Thursday, June 30, 2011

Precipitating Cause of Long Term Bear Markets/Michelle Bachmann/Sold 156+ NWBI at $12.52/SUSQ/

Michele Bachmann has officially declared her candidacy for the Presidency and has promised to bring truth telling to Washington. chicagotribune Admittedly, that would be rare for Washington politicians and even rarer still for Michele, who finds its exceedingly difficult to compose a sentence with accurate information. PolitiFact found many of her statements made in a recent interview with Bob Schieffer to be lacking much, if any, correlation with the truth which is normal for Michele who excels in receiving the "Pants on Fire" rating by that fact check organization. So, the nation may be seeking leadership that tells the truth, as Michele says, but she must have been referring to someone other than herself.

Truth telling and factual accuracy are just two of those pesky Real Conservative Values that have yet to find a home in the self proclaimed conservative party. (see, e.g., FactCheck.org article on recent GOP debate)  

I understand Michele's appeal to the "Facts Do Not Matter" crowd. It is easier, after all, to just create your own reality and then to live in that bubble. 

And, I am not going to say she is goofy for saying things like the Disney  movie, "The Lion King", was gay propaganda. AlterNet I have it on good authority that the cartoon character SpongeBob SquarePants has the same agenda, according to one of Michele's soulmates.  

And, so what if she confused John Wayne with John Wayne Gracy, the serial killer, Mail Online, or is a little mixed up when she told an audience of fawning admirers in New Hampshire that they must be proud to be "in the state where the shot was heard around the world in Lexington and Concord". CBS Boston   

Sure, her position in support of abolishing the minimum wage (Bloomberg) is criticized by those bleeding heart commies in the mainstream liberal media, but that position simply shows her patriotism and belief in liberty, not to mention her titanium spine, as does her oft repeated speech in support of the people's right to choose their own light bulbs, apparently one of the most important issues facing America today. PolitiFact on Michele's Statements on Lightbulbs

Let's all get behind her recently introduced legislation called the "Light Bulb Freedom of Choice Act"Fox Nation Yes, that is the real name of her signature piece of legislation, and the faux blondes  at "Fox News" are all for it too. I am not going to say she is a really dim bulb herself. 

As to her belief about abolishing the minimum wage laws, what can I say? If someone wants to work for $.25 an hour killing chickens in an Iowa processing plant, they should have the constitutional right to contract for those wages. Perhaps, the good Christian GOP employer could throw in a small bag of peanuts as a Christmas bonus for those extra special employees. Who besides those non-American Americans could argue with that? 

I was comforted to hear last night that Michele is confident that nothing untoward will happen by Congress failing to raise the debt limit.  CBS News  I am not really worried either, since I do not lend money to deadbeats who pay little or no interest. 

It is not surprising that Michele is moving to the forefront of the GOP contenders for President of the U.S., for she does represent the heart and soul of today's GOP.   The OG just inquired whether the RB was making much progress in buying Canada, all of it.

A case study of how the GOP misused their political power in Mississippi is set out in this  2007 article in Harper's Magazine which is also a subject of a recent HBO documentary. The Mississippi case involved a politically motivated criminal prosecution against a republican Mississippi Supreme Court Justice who did not walk in lock step with the party line.     

1. Sold 156.5828 shares of Northwest Bancshares (NWBI) at 12.52 Last Tuesday (Regional Bank Stocks's Basket Strategy)(see Disclaimer):  The 6.5828 shares originated from reinvestment of dividends. Bought 50 NWBI at 11.47 Added 50 NWBI at 11.10 Bought: 50 NWBI at 10.45  The total share profit was $170.19, bringing to total for this strategy closer to seven thousand.  Item # 3 Realized Gains Regional Banks

NWBI shares popped some last Tuesday after Standard & Poor's  announced its addition to the S & P 600.  I decided to sell NWBI based on valuation, compared to other bank stocks in my basket.  The current consensus estimate is for an E.P.S. of 66 cents in 2011 and 76 cents in 2012. With the recent decline in prices, I believe that other banks present better long term opportunities.  I now have 33 holdings in this basket strategy.

2. Susquehanna (SUSQ)(own common as LT and TP SUSPRA): I did notice that Tower Bancorp received an acquisition offer from Susquehanna (SUSQ).  SUSQ claims that the acquisition of Tower will be immediately accretive to earnings. Tower shareholders can opt for $28 cash or 3.4696 shares of SUSQ stock. SEC Filed Press Release  Form 8-K When consummated, Tower will be the second recent acquisition by SUSQ, the first being the pending acquisition of Abington.  Both acquisitions will expand SUSQ's footprint in Pennsylvania.

Unfortunately, the LB sold Headknocker's Tower shares before this offer was made, leaving a few hundred dollars on the table. Sold 100 TOBC at 23.12 "Typical Nerd Vision", RB noted with evident satisfaction.

SUSQ shares fell in response to this offer.  Sandler O'Neill upgraded the Susquehanna shares to buy from neutral after the selloff. Sandler's analyst estimates that SUSQ shares, then priced at $7.7, are selling for 8.6 times his normalized earnings estimate. (see also discussion at  TheStreet TV).

3. Onset of a Long Term Bear Market Caused by Clearly Excessive Stock Valuations/Compression of Large Cap P/E Multiples During the Long Term Bear Cycle:  In several prior posts, I discuss the reasons for the longevity of long term bear markets. The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets

The initial impetus of a long term bear market, and a contributing cause, will be excessive prices for stocks that build up during the final phase of a long term bull market, when investors become afflicted with the "This Time Is Different" brain malfunction.

The vast majority of humans will not draw any accurate or even rational lessons from the past, and many will not be able to draw reasonable conclusions from events occurring in their adult years when there are still mens sana in corpore sano.

That indelible human trait will find a concrete manifestation in a long term chart of Professor Shiller's Cyclically Adjusted Price Earnings Ratio. dshort.com  The historic average is a tad over 16.  That number hit 44.2 in 2000 and 32.6 in 1929.  The reading from 1966 was at 24.1. So the past is repeated over and over again. Elevated levels in the PE 10 are always seen at the start of long term bear markets.

The absurd P/E10 ratios are a natural process of the blowout phase of the long term bull cycle. When that blowout phase occurs, there will be a large number of companies selling at valuations that can not be supported by reasonable or rational predictions about earnings growth. This will not matter to the vast majority of humans making investing decisions. This "irrational exuberance" will apply even to the largest blue chip type of companies.

During the long term bear cycle, those blue chip companies may continue to grow earnings as their share price stagnates in a range bound movement. Some will falter and consequently be acquired or go out of business.  While the stock may have been selling at over 30 or 40 times earnings when the long term bear cycle started, the increase in earnings over the subsequent decade or so, coupled with the stagnant stock price, would cause the P/E to fall into the single digits or slightly higher. A more detailed discussion can be found in several earlier posts.  Item # 3 Large Cap Valuation Strategy (May 2010 Post); Item # 1 Large Cap Valuations (July 2010 Post).

