Tuesday, May 10, 2011

Added 2 Edison Mission 7.75% Bonds Maturing 6/15/2016 @ 86.12 in Roth/SYY/Sold 100 IGI @ 20.76/Sold 100 Killam @ 10.99 CAD/Sold 100 Transglobe @ 11.19 CAD/Sold 50 FPOPRA @ 25.7/Bought 1 Senior 7.5% HCA Bond Maturing 12/15/2023/Sold 50 IND @ 24.01

Brett Arends published a column yesterday at MarketWatch that highlighted the decline in housing prices, referencing a report from Zillow that claimed that average home prices have declined about 8.2% from a year ago. The number of zombie homeowners, whose mortgages exceed the value of their homes, has risen to a new crisis high, estimated at 28% of homeowners with mortgages.  The Zillow report can be found at  Zillow Real Estate Research.  Zillow also provides estimates of my home's value.

Just to keep track of what is happening in my neighborhood, I receive free email updates from ePropertyWatch. That service will provide me with recent sales and foreclosure information, estimate the value of my home based on comparable home sales, and notify me of any filings on my property in the register's office.  This may sound outlandish, but fraudulent transfers of title and liens are not uncommon occurrences.  This free service is from CoreLogic. I own their senior bond maturing in 2028, both in TC form, PJS, and in a 1 bond purchase.   Bought 1 7.55% CoreLogic Senior Bond Maturing 4/1/2028 @ 94.975

1. The OG Bought 2 Edison Mission 7.75 Senior Bonds Maturing on 6/15/2016 86.12 by Accident in the ROTH IRA (Junk Bond Ladder Strategy) (see Disclaimer) For those who know the OG, the following will come as no surprise. I do manage money for family members, and a testamentary trust created by my father, for no compensation of course. The OG likes working for free, "what a moron", LB had to say.

My mother, who just turned 88, has two brokerage accounts at Vanguard, where I also have two brokerage accounts. It is really hard for the OG to keep track of who owns what, maybe HK needs to add a Mexican to the staff here at HQ to assist the OG- who is after all "way past his prime", LB just helpfully added.  LB is still working on all of the scenarios on how best to achieve a divorce from the OG and wants to emphasize to all that "guilt by involuntary association" is contrary to all American values.  And for any new readers, LB wants to emphasize again that it is embarrassed by the OG. 

Last Tuesday, the OG  decided to take some risk on behalf of his Mother, whose 88 year old mind works better most of the time than the piece of mush inhabiting the OG's skull.  The OG  attempted to purchase 2 Edison Mission senior bonds in one of the two accounts owned by her at Vanguard.  It must have been the Lord's way of saying no to that decision, as the OG bought instead two Edison Mission bonds in his Roth IRA and now owns 5 of those bonds, three more than his comfort level.

My Mom has 24/7 caregiver service and one of the caregivers recently told the OG, when confronted with his usual memory lapses involving the failure to purchase all of the groceries on a carefully prepared list, that the mind was the second thing to go.  Well, if that saying was true, the OG must still have his mind, more or less.   "Far Less than more" was LB's response. 

I have discussed Edison Mission in several recent posts and have nothing to add:

This is a link to the FINRA Information on the Edison Mission 2016 bond. I discussed the recent quarterly report at Item # 6, Edison Mission.

Due to the error in buying these last two bonds, I will need to sell one or two at some point, most likely within the next year.  I am concerned about EMG's heavy exposure to coal fired generation which raises a host of problems, EMG's erratic earnings,  the total amount of debt, and the mostly short term maturity schedules of that debt.

