Tuesday, September 11, 2012

BOUGHT 100 IDE at $17.55/Bought 100 NBD at $21.8/Sold 1 Apria Healthcare 12.375% Bond Maturing in 2014 at 97/Chicago Teacher's Strike

Citigroup Inc. 3.00% Minimum Coupon Principal Protected Notes based on S&P 500 (MYP) has quickly corrected its irrational pricing, closing at $10.41 yesterday. MYP (8/31/12 Post)

Nuveen declared quarterly distributions for JLA and JSN, the two stock CEFs which I own. JSN is my larger position at 309 shares, with JLA at 200 shares.

The WSJ dividends page shows several owned securities going ex dividend on Wednesday 9/12/12, including the following: PSY (M. at $.061); KO (Q. at $.255);  CBU (Q. at $.27); GGN (M. at $.14); JSN (Q. at $.279); JLA (Q. at $.284); RNST (Q. at $.17); ISM (variable M. at $.07949); STL (Q. at $.09); UBSI (Q. at $.31); and VLY (Q. at $.1625).


The cover story in this week's Barrons assets that there are "unimpeachable signs" that the nation's housing nightmare is over. Possibly the most important reason for the Near Depression and the current weak economic recovery was the collapse in home prices that erased close to $7 trillion in household wealth. At the lowest point, the value of residential real estate fell 1/3rd from peak-to-trough and prices have a long way to go before reaching their peak 2006 levels.

I would argue that a continued recovery in home prices will be more important than any other factor to a durable and more robust recovery. There are several reasons for that opinion that I will just sum up in a general fashion. A rebound in home prices will allow more households to refinance their mortgages at the current abnormally low mortgage rates which will have a long term economic benefit for those households and consequently more fuel for a consumer led recovery. A recovery in home prices will likely spur more new home construction which has been an important contributor to earlier recoveries, but has not provided much impetus to the current recovery. Consumer confidence and spending will likely improve due to the wealth effect on consumer psychology. Even though I have no plans to sell my home, it is nonetheless depressing to go to Zillow and see a home value close to the 2005 estimate.


School teachers in Chicago went on strike yesterday. Those teachers had received increases anywhere between 19% to 46% during their 2007-2012 contract period, depending on their length of service and other factors. The city had offered them a 3% raise in the first year and 2% per year thereafter for the next three years. That offer would be higher than the anticipated inflation rate.

According to the WSJ, the average teacher salary, excluding retirement benefits, is $71,000 per year. A large number of teachers with seniority make more. The value of the pension and other retirement benefits is $15,000 or more per year. The average median household income in Chicago is $47,000.

Voters are rapidly becoming more willing to support GOP politicians who wish to decertify public employee unions who are just out of control with their salary and benefit demands. This strike by Chicago's teachers, who are already on the gravy train compared to employees in the private sector, will likely accelerate that trend in many localities, though not in Illinois or Chicago.

The State of Illinois is already on the path of debt downgrades. S & P recently downgraded the state's debt to A with a negative outlook.

{Illinois increased the individual state income tax by 66% back in January 2011, at a time when the state faced a $77.8 billion shortfall in its pension obligation and owed $8 billion to vendors. State taxes: IllinoisCSMonitor.com. Chicago has one of the highest sales tax rates in the U.S. Tax Foundation. Property taxes are also high. See Chicago | Tax Foundation. It is likely to become far worse, not better.   Over the coming years, a migration is likely to occur away from these high tax areas to low tax states. Why pay the tax, just move to Tennessee or some other low tax state whenever you can?}

It is not difficult for the average voter to see that public employees, at both local and federal governments, are doing much better than them, both in terms of current salary + benefits as well as retirement benefits. And, those voters who are also taxpayers are finally coming to the realization about who is on the hook for those excessively generous and unfunded retirement benefits. 

1. Sold 1 Apria Healthcare 12.375% Senior Secured Bond Maturing in 2014 at 97 Last Friday  (Junk Bond Ladder Basket Strategy)(see Disclaimer): While this Apria Series "B" bond is a senior secured, it is at least debatable whether or not it attaches to anything other than air. The Series "A" bond has a higher priority in the event of a bankruptcy and that higher priority bond has $700M in principal amount outstanding. FINRA 

I have not been pleased with a single Apria earnings release since I bought this bond. Those reports caused me to increase my risk rating for this bond twice. (Item # 3 Apria Healthcare and Item # 1 Apria

Since the OG prefers to avoid anxiety, this bond was sold. I may reconsider its purchase at below 90 when and if I see a better earnings report. 

