Tuesday, September 4, 2012

ING/Bought 1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 at 99/Sold 50 of the LT PWER at $6.03/Bought 50 HUWHY at $17.35/Sold 1 Telefonica Emisiones 5.877% Senior Note Maturing in 2019 at 97.13

ING (own as LT) agreed to sell ING Bank of Canada to Bank of Nova Scotia for C$3.126B in cash. MarketWatch
The government reported last Thursday that personal income and disposable personal income increased by .3% in July. Real disposable income also increased by .3%. Personal consumption expenditures increased by .4%. The July personal savings rate was 4.2%.

Consumer spending in the last revised second quarter GDP report was increased from 1.5% to 1.7%. Consumer service spending rose by 2.6%, the best performance since 2006. News Release: Gross Domestic Product

China's official PMI manufacturing index for August fell to 49.2, indicating contraction.

The Bernstein recommended shorting Nokia. He does not believe there will be much interest in a Window's Phone.

The Australian dollar has declined some against the USD since hitting U.S.1.06 in early August. The exchange rate is now closer to 1 AUD=1.02 USD. AUD/USD Currency Conversion Chart Australian sovereign bonds are still rated AAA by all three credit rating agencies. Australian Broadcasting Corporation  The  ratio of public debt to gross domestic product (GDP) is currently around 24%. U.S. public debt went over 100% earlier this year. Total US Debt Soars To 101.5% Of GDP The Royal Bank of Australia publishes a number of helpful charts. This is a link to the chart pack for August 2012: rba.gov.au/chart-pack .pdf  The conservative Heritage Foundation ranks Australia as #2 in its economic freedom index. Australia Economy (the U.S. is at #10; Canada is $ 6). I intend to start buying AUDs when I can buy 1 AUD with .95 USDs.


A summary of Romney's tax plan can be found at the Tax Policy Center. That plan will cost the federal government about $900 billion in revenue during 2015, compared to the what is called the "current" scenario where the Bush era tax cuts are allowed to expire. If the Bush tax cuts are extended then Romney's plan would deprive the government of about $480B in revenues in 2015. Romney claims that he has a plan to broaden the tax base that would make his tax cuts revenue neutral, but refuses to identify how it is even possible to make this plan revenue neutral.

{To achieve revenue neutrality, the TPC found that there would have to be a tax increase on the middle class even if one assumed that most tax breaks are entirely eliminated for couples with incomes over $200,000: taxpolicycenter.org/ Base-Broadening.pdf and update at taxpolicycenter.org/ FAQ-Romney-plan.pdf.}

The only way to come close to revenue neutrality would be to curtail middle class tax entitlements including the mortgage interest deduction. Since the middle class do not have much investment income which is tax favored under Romney's plan (outside of a tax sheltered retirement plan), the overall result would be to increase their taxes. Slate Magazine The cuts in spending proposed by the GOP would be concentrated in programs for the middle class and poor.

There was an interesting feature of Romney's plan for retirees who depend on dividends, interest and capital gains such as the OG. I do not have a pension. All of my income now comes from dividends, interest and capital gains.  I have been a beneficiary of the 15% tax cap on qualified dividends and long term capital gains.

The Romney plan would give me far more tax benefits than the current law. In addition to lowering my marginal tax rate, there would be a tax exemption for interest, dividends and long term capital gains for married couples with less than $200,000 in income and $150,000 for singles ("threshold amounts"). If there are other sources of income, then those sources would be subtracted from the threshold amount to determine the total amount of the exemption. Any amount above the exemption would be taxed at current rates (i.e. 15% for qualified dividends and long term capital gains, highest marginal rate for interest). The example given by the Tax Policy Center to explain the foregoing is a married couple with $150,000 in income. Their exemption for interest, dividends and long term capital gains would be reduced to $50,000, a major tax break for a couple with significant non-retirement savings. I would view this type of plan to be a huge plus for dividend paying stocks, and as a negative for municipal bonds. There would be no reason for me to own any municipal bonds. Anything above that exemption amount would be taxed at current rates.

If Romney's plan was partly financed by eliminating the mortgage interest deduction and by treating the amounts paid by employers for health insurance as employee income, then that would not have any impact on me. I do have a mortgage or an employer provided health plan. This type of plan would be most beneficial to generally well off retirees who do not have a mortgage but do have substantial savings outside of their retirement accounts. There would be a large number of people who would justifiably feel like they had been gored by this type of plan.

George Bush did not attend the recent GOP convention. He was allowed to speak briefly (1.21 minutes), joined by this father, to the convention via a prerecorded video

1. Bought 1 U.S. Steel 7.5% Senior Bond Maturing in 2022 at 99 Last Thursday-Roth IRA (Junk Bond Ladder Basket Strategy)(see Disclaimer): This bond replaces the 2015 Forest City senior bond that was recently redeemed by the issuer.

Vanguard charged me $2 to execute this order. This is viewed most favorably by me since I buy a number of bonds in just 1 bond lots.

Vanguard has made substantial improvements in its bond order format. For the first time, I was able to buy a bond online at a price that was not the best ask price. It is typical for the best ask price to have a minimum quantity higher than one or two bonds. The next best price, which may only be slightly more for an actively traded bond, may allow a 1 bond purchase, which was the case with the 2022 U.S. Steel bond.

I took a snapshot of the new Vanguard order page before hitting the buy button:

Order Page-2022 U.S. Steel Bond
I previously bought this bond in a taxable account. Item # 1 Bought 1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 at 94 (June 2012).