That process of multiple compression as earnings increase will frequently result in many large companies, whose earnings have increased significantly during the bear cycle, to sell for low P/Es and to be given up for dead. When viewed in the big picture historical context, the P/E compression is a natural correction process to the ebullience prevailing near the end of the bull cycle, and that compression will for many companies go too far the other way.

When thinking about stocks in terms of these long cycles, it is impossible to predict when the worm will turn, and investors will start taking the P/Es back up. The P/E compression can continue for as long as investors lack confidence about the future.

The Shiller P/E is uncomfortably high now. The data does include earnings from two recessions, including the Near Depression period. When the 2001 recession year is excluded from the 10 year series, and assuming earnings continue to increase,  the 10 year earnings average will start to look better, and hopefully the Shiller P/E 10 will look better. I do believe that it has to be examined in context.  Shiller, for example, was waiting for a single digit number in March of 2009 before committing to stocks, which did not happen. The past may repeat itself, but not in mathematical precision.

Still, even if I have a good explanation for a temporary spike in P/E10 ratio, I am not going to develop a deer in the highlights syndrome when that ratio spikes to over 30. The stock allocation will be significantly reduced under those circumstances, based on the extensive historical record that such a P/E is not sustainable and will  mark the beginning of a long term bear market when it occurs deep into the bull cycle.

I will buy both individual common stocks and ETFs to implement the Large Cap Valuation Strategy.

The ETF, OEF, is  one of the ETFs currently owned that implements this strategy:

100 OEF Average Cost Per Share $49.19

This snapshot does not include the shares purchased with the reinvested dividend received yesterday, nor does it reflect the 51 cent per share price increase yesterday. iShares S&P 100 Index Fund closed at $58.17 in trading yesterday.

As previously noted, many of the largest U.S. companies have the lowest valuations. Bought 100 OEF at 49.61 Added 100 OEF at 49.11 Since the OEF ETF contains the the S & P 100 companies 100, it is weighted in the largest of the large: iShares S&P 100 Index Fund (OEF).  I am reinvesting the dividend.

I sold 100 of the 200+ shares of OEF late last year to book a profit. Sold: 100 OEF at 54.94  Bought 100 OEF at 49.61

I will also play this theme with the ETF DLN, which is currently owned, and VV which has been bought and sold and is no longer owned. BOUGHT VV at $41.45   Sold 102 VV at 49.43  Bought 100 VV at 54  Sold 100 of the stock ETF VV at $60.69

The decline in the ^VIX yesterday required the LB, under one of its myriad trading rules, to buy back two stock positions previously sold. I will discuss those two purchases in the next post.  The VIX declined 9.55% to close at 17.34.

Wednesday, June 29, 2011

Floating Rate Investment Grade Bond ETF (FLTR)/Case Shiller Index/Sold 50 of the TC FJA at $24.84/Bought Back 1 Mueller Water 7.375% Senior Subordinated Bond Maturing on 6/1/2017 at 94.5

Market Vectors has an ETF that invests in investment grade floating rate securities. Van Eck Global - Market Vectors® Investment Grade Floating Rate ETF (FLTR) I do not plan buying that ETF anytime soon, given the extremely low short term rates. Generally, this type of security will pay a spread over a short LIBOR rate, and those rates are extremely low now. The expense ratio for this fund are capped at .19% until 9/1/2012 and will then rise to .49%.  Even with the cap, the sponsor's web page shows a miniscule yield of .7%.  This is one that I will simply keep in mind.  It would be difficult for me to buy the securities owned by this fund in the bond market.  This kind of fund may have a place in my portfolio when and if I become concerned about rising interest rates.  Besides the low yield, another major drawback is that this ETF has a very heavy concentration in bank issues.

There are exchange traded bonds that provide floating rates.  Many of the floating rate securities, traded in the stock market, are investment grade.  However, most of them have long maturities.  There are several synthetic floaters that are tied to bonds from non-financial firms, which would allow an investor to achieve a greater sector diversification. Synthetic Floaters  In that post, I reference floaters tied to senior bonds from Wal-Mart (GJO), Proctor & Gamble (GJR), Dominion Resources (GJP), AT & T (GYC), Allstate (GJT) and IBM (GJI), along with several issued by banks.  I currently own GJP and GYC in the ROTH IRA. I have sold GJT, GJR and GJO due to their current low yields and realized a profit on the shares. Floaters: Links in One Post  I will own the synthetics only in a retirement account due to their complex tax issues associated with the swap agreement which creates the float. All of these exchange traded synthetic floaters are thinly traded most of the time, with large bid/ask spreads, so I will use limit orders when placing a trade.

The Case Shiller 20 metropolitan area home price index rose .7% in April compared to March, the first monthly increase since July 2010.  Spring buyers and a delay in foreclosures by many banks probably contributed to the rise.  standardandpoors.com.PDG However, the 20 city index is down 4% year-over-year.  In that report, it is mentioned that existing home sales in May are 15% below the level from May 2010 and 35% below their 2005 pace.

1. Sold 50 of the Trust Certificate FJA at 24.84 Last Monday (see disclaimer): This TC represents an undivided beneficial interest in senior Embarq bonds maturing in 2036.  Embarq was later acquired by CenturyLink (CTL).  CTL Acquires Embarq FJA' coupon is 7.1% on a $25 par value.  Prospectus   The underlying bond has a higher coupon at 7.995% and is only selling slightly above its par value.  FINRA 

The 50 share lot sold last Monday at $24.84 was purchased at a total cost of  $14.36 over two years ago, so I received a number of semi-annual interest payments in addition to harvesting a 75% long term capital gain on the shares:

50 FJA Purchased at a Total Cost of $14.36

This last sale marks my exit from this position. A prior sale was at $24.75: 


2010 50 Shares FJA +$458.02 Long Term Capital Gain


And there was one quickie transaction in 2009 that netted about a $50 profit plus an interest payment. Bought another 50 FJA at $14.2 BOUGHT 100 of the TC FJA 15.36 The shares sold on Monday, using FIFO accounting, were the shares bought at $14.2. The total cost number shown in the first snapshot includes the brokerage commission. I am more than satisfied with the results of those two purchases made in May 2009 and do not wish to press my good fortune by risking a significant gain on the remaining odd lot. A long bond maturing in 2036 has a boatload of interest rate risk attached to it.

FJA went ex interest for its semi-annual distribution on 5/26/2011.

The realized long term capital gain was $516.02 on a $718 investment, plus interest payments. 

2. Bought Back 1 Mueller Water 7.375% Senior Subordinated Bond Maturing on 6/1/2017 at $94.5(Junk Bond Ladder Strategy)(see Disclaimer ): Maybe Uncle Ben has turned me into a junk bond trader as I scramble for yield.  I previously bought this same bond at the same price back in December 2010. Item # 1  Bought 1 Mueller Water Bond I sold that 1 bond for a small profit last May:  Sold 1 Mueller Water Sen Sub Bond at 100.625  I have bought and sold the common shares many times in the LOTTERY TICKET category. 

