Thursday, August 11, 2011

Exchange Traded Bond and Preferred Stock Table as of 8/10/11/Added 50 JZV at $23.04/

Yesterday, the stock market continued to experience extreme volatility with a downside bias. I believe that the cyclical bull market starting in March 2009 can now be declared dead. The latest fear gripping investors involves European banks, particularly several French banks. WSJ  Reuters

The DJIA fell 519.98 points to close at 10,719.79. That is close to the DJIA close on 5/26/1999: ^DJI Historical Prices  My concern would be a decline in the S & P 500 to below 950 which is my current target level for this cyclical bear market. The S & P 500 closed yesterday at 1,120.76, down 51.77 or 4.42%.

The ^VIX spiked 22.62% yesterday to close at 42.99. The Russell 2000 volatility index shot over 50, closing at 50.51. ^RVX

Maybe Cisco's earning will provide some comfort for today. SEC Filed Press Release MarketWatch  European markets were in a slightly better mood early this morning.

Personally, I believe that fear is a more powerful emotion than greed.

The last signficant round of selling occurred on Tuesday, July 27th:  SOLD: 100 EXC @ 44.67, 100 APF @ 17.47, 50 DLN @ 49.38, 100 PEO @ 30.62, 100 MSFT @ 27.9 I mentioned in that post that I might buy back the stock ETF DLN after a 10% slide. That slide has already occurred.

Instead of going back to DLN, I will probably buy back DHS which has a higher dividend yield. WisdomTree Equity Income Fund I sold virtually all of my stock ETFs, including OEF, VTI, VV, VEU, and DHS, before this meltdown began. My last buy of DHS was in July 2010:  Bought 100 DHS at 35.32 I am not likely to buy 100 shares again, more like 50 shares and even that will be based on feel.

I mentioned in yesterday's post that the Fed's assessment of the economy provided little comfort to stock investors. I would consequently view yesterday's price action in the market as more consistent with that assessment than the move upward late on Tuesday. I would anticipate rallies to be sold so I am holding my powder mostly dry on stock purchases. Purchases will be spaced out and limited to small odd lot orders at best.

JBI (owned) was ex interest for its semi-annual interest payment yesterday. This TC has at is underlying security a senior bond issued by Spectra Energy Capital, formerly known as Duke Energy Capital. FINRA The underlying bond is investment grade. There is a danger that this TC will be called by the owner of the call warrant which will act to restrain its price appreciation. Adjusting for the interest payment since TCs trade flat, JBI rose 36 cents yesterday to close at $25.22.

FPC Capital I 7.10% (own) was also ex interest yesterday for its quarterly interest payment and rose 9 cents to close at $25.26.

Bill Miller wrote an opinion column, summarized in the WSJ, skewering S & P on its downgrade.

The Swiss Franc hit an all time high against the USD and the EURO.WSJ

As noted previously, Moody's reaffirmed the U.S. "AAA" rating. This is a link to an excerpt from its report: WSJ

The U.S. does issue and pay its debt in USDs. As long as that happens, there is the capacity to repay the debt provided the Congress allows it, by simply printing more dollars.

The  Barrons' technical analyst believes the stock market has ended it cyclical bull cycle. I agree with that assessment. He thinks that 1040 on the S & P 500 is the next support level. He does make an observation in his column which I frequently make in this blog. Long term bear and bull cycles typically last 15 to 18 years, though he uses 18, and consist of multiple bull and bear cyclical cycles lasting a few years each. He also starts the current long term bear in 2000, as everyone does who thinks about this issue other than me. I start it in October 1997 for reasons given in this post: Dating the Start of the Current Long Term Secular Bear Market

If it generally takes around 15 years for humans to recognize the cause of the long term bear cycle, and actually do something to cure it, which is about right give or take a couple of years, then the start date becomes important. I would have the current cycle ending in the later part of 2013 or possibly as late as 2016. The 18 years suggested by the Barron's analyst would put the end at around 2018 with the start date in 2000. Of course these dates are at best approximations. Once you identify the cause or causes for the long term cycle, by asking the right question and searching for the facts, then the question which has to be answered is a simple one. Has the problem been resolved yet, and my answer to that question is no. Others may disagree. So, the roller coaster ride of the long term bear market is likely to continue in my opinion. The Roller Coaster Ride of the Long Term Secular Bear Market (May 2010 Post).

It is important to identify whether the market is in a long term secular bull or bear cycle. The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets (June 2011 Post). This is probably the most important decision for an individual to make about investments.

A proper identification will tell me whether to buy and hold, or to trade aggressively with significant shifts in my asset allocation. I have been in a trading mode for over 10 years now.

The Buy and Hold strategy and minor asset allocation shifts is generally the appropriate investment for a long term secular bull market, especially when the two major asset classes of bonds and stocks are positively correlated with one another. This would have been appropriate for the periods between 1950 to 1965 and from 1982 to 1998.

A Sell the RIPs and Buy the Dips, along with constant allocation shifts based on an assessment of market conditions, is the only way to advance one's capital in a long term bear market for stocks, which is also likely to have highly cyclical and volatile, up and down patterns in other asset classes. The Fed's decision on Tuesday will cause me to shift some funds out of cash into bonds for example and to shift some funds into non-USD assets.  This trading approach was the appropriate one for the periods between 1929 and 1949 and 1965 to 1982, as well as 1998 to present.  This is extremely difficult for most people to do, requires a lot of decisions, and an extraordinary amount of effort. The long term bear cycle is also more interesting to me.

