Friday, March 2, 2012

MOU/Bought 100 of the Stock CEF IRR at $12.41-ROTH IRA/SOLD 200 BTZ at $13.26

Abnormally low interest rates have a large number of actual and potential adverse consequences. A recent article in Bloomberg points out that a number of large American corporations will have to substantially increase their pension contributions due to low interest rates.

The negative impact on those dependent on interest income to meet living expenses is well known. The purchasing power of the Savings Class in the U.S. has been significantly reduced by the Fed's long Jihad Against the Saving Class. The Real Cost of The Federal Reserve's Jihad against the Saver Class Part of that impact has been offset by those investors willing and able to invest in stocks since March 2009, assuming they had a relatively quick recovery from the shellacking between 9/2008 to 3/2009.

The most serious consequence has yet to arise. As investor's worldwide search for a return on their capital, and the world is flooded with liquidity by central banks, the prices for many asset classes have skyrocketed in value due in large part to a herd like demand for them. Those assets include investment grade bonds, gold & silver, stocks, and oil.

Bill Gross argues in his recent commentary that it is time to become defensive. He also highlights the fact that the Fed's Jihad, which he calls financial repression, is wrecking "havoc on historical business models connected to banking, money market funds, and the pension industry". PIMCO For me, I am the most circumspect now about investment grade bonds that have a negative real yield.

Medical Properties Trust closed its $400 million purchase of 16 healthcare facilities formerly owned by Ernest Health.

The market took a fast dip yesterday after the ISM reported a decline in manufacturing index to 52.4. The new orders component fell to 54.9 in February from 57.6 in January.

The ex dividend date for Zurich Financial's dividend is apparently 4/2: Financial calendar | Zurich Financial Services Ltd

A GOP measure that would allow employers to opt out of insurance coverage for birth control was narrowly defeated in the Senate yesterday. Rush Limbaugh called the young Georgetown student who testified before Congress a "slut" for advocating such insurance coverage.  MSNBC

1. Bought 100 of the Stock CEF IRR at $12.41 Last Tuesday-ROTH IRA (See Disclaimer): The ING Risk Managed Natural Resources Fund (IRR) is a stock closed end fund selling currently at a small discount to its net asset value.  As of 2/28/12, the net net asset value per share was $13.19. While the fund owns stocks in a variety of natural resource companies, it has close to a 75% weight in energy as of 8/31/2011. The fund is not currently using leverage and does utilize an option buy-write strategy.

IRR Page at the Closed-End Fund Association
Sponsor's web page:  ING Risk Managed Natural Resources Fund - Fund Profile
Annual Report for Period Ending 2/2011.pd
Semi-annual report for period ending 8/2011.pdf

This is a snapshot of the top 10 holdings as of 8/31/2011:

As shown above, this fund is tilted toward big cap energy companies.

The fund pays quarterly dividends at the current rate of $.33 per share, reduced from 36.3 cents last year. The fund has supported this dividend with a return of capital. The only realistic way for the fund to earn all of that dividend is through realized capital gains that are not offset by carryover losses from prior years.  Option income and dividends would likely remain insufficient to support the current payout.

The expense ratio is close to 1.2%. As shown at the Morningstar page for IRR, the average three year price is at a 1.42% premium to net asset value. That page also shows a substantial return of capital associated with recent dividend payments.

Assuming a continuation of the 33 cent quarterly dividend, the yield at a total cost of $12.41 would be about 10.64%.

For the shares held in the Roth IRA, the goal is simply to capture the dividend and to eventually sell the shares at any profit.

I also own shares recently bought in a taxable account: Bought Back 100 IRR at $12.17 So far, I have received one quarterly dividend on those shares. The goal for those shares is to capture the dividend and to sell the shares at a profit based on my original cost. For tax reporting purposes, of course, the original tax cost basis has to be adjusted down by the dividend amounts classified as returns of capital.

ING Risk Managed Natural Resources Fund closed at $12.63 yesterday.

2. Sold 200 BTZ at $13.26 Last Wednesday-Taxable Account (see Disclaimer): I own BTZ shares in both a taxable and a Roth IRA account. I sold last Wednesday my highest cost shares owned in the taxable account which were the first shares bought back in October 2010.  Sold 100 ERC at 16.27 and Bought 200 BTZ at 13.14 (Oct 2010). This will reduce my average cost per share for the remaining 188+ shares bought at lower prices. Bought 100 BTZ at 11.90 (SEPT 2011);  Added 50 BTZ at 11.24 (Oct 2011).

As with other bond CEFs, BTZ's discount to net asset value per share has fallen over the past several weeks.  The average 3 year discount is currently over 11%. On the day before I pared the position, that discount had narrowed to -8.18%.

With bond CEFs purchased from 1/1/2010 to date, I am content to sell the shares for any profit and to simply capture the dividend payments without diminution from a share loss. BTZ pays monthly dividends.

I sold the shares with a GTC AON limit order calculated to generate a profit after commissions. The amount of profit, given the objective, is not a material consideration for me.

BlackRock Credit Allocation Income Trust IV closed at $13.22 yesterday. The net asset value per share as of yesterday's close was $14.46 per share.

3. MOU (own): The Citigroup 3.00% Principal Protected Notes linked to Russell 2000 Index paid its annual interest payment yesterday:

I have not been paying much attention to my Citigroup Funding exchange traded "principal protected" notes. All of those unsecured senior notes mature in 2014 at $10 and pay minimum coupons. Given the low interest rate environment, I view the minimum coupon as satisfactory given the short maturity and view anything more as gravy.

I bought MOU at $10.12 back in April 2010, and hit pay dirt with its prior annual coupon which was 27% (see snapshot at MBC & MOU; and MOU Ends Second Annual Coupon Period With a 27.93% Gain) So I am content to hold this one. As long as Citigroup survives to pay par value in 2014, the worst that can happen is a 3% minimum coupon. If Citigroup is seized by the FDIC before that time, it is really simple to understand that anyone owning its "principal protected" senior unsecured notes is screwed.

MOU Pricing Supplement

The starting value in the Russell 2000 Index for the next annual coupon period is 829.23, the closing value of the RUT on 2/23/2012. ^RUT Historical Prices This places the maximum limit at 1136.04 during the current coupon period (1.37 x. 829.23).

As shown above, I received $37 in interest for the prior period, indicating a $7 improvement over the minimum amount. That sum would be calculated using the RUT's starting value on 2/23/11 at 799.65 and the ending value of 829.23, giving a percentage gain of 3.7% or $37 in interest per 100 shares of the $10 par value unsecured senior note.

MOU is a thinly traded security and limit orders have to be used. Fidelity does not permit its customers to buy it. Fidelity Prohibits New Purchases of SIPs If a Fidelity customer attempts to buy it, this ASININE message will appear:

Now, if I wanted to buy some wildly overvalued stock, which would virtually guarantee me a loss of capital, I am permitted to do that.

MOU closed at $10.15 yesterday. 

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