The bond is rated well into junk territory.  According to FINRA, this bond is rated at B3 by Moody's and CCC+ by S & P.  This bond is more junior to a senior bond maturing in 2020 with a 8.75% coupon. FINRA  That bond is still rated junk, but at a higher level than the 2017 subordinated bond that I bought again. The 2020 senior bond is also selling well over its par value which makes it off limits to me under this strategy. 

MWA is one of the companies that I regularly follow, due to my interest in its long term turnaround potential.  I did recently place a day limit order to buy 50 shares of the common, but the order was not filled at my $3.5 limit price.  

This is a link to Reuter's Profile page on MWA. 

I do recall reading part of MWA's recently filed 10-Q, where it expressed an interest in strategic alternatives for the money losing U.S. Pipe operation. (page 29)  If that operation can be sold at a reasonable price, I would view it as a positive for the company. 10-Q  

The long term debt is mentioned at page 8 of that Form 10-Q. 

I am assigning a 7- to the 2017 subordinated bond.   Personal Risk Ratings For Junk Bonds

My confirmation states that the current yield at my cost is 7.738% and the YTM is 8.396%. 

Tuesday, June 28, 2011

HYS/EK/Bought 50 AMAT at $12.45/Bought 1 Cricket Communications 7.75% Senior Note Maturing on 10/15/2020 at 96.5

The Greek Parliament is scheduled to vote tomorrow on the austerity package. This vote is apparently only for the general goals of tax and spending targets, along with the creation of a privatization agency.    BBC News  The Deputy Prime Minister is not exactly brimming with optimism about securing the necessary votes to actually implement those general goals.   George Soros is quoted in that BBC story saying that the world is on the "verge" of another collapse.  The word "verge" is one of those amorphous words that suggest a certainty of a particular outcome, but actually predicts nothing.  I could say that the OG is on the verge of running around the block here at HQ.  Or, I could say that the OG is on the verge of eating some Hershey Kisses, possibly a more likely scenario than a jog around the block.

The market may rally in the event Greece's Parliament approves the general goals of austerity, but that could easily end up being a head fake.  

PIMCO has launched a short term high yield bond ETF.   HYS  As of 5/31/2011, the fund had a yield-to-worst of 6.8% and a duration of 2.2 years. www.pimcoetfs.com /HYS .pdf   This ETF will attempt to track the BofA Merrill Lynch 0-5 High Yield Index. Historically, this segment has produced returns in line with equities but "with approximately half the volatility", according to PIMCO.

Although the FED will end this month QE2, it intends to keep its bloated balance sheet stable by reinvesting principal from maturing assets. FRB: Press Release--FOMC statement--June 22, 2011 This policy could result in the purchase of up to 300 billion in treasuries over the next year, according to Bloomberg. That Fed policy has been called QE3 Lite. The FED had a record $2.86 trillion in assets as of 6/22.  It is far from clear who will emerge to buy U.S. debt, in the quantities needed to pay off maturing debt and to finance the budget deficits, once the FED stops buying in bulk.

The personal consumption expenditure (PCE) index, viewed by the FED as a more accurate gauge of inflation than CPI, rose .2% in May and is up 2.5% over the past year.   Excluding food and energy, the PCE index rose .3% in May. News Release: Personal Income and Outlays, May 2011

The Dallas Fed manufacturing survey reported the results of its June manufacturing survey in Texas.  Texas Manufacturing Outlook Survey, June 2011 - Economic Data - FRB Dallas The general business conditions index fell to -17.5. A -3.2 was the consensus estimate.

The treasury sold $35 billion in two year notes yesterday with a yield of .359%. www.treasurydirect.gov.pdf Yes, that is a period before the numbers.  There is no doubt in my mind that the real rate of return will be negative before taxes.

The London P.M. fix for gold on 6/27/2011 was at $1,498 in USDs.

The International Trade Commission has postponed its decision in Eastman Kodak's patent infringement case against Apple and RIMM until 6/30/11.  The decision was scheduled to be announced on 6/24. usitc.gov.pdf I would anticipate that this ruling will have some impact on the pricing of my 2 EK 2013 senior bonds.  A ruling favorable to EK, followed by a substantial cash settlement, would provide considerable comfort to the owners of EK's 2013 senior bond.   Bought 1 Eastman Kodak 7.25% Senior Bond Maturing 11/15/2013 Added 1 Eastman Kodak 7.25% Senior Bond Maturing 11/15/2013 The last post cited contains a more thorough discussion of this legal proceeding.

1. Bought 50 AMAT at $12.45 (Large Cap Valuation Strategy)(see Disclaimer): Do I care about my opinion on AMAT stock? Of course, I could care less about my opinion since I am simply not capable of forming an informed judgment about AMAT's business.  Somehow, I have avoided losing money so far in this stock. Recognizing my total lack of expertise in technology in general, I will wait to buy large cap tech stocks only when the valuations appear compelling to me.  As a result, I have never paid over $15 per AMAT share and all of my recent purchases were at or below $13.   Bought 50 AMAT at 12.48 (January 2010 Post); Added 50 AMAT at 12.28 (March 2010 Post ); Bought 50 AMAT at 11.95 (July 2010 Post);  Bought 50 AMAT at $13 (September 2009 Post) I have sold those shares for small profits.  I intend to hold onto this latest purchase for a least a year to see whether I can improve upon my prior percentage gains.  

I am generally aware that AMAT makes equipment for the semiconductor industry.  The latest purchase was motivated by the following factors:

a. The dividend yield at a total cost of $12.45 is around 2.57% at the current quarterly rate of 8 cents per share. News Release | Investors | Applied Materials

b. The price had declined from a high of $16.85 on 3/3/11, NASDAQ:AMAT, or close to 26% which seems harsh to me.

c.  The consensus estimate for the F/Y ending 10/11 is for an E.P.S. of $1.42, which gives me a P/E of less than 10, though earnings are of course very cyclical for this company.

d.  I am not qualified to judge the soundness of AMAT's proposed acquisition of Varian Semiconductor (VSEA).  I do know that part of the financing was raised at low interest rates (Prospectus) and VSEA is a profitable company.  The consenus estimate is for an E.P.S. of $3.97 for VSEA's current fiscal year ending in September 2011.  The large cash pile on AMAT's balance sheet was not earning much anyway.

e.  Morningstar rates AMAT's stock 5 stars. S & P currently has AMAT rated 4 stars with a $18 twelve month price target. S & P views Varian as providing some interesting growth opportunities and provides a good fit.  I am aware that Varian has a dominant position in the ion implantation market.

While AMAT did okay in its last quarter, many investors were disappointed with its forecast for the current quarter.
SEC Filed Press Release Announcing Results for Q/E 5/1/11 (see section on "business outlook")

2. Bought 1 Cricket Communications 7.75% Senior Bond Maturing 10/15/2020 at 96.5 (Junk Bond Ladder Strategy)(see Disclaimer):  This bond is normally unavailable for purchase in small lots.  With the recent retreat in junk bond prices, this bond had declined some in price, and a seller emerged willing to feed small investors with 1 bond sales.

