Wednesday, May 11, 2011

Sold 1 Mueller Water Sen Sub Bond at 100.625/Sold 50 IDG at 24.63/Sold 120 ZBPRC at 26.91/Sold 200 Artis REIT at 13.88 CAD/Sold 100 PHB at 18.63

The following article, written by a research team at Nuveen, has some worthwhile information about how different income investments react to increasing federal funds rates by examining three periods starting in the mid-1990s.  nuveen_risingrates.pdf

I would add a word of caution that is not made by the authors. In my opinion, the bond market has been in a long term secular bull market, which started in 1982, and those three periods examined in the article were mere blips in the overall upward trajectory in bond prices and decline in yields.

While some of the factors discussed by the authors are relevant in a garden variety correction in bond values within the context of a continuing long term bull market, I would not view any of those considerations as the most important when and if investors change their perception about the likely course of future inflation. The current perception is that inflation will not be a long term systemic problem for bonds. If the world enters into a stagflation scenario or just a relentlessly rising inflation rate, then I would not be looking at history since the mid-1990s to determine how those conditions will impact the various bond classes. Instead, I would be pulling up data from 1965 to 1982.

1. Sold 1 Mueller Water Sen Sub Bond Maturing in 2017 at Over its Par Value (Junk Bond Ladder Strategy)(see Disclaimer): The profit on this 1 bond was $42.21 plus interest. Bought 1 Mueller Water Bond at 94.5  

2. Sold 100 of the Bond ETF PHB at $18.63 in the Roth IRA Last Thursday (see Disclaimer): I have elected to go with individual junk bonds, and to manage my positions, rather than to own a junk bond ETF. There is also some overlap in my individual bond purchases and the bonds owned by PHB (see: PHB Holdings).

Some of those duplications include the following senior bonds: the 2015 8% Supervalu; the 2016 7% Dean Foods; the Edison Mission 7% 2017; and the Cincinnati Bell 8.375% 2020.  Most of the PHB holdings are off limits due to their premiums.  I checked most of them last week and would not buy them due to their premiums to par value.

In my individual selections, I am avoiding paying a premium to par value.  And, I do not have any ongoing expenses after paying a small brokerage commission. PHB has an expense ratio of .5% and a weighted average price per bond of 108.81 as of 4/28, whereas my weighted average price is a few points below 100 with a higher yield.

My portfolio is riskier however with many bonds rated deeper into junk. I am attempting to manage risk some by harvesting some profits, particularly in the riskier ones like the Hawker bond which has already been sold at a profit.   

3. SOLD 200 ARTIS Real Estate, A Canadian REIT, at 13.88 CAD last Thursday (Canadian Dollar (CAD) Strategy) (see Disclaimer): The 200 Artis shares served their purpose under the Canadian Dollar Strategy.  I received several monthly dividends in Canadian dollars and exited the position at a profit, thereby increasing my CAD stash.   I may use part of that stash to add to one of my Canadian stock ETFs. 

ARTIS REIT +205.1 Capital Gain Plus Monthly Dividends Paid in CADs 

4. Sold 120 ZBPRC at 26.91 (see Disclaimer):  I just declared victory on the three Zions' preferred stocks that I have been trading over the past two years.  These securities are ZBPRA, a floating rate equity preferred stock with a minimum coupon; ZBPRB, a fixed coupon trust preferred; and ZBPRC, fixed coupon equity preferred stock. Both ZBPRA and ZBPRC paid me qualified dividends but their distributions are non-cumulative. My largest percntage gain was on 100 shares of ZBPRA: 

ZBPRA LT Capital Gain +1,099.21 on $788 Investment, plus dividends

Another shorter term trade in the regular IRA netted a $201.53 capital gain on the ZBPRA:

ZBPRA Gain +201.53 on $633 investment plus dividends

A thirty share chicken trade of ZBPRC shares netted a long term capital gain of $226.13 on a $560 investment:

The best trade on ZBPRA was in the ROTH IRA, netting a capital gain of $208.02 plus interest payments on a $1003 investment:

The last trade on ZBPRC netted a short term capital gain of $208.63, plus dividends:

5. Sold 50 of the ING HYBRID IDG at 24.63 Last Friday (see Disclaimer):  The ING hybrids are perpetual junior bonds.  I have zero interest in them now, as most of them are selling near their $25 par values.  I simply view the risk to the downside to be more pronounced than the possibility of additional appreciation.  Besides, I do not want to spoil my trading record in the ING hybrids by holding onto them too long.  The sale of IDG leaves me with only 50 shares of INZ bought in a regular IRA when it was priced to yield over 22% annually:

These bond sales are consistent with my opinion that the long term secular bull market in bonds, which started in 1982, is near an end.   This makes me, rightly or wrongly, extremely cautious with long term bonds and non-term bond funds, or any other bond selling for over par value where I have an unrealized gain.  I may make an exception for this 50 shares of INZ and just hold it.

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