2. Bought 100 of the Bond CEF NBD at $21.7988 Last Friday (see Disclaimer): This brings me up to 200 shares of the Nuveen Build America Bond Opportunity Fund. I bought 100 in the ROTH IRA at a lower price. Item # 2 Bought 100 of the Bond CEF NBD at $21.29-Roth IRA (June 2012) BABs are taxable municipal bonds. I would never buy a tax free municipal bond fund in an IRA.  

On the day prior to my purchase (9/6/12), this fund closed at $21.8 with a net asset value per share of $23.47, creating a discount to net asset value of -7.12 at that time. The net asset value per share on 9/10 was $23..47 and the discount narrowed to -6.99%. 

NBD page at the Closed-End Fund Association

This fund does use leverage which is working for investors at the current time given the abnormally low short term interest rates for borrowed funds. This kind of fund borrows short term and uses the proceeds to buy long bonds.  That favorable environment will change at some point. When it does, a leveraged bond fund could easily suffer a triple whammy, as short term borrowing cost go up, the value of the long term bonds decline and the discount to net asset value expands. Consequently, I will not likely own a leveraged bond fund for more than two more years at the most. 

This bond CEF pays dividends monthly. Nuveen will issue a single press release announcing dividend amounts and dates for all of its CEFs paying monthly dividend. NBD's current monthly dividend is $.1065, slightly lower than the other Nuveen Build America Bond fund NBB which I also own. The ex dividend date will be 9/12/12.

At the current monthly rate, the dividend yield is around 5.86% at a total cost of $21.8. This would be about 1% more than the unleveraged ETF PowerShares Build America Bond Portfolio, which has a lower weighting in "AA" rated bonds and a higher weighting in "A" rated bonds than NBD: Build America Bond Portfolio | BAB SPDR also has a BABs ETF which has about a 1.5% lower current yield than NBD. SPDR Nuveen Barclays Capital Build America Bond ETF 

NBD's credit quality is weighted in "AA":

The Build America Bond program has expired, so there are no new bonds being issued under that program. Both NBD and NBB have contingent term provisions. If there are no new BABs issued for the 24 month period ending 12/31/2014, which appears likely, this fund will liquidate on or about 12/31/2020. This gives this fund the characteristic of a term bond with an important caveat. Many of the newer term bond ETFs, such as the ones sponsored by Guggenheim BulletShares ETFs, own bonds maturing in the liquidation year. Almost all of the bonds owned by NBD mature in more than 20 years, way beyond the 2020 liquidation date. If interest rates are much higher as 12/31/2020 approaches, it is possible that this fund will have to liquidate at an inopportune time when the value of its holdings are declining in value. 

I am not likely to hold this fund for more than two years, at the most, and will be satisfied with any gain on the shares after collecting several monthly dividend payments. I simply view NBD as an alternative to cash earning nothing in a money market fund.

Yesterday's close: NBD: 21.83 +0.03 (+0.14%)

3. Bought 100 of the Stock CEF IDE at $17.55 Last Friday (see Disclaimer): The news last week about China's recently approved infrastructure spending caused me to repurchase shares of the ING Infrastructure Industrial & Material Fund (IDE).

I have previously traded this security on a number of occasions for relatively small profits, usually after clipping a dividend or two at the most:

2012 IDE 50 Shares +$55.58
2011 IDE 100 Shares +227.25 (two 50 shares lots)
2010 IDE 50 Shares +$49.08
This fund is currently paying a $.45 per share quarterly dividend. Assuming a continuation of that rate, the dividend yield would be about 10.26% at a total cost of $17.55. The last ex dividend date was 7/2/12. The next ex dividend date will be 10/1/12.

On the day prior to my purchase (9/6/) the fund's net asset value was $17.94, and the discount to net asset value was only -2.06 based on a market closing price that day of $17.57. The discount increased to -3.61% on 9/7/12, based on a net asset value per share of $18.26 and a closing market price that day of $17.6.

I much prefer buying stock CEFs closer to a 15% discount, but this one rarely trades at a large discount as shown in the Morningstar page on IDE.

Sponsor's webpage: ING Infrastructure, Industrials and Materials Fund - Fund Profile - Overview

Last SEC Filed Shareholder Report:  ING Infrastructure, Industrials and Materials Fund

Yesterday's close: IDE: 17.45 -0.15 (-0.85%) 

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