Cricket is the brand name for wireless communication services provided by Leap Communications, whose stock is publicly traded under the symbol LEAP. Cricket Communications, the issuer of this bond, is the operating subsidiary of Leap Wireless. This is a link to Leap's last filed Form 10-Q for the Q/E 3/2011.  SEC  As of Q/E 3/2011, LEAP had long term debt of $2.8337 billion and was operating at a loss.  The long term debt is discussed starting at page 10 of that Form 10-Q.   The senior 2020 note is discussed at pages 12-13. This note was originally a private placement and that note was exchanged for a publicly traded one registered with the SEC. PROSPECTUS

This is a link to the Reuter's Key Developments page for Leap.

The bond is of course rated well into junk territory.  According to FINRA, Moody's rates it at B3 and S & P at CCC+.

I am assigning it a 6+ rating in my personal junk bond rating system. Personal Risk Ratings For Junk Bonds

Interest is paid semi-annually in April and October.

My confirmation states that the current yield at my cost is 7.965% and the YTM is 8.167%.

In the absence of the Fed's JIHAD against savers, I would not be taking so much risk with junk bonds.  I cried Uncle a couple of years ago, but Uncle Ben did not hear me wailing. So, when I ran out of other options, the junk bond ladder strategy was born late last year. Item # 5 More on Rationale for Junk Bond Ladder Strategy

I am tracking realized gains from this strategy in Item # 5:   Realized Gains Junk Bond Ladder Strategy

As previously discussed, I will be more than content to break even on the bonds, that is, profits on bond sales and redemptions netting out bond losses from sales and/or defaults. If I am able to accomplish that objective, which is dicey given the risks, I will have at least captured a good interest rate spread compared to similar maturity treasuries. The 10 year treasury note is now less than 2.9%.  My average weighted maturity in the junk bond ladder is slightly over 7 years with close to a 10% yield to worst.  I expect defaults which is one reason for using a basket strategy and to limit purchases to bonds selling at less than their par value.

I made two more bond trades on Monday that I will discuss in the next post.  

Monday, June 27, 2011

The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets/Sold 170 NSSC at 2.93

With the robust stock market rally off the March 2009 low, the compound annualized return for an investment made in the S & P 500 on 1/1/1999 through 12/31/2010, was -.54%, with dividends reinvested, and adjusted for inflation. CAGR (compound annual growth rate). If I move the starting point to 1/1/2000, the annualized return falls to -2.07%. The S & P 500 has risen 97.1% off its March 2009 low. dshort.com 

Historically, a long term stock bear market will have a series of strong cyclical bull and bear moves. Some of the strongest cyclical up moves in stock market history were recorded during long term secular bear markets, such as during the Great Depression and after the recent Near Depression.

Those strong up moves are viewed here at HQ as simply a reaction to the catastrophic phase of a long term secular bear market. A typical up cycle, within the context of a long secular bear market, would be between 1933 to 1937 occurring after the catastrophic 89.2% decline, October 1974 into early 1976, and the most recent spurt since March 2009, all occurring after the catastrophic phases of a long term bear market.   

When the reasons for that down cycle dissipate (or are recognized by the market as no longer dominant factors), and some powerful force develops to power a long term bull super cycle, then the long term bull cycle will finally emerge. It is never clear for an investor living through these cycles, except in hindsight of course, when one long term cycle has ended and the other has begun. 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009 Post); LONG TERM SECULAR BULL PATTERN 1950 TO 1966/ Long Term Secular Bear Pattern from The Great Depression (September 2009 Post).

The onset of a bear market cycle generally results from clearly excessive stock valuations that build up during the last phase of a long term bull cycle. 

Unfortunately, recognizing that demarcation line is key for an individual investor who is faced with a limited life cycle and a number of unique situational risks. So you have to do the best that you can given the unknowns and unknowables. Most individuals will need the robust returns provided during a long term secular bull market, in order to finance their needs during retirement. Living off the income generated by bonds now is not a long term option for many people.  

For most individuals, Professor Siegel's statistics about the relative performance of stocks over bonds since 1871 are not very helpful. Really, his argument is just absurd, except in a make believe world.

Most individuals are not able to save much money until later in life, and then retirement is looming when the individual will have to live off their investments, supplemented by social security payments and less frequently now a pension. For more retirees now, it is more of a question about living off their retirement savings in a 401 (k) or an IRA. So, the window for saving money is not that large before the individual has to start spending the savings.   

Sure, if I could all go back to the year of my birth, 1951, invest the money that I  have now in the S & P 500, I could see the wisdom of Professor Siegel's thesis. It would have helped tremendously that 1950 was the start of a long term bull cycle. I can not live in Siegel's make believe world, however, which would be ideal for trust fund babies or the spendthrift wealthy. Stocks for the Long Run: Jeremy J. Siegel: Books {I saw the same thesis presented in a recent Retirement Guide 2011 published by Fortune. That article,  which did have some big picture insights, spoiled it by quoting Siegel's thesis using data from 1802 to 2007, a grotesquely absurd time period for individuals facing a variety of situational risks, not to mention problems with the older data.}  

I recall in 1982 that many pundits believed then that the rally staring in August of that year was just another short cyclical up move in the long term bear cycle. That long cycle started in 1966 (see middle chart at More on 1982 or 1974).

An investor, buying the S & P 500 on 1/1/1966, would have suffered a compound annualized loss of 1.04%, with dividends reinvested and adjusted for inflation, as of 12/31/1982. That is a long time for an individual. The Roller Coaster Ride of the Long Term Secular Bear Market (May 2010 Post) To Professor Siegel: Time for a Re-Think Long Term Stock Risks and Situational Risk (March 2009 Post)  Siegel v. Arnott: Both Have Winning and Losing Arguments for Me in my Dynamic Asset Allocation (May 2009). Now if I had retired at 65 in 1966, needing my savings to pay expenses, how would I have fared under Siegel's stocks for the long run thesis? Most likely, I would have died poor, still waiting for that promise to bear fruit for me.   

The rally starting in August 1982 was not just another cyclical bull move in the context of a long term secular bear market. It was the start of a long term bull cycle.  I end that cycle earlier than others who use 2000 as the end date. I end that cycle in October 1997. Dating the Start of the Current Long Term Secular Bear Market (May 2010 Post) For that long term bull cycle, the mantra heard from financial advisers, "buys the dips, and hold for the long term" actually made sense, and at least made them appear to be knowledgeable. 

Of course, the future may be different from the past. The last two major up cycles (1950 to 1966/1982 to 1997) resulted in 14%+ CAGR with reinvested dividends in the S & P 500, adjusted for inflation, compared to an annualized loss of 1% to 1.5% on the same basis for the long term bear market.  Do I need to say more about the importance of identifying the nature of the long term cycle and its underlying dynamics?  

Each individual has to make up their own mind on this extremely important big picture view. 

