Thursday, May 31, 2012

Spain/Bought 400 of the Bond CEF ACG at $8.19/Bought 100 WIN at $9.35-ROTH IRA

So, a tomato has more genes than a human. NYT

Perhaps, I do not find that surprising after just watching 6 hours of the mini-series about the Hatfields & McCoys on the History channel.

The lawyer Perry Cline, a distant cousin of Randall McCoy, who was portrayed in that mini-series as the most erudite and articulate of those involved in this multi-decade violent scuffle, wrote the following letter to the Governor of West Virginia, complaining about the Hatfields: "They have and can make the people sign any kind of petition they want. I was rased (sic) near them men and know them; they are the worst band of meroders (sic) ever existed in the mountains, and have been in arms since the war; they will not live as citizens ought to; they stand indicted in 4 bad cases of murder . ..last year's court was indicted for Ku-Kluxing and various other misdemeanor cases, in fact, we cannot hold our elections without them crossing the line and rung (sic) our citizens from the election grounds, and selling them liquors in violation of law, and these men has (sic) made good citizens leave their homes..."

A segment on CNN highlights the extreme difficulty associated with firing a tenured teacher in New York. The teacher allegedly told her female students to take off their clothes for a medical exam, and there were other allegations of inappropriate conduct. It costs almost $300,000 to dismiss a tenured teacher in NY, even when the conduct clearly warrants a dismissal. The basic constitutional precept of due process is without question being abused by teacher unions, aided and abetted by legislators willing to assist them. The students, their parents and the taxpayers are the true victims.

As the unfunded liabilities for retired government workers become current liabilities over the next two decades, state and local taxes will continue to rise for those living in California, Illinois, New York,  New Jersey and other high tax states.

The migration to low tax states will accelerate in the coming years, making the burden even more onerous on those unable or unwilling to move. Tennessee will be a beneficiary of that migration due to low property taxes and no personal state income tax except for a 6% tax on certain interest and dividend payments above a standard deduction. The City of Brentwood, where HQ is located, has not raised the property tax rate since 1991. City of Brentwood, TN My property taxes are around $2,100 per year. recently published an article on affordable retirement havens in Tennessee.

The WSJ reported that the large Chinese banks have cut off some European banks from borrowing and derivative trading.

Spain's sovereign debt crisis has entered center stage once again, as Spain attempts to recapitalize its third largest financial institution, Bankia, which was formed by the forced consolidation of seven regional banks in December 2010.

On May 25, 2012, Bankia requested an additional €19 billion from Spain, WSJ, which Spain intends to raise by selling new debt. MarketWatch This latest government bailout has caused the yield on Spain's sovereign debt to rise. ES 10Y Govt Bond Benchmark With an unemployment rate hovering near 24%, and recessionary conditions in Spain, the ability of Spain to refinance its debts has become a relevant issue. Spain's stock market hit a nine year low yesterday. The iShares MSCI Spain Index Fund (EWP) is trading well below the Near Depression lows hit in March 2009: iShares MSCI Spain Index Fund ETF Chart

The problems in Spain's banking sector are due largely to a real estate bubble, similar in many respects to the bubble in the U.S. A similar situation has already played out in Ireland.

As noted by Michael Lewis in his book "Boomerang", Greece's banking problems do not originate from improvident decisions made by the bankers, but by the irresponsible and frequently fraudulent actions of the Greek government. An excerpt from that book, which deals with Greece, can be found at Vanity Fair.

The U.S. 7 and 10 year notes hit all time low yields yesterday. The 10 year treasury closed at a 1.618% yield. WSJ  The thirty year treasury bond is yielding about 2.71%.  Apparently, everyone has forgotten about the trillion dollar plus annual budget deficits, and the complete lack of restraint among U.S. politicians when spending other people's money.

The CBOE Volatility Index (VIX) rose 3.11 yesterday to close at 24.14.

1. Bought 400 of the Bond CEF ACG at $8.19 Last Thursday (see Disclaimer): The AllianceBernstein Income Fund is an investment grade closed end bond fund that uses leverage. Currently, the fund pays a monthly dividend of 4 cents per share. At a total cost of $8.19, the dividend yield at that penny rate would be approximately 5.86%. Given the low yield and the use of leverage, I will trade this fund for small gains, while capturing one or more monthly dividend payments. 

Last Thursday, the date of my purchase, ACG closed at $8.2 and had a net asset value per share of $9.08, creating a discount of -9.69 to net asset value per share at that time.

ACG Page at the Closed-End Fund Association

The fund has a significant weighting in U.S. treasuries. Most of the bonds owned by the fund are rated investment grade:

2011 SEC Filed Annual Report: AllianceBernstein Income Fund 

The latest monthly update of portfolio holdings can be found at AllianceBernstein Income Fund Releases Monthly Portfolio Update.

The next ex dividend date is 6/6/12 for the 4 cent per share dividend. AllianceBernstein Income Fund, Inc. Monthly Distribution

As noted above, I have not been a long term owner of this fund:

Generally, the OG will buy this fund whenever he starts to get the shakes.

AllianceBernstein Income Fund rose two cents yesterday to close at $8.22. As of yesterday's close, the net asset value per share was $9.13, creating a discount to net asset value of -9.97.

2. Bought 100 Windstream (WIN) at $9.35 Last Tuesday-ROTH IRA (see Disclaimer): The reasoning for purchasing WIN is similar to the rational underlying the recent 50 share purchase of R.R. Donnelley.  Bought 50 RRD at $10-ROTH IRA (5/23/12). My opinion is that investors have become too negative about both WIN and RRD, and both companies have generous dividend yields that become tax free when the stock is purchased in the ROTH IRA. Many investors undoubtedly believe that these high yielding stocks will not be able to continue their respective current dividend rates.

While the Windstream dividend exceeds its net income, the free cash flow does support the current dividend rate. (see discussion in articles at Motley Fool). When asked during the Lightning Round last Tuesday, Cramer said that he did not know whether the dividend was safe, given the "ugly" last quarter.

WIN is currently paying a quarterly dividend of 25 cents. Assuming a continuation of that rate, which is of course in no way assured, the dividend yield at a total cost of $9.35 would be approximately 10.7%, significantly higher than the junk rated unsecured senior bonds. I have sold my WIN senior bonds. Sold All Windstream Bonds: Two 2019s at 101 and One 2020 at 103.5 Those bonds were bought after selling my common stock position. Sold 300 WIN at 12.31 (August 2011. Now, I am gingerly moving back into the stock.

The amount and maturity schedule of the debt are concerns for both the bond and stock owners. As of 3/31/12, WIN had $8.788 billion in long term debt, mostly in bonds maturing before 2023 (see schedule at page 12 of 10Q for Q/E 3/12)

The recent downdraft in WIN's stock is linked in large part to the downward guidance for the wholesale business. I discussed that issue a few days ago in Item # 5  WIN. That reduced guidance caused institutional investors to question the recent $2.3 billion purchase of PAETEC.

I would be satisfied with a 10% annualized return from this purchase. Over the course of a one year holding period, and assuming no reduction in the dividend, that goal could be achieved by selling the stock near my purchase price. The roundtrip commission would be $14, so a sell a $9.5 after collecting 4 dividend payments would exceed that 10% annualized return goal.

If the price returned to a $11 to $11.5 range within a year, then I would likely sell the shares bought last Tuesday in the ROTH. I am not a long term holder of the stock.

The next ex dividend date is 6/27/12 according to Marketwatch. I will not be reinvesting the dividend to buy more shares.

Windstream declined 8 cents yesterday to close at $9.32. 

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