(added: after this post was published in May, Moody's downgraded Edison Mission debt to Caa1 and I have downgraded the debt in my personal risk ratings to indicate a higher possibility of default: Personal Risk Ratings For Junk Bonds)

(added: in response to my views about the increased risk of EME bonds, I have sold 4 out of 5 bonds at a loss, with the latest disposition discussed in Sold 2 Edison Mission 7.75% Senior Bonds Maturing in 2016 at 73.25)

(added 6/6/12: for the detailed reasons given in a subsequent post, I have raised my personal risk rating for EME unsecured senior bonds to 10-, Item # 1 Risk Rating Raised on Edison Mission Bond to 10- from 9-. Edison Mission recently hired Kirkland & Ellis to assist it in assessing its options, which suggests that a bankruptcy filing is one such option)

(added 9/13/2012: Edison Mission specifically raised the bankruptcy option in its last quarterly report: EME 2012 Q2. I discussed this development at Item # 5 Edison Mission Statement SEC Form 10-Q on Bankruptcy Option. Subsequent to that filing, the District of Columbia Court of Appeals struck down the EPA's emissions rules for coal plants.  EPA Emissions Rules for Coal Plants Struck Down in 2-1 Decision. This decision is not yet final, since the government still has appeals left.)

(added 11/25/12: As noted in a subsequent blog, Edison Mission, EME failed to make the interest payments due on 11/15/12-‎EME 8-K SEC Filing)

(added: On 12/15/12, the WSJ.com reported that EME was preparing to file for bankruptcy and that it may be necessary for the reasons outlined therein to stay in bankruptcy for some time.)

(added: as expected, EME filed for bankruptcy on 12/18/12, ‎www.sec.gov)

2. Sold 50 IND at 24.01 in Roth IRA Last Wednesday (see Disclaimer):  I successfully traded the ING hybrids during the Near Depression period.  There are several exchange traded ING hybrids available for purchase in the U.S., and I view them to be functionally equivalent. The main issue for choosing one over another is the yield at my potential purchase cost.  I do not find these perpetual junior bonds attractive at current levels and will simply move in and out of them.  I still own 50 shares of INZ bought at $ 7.82.

I discussed these hybrid securities in a Gateway Post from 2009:    ING Hybrids: Links in one Post I can confirm that all of the dividends received by me from the ING hybrids owned in taxable accounts have been classified as "qualified dividends" by my brokers. That classification will provide some buying support for these securities, as long as this tax provision remains. I would not count on it remaining in the event Obama is reelected and the budget deficits continue to be a problem. 

I recently bought those IND shares at  $22.95 in a satellite taxable account, and I received one quarterly dividend.

I have been raising a fair amount of cash over the past several months. While some of the proceeds from security sales has been channeled back into junk bonds and a few common stock purchases, I have had a net increase of over $50,000 in my cash allocation, mostly from a reduction in stock ETFs, bond CEFs, and long term bonds selling near or over their par values. 

3. Sold 100 IGI at $20.76 Last Wednesday (see Disclaimer):  I am managing my position in this bond CEF with a 2024 term date by taking small profits over time and hopefully buying back shares sold at a lower cost. The shares sold last Wednesday were bought in the main taxable account at 19.65 (3/14/2011), so this was a quick flip after receiving two monthly dividend payments. 

Based on the $20.7 closing price on 5/4/11, IGI was selling at a -4.12 discount to its then net asset value per share of  $$21.59.   I now own 150 of IGI, all of those shares are held in the ROTH IRA.

I own far more of a similar fund, GDO, that includes foreign corporate bonds and also has a 2024 liquidation date.   I also own 220 shares of GDO in the Roth IRA, where I am taking the dividends in cash.  I also own 326.826 shares in the taxable account, and I am currently reinvesting the dividend to buy additional shares. GDO has a higher dividend yield and is selling at a larger discount to its net asset value.  So, I am more inclined to go with it than IGI, at least for now.  I have yet to sell a share in GDO.   The trading profit in IGI shares now stands at +328.8 plus dividends.   

4. SOLD 100 KILLAM Properties at 10.99 CAD Last Wednesday and 100 Transglobe Apartments at 11.19 CAD-Both Canadian REITs (Canadian Dollar (CAD) Strategy)(see Disclaimer): Both of these REITs pay dividends monthly and served their limited purpose in the Canadian Dollar Strategy.  I increased my CAD position by making a profit on the shares and by receiving several monthly dividends. 

