Thursday, December 15, 2011

Added 50 MSF at $13.1/Bought 50 KRBPRD at 23.6/Vulcan Materials

Due to my absence from HQ and times constraints, I will only briefly summarize two trades in this post which occurred earlier this week.  I have explained both securities in prior posts. 

1. Bought 50 KRBPRD at $23.6-Roth IRA Last Monday (see disclaimer):  KRBPRD is a typical trust preferred, originally issued by MBNA Capital, that contains as its underlying security a junior bond issued by MBNA, later acquired by Bank of America.  The credit rating is the same as TPs originally issued by BAC. Bank of America | Investor Relations | Fixed Income Investor Relations Both Moody's and S & P have reduced BAC's TPs to junk. S & P rates the TPs at BB+ with a negative outlook. Moody's rates them at Ba3 with a negative outlook. Fitch still has them at investment grade, barely at BBB, but has a negative outlook too. A listing of the outstanding BAC equity and trust preferred securities can be found at the bank's website:  Bank of America | Investor Relations | Capital Issuances

The coupon is 8.125% on a $25 par value.  Prospectus The TP and the underlying bond mature on 2/15/2032.

At a total cost of $23.6, the current yield is around 8.6%. Since this security was bought in the ROTH IRA, that is in effect a tax free yield. 

I recently sold a similar security, KRBPRE, in the ROTH IRA. I indicated then that I would be looking for an opportunity to buy one of the MBNA TPs back at a lower price.   Sold 100 KRBPRE at $25.13-ROTH IRA (November 11, 2011 Post) (and see SOLD 50 KRBPRE @ 25.96) I no longer have a position in KRBPRE which is viewed as functionally equivalent to KRBPRD, though the "D" series matures a few months earlier.  For functionally equivalent securities, choosing one over another comes down to yield at my purchase price.  

Both KRBPRE and KRBPRD make quarterly interest payments but the time periods are different. The "E" series just went ex interest early last month, while the "D" series will go ex later in December.  MBNA Capital D 8.125% TruPs, KRB.PD MBNA Capital E 8.10% TOPrS Series E, KRB.PE 

A more extensive discussion of this security can be found in a prior post. Bought 50 KRBPRD @ 25.14  That purchase was made in a taxable account and I still own those shares. 

Being in effect junior bonds, trust preferred securities issued by banks will be extremely sensitive to credit concerns.  Interest payments can also be deferred for up to five years provided the stopper clause is not activated by a distribution on, or repurchase of a junior security.  Trust Preferred Securities: Links in One Post For BAC to defer cumulative interest payments on KRBPRD, it would have to eliminate its common dividend and non-cumulative equity preferred dividends, and defer all cumulative distributions on other TPs as well as any cumulative equity preferred stocks.  For BAC to do that, it would be an invitation for depositors to yank their money in excess of FDIC insurance limits. 

Anyone owning a TP after a bank failure will likely recover nothing, i.e., your money went to money heaven.

KRBPRD rose 9 cents yesterday to close at $23.8. 

2. Added 50 of the stock CEF MSF at $13.1 Last Tuesday (see Disclaimer): Morgan Stanley Emerging Markets Fund is a closed end stock fund.  Generally, I would expect emerging market stocks to be positively correlated with U.S. stocks except with a higher beta. That relationship has broken down in 2011, with emerging market funds falling 15 to 20% while the major U.S. stock averages are close to flat lining.  The 2011 NAV return for MSF was -16% as of 12/12/11.  A lot of the decline is associated with the overall poor performance of Chinese stocks. 

On the day of my purchase, the net asset value per share was at $14.46. 

MSF page at the Closed-End Fund Association

MSF page at  Morningstar

This is a link to the  last filed SEC  N-Q which lists the fund's holdings as of 9/30/11: 

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

This fund generally pays an annual distribution in late December. I hope that it is not much since I never want to buy a large dividend. I am waiting to buy another 50 shares of the China Fund (CHN) after its goes ex dividend in a few days with its large distribution.

This 50 share purchase brings me up to 150 shares. My last transaction was to sell 100 shares at 16.2 last April. Whenever I can buy shares back at a lower price, I at least feel like I am winning or losing less, a form of winning for us Stock Jocks in bear markets.

3. Vulcan Materials (own senior bonds only: 2018 and 2021)(Junk Bond Ladder Strategy): Both of my Vulcan Materials senior bonds popped after Martin Marietta Materials made a hostile bid for Vulcan.  Press Release The Martin Marietta bonds are investment grade,  FINRA, while the VMC senior bonds are rated in junk territory.  I may sell one or both of them.  The 2021 maturity is held in the regular IRA.

4. Hedging: I have previously noted that 1250 to 1300 on the S & P 500 would likely prove to be a stiff resistance area. (e.g. Stocks, Bonds & Politics: 11/15/11 Post Introduction)  As a result of that belief, more accurately called a guess, I have been buying double and triple short stock ETFs as hedges when the S & P 500 starts to breach 1250 to the upside.  I now own two triple shorts and two double shorts and will likely dispose of all of them before the end of this year. Hopefully this can be done at a profit, possibly on the next major down day. Since I have realized gains on my hedges this year, I would not mind losing money on the recently purchased ones, but all of them are currently in profit territory based on this week's action. I sold one triple short last week on a quick pop. It would not take much of a Santa Claus rally to cause the triple shorts to lose money, a ten percent or greater daily move is not uncommon in this volatile market.

S & P 500 1 Year Chart/Red Line 50 day SMA/Blue Line 200 day SMA
Instead of using the VIX as a signal for the purchase of hedges, I am now using what I perceive to be the  resistance level in the S & P 500 as the signal.  Generally, as discussed in many prior posts, the prior hedging was limited to purchases when the VIX moved below 20 during the Unstable Vix Pattern.  Mark Hulbert and the Use of the VIX as a Timing Model/Modification # 1 To Vix Asset Model Approved re: Hedging  The primary reason for this modification revolves around concerns about a possible significant downdraft.  The stock allocation has already been reduced to my minimum level, and the hedges are small compared to even this reduced allocation.  

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