I try to start my analysis by asking a very simple question. What is causing the long term bull or bear market?   The principal cause in my opinion for the 1966 to 1982 bear market was inflation. Once the Federal Reserve drove that bogeyman into the ground, the market had a good chance to start a long term bull move. By mid-1982, the more sound judgment, based on then existing evidence, was that the FED had successfully brought that problem under control. Hence, the better judgment then was the rally starting in 1982 was in fact the beginning phase of a new long term bull cycle.

Improvements in productivity, resulting from technological innovation, provided a prolonged fuel for the up move too. Those innovations centered around computers. 

Unfortunately, the up move was fueled also by the same factor that has caused the current long term bear market: TOO MUCH DEBT. Starting in 1985, without any rational doubt or question, both consumers and governments in the developed world started to spend ever increasing amounts of borrowed money.  The borrowings escalated at a rapid rate, as shown in graphs previously referenced many times in this blog. A typical set of charts are the following, showing increases in U.S. consumer debt:

U.S. Household Credit Debt Outstanding



U.S. Consumer DEBT to Disposable Income Ratio


Governments in developed countries have imitated their citizens desire to spend ever larger sums of borrowed money, in order to keep most of the population content. Spending borrowed money, in significantly increasing amounts over time, will create growth.

The  WSJ has an article in today's paper that pinpoints the original problem as too much debt. 10 Commandments for Frugal Living - TheStreet

Entitlements will vary by income class, but all segments receive a healthy dose.  Many in the middle class do not recognize the existence of entitlements for them. Many do exist including Medicare and certain tax breaks like the mortgage interest deduction. Medicare is primarily for the benefit of the middle class. The rich do not need either Social Security or Medicare. Most in that class would certainly prefer seeing those programs cut to avoid more taxes on them to pay for programs designed to benefit others, a desire finding a concrete manifestation in the budget recently approved by the House of Representatives with no Democrat votes. The poor have Medicaid, food stamps, etc. and so on. The rich have a large number of entitlements, usually found in the tax code.  Everybody is more or less content, not up in arms so to speak, as long as the nation can finance those entitlement with borrowed money. "Shared sacrifice" was gradually buried in the U.S., starting  after WWII.    

When looked at it in perspective, the seeds for the current bear market, caused by too much debt and leverage at all levels, were planted in the prior bull market, and fertilized excessively for many years. The spending of borrowed money contributed to the longevity of the prior bull market, by creating an illusion of growth that had to come to an end. Possibly, one could argue that household debt to disposable income could be increased to say 80 to 90%, provided it remained steady in that range, without creating a massive problem. That range would represent an increase  from the 60% to 70% ratio prevailing between 1960 to 1985, but may have not been problematic over the long term, especially when many could lower their debt payments with refinancings during periods of low interest rates. What ultimately was unsustainable was the relatively quick jump from 90% to 130% starting in 2000. It is helping now that a considerable amount of the mortgage debt has been refinanced at lower rates. 

Once I view the underlying problem as too much debt, and the cure being the need to cut spending and to save more,  then the question becomes whether that process is far enough along, and no longer an impediment to the creation of the long term bull cycle, similar to what was apparent in 1982 for inflation. Even if I can answer that query in the affirmative, which I can not do now when looking at the overall picture in developed countries, I would still need to find some driving force ready to power worldwide growth after the Age of Leverage. What Will Produce Growth after the Age of Leverage? (September 2009 Post); Underlying Cause of the Current Long Term Bear Market is Too Much Debt (June 2010 Post). 

Hopefully, I have identified the supporting fuel for the next long term bull market, the rapidly growing middle class consumers in emerging markets who are not yet loaded to the gills with debt, having just discovered in many cases the credit card. When that demand force becomes clearly more pronounced than the deleveraging force in developed markets, then I suspect the bull move can not only commence but also last.  I do not see that happening yet as the world teeters on one debt crisis after another, with several others still waiting in the wings.  It is impossible for me, for example, to use the word "sane" to describe our government's 1 trillion dollar plus budget deficits. A couple of trillion of borrowed funds for the GOP's war in IRAQ and the Democrat's "stimulus" package only added to the pre-existing government debt problems, while nothing was done to address the serious unfunded government liabilities running well into the trillions of dollars. I do not believe that members of either political tribe in the U.S. have yet come to terms with the necessary shared sacrifice that has to be sold to a public who are living under a variety of misconceptions and false information, fed in large part by the political parties themselves.    

I of course may be wrong, but I anticipate another cyclical down move in the market before the long term bull cycle will be able to form and to maintain a trajectory similar to what has been seen in the past. This next bull cycle will not be dependent to any significant degree on spending by the American consumer, who will become less important in the scheme of things every year. 

The GOP believed that Bush's tax cuts passed in 2003 would provide the conditions of economic nirvana to occur.  I have not mentioned that philosophy in the foregoing discussion, since those cuts were far more important in adding to the nation's existing problems rather than contributing meaningfully. Apparently, their plan now is to increase the tax breaks for the wealthy and hope for a better result. 

Far more powerful forces are at work. The GOP policy of tax cuts primary for the wealthy, who provide them funding in reciprocation, did manage to increase the government's deficits and dig the nation even deeper into the hole. However, the promised job creation did not materialize in the Bush years after those cuts, with the job creation record properly described as the worst in decades. A Lost Decade for Jobs & Income Growth Adjusted for Inflation and WSJ article Bush On Jobs: The Worst Track Record On Record And, I would add that most of the jobs created were soon lost, since they were connected in one way or the other with the housing bubble rather than to the stimulus impact tax cuts for the wealthy.
   
Any person, who lives in the world of dogma, would never see a financial crisis developing, or identify the causes of major business cycles.  In short, they are unable to process information in a non-biased manner and to arrive at informed judgments based on the most reliable information. A successful investor does not have the luxury of living in a make believe world, ruled by cliches, rigid beliefs, clearly erroneous or fabricated information, and a disinterest in actually learning from experience. The assertion, for example, of "buy and hold", is not a path to financial success for an investor facing significant situational risk with heavy stock exposure during a long term bear market in stocks.

Believing that tax cuts for the rich are the path to economic prosperity will cause an investor to ignore evidence of more powerful forces that will send the economy in a decidedly different direction.  The dogma of politicians, their TBs, and the supporting array of TV and radio personalities masquerading as journalists, particularly the faux blonde ones, have no place in the successful investor's universe. 

When the preponderance of evidence points in one direction, I will shift course and will do so fairly rapidly. Until that time, I remain in a trading mode applicable to an Unstable VIX Pattern within the context of a long term secular bear market.

If I see signs of more daylight, I will most likely start adding back stock ETFs that I recently sold, such as VEU and VV.  I would hope to see several of the following in the weeks and months ahead: a pick up in manufacturing after the recent slowdown, a vastly improved jobs picture, more evidence of responsible behavior by consumers dealing with excessive debt levels, adult behavior by U.S. politicians from both tribes which means compromises both on taxes and spending,  a slower inflation rate in emerging markets coupled with good GDP growth, a bottoming in housing prices, and no sovereign defaults in the EU. This article in Seeking Alpha highlights some of the known, existing risks to a market breakdown.