I will receive a current yield slightly more than the 7.5% coupon yield. In the Roth IRA, that yield will be tax free.

Prospectus Supplement

FINRA Information

The bond is rated junk. S & P has a BB rating, and Moody's is at B1. S & P recently changed its outlook to negative, however. TEXT-S&P

Morningstar has a five star rating on United States Steel common shares.

For the last quarter, the company reported a profit of $101 million or 62 cents per share, beating the consensus estimate of 55 cents. Form 10-Q As of 6/30/12, long term debt was $3.801B; and cash was at $565M. The maturity schedules for the debt are listed in note 14 at page 17.

Over the holiday weekend, U.S. Steel and the United Steelworkers reached a tentative three year labor deal.

X: 19.45 +0.13 (+0.67%)

2. Bought 50 HUWHY at $17.346 Last Thursday (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): Earlier this year, I bought 100 shares of Hutchison Whampoa at $17.84 and sold those shares at $20.72:

2012 HUWHY 100 Shares +$272.06

Hutchison Whampoa Profile Page at Reuters
Hutchison Whampoa Key Developments Page

This company is a large conglomerate based in Hong Kong with worldwide operations. Hutchison Whampoa Limited

The ordinary shares are traded on the Hong Kong stock exchange: 0013.HK: Summary for HUTCHISON On the day of my purchase, the ordinary shares closed at HK$68.05. Two ordinary shares equal 1 ADS share. The Hong Kong dollar is pegged to the U.S. dollar which mitigates the currency risk. It does not eliminate the currency risk since the peg may change. (see discussion of peg at Businessweek)

On the day of my purchase (8/30/12), a HK dollar was worth $.1289 USD. The closing price of HK$68.05 would convert into $8.7736 USD. Since one ADS HUWHY equals two ordinary shares, the 8/30/12 equivalent price for the ADS shares would be $17.55. I paid about 20 cents less per share.

The consensus analyst target price is HK$86.88. The current consensus E.P.S. estimate is HK$5.29 per ordinary share for 2012 and HK$6.17 in 2013, giving the shares a forward P/E of 6.17, all according to data published at HUWHY.  A HK$86.88 price for one ordinary share would equate to $22.4 for each ADS share at 1 USD=$.1289 HKD

Link to Interim Report for the period ending June 30, 2012: hutchison/interim.pdf For the six months ending 6/30/12, the company reported revenues of HK$194.993 billion and EBITDA before profits on investment disposals of HK$40.487 billion. Recurring earnings per share for that six month period was HK$2.3, up from HK$2.04 in the first six months of 2011.

HUWHY: 17.36 +0.03 (+0.17%)

3. Sold 50 PWER at $6.03 Last Thursday (Lottery Ticket Basket Strategy)(see Disclaimer): I am not confident that the solar industry has turned a corner which explains why I sold this LT selection. This sale brings my realized gain number to $10.837.97. My total exposure is reduced to $10,278.93 in 46 LT selections. One of the rules applicable to the LT strategy now is that the realized gains have to exceed the exposure amount. By increasing the realized gain number and decreasing the exposure amount, there is more capacity ($559.04) to buy other LTs. This is a disciplined strategy as to the amount of monetary exposure.

2012 PWER 50 Shares +$52.59
Bought 50 PWER at $4.66-LT Category

PWER: 6.14 +0.11 (+1.82%)

4. Sold 1 Telefonica Emisiones 5.877% Senior Note Maturing in 2019 at $97.13 Last Thursday (see Disclaimer): This turned into a short term trade. I bought this bond on 6/22/12 at 91.067.  Bought 1 Telefonica Emisions 5.877% Senior Note Maturing 7/16/19 at $91.067  It is impossible for me to view either the current yield or the YTM at 97+ as attractive for a bond maturing in almost 6 years.

I still own two other Telefonica Emisiones bonds with shorter maturities.  I may sell the one maturing in 2015 and keep the one maturing in 2016. Bought 1 Telefonica Emisiones 4.949% Senior Bond Maturing on 1/15/2015 at 96.075Bought 1 Telefonica Emisiones 6.421% Senior Bond Maturing in 2016 at 95.178.

TEF: 12.56 +0.25 (+2.03%)

5. Cash Flow-Main Taxable Account for 9/1/2012: I received less than the forgoing amount on 8/31/12:

Cash Flow 1 Taxable Account for 9/1/12
I changed my distribution option to cash for ADX. Instead of randomly picking up shares with reinvested dividends, I will make a note of the total dividends received by this CEF and then buy shares in the open market when I can reduce my average cost per share. ADX currently has a managed distribution policy that will pay out 6% calculated in the manner spelled out at ADX's website: Adams Express Company. Most of that distribution will be capital gains paid out at year end. I took a snapshot of my yearend ADX dividend from 2011, where I bought 33+ shares at $9.745, see Item 4, CEF Portfolio as of 12/31/2011.

I was pleased to receive interest payments from Travelport. I am about a $1,000 in the hole on my three bonds, with over half of that amount originating from the extremely risky 2016 senior subordinated bond, currently priced below 40. The pricing of the 2014 and the 2016 senior unsecured bonds have improved over the past several months.

I quit using the Intel dividend to buy shares several months ago, and will not resume the reinvestment option unless the shares are trading below $20. I may not resume reinvestment unless the shares can be purchased below my average cost per share which is $17.82 (see snapshot at Item # 2, Intel)

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