Wednesday, October 5, 2011

Bought 200 IMF at $17.45/Italy Debt Downgrade/ADX Distribution Rate/Deficiency Judgments for Strategic Defaults/Cash Flow into Main Taxable Account/

I did unload my last double short stock ETF yesterday morning. Based on the preponderance of evidence and after a careful investigation here at HQ, Headknocker (HK) ruled that the Nerd Machine (LB) had violated its own rule book when purchasing the last three double short stock ETFs, notwithstanding LB's protestation that such purchase was allowed under a modification to those rules (e.g., LB's assertion in last ¶ 8/31/11 Post)  Since those ETFs were sold for a profit, HK decided to leave the matter alone, after publishing this public reprimand, based on the OG's philosophy that All's Well That Ends Well, lifted from  the title of a Shakespeare play "since the OG has never had an original thought in his life and never will", the LB said in closing.

As noted in the current profile section to the right, the double short stock ETFs, bought in compliance with LB's "stinking rules," RB added, had to be sold under those same rules when the VIX spiked to and over 30, climbing to a close of 31.66 on August 4, 2011.  ^VIX Historical Prices The VIX Asset Allocation Model allows for the purchase of double short stock ETFs as hedges only when the VIX is below 20 during an Unstable Vix Pattern.  More on VIX AND ASSET ALLOCATION (11/26/2008 Post) Those hedges will be sold when the VIX spurts to around 30. The recent August 2011 sales included SDS, SRS, EFU and TWM.  There was some discussion among staff members about keeping one or two just in case the VIX headed even higher. But no modification of the trading rule has ever been adopted by HK permitting the purchase of one of these securities when the VIX is over 20.  LB nonetheless proceeded to make three such purchases after becoming HT on 8/4/11, during periods of market rallies, apparently upset about the Old Geezer disposing of all of the hedges in early August, as noted in the current profile section, just prior to resigning as the Head Trader to pursue spiritual matters.  

RB chimed into this discussion, desiring to defend the OG from the hypercritical and judgmental LB, noting that the "Old Goat was wise for someone who was past his prime and in constant need of chill pills. Besides, LB needs to chill out, the RB is reprimanded about every ten seconds by the HK. Go all in."

Tomorrow, I will go into more detail about stock allocation strategies for an Unstable Vix Pattern, using two hypothetical investors.  I will name one Mr. Stock Jock and the other Mr. Nervous.

The market staged a strong late day rally, with the DJIA closing up 153.41, based on reports that the EU was working on a bank aid plan. That was already known. The DJIA had traded as low as 10.404.49 before closing at 10,808.71.  The  ^VIX had another wild day, hitting 46.88 intraday, before spiking lower as the rally gained steam, closing down 4.63 at 40.82. I would expect a negative correlation, in terms of directional moves, most of the time.

Moody's downgraded Italy's sovereign debt after the market closed yesterday. The rating was reduced from Aa2 to A2 with the outlook kept at negative.  Articles discussing this downgrade can be found at Bloomberg and Reuters.

Forty-one states allow a lender to sue a borrower for a deficiency judgment after foreclosing on a property and selling it for less than the loan balance plus expenses associated with the foreclosure. The WSJ published a story claiming that some banks were becoming more aggressive in suing borrowers, particularly those viewed as strategic defaulters.

For borrowers who have assets and/or good incomes, and live in one of those states, one way to cut down on the number of such defaults would be to pursue deficiency judgments with some publicity attached to that effort.  Strategic defaults contribute significantly to the supply of foreclosed homes and the downward pressure on home prices. A sixty minutes report estimated that there have been over one million strategic defaults in the year prior to that May 2011 program. CBS News (see also Item # 4 Strategic Defaults May 2010 Post; Item # 2 Delays in Foreclosure Encouraging Defaults) Government is adding and abetting strategic defaults by making it difficult to foreclose on properties when there is no dispute that the borrower signed a note and quit paying on it. The incentive is to renege on the loan and to live in the house rent free until the mortgage company is able to foreclose. (see stories at NYT  CNBC)

While many argue that the banks are at fault for tempting people with easy credit, which is true, the bank's conduct is unrelated to the personal responsibility issue of the borrower. Each individual is responsible for their own decisions and must bear the consequences of erroneous ones.