1. Sold 170 of Lottery Ticket NSSC at $2.93 (LOTTERY TICKET strategy) (see Disclaimer):  I bought 100 shares of NSSC at $1.8 and 70 at $2.25. This marks my second successful roundtrip in NSSC shares, with all purchases made in the LT category.  



LB'S rule on LT purchases limits the purchase amount to $300 plus any profits or distributions received from prior forays. Based on the profits from the previous sales, I could go as high as $514.75 in my next purchase, if any, without violating LB's exposure limit. 

Friday, June 24, 2011

SWZ/Bought 50 of MFA at 8 in ROTH IRA/Closed End Fund Table/Bought 1 Hercules 6.5% Junior Bond Maturing on 6/30/29 at 86/What is Meant by Defensive in this Blog

The jobless claims number from last week, which got the market so excited last Thursday, was revised up yesterday morning to 420,000. I mentioned in last Thursday's post that the market's reaction was non-sensical. (introduction:  Stocks & Politics) For the W/E 6/18/2011, the seasonally adjusted, initial  unemployment claims rose to 429,000, compared to a consensus estimate of 415,000.   ETA Press Release: Unemployment Insurance Weekly Claims Report

Gold suffered a significant decline in value yesterday, which gives the "principal protected", senior, exchange traded, unsecured note MTY more breathing room. Stocks & Politics: MTY To avoid a reversion to the 3% minimum annual coupon, gold can not close above $1,576.80 at anytime during the current annual coupon period ending on 7/27/2011, based on the P.M. London Fix.  The starting value for gold during MTY's current coupon period is $1,168. Kitco Inc. - Past Historical London Fix Yesterday's P.M. fix was at $1523, down from $1541 at the A.M. fix. Still, I would be surprised to see MTY avoid what I call a maximum level violation.  Of course, the phrase "principal protected" means that par value will be paid at maturity, which is $10 per note, provided the issuer has survived to pay the note off, just like any other unsecured bond.

The U.S. Chamber of Commerce, a right wing partisan organization, criticized the release of 30 million barrels of oil from the U.S. strategic reserve, which will probably bring down gas prices for average working Americans.    UPDATE  That release was done in conjunction with the International Energy Agency that authorized the removal of 60 million barrels from strategic reserves worldwide.  The Chamber previously argued that the U.S. taxpayers need to pick up most of the tab from the BP oil spill:  ABC News  U.S. Chamber Statement on BP Oil Spill Cleanup | U.S. Chamber of Commerce  Taxpayers Pay

The market managed to recover somewhat from a downdraft yesterday morning after the EU and IMF announced their approval for the proposed 5 year Greek austerity plan.  Now, the Greek Parliament has to approve the plan.

1. Swiss Helvetia Fund (SWZ)(own): SWZ is a closed end fund (CEF) that invests in Swiss companies.  The Swiss Helvetia Fund  declared a net long term capital distribution of $.727 per share.  The ex dividend date is 7/21/2011.  I have been reinvesting the dividend to buy additional shares. This fund is classified by me as a core long term holding in my CEF portfolio, but only for shares held in a taxable account. I have traded  SWZ in retirement accounts.  I have not bought many shares in the open market. My last purchase in a taxable account was at $12.15 (December 2009 Post).  I own 263.902 shares as part of my international stock allocation in the CEF portfolio.  

Given the recent strength of the Swiss Franc against the USD, the net asset value of SWZ has had a strong tailwind behind it.  The fund has a large concentration in Nestle and Novartis, together representing about 29% of the funds' assets. Both of those companies would be viewed as "defensive" stock holdings. (see explanation in Item # 4 below)  The fund also has about a 7.55% weighting in Roche.  More information about the fund can be found at its website:  SWZ.com - Swiss Helvetia Fund  

One reason for reinvesting the dividend is that SWZ shares will typically trade at more than a 10% discount to net asset value per share. Morningstar shows the 3 year average discount at -14.45%. I would not be an open market buyer at less than a 10% discount.  Morningstar has a 4 star rating on this fund. 

The daily net asset value can be found at the sponsor's website or at the Closed-End Fund Association

This is a link to the dividend history: SWZ.com - Swiss Helvetia Fund

This is a link to the last filed SEC Form N-Q, listing the fund's portfolio holdings as of 3/31/2011: The Swiss Helvetia Fund, Inc.

This is a link to the last SEC filed shareholder report for the 2010 year: Swiss Helvetia Fund, Inc.

2. Bought 1 Hercules 6.5% Junior Subordinated Bond Maturing 6/30/29 at 86 on Thursday (Junk Bond Ladder Strategy)(see Disclaimer): Hercules was acquired by Ashland (ASH) on 12/13/2008. Form8k  According to FINRA, this bond is currently rated in junk territory S & P gives it a BB- and Moody's has it at Ba2.  Both of those ratings are better than most of the bonds in my junk bond basket. This debt is referenced in Note J to Ashland's last filed  Form10-Q at page 16.  

As I understand it, when this note was issued by Hercules, it would have been subordinated to all senior debt and later to a senior subordinated note. Form 10-Q, March 31, 2004 Prospectus for 6 3/4% Senior Subordinated Note due 2029.  

The history of this note was summarized by Hercules at page 60, footnote d, to its 2007 Form10-K. This junior was originally issued in 1999 to the Hercules Trust II that was liquidated in 2004, with the debentures held by the trust distributed to the owners of the trust preferred securities. According to that statement, the redemption value of the debentures is $1,000 per bond. As shown in this summary, this bond had an usual history before Hercules was acquired by Ashland. A possible reason for dissolution of the trust can be found in footnote g  at page 47 to the 2004 Hercules Annual Report. This history was sufficiently complicated that I almost passed on the 1 bond purchase, and would not purchase any more than 1 due to the legally complex history of this bond.    

When I went back and looked at the prospectus for the 1999 TP, I found that it was a normal trust preferred security. The underlying bond owned by the trust provides for quarterly payments:  www.sec.gov Interest may be deferred for up to five years provided no distributions are made on a junior security. The stopper provision is typical and is summarized at page S-11. 

This kind of security will be junior to all debt issues, other than other TPs if any, and senior only to pure equity securities, such as common stock and equity preferred or traditional preferred stock.  As a practical matter, for a company like Ashland, this would encompass only common stocks.  For many bank TPs there will often be a layer of equity preferred stocks sitting below the junior bond in the capital structure. 

Unlike Exchange Traded TPs, which trade flat, accrued interest will have to be paid by me to the seller of the 2029 Hercules bond. 

Ashland does pay a common stock dividend.  I am not currently concerned about the credit risk of this junior bond.  There is of course significant interest rate risk with any long term bond. 

For anyone unfamiliar with Ashland, this is a link to its profile page at Reuters and to the key developments page. As noted in the important developments, the company did recently increase its common dividend. 

