Thursday, June 21, 2012

Bought 100 of the Bond CEF NBD at $21.29-Roth IRA/PG/ GOP's Trickle Down Economics and the Middle Class

The Federal Reserve concluded its meeting yesterday with an announcement that it will extend Operation Twist through December using $267 billion in securities. FRB: Press Release--Federal Reserve issues FOMC statement --June 20, 2012 Operation Twist involves the selling of shorter term securities and then using the proceeds to buy longer dated ones. The purpose is to bring down long term interest rates. The Fed intends to keep its bloated balance sheet at close to $2.9 trillion.

I view the foregoing as a symbolic action, rather than one having any meaningful impact. Possibly, this operation will keep long term rates near their already rock bottom levels.

The Fed also reiterated its estimate that exceptionally low federal fund levels will last "at least through late 2014". For retirees dependent on income from their savings, that estimate is worthy of note.

It is unfortunate that politicians from both tribes mislead the American public. Lying does work in politics since a large number of Americans make no effort to challenge assertions by exercising good judgment after conducting a diligent search for reliable information. Virtually all political commercials are so vapid as to be totally devoid of meaningful information, the so called positive commercial about the candidate, or contain misleading and false assertions relating to the other candidate. 

Earlier this week, the NYT ran a story analyzing the accuracy of assertions made by Romney and Obama and found many of them to be "half truths and exaggerations". On a scale of 1 to 10, with 10 being a pathological liar and 1 being an honest truth teller, I would rate Romney at a 10 and Obama at a 5 or 7, depending on whether his assertions are made as a political candidate (7) or as the President (5). Some of the organizations that do fact checking are | A Project of the Annenberg Public Policy Center and PolitiFact | Sorting out the truth in politics. The Washington Post also a Fact Checker.

Reality creation is a really serious problem in politics, since it undermines the formation and implementation of viable solutions to actual problems. Possessing a rigid ideology that prevents learning from experience compounds the problem. Being afflicted with a rigid ideology and a strong tendency toward reality creation, both of which are critical and essential to election success as GOP politicians, are not prescriptions for the creation and implementation of viable policies. 

The NRA is one of those organizations that find it nearly impossible to be accurate with their facts. PolitiFact | National Rifle Association's file Among today's self-styled "conservatives", truth telling is obviously not one of their conservative values. 

Yesterday, I referenced a study by the Census Bureau that estimated the median household net worth at $15,000 in 2010, exclusive of home equity. Updated Regional Bank Basket Table I downloaded that information into Excel and then took a snapshot of the pertinent part:


Virtually every member of the GOP in the House voted to replace traditional Medicare with a voucher system to purchase private insurance. GOP's Plan To Bankrupt the Middle Class That plan would be applicable to those Americans who were then 55. That plan would double medical insurance premiums compared to traditional medicare, as the government shifts the rise in medical costs unto those unfortunate individuals. I observed that the plan would bankrupt most members of the middle class long before their demise. Can there be any dispute of that assertion? Those same GOP members also voted to slash taxes more for the wealthy and for corporations, based on their theory that such tax cuts would benefit the middle class as the benefits trickle down. Really, they are serious. The Bush tax cuts were in force between 2005-2010. The GOP's Movement Toward An AYN RAND Vision for America 

{Democrat attack ads will frequently distort the GOP Medicare program as an end to traditional medicare, for the obvious purpose of trying to scare those seniors who now receive medicare benefits. While that charge is true for those under 55 in 2011, it is not accurate for those over that age limit. : Democrats’ ‘End Medicare’ Whopper, Again. That article references a study by the CBO, which is of course a projection, that the GOP plan would cost $6,400 more per year in 2022 when the GOP plan would start for those who were under 55. I suspect that it would end up being much higher than that estimate and that number would accelerate in the subsequent years. Even if I am wrong about the estimate being too low, particularly in subsequent years, the difference in cost would bankrupt most members of the middle class in their golden years.The Kaiser foundation came to a similar conclusion to the CBO about the differences in cost:, see also Ryan's radical plans for Medicare - CBS News and Ryan_Letter.pdf. The GOP has nothing to fear really by supporting this kind of change since the True Believers have no idea what is in store for them}

I am still waiting for the Job Creators to start hiring in exchange for the 2003 Bush tax cuts received by them. Assigning to Bush Junior the job losses in the fist year of Obama's term, and taking away the job losses in Bush's first year which was also a recession, which I view as fair, there was a net job loss in the U.S. of 184,000 during the Bush administration, using the Department of Labor numbers. Stocks, Bonds & Politics Blog 4/24/12; Bush Tax Cuts and JobsBush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ

True Believer Train of "Thought" Process: Government Bad; Regulations Bad; Tax Cuts for Rich Good.  End of Discussion. 

General Electric (own) is ex dividend today for its quarterly distribution. I am reinvesting the dividend and currently own over 500 shares. I am in profit territory based on yesterday's closing price of $20.13. I plan to stop reinvesting the dividend when the share price starts to close above $25 for at least a month.  

Spain had to pay about 200 basis points more than the last auction for bills maturing in 12 and 18 months. The 12 month bill was auctioned at 5.07%. 