5. Sold 50 FPOPRA at 25.7 Last Wednesday (see Disclaimer):  This REIT preferred stock was ex dividend last Wednesday and inexplicably rose by more than the quarterly dividend. FPOPRA Par value is $25.  As discussed many times, I do not even like REIT preferred stocks, though I had a success trading them during the Near Depression when their prices were crushed and their yields in many cases exceeded 15% and even 75% in one case. REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock  Equity Preferred Stocks as a Disfavored Sub-Asset Class  (May 2009 Post) I am a reluctant buyer now, and certainly a weak holder of those purchased anywhere near their par values.  So, I decided to just flip FPOPRA for the small gain on the shares and the one quarterly dividend.  Bought 50 FPOPRA at 24.99 (4/5/2011 Post) 

6. Bought 1 Senior 7.5% HCA Bond Maturing 12/15/2023 at 96.854 Last Wednesday (Junk Bond Ladder Strategy) (see Disclaimer):  I recently bought another HCA bond and have already discussed this company. Item #3  Bought 1 Senior 7.69% HCA Bond Maturing 6/15/2025 at 92.26 (5/4/2011 Post). 

After that last purchase, HCA did report first quarter earnings: SEC Filed Press Release Revenues increased 6.8% to 8.055 billion. Net income increased to 240 million or 52 cents per share, which includes a 32 cent charge relating to the termination of a management agreement with HCA's investors in conjunction with its recent IPO.   

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

My confirmation states that the current yield at my cost is 7.68% and the YTM is 7.794%. The bond is currently rated Caa1 by Moody's and B- by S & P.

7. Sysco (own: Common Stock Dividend Growth strategy): SYY reported better than expected results for its fiscal third quarter ending on 4/2/2011. Revenues increased by 9.1% to 9.76 billion dollars, better than the consensus estimate of $9.48 billion. SEC Filed Press Release SYY reported 44 cents per diluted share in earnings, with a net charge of 2 cents per share for extraordinary items discussed in that press release. Excluding items, the company earned 46 cents per share, compared to the consensus estimate of 41 cents.

Sysco rose 10.73% yesterday, or $3.06 per share, to close at $31.57. Barrons.com is still positive about SYY even after that robust rally. I am in a holding pattern, maybe I would sell at $40.

My shares in SYY were bought in March 2009 at $19.46. Buys of CPB LQD SYY XKK (MARCH 9, 2009 Post). While I expect the dividend growth rate for SYY to slow from historic levels, the stock still qualifies under the dividend growth strategy.  I go into greater detail on the growth rate of SYY's dividend in the following post:   ITEM # 4  Sysco  When I bought shares in 2009, the annual dividend for that year was $.94. The yield at a total cost of $19.46 at that annual dividend rate was then 4.8%.  One key to the dividend growth strategy is that my cost remains constant as the dividend grows over the years which is an advantage of a common stock over a fixed coupon bond.  The last quarterly dividend was at 26 cents or $1.04 annualized.  The yield on shares bought at a total cost of $19.46 is now 5.34%.

The dividend growth strategy works best when the starting yield is over 3%, the dividend doubles in ten years or less (7 years is really good), and the company is in a business where dividend cuts are unlikely even during a serious recession. This makes consumer staple stocks the ideal choice for purchase using this strategy, but the time to buy is during a stock bear market, the time of my buys of KO (Buy of KO at 38.72), HNZ (Buy of HNZ at 31.67) and SYY at $19.46.

If you are young, there will be many opportunities over your lifetime to initiate positions in these type of companies when all of the criteria, discussed in Item # 6  Common Stock Dividend Growth, are met.  The OG may have just one more major opportunity. These opportunities are infrequent and have to be seized whenever they appear.  The best opportunity to buy them is doing the catastrophic phase of a long term secular bear market, when the major averages fall over 50% in a relatively brief period of time (E.G. September 2008 to March 2009, or see January 1973 to October 1974 at dshort.com). A catastrophic phase will generally occur at some point during a long term secular bear market in stocks that will last around 15 years, give or take a few.  The timing will vary (beginning, middle or near the end). 

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