Thursday, September 6, 2012

Bought 100 of the Bond ETF AUNZ at $22.29/CNO, FedEx, OMX, Intel/Sold 50 of 250 FAM at $17.99/Labor Productivity

The 4 week moving average of initial unemployment claims is presenting an encouraging picture. 

4 week moving average initial unemployment claims
As noted in this chart, there will be a spike during recessionary periods. The spike in 2009 was similar to the one in 1981-82. The 4 week moving average number is currently below 400,000 which was also the case in 1983.

In my adult life, mortgage rates have never been so favorable as now:

30 Year Conventional Mortgage Rate

For households refinancing at the current abnormally low rates, there disposal income available for spending will be considerably higher for years, possibly for thirty years where the family remains in the home.

The government reported yesterday that nonfarm labor productivity increased at a 2.2% annualized rate in the second quarter. Unit labor costs increased by 1.5%, while hourly compensation increased by 3.7%. Productivity and Costs, Second Quarter 2012, Revised Labor productivity is a measure of economic growth.

The U.S. economy has recovered from a decline in productivity during the Near Depression period:

Output per Hour
Nonfarm Business Sector: Output
Nonfarm Business Sector: Output Per Hour of All Persons

Overall, the evidence is pointing to a much better economy during the next Presidential term, regardless of who is elected this November.

A front page article in yesterday's USATODAY highlights how risk averse Americans have become in the wake of the Near Depression. A record $9.43 trillion is currently sitting in money market mutual funds, bank savings accounts and CDs, earning practically nothing. That amount would be sufficient to buy 120 of the largest companies in the S & P 500.


FedEx lowered its forecast for the quarter ending 8/31/12 to $1.37 to $1.43. Prior to this latest warning, the consensus forecast was for $1.56. The consensus for the quarter had been $1.7 before FedEx warned in June. The slump in Europe and slowing growth in Asia are taking a toll. FDX: 85.80 -1.74 (-1.99%) 

A bankruptcy judge ruled that AMR could reject its labor agreement with the pilot's union. 

According to the WSJ, Intel will soon unveil a new line of its mainstream chips that will substantially reduce energy usage by 41%.

Australia's GDP increase .6% for the June quarter compared to the first quarter. This was a seasonally adjusted number. The trend number was .8%. The annualized growth rate was 3.8% on a trend basis. Australian National Accounts: National Income, Expenditure and Product, Jun 2012

OfficeMax reiterated its third quarter and 2012 guidance. The current consensus E.P.S. estimate for 2012 is for 73 cents. I own two senior unsecured bonds. Bought 2 OfficeMax Senior 7.35% Bonds at 97.494 This bond is traded infrequently. OMX: 6.05 +0.12 (+2.02%)

The LT CNO Financial Group hit a 4 year high yesterday after announcing a recapitalization plan. CNO: 9.45 +0.49 (+5.47%)


1. Sold 50 of the Bond CEF FAM at $17.99 Yesterday-ROTH IRA (see Disclaimer): I accomplished my objective for this security, purchased in November 2010. Bought 50 FAM @ 17.37 in Roth IRA I collected almost two years of a generous monthly dividend without losing anything on the security. I decided not to press my luck with the shares owned on the ROTH IRA. I still own 200 shares of FAM in a taxable account:

200 Shares FAM Taxable Account Average Cost Per Share=$17.42
That snapshot was taken shortly after I sold the FAM shares in the ROTH IRA yesterday morning.

On 9/4/12, FAM had a net asset value of $17.72 and closed at $18, creating a premium to net asset value per share of 1.58%. Individual investors have been bidding up bond CEFs searching for yield.

FAM Page at CEFA

SEC Filed Semi-Annual Report for the period ending 6/30/12: Montgomery Street Income Securities, Inc. Form N-CSRS. The expense ratio is shown at .71%, page 19.

FAM is rated 3 stars by Morningstar. As shown at the Morningstar page for this fund, FAM does use leverage and the dividend is slightly supported by a return of capital. First Trust/Aberdeen Global Opportunity Income Fund was ex dividend on 9/4/12 for its 13 cent per share distribution.

FAM: 17.77 -0.23 (-1.28%)

2. Bought 100 of the BOND ETF AUNZ at $22.29 Yesterday (see Disclaimer): AUNZ is the symbol for the WisdomTree Australia & New Zealand Debt Fund. This fund will invest in debt securities denominated in Australian and New Zealand Dollars. The expense ratio is .45%. The fund currently has about 60 holdings with an effective duration of 3.69. WisdomTree-FactSheet-AUNZ.pdf The short duration will provide some interest rate risk protection, but it also means that the current yield will be low. The fund is paying a monthly dividend of $.0535 per share (Distributions) which will give me only a 2.88% yield at a total cost of $22.29.

The currency exchange rate will vary more than 2.88%. The main risk with this type fund is not the credit or interest rate risk but the currency risk. It would not take much of a decline in the Australian dollar vs. the USD to wipe out the value of that 2.88%. Conversely, a rise in the AUD/USD exchange rate would be beneficial to this fund priced in USDs.

I do not mind the currency risk over the short term, since I am bullish on the AUD gaining value against the USD over the intermediate and long term. AUD/USD Currency Conversion Chart In my opinion, investors are starting to change their opinions about the AUD and AUD government debt. Australia's sovereign debt is AAA rated by Fitch, S & P and Moody's.

For a long time, the AUD was viewed simply as a commodity currency. Investors are transitioning in my opinion away from that narrow viewpoint to a perception that Australian government debt is "safe" compared to the sovereign debt of most other developed countries. A corollary is the AUD is starting to be viewed more as a "safe haven" currency than just a "commodity currency". One major reason for that emerging view is that Australia's public debt is less than 25% of GDP, and NZ is not much higher, compared to over 100% and growing fast for the U.S. with its grossly dysfunctional and irresponsible politicians. If the U.S. government was a person, I would not hesitate using the word "insane" to describe its mental condition.

As of 9/4/12, AUNZ was weighted 53.46% in AAA debt and 18.84% in AA debt. The remainder was not rated but would be viewed as high quality debt. WisdomTree Australia & New Zealand Debt Fund - All Holdings

I have a much large exposure to CADs than AUDs, a situation that I hope to remedy over the coming years. I was able to buy a large number of CADs when a USD would buy at least 1.05 or more CADs. Generally, I hope to wait until a similar exchange rate prevails before making large purchases of AUDs with my USDs (about $50,000 which would be less than my CADs). I would then pursue a similar strategy for Australia that I have been pursuing for some time with Canada: Canadian Dollar (CAD) Strategy         

AUNZ: 22.35 +0.07 (+0.31%) 

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