Due to Ashland's proposed acquisition of International Specialty Products, S & P recently put Ashland's debt on credit watch with negative implications.  So, a downgrade in Ashland's debt by S & P may soon occur.  Reuters 

Usually, I could not buy this bond.  It will be difficult to buy or sell. Given the possible downgrade, a small number became available yesterday, undoubtedly from another small investor.  Since I am able to hold the bond to maturity, I do not care about its lack of liquidity.

My confirmation states that the current yield at my cost is 7.488% and the YTM is 7.878%. 

3. Bought 50 MFA at 8 in Roth IRA (see Disclaimer):  MFA Financial Inc. is a mortgage REIT that invests in both agency and non-agency mortgage securities. At a total cost of $8, and assuming a continuation of the current payout, the yield would be around 11.75%. The payout will fluctuate and will be dependent on a number of factors.  One important factor, common to all mortgage REITs, is the spread between their cost of borrowing and the yield on the securities bought with borrowed funds. Due to the FED's Jihad against savers, the cost of borrowing money is abnormally low at present. I would not want to own this type of security when interest rates are rising at any kind of rapid pace. The value of the assets bought with borrowed money might be declining and the cost of funds rising in that scenario, a double whammy for this kind of business. For now, the mortgage REITS are probably in close to their optimal operating environment, which is just my opinion. 

Unlike many Mortgage REITS which invest in only GSE mortgages, MFA ventures into the private mortgage market. I can only hope that the managers know what they are doing.  That is one reason for such a  small investment. There is no practical way for me to know the answer to that question.  My practical problem is that I have an excessive amount of cash building up in the IRAs due to bond redemptions.  

A discussion of MFA can be found in this Seeking Alpha article. 

I mentioned in yesterday's post that Randall Forsyth recently posted a column on the Mortgage REITs.  

I own an ETF that currently has about 67% of its assets in mortgage REITS, which went ex dividend for its quarterly distribution yesterday. iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM  MFA is one of the holdings, with a 4.58% weighting. 

This is a link to the MFA's last filed Form 10Q.  www.sec.gov This is a link to the  SEC Filed Press Release that is easier to digest.  In that document, the book value per share is shown at $7.86 as of 3/31/2011. 

4. What is Meant By "Defensive":  By defensive, I am not referring to a security that is "safe".  Many investors ask whether a common stock is "safe", which is never a question that I have asked anyone.  If I ask that question, then I will consent to having a conservator appointed to manage my assets.  "Maybe the LB already needs a conservator, being a Lame Brain and all", RB added with emphasis.   

There is a mind set among a certain class of individuals who want large returns for "safe" investments, something like greater than 10% annualized returns with the safety of a FDIC insured bank certificate of deposit. That mindset is just incredibly ludicrous to me.

Once an investor moves beyond relatively safe investments like a FDIC insured bank CD or a 3 month treasury bill, the proper question is not whether the investment is safe or not, but what are the risks and whether the risks outweigh the potential rewards?  Any investor who wants to know whether a security, which fluctuates in value, is "safe" needs to quit immediately making their own investment decisions. "LB needs to chill out", RB had to interject after that last comment, "go all in". I say relatively safe since I do not view anything as 100% safe, even a 3 month treasury bill issued by our destitute Uncle Sam. During the Dark Period, the government had to insure money market funds after a big fund broke the buck.  

There is more risk involved with owning just one stock rather than an ETF for the entire stock market {e.g. Vanguard Total Stock Market ETF (VTI) or iShares Dow Jones U.S. Index Fund (IYY)} The total stock market ETF is not risk free or safe, as that term is normally used by an investor seeking safety. An investor could buy a VTI in October 2007 and still be trying to breakeven on that purchase.  During a long term secular bear market in stocks, an investment in a broad market average like the S & P 500 will decline in value after inflation even with the dividends reinvested to buy additional shares.  The Roller Coaster Ride of the Long Term Secular Bear Market   Does that sound safe to anyone?

And it could be made worse by the individual's situational risk, such as having to withdraw money during retirement when the asset has declined a lot in value or when the asset's value has lost ground to inflation.   

An individual stock may at times outperform the total market index. Apple's shares would be a recent example. I would view the diversification provided by the total stock market ETFs to be "more safe" than owning a handful of stocks for most individual investors.  I will own the total stock market ETFs from time to time, but I try to outperform the broad market indexes with a large, diversified selection of stocks, moving my allocation up and down based on my macro views.  My stock allocation was decreased substantially in 2007, increased substantially in March-July 2009 as noted in these Posts, and has recently been decreased significantly this year back to about where it was in March 2009.   So, I try to outperform based on the allocation to stocks and the selection.  If the market skyrockets from yesterday's close, I will underperform the averages.  Otherwise, I will most likely outperform based on security selection and the increased cash allocation.  

When I started to increase my allocation in March 2009, I was buying a lot of stocks that I viewed as "defensive". This would include stocks like Coca Cola, Unilever, Heinz, Pepsico, Sysco, Campbell Soup, Kraft, and Proctor & Gamble.  If an investor looks at the charts for those kind of stocks, over any short period of time, the word "safe" does not come to mind.  A long term chart, say twenty or thirty years, looks better and more safe, provided the investor has the wherewithal to ride the down periods. 

One characteristic of consumer staple stocks is that many of them continued to increase both their profits and dividends during the Near Depression period. They were, however, clearly vulnerable to downdrafts in their stock prices.  If an investor panicked and sold the stocks, it would have been easy to lose money. Or an investor could have purchased one or more of those stocks when the P/Es were over 20, with the share price returning now to near where the purchase was made, and that investor might not believe that KO is a good investment or a defensive one, when the shares were bought at $80 and over a 40 P/E many years ago.  As the stock price moves up, so does the risk. KO was less risky when I bought shares in the spring of 2009 at $38.72 than at $65 now. 

These stocks, whose businesses are not dependent so much on the ebb and flow of the business cycles, are defensive in that sense. They are not defensive in the sense of being immune to downdrafts in their stock prices which will likely occur in bear markets. Maybe they will decline less than other stocks, where the company is more directly exposed to unfavorable economic conditions.

The consumer staples and other "defensive" names, which would include pharmaceutical companies who are not suffering from a patent cliff,  can become more defensive when the entry price has been impacted downward by a recession and/or bear market. A catastrophic bear market will periodically come along, based on historical precedent, and most stocks will hit the crapper. The catastrophic phase is one where prices fall more than 50%, usually in a relatively brief period of time. That type of event culminated in March 2009 and in October 1974, for example, with both of those catastrophic declines occurring in the context of a long term secular bear market in stocks, usually lasting 15 years or so.    

So, buy defensive, I do not mean a lack of vulnerability to stock market downdrafts or to any possible meaning of the word "safe".  Instead, I am referring to the following:

A. A company whose business is less subject to the ups and downs of the business cycle compared to the vast majority of companies. 

B. A company with a long history of raising its dividends and increasing its earnings, in both good and bad times. While I would allow for a minor dip in earnings during a severe recession, I would prefer to see no earnings retreat at all.  

