Tuesday, November 22, 2011

Sold 100 NBB at $20.13-ROTH IRA/Barrons Article on Income for Retirees/Added 30 MSFT at 25.02

Normally, on a day like yesterday, I would sell one of my double short stock ETFs being used as a partial hedge for my minimum stock allocation. I considered doing that when the DJIA fell more than 300 points intraday. I recently added two double short stock ETFs and one triple short, notwithstanding the VIX trading well over 20. The VIX rose .77 yesterday to close at 32.77.

A recent modification of the trading rules in an Unstable Vix Pattern allows for the short term use of double short stock ETFs as hedges, as outlined in this post from October:  Mark Hulbert and the Use of the VIX as a Timing Model/Modification # 1 To Vix Asset Model Approved re: Hedging Prior to that modification in the trading rules, the hedging had to be done during the Unstable Vix Pattern only when the VIX fell below 20, though LB violated that rule earlier this year. These ETFs lose their tracking after one day and are inadequate hedging tools for that reason.  Instead of selling one yesterday, I elected to buy during a market rally another triple short stock ETF on an index where I already own shares of a double short ETF.

I hope to sell the double short before the end of this month at a price higher than its close yesterday, and then to keep the triple short possibly into late December in case there is a meltdown. The triple short, while more dangerous, allows me to hedge more with less money.

The Barrons technician believes that the stock market has broken down. The S & P 500 did fall below its 50 day moving average yesterday. S&P 500 Index Chart A similar conclusion is reached by Thomas Kee in his column at Marketwatch. The S & P 500 closed yesterday at 1,192.98.

My current opinion is that the market is in a cyclical bear market within the context of a long term bear market. The VIX pattern is called by me an Unstable VIX Pattern, which has been in force since the August 2007 Trigger Event. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern My downside target in the S & P 500 is 950 for the current shorter term bear cycle. The longer term forecast is for a continuation of the long term bear market for at least two more years, possibly into 2015 in the event of policy mistakes. Mark Hulbert and the Use of the VIX as a Timing Model (October 2011); The Roller Coaster Ride of the Long Term Secular Bear Market (May 2010 Post); More Discussion on Asset Allocation in Unstable Vix Patterns (October 2011 Post); 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009 Post); More on 1982 or 1974 (Sept. 2009 Post); The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets (June 2011 Post); The Big Picture Questions (August 2011 Post); Underlying Cause of the Current Long Term Bear Market is Too Much Debt (June 2010); Dating the Start of the Current Long Term Secular Bear Market (May 2010 Post).

Fitch will complete the review of its U.S. sovereign debt rating before December. (Text of Fitch statement in response to Super Committee Failure: Reuters) The most likely result will be a change from a positive to a negative outlook. A less likely result would be a one notch downgrade.

The cover story in this week's Barrons  highlights certain securities that provide yields in excess of  7%. The article is apparently intended for retirees searching for yield. One of the persons interviewed for that column recommended two bond CEFs that I own, BTZ and ACG.  I have bought and sold ACG and currently own 400 shares. Bought 200 ACG at 7.85 August 2011 ADDED 200 OF THE BOND CEF ACG at $7.98 October 2011

Barron's is a subscription publication. I have online subscriptions to both Barrons and the WSJ.

Both BTZ and ACG use leverage which makes them more risky while producing more income now due to the extremely low short term rates on borrowed funds. Both of those funds pay monthly dividends, and are currently selling at greater than 10% discounts to their respective net asset values. I am currently taking those dividends in cash.  Both of those funds are classified as "investment grade" by the CEFA, though BTZ does own a fair amount of junk rated bonds. ACG is heavy into U.S. government bonds. CEFA

The recent purchases of ACG are defensive in nature, based partly on the belief that other investors will still flee to U.S. bonds during periods of market stress. I personally do not view U.S. debt securities to be a safe haven and suspect that will be the market consensus within a few years. (see introduction Stocks, Bonds & Politics 11/18/11 Post).

ACG closed yesterday at $8.06, up 1% or 8 cents for the day, which is a good up move for this security.

I am in the hole on BTZ with 538+ shares. My most recent purchases were discussed in these posts: Bought 100 BTZ at 11.90 September 2011  Added 50 BTZ at 11.24 October 2011

BlackRock Credit Allocation Income Trust IV closed at $11.89 yesterday, up 5 cents for the day.