I have no sympathy for anyone who incurs a debt and then decides to engage in a strategic default. The possibility of a deficiency judgment needs to be kept in mind by the borrower when making the decision to buy and how much to borrow.

I noticed my shares of Coca Cola were weak last Monday. JP Morgan downgraded KO shares to neutral based on a "tough macro environment". The stock target price was also reduced to $76 to $80 per share. I have quit reinvesting the dividends. I would consider buying more shares only below $55.

Coca-Cola shares were trading over $70 a few days ago and closed yesterday at $65.23.  I have elected to keep the KO shares. Instead, I sold HNZ when I noted the probable formation of a Phase 2 Unstable Vix Pattern. Sold HNZ at $50.10/Probable Formation Phase 2-Unstable Vix Pattern/Fear and Enhanced Volatility in Certain Classes of Income Securities I had to sell something with a large unrealized percentage gain at that time.

I am a long term holder of the stock CEF Adams Express (ADX) which of course has not fared well over the past several weeks. I will periodically visit the website for the CEFs that I own. I visited the ADX site last Monday, for the first time in months, and noticed a press release that ADX had committed to a 6% annual distribution rate. Adams Express Company Commits to Annual Distribution of 6% I am reinvesting the dividend. The current discount is close to 15%. If and when the spirit moves me, I will add to my ADX position.

1. Cash Flow into Main Account: My most basic strategy is to generate cash flow from dividends and interest and then to invest those funds into more income generating securities. In my main taxable account, that cash flow will be a continuous stream, though the flow will increase on the 1st business day of the month, the middle of a month (usually the 15th if that is a business day) and the last day business day. The following are snapshots of the cash flow into that one taxable account for the last business day in September and the 1st one in October:

Cash Flow Snapshot #1

Cash Flow Snapshot # 2

Cash Flow Snapshot # 3

Cash Flow Snapshot # 4

Cash Flow Snapshot # 5 

Cash Flow Snapshot # 6

While I do not care to see these securities fall in price, it is important for them to continue generating income, regardless of their price, during severe market downturns.  This is primarily psychological. I am willing to invest that income no matter how dire the circumstances appear to be. However, if that income is taken away, I may have more than a few days of having that dear in the headlights look during market meltdowns.

Added: Another dividend, paid on the 1st business day of October, appeared in this account today. The dividend was paid in Canadian currency by HSE:CA (Husky) in the amount of  30 Cads minus 4.5 Cads in withholding taxes.

2. Bought 200 of the bond CEF IMF at $17.446 on Monday (see Disclaimer): I treat this bond CEF as functionally equivalent to WIW. Both funds own primarily U.S. treasury issued inflation protected bonds. I recently bought back WIW, and snapshots of my realized gains can be found in that post. Item # 1 Bought 200 WIW at $12.63

IMF and WIW will not generate much income. The current monthly distribution for IMF is 5 cents per share. At a total cost of $17.45, that works out only to a 3.44% annualized yield. That is better yield than I could receive by buying a treasury inflation protected bond in the bond market. The ten year TIP was just auctioned by the treasury with a coupon yield of .078%.

My previous round trips in IMF were at lower levels.  Bought 300 CEF IMF at 16.5 May 2010 Sold: 300 IMF @ 17.23 October 2010  Bought 200 of the Bond CEF IMF at 16.64 February 2011 Sold at Few Days laterSold 200 IMF at $17.15 February 2011 I am not a long term holder of this kind of investment. I am just parking some cash yielding nothing in this investment, hopefully for a short period.

This is a link to the sponsor's website: Closed-End Funds Details As of 6/30/11, the holdings are weighted in "AAA" at 93.92%. IMF Portfolio

The fund closed the third quarter with a net asset value per share of $19.34. This information is available at the sponsor's website, the CEFA and the WSJ.

This is a link to the last SEC filed shareholder report:

This is a link to the Morningstar page. IMF is unrated by Mornginstar.

On Monday, IMF closed with a NAV per share of $19.53, up from $19.34 on Friday, and the discount to NAV expanded to -10.55 based on a closing price that day of $17.47.  On Tuesday, the fund closed with a net asset value of $19.57 per share and at discount to net asset value of -11.19 based on the closing price of $17.41.

As the fear trade was taken off late yesterday,  IMF declined slightly to close at $17.41, down six cents. The TIP ETF rose 8 cents to $115.33, bucking the downdraft in the non-inflation protected treasury ETFs TLT and IEF

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