C.  Whose stock is currently valued at less than 15 times forward earnings and at less than a 2 P.E.G.  I would not view buying KO at 40 times earnings to be a defensive stock selection.  So, items 1 and 2 above have to be put in some kind of context relating to price and earnings.

5. Closed End Fund Table:  I periodically post a table of the CEFs that I own. The primary purpose of this portfolio is to receive a constant stream of income distributions, which will then be grouped with other distributions to buy more income generating securities.  This is a balanced world portfolio. Some of the distributions will be from capital gains, especially from the stock funds.  I am currently reinvesting dividends to buy additional shares SWZ, JQC, RMT, RVT, CSQ, SGL and ADX, plus only the GDO and BTZ shares owned in a taxable account. I will soon receive shares purchased with monthly dividends paid by CSQ, BTZ, SGL and GDO, plus the quarterly distribution for JQC, which are not yet reflected in the following table.

I take everything in cash in the retirement accounts, which are bond heavy.  I own 220 shares of GDO in the Roth and 200 of BTZ.

I look at this table at least once a day. I am interested in how the portfolio, as a whole reacts, to volatility and to down moves in the market.  The portfolio lost $4.64 yesterday:



Thursday, June 23, 2011

DUK/Mortgage REITs/SOLD 50 of the TP JWF at 25.06/Exchange Traded Bond Table

Duke Energy (own) increased its quarterly dividend by 2%. The new rate will be 25 cents per share. I am reinvesting the dividend to buy additional shares.  While DUK are part of my core electric utility strategy, I did recently pare my position to take a profit and to reduce my average cost per share using FIFO accounting. Pared 50 DUK at 18.42 (March 2011 Post). My long term average cost per share is now $15.03.  

The Supreme Court rejected efforts by local governments to regulate emissions from utilities, basically holding that the EPA had jurisdiction. Bloomberg This is an important victory for utilities that are heavy uses of coal who have been sued by several states for alleged violations of state emission laws. American Electric Power v. Connecticut, supremecourt.gov/opinions/ 10-174.pdf

Randall Forsyth wrote a worthwhile column on the advantages and disadvantages of Mortgage REITs, who borrow money short term to buy mortgage securities. The current low short term rate environment is beneficial to these companies. I own 200 shares in an ETF that owns Mortgage REITs as well as some bank stocks. iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM  (66.86% Mortgage REITs as of 3/31/2011: Fact Sheet/pdf)  It is very heavy into Annaly Capital (NLY) at around 22.6% of net assets.

I also have a small position in American Capital Agency (AGNC) in the ROTH IRA, and hope to exit that position at some point with a gain of one dollar or more after collecting a few quarterly dividend payments.  If the current quarterly dividend rate was maintained for an entire year, which is always open to question for this type of company, the dividend yield for AGNC would be around 19.4% at a total cost of $28.85, the close from yesterday.  So a one dollar gain on the shares would result in an excellent total return. Bought AGNC at 29.29 AGNC went ex dividend for its quarterly distribution of $1.4 per share on 6/21/11, which was my second dividend since purchasing a position.

After the close last night, AGNC announced a stock offering, selling 43.2 million shares for approximately 1.2 billion in proceeds. American Capital Agency  If my math is correct, that is $27.78 per share. So I would expect the stock to decline today.  The timing may have had something to do with the FED's statement released yesterday.

After digesting the Fed's statement released yesterday, which downgraded their assessment of the economy, the stock market headed south. FRB: Press Release--FOMC statement--June 22, 2011 The lower forecast is contained in a the following table: federalreserve.gov/.pdf The WSJ does a good job of comparing this last FED statement with the one released last April. The FED intends to continue its JIHAD against savers and responsible Americans for an extended period of time. The continuation of abnormally low rates is beneficial to those firms who borrow short term to buy higher yielding assets.

1. Sold 50 JWF at $25.06 on Wednesday (see Disclaimer): JWF is a trust preferred stock that has a 5.625% coupon on a $25 par value.  JWF is a typical trust preferred. Interest payments are made quarterly and JWF just went ex interest. In effect, JWF is a junior bond from Wells Fargo (WSF) which matures in 2034.  I bought those shares at a total cost of $9.55 on 3/6/2009:

50 Shares of JWF at Average Cost per share of $9.55
It is possible that WSF may redeem this security since it will have to phase out the use of TPs as Tier 1 equity capital.

Generally, a trust preferred security represents an undivided beneficial interest in junior bonds owned by a Delaware Trust. The bonds will be from one issuer. Both the TP and the underlying bond will mature at the same time and have the same basic terms.  The TP is sold  to the public to raise funds to buy the junior bond.  The trust is formed by the entity that sells the bond, usually a bank. If the TP met certain criteria (see Item # 8 Added 50 of ABWPRA), the bank could use it as Tier 1 equity capital and deduct the interest payments made in connection with the bond.  Financial reform ended this absurd practice of treating a bond as equity for banks with over 15 billion in assets as of 12/31/2009. Trust Preferred Securities & Financial Reform Trust Preferred Securities: Links in One Post Regular Preferred and Trust Preferred

I decided to harvest my 160%+ long term capital gain in JWF rather than to risk losing any part of it.  The long term capital gain will exceed 10 years of interest payments on those 50 shares. I previously harvested profits on another 50 share lot bought around the same time.

2. Exchange Traded Bond and Preferred Stock Table:  Since I last posted this table, I have suffered a number of redemptions, either by the issuer or the owner of the call warrant for trust certificates.  I have included a variety of securities in this table, including TPs, trust certificates, synthetic floaters, baby bonds, "principal protected" unsecured senior notes, and equity preferred stocks. I include equity preferred stocks since their bond characteristics are more dominate.

Among the equity preferred stocks are a few cumulative REIT preferred, where I have reduced by exposure to virtually nothing.  I still own the non-cumulative equity preferred floater issued by Met Life that was bought during the Near Depression.  I have also sold most of my European hybrids, keeping a few bought during the Dark Period. All of these securities are traded on the stock exchange and are consequently easier for small investors to buy and sell. The synthetic floaters will only be bought in retirement accounts due to tax issues.  More about these securities can be found in the following Gateway Posts, and the links provided therein.

Exchange Traded Bonds
TRUST Certificates: Links in One Post
REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Synthetic Floaters
ING HYBRIDS: Links in one Post
Aegon Hybrids: Gateway Post
Trust Preferred Securities: Links in One Post
Floaters: Links in One Post


This portion of my portfolio did increase in value yesterday. More lengthly discussions about exchange traded "principal protected" notes can be found in a variety of posts:  Principal Protected Notes (April 2010 Post); Bought 100 MDC at 9.84 (April 2010 Post); MKN Closes with a 25.56% Gain (March 2011); Bought 100 MKN at 9.85;  MOU Ends Second Annual Coupon Period With a 27.93% GainBought 100 MOU at $10.12 (April 2010); Item # 2 Principal Protected Notes (May 2010); Stocks & Politics: MTY (May 2011).