The Barrons' technical analyst maintains, as I do, that the current long term cycle is a bear market. A buy and hold strategy during a long term bear market has historically lost the investor around 1% to 1.5% annualized adjusted for inflation, assuming an investment in the S & P 500 and a reinvestment of the dividends. The market will go up and down a lot, but the end result after 15 or so years is a loss adjusted for inflation. You would think that financial advisers would have figured that one out a long time ago, but they are either thick in the head or do not want the responsibility for all the shifts that have to be made in order to stay ahead. (see data at The Roller Coaster Ride of the Long Term Secular Bear Market for returns in long term bull and bear markets).  The return for the secular bull market has historically been 14% to 14.5% annualized, after adjusting for inflation and dividend reinvestment. Point made.  Sure the long term bear cycle is difficult, but a static allocation, coupled with a buy and hold strategy, during such periods will inevitably result in negative returns over a very long period of time.

The recent surge in the market off the March 2009 lows is viewed currently as a cyclical bull market within the confines of a long term secular bear market. I believe that the underlying cause of this long term bear market is too much debt. Underlying Cause of the Current Long Term Bear Market is Too Much Debt Until that problem is resolved, or the market believes that it is close to be being resolved, then it is not possible for a new long term secular bull market to be born. What Will Produce Growth after the Age of Leverage? That at least is my theory for the historical evidence.

For the secular long term bull market to last, there will need to be one or more powerful long term forces supporting it.The long term forces supporting the long term bull market starting in 1982 consist primarily of governments and individuals in developed nations willing and able to borrow ever increasing amounts of money to spend and the growth of technological innovation (primarily computers) spurring both job creation and productivity gains. Historically, some of those innovations can also be in transportation, distribution or communication.  Another force making that bull market possible is the successful fight waged by the Federal Reserve against inflation in the late 1970s and early 1980s, which provided a more optimal environment for growth and eliminated the primary cause of the long term bear market starting around 1965.

The most likely forces for the next bull market will be governments and consumers in emerging markets willing and able to borrow increasing amounts of money to spend, plus some contributions from consumers in developed countries after they successfully deleverage. Innovation will also be a driving force in ways that can not be predicted with any specificity now. So part of the force propelling the next bull cycle will be a resolution of the underlying cause of the current long term bear cycle. Earlier innovation cycles would include the production of electric power at a continuous lower average cost (economies of scale), railroads and canals, and the telephone.  

For the moment, I am inclined to agree with this analyst that the cyclical bull market has ended. The burden of proof is on stocks that they can move ahead consistently in the face of an economic slowdown, the massive drags associated with deleveraging, unfavorable trends in new housing construction and housing prices, and a stubbornly high unemployment rate.   

This chart shows the S & P 500 index from 1/1/1998 to 8/10/2011, and is consistent with the foregoing analysis of long term secular bear markets:

My downside target on the S & P is 950, and it does not matter when that point is reached in the current cyclical bear cycle. That is simply the point where I will consider making serious additions to my stock allocation.  Anything prior to that time should not be viewed as serious, or simply as a trade.

1. Appleton Papers (own bond only):  Appleton reported a net loss of $8.478 million on a 1.9% decrease in revenues to $216.6 million.  The company noted in its press release a "softening" market for the paper segments, "especially carbonless", and a "unrelenting challenge" presented by rising raw material costs.   Bought 1 Appleton Papers 11.25% 2nd Lien Bond Maturing 12/15/2015

2. Bought 50 JZV at $23.04 on Tuesday (See Disclaimer):  This brings me back up to 150 JZV.  I last sold 50 shares at $25.62 and 100 shares at $25.50.  I have repeatedly traded these Trust Certificate over the past two years or so. That trading left me with 50 shares bought at $9.93 (March 2009: see snapshot at Item # 3  Sold 120 of the TC JZV at $25.50/KTV REDEMPTION). Some other trades include the following: Sold 100 JZV at $16.25 (January 2009: bought at $12.78); Bought back 1/2 of JZV at $12.5 (January 2009);  SOLD 1/2 JZV at $14.07 (April 2009). 

I decided to add some more shares to my existing 100 share position due to the Fed's statement about continuing its Jihad until mid-2013. 

I discussed this TC thoroughly in the above linked posts One of my first discussions was in October 2008, when this security was selling at around $10. TRUST CERTIFICATE CNA BOND JZV I mention in that post, one of my firsts, that I had just bought this TC for the third time at $12.78. 

JZV is a trust certificate containing as its underlying security a senior bond issued by CNA Financial (CNA), an insurance company. This TC pays a 7% coupon on a $25 par value. The underlying bond and the TC, of course, mature at the same time which is on 12/23/2023, so I can easily hold this one to maturity. 

JZV Prospectus: 

The TC represents a beneficial interest in the assets owned by a trust, administered by an independent trustee. 

The owner of the call warrant has the option to call this TC now by paying par value plus accrued interest to the owners of JZV.  

The underlying bond is rated investment grade according to FINRA.  The rating is at Baa3 by Moody's and BBB- by S & P.  The bond was trading at around a 10% premium to its par value when I made my purchase on Tuesday. The bond has a higher coupon at 7.25%, but the TC would provide both a higher current yield and YTM based on a purchase price of $23.04.  

This is a link to the Reuters Profile Page on CNA and to its  Key Developments' Page.

JZV rose 38 cents yesterday to close at $23.6.

3. Exchange Traded Bond and Preferred Stock Table as of 8/10/11: I regularly post this table that includes my exchange traded bonds and preferred stocks. These securities include Trust Certificates, Trust Preferred, equity preferred stocks, Baby Bonds, European Hybrids and "Principle Protected Notes".  I had been taking profits in this sector and have recently reversed course by buying back some securities such as JZV mentioned above.

This part of my portfolio was up $268 in the carnage yesterday.  This table had more securities in it, before our LB started to take profits, as shown in the table posted in April 2011: EXCHANGE TRADED BOND TABLE 

No comments:

Post a Comment