Tuesday, December 27, 2011

Added 50 of the Balanced CEF CSQ at $8.28/Added 50 of the Synthetic Floater GJS at 13.25-Roth IRA/Added 50 of the Stock CEF BCF at $10.68

Traveling through the SUV Capital of the World, I routinely have to hit my breaks several times as SUVs pull out in front of me. The degree of pressure applied to my Saturn's brakes varies but occasionally the force is sufficient to activate the anti-lock braking system. Possibly, the Cleons have surreptitiously installed one of their cloaking devices on my car. 

The government reported last Friday that both consumer spending and incomes rose just .01% in November, below expectations. The weak income number was due to a decline in wages and salaries. News Release: Personal Income and Outlays, November 2011 The personal savings rate was 3.5% for November. 

Eastman Kodak announced that it had sold the Eastman Gelatin Corporation for an undisclosed sum. The sale includes a 575,000 manufacturing facility in Peabody, Mass. I unfortunately own two EK unsecured senior bonds maturing in 2013. Eastman Kodak Bonds: Update on Third Quarter Earnings Report  Eastman Kodak (EK) Bonds-Own 2013 Senior Bond  Moody's and Eastman Kodak The LB does not believe in miracles so I would be shocked to receive par value at maturity. I rate this bond at 10+ in my Personal Risk Ratings For Junk Bonds.

1. Added 50 GJS at $13.25 Last Friday-ROTH IRA (see disclaimer): GJS is a Synthetic Floaters in the trust certificate ownership form. Trust Certificates: New Gateway Post It is an exchange traded bond. The underlying security is a Goldman Sachs senior bond maturing in 2033. While the underlying bond has a 6.125% fixed coupon (FINRA), the owners of GJS will receive that coupon only if the swap agreement creating the floating rate is no longer in effect. The floating rate is .9% above the three month treasury bill rate on a $25 par value, paid monthly. There is a 7.5% maximum coupon. Prospectus

The Trustee receives the 6.125% coupon payments from Goldman Sachs and then swaps that payment with Wells Fargo for the floating rate payment. Since T Bills are now hugging zero, Wells Fargo is receiving the best part of that deal. It is what it is.

At a total cost of $13.25, I can calculate the minimum and maximum yield for this security. The minimum yield would be about what is being paid now due to the Fed's Jihad against the Saving Class. The 3 month treasury bill is a smidgen above 0%. I will call it zero for purpose of computing the minimum current yield, which would be 1.5%, assuming T Bills are at zero (.8% spread over 3 month bill x. $25 par value=$.20=1.5%). The maximum current yield would be 14.15%. The maximum rate would be hit when the 3 month treasury bill exceeds 6.6% during the relevant computation period.

One way to look at this security is that it juices the 3 month T bill yield due to the spread factor and more importantly the GJS current discount to its $25 par value.

In the foregoing analysis I used the phrase current yield. The yield to maturity would be significantly higher, since the YTM includes the additional yield resulting from the profit on the security. If GS survives to par value value on the 2033 bond, then the owners of GJS will receive their $25 par value. That would be a material increase in the total return/yield for this security.

There are two main factors that make GJS unappealing now. There are concerns about the long term credit worthiness of investment banks. Those concerns ebb and flow and are reflected in common stocks prices of Morgan Stanley and Goldman Sachs as well as the prices of their respective equity preferred stocks, trust preferred stocks and bonds. All of those securities have fallen in price over the past several months.

The other issue is the currently low treasury bill rate. GJS is not likely to provide any meaningful income anytime soon. Possibly, the FED's Jihad against the Saving Class, designed and intended to cause savers and other responsible Americans the maximum amount of pain possible for "an extended period of time", will continue to 2014.

When T Bills return to more normal levels, this security will look better. In the meantime, I will just wait.

I have snapshots of my prior trades of GJS in Stocks, Bonds & Politics: Trust Certificates: New Gateway Post.

Those trades include the following: Bought 100 GJS at 10.5 April 2009 SOLD 100 GJS at $13.06 August 2009 Bought 100 GJS AT $13 October 2009 Sold 100 GJS in the Roth IRA at $15.6 November 2009 Bought: 50 GJS at 14.6 August 2010 Sold 50 GJS @ 16.20 October 2010

My last trade was a buy, and those shares are still owned. I will sell them when and if I can realize a profit and then keep the shares purchased last week. Bought 50 GJS at 16.9 in Roth IRA July 2011

2. Added 50 of the CEF CSQ at $8.28 Last Thursday (see Disclaimer): This small purchase was an average down from my recent purchases. Bought 100 CSQ @ 8.94 November 2010  Added 50 CSQ at 9.2 August 2011 Added 70 CSQ at 9.63 April 2011 I am reinvesting the monthly dividend of $.0525 per share to buy more shares. Distributions - Strategic Total Return Fund

For this kind of investment to work, I will need to make money on the shares at some point. At a total cost of $8.28, the current dividend yield would be about 7.6%. I would need an annualized return of close to 10% before I would characterize this investment as successful. So far, I am nowhere close to that number.

CSQ is a balanced fund that uses leverage. As of 11/30/11, the fund states that the total percent leveraged was 27.11. The portfolio allocation is shown at Strategic Total Return Fund Portfolio. Roughly, the allocation is 60% to stock and 40% to bonds. I would characterize the stock portfolio as titled toward large cap dividend stocks. The bond portfolio has probably been a drag recently with its junk bond weighting which is heavy into "BB" and "B".

This is a link to the last filed SEC Form N-Q that contains the fund's holdings as of 7/31/2011.

The last SEC filed shareholder report is for the period ending 4/30/11.

Calamos Strategic Total Return Fund closed last Friday at $8.45 with a net asset value per share of $9.99, creating a discount to net asset value of -15.42% at that time. 

3. Added 50 of the CEF BCF at $10.68 Last Friday-Roth IRA (see Disclaimer): I recently discussed this fund at Item # 5 Added 100 of the Stock CEF BCF at $11.95. This CEF recently went ex dividend for its quarterly distribution of $.2718.  BlackRock Real Asset Equity Trust, BCF Stock Quote 

BCF closed last Friday at $10.7 with a net asset value per share of $11.72, creating a discount to NAV at that time of -8.7%.

Last SEC Filed Form N-Q BlackRock Real Asset Equity Trust (BCF)

Prior to this purchase, I owned only 102 shares of BCF in a retirement account and those shares have an average cost of $7.9. I have been taking the dividend distributions in cash since the 4th quarter of 2008. So I am ahead in that position:

I also own shares of this stock CEF in a taxable account. I am in the red on the shares in that account and close to break-even with the dividend.

I will discuss some of the other trades from last Friday in the next post. 

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