Friday, September 9, 2011

Obama's Speech on Jobs and GOP Response/Mortgage Rates/Europe/Bought Municipal Bond CEFs: 200 NMO at 13.03, 200 MUE at $12.89 and 100 BAF at $13.89/Sold NQS at 14.44

Gartner reduced its 2011 worldwide growth estimate for personal computers to 3.8% from 9.3%.

Obama had fire in his belly for the first time during his speech last night. Daniel Gross expressed some favorable opinions about Obama's jobs plan in his YF column, but noted correctly that the GOP will likely oppose even those aspects of the plan which originated from their brains, with the usual abundant level of hypocrisy and political machination. The WSJ noted that the tax cuts proposed by Obama were designed to help small businesses. A summary of the plan can be found in this article at The Atlantic and in this graphic found at the The Washington Post. Virtually no member of the GOP applauded a single proposal other than the passage of new trade agreements or the need to cut back on some regulations. NYT  Obama's plan was dismissed by Senator Minority Leader Mitch McConnell, as I would expect, even though it was filled with tax cuts for small businesses. (Transcript - Obama’s Speech)

Christine Lagarde, the new IMF chief, said yesterday that the countries "must act now-and act boldly-to steer their economies through this dangerous new phase of the recovery". Bloomberg It is hard to see that actually happening in the U.S.

The BALTIC DRY INDEX continues to turn up, increasing 2.179% yesterday.

Initial claims for unemployment remained over 400,000 for the week ending 9/3. ETA Press Release

Greece is backsliding on the austerity goals required by the EU for more bailout funds.

Freddie Mac reported yesterday that mortgage rates hit another all time low yesterday since it started to compile data. The average rate on a 30 year mortgage loan was just 4.12%. A 15 year FRM averaged a ridiculously low  3.33%. Those rates are tempting, particularly the 15 year FRM, but I will just keep HQ free and clear of any debt.

I mentioned yesterday that my baseball cards are stored with my gold in a bank lock box.  I had a query about that. What do you think is more valuable, a 1958 TOPPs Mickey Mantle baseball card, professionally graded at PSA 8, or a one ounce Gold eagle worth around $1,850? 1958 Topps MICKEY MANTLE #150 HOF PSA 8 | eBay Now, that baseball card cost a penny originally, making gold and silver buys look like pikers in comparison.  The gold would be easier to sell, however.

I did become more concerned yesterday about the situation in Europe, which caused me to exit my ING hybrid position by selling the last remaining shares of INZ bought at less than $8. The same concern caused me recently to sell my last Aegon fixed coupon hybrid, owned in the same account: Sold Aegon Hybrid AEH at $23.09 Bought at $4.63 That concern has been building for awhile, but the tipping point occurred when I read comments made by several officials yesterday about Greece. NYT The market has been signaling concern over the past several weeks by knocking down the prices of European bank shares.  It just was not worth it to risk close to a 200% gain under the current circumstances. I will discuss that transaction and two others made yesterday in the next post.

50 SHARES INZ 2011 Realized Gain Regular IRA=$ 653.52 on $399 Total Cost
I am not making a prediction about what will happen in Europe. I do view the risks of a meltdown as increasing due to a Lehman 2.0 type event, starting with one or more sovereign defaults and cascading into the European financial system.

While Bernanke did not plough any new ground in yesterday's speech, it was nonetheless depressing for the OG to read it. FRB: Speech--Bernanke, The U.S. Economic Outlook--September 8, 2011 "Just a load of B.S", a voice was heard to say, "Uncle Ben is so boring, don't sweat the details, go all-in you bunch of wusses, buy a million of the Baby B, who ate my skittles, set the RB free".  RB concluded by noting that even the Lame Brain should be able to beat the 1.979% yield of the 10 year treasury, assuming the "girlie man starts taking a chance or two".  After all, "that is a pretty small bogey to beat, the RB could earn that compounded ten year return in about two seconds".

What are the odds that an investment in the SPDR S&P 500 ETF Trust (SPY) will beat the return of a ten year treasury bought at yesterday's close with a 1.979% yield, over the next ten years?

What are the odds than two decades back to back will have a negative real return for the S & P 500?

