, or even a recession on the horizon, may be right. Those future conditions would suggest an improvement in the market price for ACG.  A continuation of a recovery, an uptick in inflation and higher short rates would be a perfect recipe for losses.

ACG closed last Friday at $7.61. At that price and based on a closing net asset value that day of $8.72 per share, the discount to net asset value was -12.73. 

What will the future bring? Who really knows? The OG plays the angles, and covers the bases.

The OG took the reins at the trading desk late Friday and sold two stock ETFs late in the day, which will be discussed briefly in the next post.  The OG was heard to mumble, "gold is at $1475 per ounce and oil closed at over $112 per barrel, all is not right with the world".

Gold Price

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