The author of that Barron's article also mentions some municipal bond CEFs. The funds mentioned are leveraged municipal bond funds. I have recently cut my exposure in that area. Sold 200 of the Bond CEF NPT at $12.92 November 2011 Sold 204+ NPF at $14.02 and 100 NPP at $14.45 October 2011 Sold 100 BAF at $14.3 September 2011 BAF is mentioned in the Barron's article. It is possible to pick up good tax free yields with those investments but there is considerable risk associated with the leverage and the long duration of many of those funds. They plummeted in value late last year after Meredeth Whitney put a scare into municipal bond investors. (see her interview with Steve Kroft in December 2010 at CBS News)

An article in this month's Kiplinger recommends several leveraged municipal bond CEFs. Of the ones mentioned by the author I have recently bought and sold MUE. Sold 200 MUE at $13.54 October 2011

In several posts over the past several months, I have noted news stories about financial institutions refusing to rollover short term loans to European banks. According to a recent NYT article, this trend is continuing. Moreover, many institutions are refusing to participate in government auctions held by Italy and Spain and have been selling PIIGS debt. The new ECB head, Mario Draghi, is reluctant to step into the fray and buy large amounts of sovereign debt.

The EU has told the Greek politicians that they must sign a written commitment to implement the austerity package in order to receive the next installment of aid. Bloomberg The leader of the New Democracy party, Antonis Samaras,  has so far refused to sign a written commitment, saying that his word was good enough.  When that party was in power, the books were routinely cooked in order to deceive the EU about Greece's compliance with EU deficit rules.

Credit Suisse said that Europe needs a momentous deal to save the Euro, otherwise the EU will collapse by January 2012.  Bloomberg

I no longer have a position in European hybrids, issued by financial institutions, since I do not view the risk as worth the yield. However, with more of a price decline in the hybrids issued by either ING or Aegon, I will consider nibbling at them again. Aegon Hybrids: Gateway Post ING HYBRIDS: Links in one Post

Motley Fool has a article describing how Eastman Kodak's management has destroyed shareholder value. I own only two 2013 senior bonds. Some recent posts discussing the likelihood of EK paying par value at maturity include the following: Eastman Kodak Bonds: Update on Third Quarter Earnings Report Eastman Kodak (EK) Bonds-Own 2013 Senior Bond  Moody's and Eastman Kodak  The risk rating on this bond position is currently at 10+, my highest risk rating.  Personal Risk Ratings For Junk Bonds

This is a video of the best diving dog that I have seen. YouTube This rescue dog will dive into a pool, swim eight feet down and retrieve a toy.

I never give my credit card to a waiter. There are frequent reports about credit card information being stolen by waiters and then used to produce duplicate cards. A large identity theft ring was busted over the weekend that allegedly used waiters at Smith & Wollensky and several other restaurants in Manhattan.  WSJ 

1. Sold 100 of the bond CEF NBB at $20.13 Last Friday-ROTH IRA (see Disclaimer): I am raising my cash allocation in the retirement accounts, almost entirely devoted to bond investments, based on my belief that better buying opportunities will be available relatively soon.  Earlier this month, I sold another 100 shares of NBB at $20.07 and no longer have a position in any CEF investing in Build America Bonds.  (see also: Sold 100 BBN at $20.51-ROTH IRA) I made a small profit on this last NBB trade. Bought Back 50 NBB @18.4  in IRA Added 50 NBB at $19.55 in the ROTH IRA This CEF pays monthly dividends.

NBB closed last Friday at a 3.87% discount to net asset value. NAV was then $20.94 per share.

Nuveen Build America Bond Fund closed yesterday at $20.05, down 8 cents.

2. ADDED 30 MSFT at 25.02 Microsoft Yesterday (Large Cap Valuation Strategy and  Common Stock Dividend Growth Strategy) (see Disclaimer): Due to the decline in price and the recent quarterly dividend increase to 20 cents per share, MSFT barely qualifies under the common stock dividend growth strategy. One requirement for that strategy is a dividend yield at the time of purchase in excess of 3%. Microsoft shares have qualified for purchase under the large cap valuation strategy for several years. The current consensus estimate is for an E.P.S. of $2.76 for the F/Y ending in June 2012 and $3.05 for the 2013 F/Y. Total cash per share is around $6.65. The forward 5 year P.E.G. is estimated at .82.  MSFT Key Statistics

I am on automatic pilot for re-purchasing Microsoft shares recently sold at higher prices. SOLD 100 MSFT @ 27.9 July 2011 Sold 50 MSFT at 26.9 September 2011 The first buy target was triggered yesterday with a fall below $25 yesterday. The market moved up some after I entered the order so I received a fill at $25.02, slightly above my target. Instead of buying 50 shares, which was originally the plan, I bought only 30 shares due to my significant concerns about the downside risks for stocks worldwide. The next buy will occur at less than $24.

The NYT reported that Google was acquiring small business customers for its cloud based office product.

This is a link to my post discussing the third quarter's earnings report: MSFT (10/24/11 Post)

This is a link to my discussion of the second quarter earnings report: MSFT

Snapshots of my trades from 2009 can be found at Added 30 MSFT at 24.15. I did not own MSFT shares from 1999 to 2009, when I started to buy some shares based on valuation. I have been moving into and out of MSFT since that time.

Microsoft closed yesterday at $25. 

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