1. BOUGHT 200 shares of MUE at $12.89 on Wednesday (see Disclaimer): The tax free dividends paid by leveraged municipal bond funds look attractive to me. The leveraged municipal bond CEFs are able to borrow money at low short term rates, using those borrowed funds to purchase longer dated and higher yielding municipal bonds. The current dividend yields on many of them are over 6%. There is of course enhanced risk due to the leverage, as well as the credit risks generally associated with municipal bonds today and the interest rate risks of owning longer dated maturities.
This is a link to the sponsor's webpage for MUE. The portfolio is weighted in AA rated bonds at 66.3% of the portfolio. Bonds rated at "A" are weighted at 24.4%. Both numbers are as of 6/30/11. The current monthly distribution rate is $.0735 per share. The next ex dividend date is 9/13/11. Dividend Dates and Distribution Amounts Announced for Certain BlackRock Closed-End Funds At a total cost of $12.89, this would equate to around 6.84%. The tax equivalent yield would be much higher for a U.S. taxpayer in the highest tax bracket. Morningstar currently rates the fund at 3 stars. The fund does use a lot of leverage which would make it even more risky in a rising rate environment. 

This is a link to the last SEC filed shareholder report for MUE: The fund is still using auction rate preferred shares as the source of borrowing. As of 1/31/11, the unfortunate souls who own those shares were  receiving .44% on average over the prior six month period (page 51). A list of portfolio holdings for the period ending in April 2011 can be found in the last filed SEC Form N-Q.

BlackRock MuniHoldings Quality Fund II (MUE) closed at $12.91 in trading yesterday. 

2. Bought 100 shares of BAF at $13.89 on Wednesday (see Disclaimer): This is a link to the sponsor's webpage for BAF. As of 6/30/11, the portfolio has a greater weighting than MUE in "AA" rated municipal bonds, with a 77% concentration compared to 66.3% for MUE. The current monthly dividend for BAF is $.0745 per share, and the next ex date is 9/13/11 also. At a total cost of $13.89, the yield would be around 6.44% at that rate. BAF is also rated 3 stars by Morningstar. This fund also uses leverage. This is a link to the  SEC Form N-Q and to the last SEC filed shareholder report. The leverage is shown as 37% in that shareholder report as of 2/28/11. An investment advisor reported a 15.61% ownership of this fund, on behalf of its clients, as of June 2011, in a SEC Schedule 13-G filing. This is a link to BAF's CEFA page.

BlackRock Municipal Income Investment QualityTrust (BAF) closed at $13.85 in trading yesterday. 

On Wednesday 9/7/11, MUE closed at a -5.08% discount to its net asset value per share and BAF closed a -5.57% discount. The MUE discount remained at -5.08% on Thursday. The MUE net asset value per share was $13.58 as of 9/8/11. BAF's discount expanded some on 9/8 to -5.97% based on a closing price of $13.85 and a NAV per share of $14.73.

3. Pared Trade: Sold NQS at $14.44 and Bought 200 NMO at $13.028 Yesterday (see Disclaimer): In this pared trade, I basically exchange NMO for NQS. Both are leveraged municipal bond funds offered by Nuveen. They are similar funds.

As of 7/291/11, the bonds owned by NMO have an average maturity of 20.40 years, weighted in AAA (16%), AA (44%), A (15.3%) and BBB at 20.9%. NMO - Nuveen Municipal Market Opportunity Fund Unlike NQS, NMO was selling at a discount to its net asset value. The discount was 4.82% at Wednesday's closing numbers.

As of 7/29/11, the bonds owned by NQS have an average maturity of 19.57 years, weighted 15.5% AAA, 38.3% AA, 15% A and 23.3% BBB.  NQS closed Wednesday at a +1.12% premium to its net asset value. Both CEFs pay monthly dividends at the same time and use a lot of leverage. NMO Leverage

Daily Pricing information on Nuveen CEFs is available at that firm's website.

The current monthly distribution rate of NMO is $.0775 per share: NMO. At that rate, the yield at a total cost of $13.03 is around 7.14%. The tax equivalent yield for a high bracket U.S. taxpayer would be higher of course.

This is a link to the last NMO SEC filed shareholder report.

Nuveen Municipal Market Opportunity Fund (NMO) closed at $13.04 yesterday. As of the close yesterday, net asset value per share was $13.69 and the discount to NAV was at -4.75% based on a close of $13.04.  The Nuveen Select Quality Municipal Fund (NQS) closed at $14.44 and at a +.98% premium to its net asset value.

I will discuss the remaining trades from yesterday in the next post. For the most part, I am concentrating on increasing my cash flow, which, along with my cash stash, will give me more firepower later on.  

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