1. Proctor and Gamble Warns Again: I suspect that investors will be receiving more warnings from U.S. multinational companies, to varying decrees, similar to the one given by Proctor & Gamble yesterday. I currently do not have a position in PG shares. I do own 50 shares of the Synthetic Floater GJR in the ROTH IRA, which has as its underlying security a senior PG bond maturing in 2034

{GJR currently has an unattractive yield since interest is calculated at a .7% spread to the 3 month treasury bill rate (near zero now) on a $25 par value, with no guaranteed coupon and a maximum coupon of 7.5%. Prospectus I am close to playing with the house's money on those 50 shares, currently owned, after trading some lots including one purchase at $11. And, I am not concerned about the credit risk} 

P&G released yesterday its preliminary financial outlook for the 2013 fiscal year. For the current quarter, PG estimates that E.P.S. will be $.75 to .$79, excluding some items, compared to the current consensus forecast of $.84. For the F/Y starting 7/1, PG expects organic sales growth between 2% to 4%, with core E.P.S. rising in the mid-single digits compared to F/Y 2012. The company blamed slowing growth in China and developed markets, as well as the strength in the USD. This is the second warning from PG since April. 

I have PG shares on my monitor list for a potential add at below $57. PG I may lower that entry price based on yesterday's announcement. I have already sold shares bought at $47.49 and $52.85 in 2009. Those shares were flipped after a brief holding period:

2009 PG 130 Shares +907.12
My last transaction in PG shares was to sell 50 shares in 2010:

2010 50 Shares +$160.05

Those short holdings periods reflect a lack of confidence. I still own shares in Unilever bought at $18 (March 2009). The last discussion of UL is in Item # 4 UL (5/1/12 Post)

This latest P & G warning is discussed in articles at Bloomberg, the, and Reuters.

Procter & Gamble fell $1.82 in trading yesterday to close at $60.39. 

2. Bought 100 of the Bond CEF NBD at $21.29-Roth IRA (see Disclaimer): NBD is the symbol for the closed end fund Nuveen Build America Bond Opportunity Fund (NBD). I recently bought back a similar fund, NBB, in the Roth IRA solely for its income generation.  Bought 50 NBB at $20.73-ROTH IRA (6/8/2012 Post) Both funds are sponsored by Nuveen, pay monthly dividends, use leverage, and own taxable municipal bonds issued under the Build America Bond program which has now expired.  For these bond funds, I would be content to harvest the monthly dividend for a year or so and then to sell the position at any profit. 

NBD has a slightly lower yield than NBB, but a higher overall credit quality. NBD was selling yesterday at a greater discount to its net asset value than NBB. 

NBD's closing net asset value was $22.96 on 6/19/12. Based on a closing price that day of $21.36, the discount to net asset value per share was -6.97%. The discount widened in trading yesterday to -7.85%, as the net asset value increased to $23.06 with the share price falling 11 cents. 

NBD is currently paying a monthly dividend of $.1065. Assuming a continuation of that rate, which in way is assured, the dividend yield at a total cost of $21.29 would be approximately 6%. In the ROTH IRA, of course, that taxable dividend would become a tax free one.  

The fund reduced its monthly dividend from $.126 in March 2012. I would prefer a reduction in the dividend to a dividend supported by a return of capital. 

My retirement accounts are managed for income generation with a tilt toward capital preservation. So if the OG becomes nervous, the cash allocation will be raised, and the the retirement accounts have over $20,000 and $5,000 in a money market now earning nothing. The larger amount is in the ROTH IRA, where capital preservation is given even greater weight than the regular IRA. I do not anticipate ever needing the funds in the retirement accounts. In the event that I do, the money better be there, rather than in money heaven. 

This is a snapshot of the credit quality breakdown of NBD's holdings as of 5/31/12:


This a comparison of the credit quality for both funds as of 5/31/12:

AAA: 9.6% NBD/8.7% NBB
AA: 65.8% NBD/47.6% NBB
A: 17.8% NBD/37.4% NBB
BBB: 4.1% NBD/5% NBB

NBD has a higher concentration than NBB in AAA and AA rated securities. NBB picks up some yield by having over twice the weight of NBD in "A" rated bonds. 

This is a snapshot of NBD's maturity breakdown as of 5/31/12, and the long maturity dates could prove to be problematic in light of the potential 2020 liquidation date for the fund:

Like NBB, NBC will liquidate in 2020, provided there are no new BABs issued. Most likely, there will be none:

Contingent Term Summary
While the 2020 term date for the fund gives it a feature of an individual bond, the payment of principal at a certain date, a liquidation date for a long bond fund could pose a risk if interest rates are rising later this decade in a troublesome manner, and this fund did not transition to shorter term instruments before that happens. One way for an investor to deal with that potential problem would be simply to sell the shares if and when that scenario starts to unfold. I doubt that I will own either NBB or NBD for more than two years. I would anticipate that the Fed's Jihad Against the Saving Class will last at least that much longer. 

NBD page at the Closed-End Fund Association

NBD page at Morningstar (unrated)

Nuveen Build America Bond Opportunity Fund (NBD) fell 11 cents in trading yesterday to close at $21.25. The net asset value, as noted above, rose 10 cents or about .44%. The ETF SPDR Nuveen Barclays Capital Build America Bonds rose 13 cents or .22% to close at $60.31. Another BABs ETF, BAB, also rose in yesterday's trading, rising 7 cents or .24%, to close at $29.73. The foregoing describes one of the frustrations that CEF owners frequently have to endure. 

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