Friday, September 21, 2012

SOLD 3 Sears 6.625% Senior Secured Bonds Maturing in 2018 at 95.002/Sold 100 EMLC at $26.55 and Bought 50 of the Stock ETF DWX at $47.56

Build America Bonds received a favorable write up by Randall Forsyth in his Barron's column. BABs are taxable municipal bonds. Forsyth mentions that the investor can secure more yield with leveraged CEFs that invest in BABs, while pointing to the risks of that leverage. As discussed in a recent post, I highlight the same risks associated with the use of leverage. Item # 2 Bought 100 NBD at $21.8

He highlights another risk for BABs owners arising from the upcoming fiscal cliff. If nothing is done to change current law, then there will be across the board sequestration in the federal government's expenditures on 1/1/13. The federal government pays 35% of the BABs interest in lieu of granting the tax exemption. Part of those funds would be sequestered, estimated at about 7.6% of the subsidy, a number that originates from a report prepared by the Office of Management and Budget. While that would not cause an issuer to default, some issuers have reserved the right to call BABs if the government fails to pay its subsidy. Since many of these bonds sell at par value, BABs could lose value in that eventuality.

I own two CEFs that invest in BABs, NBB and NBD. Forsyth mentions GBAB, which I have bought and sold.

Moody's downgraded R.R. Donnelley senior unsecured debt to Ba3 from Ba2 with a negative outlook. I own two RRD bonds. Bought Back R.R. Donnelley 8.875% Senior Bond Maturing in 2021 at $96.95Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89 The 6.125% 2017 RRD bond has been trading recently over its par value. If there was a bid willing to accept my one bond at any price above par, I would sell that bond. The lowest minimum amount attached to any bid has been two bonds.

‎Markit reported yesterday that the "flash" Eurozone services PMI hit a 38 month low at 46, while the flash manufacturing PMI rose to 46 from 45.1 in August. The composite index was 45.9 in September, down from 46.3 in August.

The Philly Fed reported that its business conditions index rose to -1.9 in September from a negative 7.1 in August. The new orders component rose to +1 from -5.5 in August.

Freddie Mac reported yesterday that the average 15 year mortgage hit a new low at 2.77%.

The U.S. Treasury sold 10 year TIPs yesterday at a negative yield of

1. Sold 3 out of 4 Sears 6.625% Senior Secured Bonds Maturing in 2018 at $95.002 Last Monday (Junk Bond Ladder Strategy)(see Disclaimer): I am keeping one of these bonds, purchased in the Roth IRA. Recently, I added two bonds in a taxable account in order to improve my liquidity. ADDED 2 Sears Holding Senior Secured 6.625% Bonds Maturing 10/15/2018 at $89.75 (8/21/12 Post). Prior to that add, I had bought only one bond and could not sell it online since there were no buyers willing to accept a one bond lot.  Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 at 83.25 I mentioned in my 8/21/12 post that "I would be leaning strongly toward selling at above 95".

FINRA - Investor Information on 2018 bond.

2. Sold 100 of the Bond ETF EMLC at $26.55 Last Tuesday (see Disclaimer): I bought this ETF back in September 2010. Bought 100 of the ETF EMLC at 26.18 I realized a gain of $21.04 on the shares plus two years of monthly dividends.

This bond fund has three known and fundamental risks attached to it. There is the currency risk which may often be overlooked by individual investors.  Interest rate and credit risks of course are also present.

When making a judgment about those risks, I will focus on a number of factors including the yield of the security. Recently, I sold a junk bond ETF JNK, since the yield had fallen to historic lows. I no longer viewed the dividend yield of JNK as worth the risk. EMLC's dividend has been decreasing since my purchase in September 2010 as shown in the following snapshots:

2010 EMLC Dividends
2011 EMLC Dividends

2012 EMLC Dividends

At the current monthly dividend rate of $.095 per share, subject to further reduction, the yield at a total cost of $25.55 is about 4.3%.

This is normal for bond funds in the current rate environment. As bonds mature, or are redeemed, the proceeds are reinvested in lower yielding securities due to the worldwide decline in yields for all bond classes. With some bonds, like the five and ten year U.S. TIPs, the current yield is negative.

Given the declining income paid by this security, and its risks, I decided to exit the position while I had a profit and after receiving $257.36 in dividends.

Quote: Market Vectors Emerging Markets Local Currency Bond ETF

3. BOUGHT 50 of the Stock ETF DWX at $47.56 Last Tuesday (see Disclaimer): This selection is my replacement for the bond ETF EMLC. The international dividend ETF DWX has a higher yield than the bond ETF EMLC by almost 3% at current prices and yields. I will consider averaging down with another 50 share purchase at below $45.

(ADDED: DWX was ex dividend today for a quarterly distribution of $.5574 per share)

In addition to the stock ETF's higher current yield, stocks have the prospect for increasing their payouts, whereas the fixed coupon bond fund, particularly one owning shorter maturities, will likely be reducing its payout, at least for a few more years. EMLC has an average modified duration for its bonds of 4.91 and an average years to maturity of 7.3. Market Vectors® Emerging Markets Local Currency Bond ETF - EMLC While the shorter duration cuts down on interest rate risks, it will also result in lower yields as bonds mature or are redeemed early during a period of declining rates.

As a class, international dividend stocks have underperformed U.S. dividend stocks since March 2009. This can be seen by simply overlaying the charts of DVY (U.S. Dividend ETF) and DWX (International Dividend ETF). SPDR S&P International Dividend ETF Chart DVY is up close to 100% since 3/2/99 whereas DWX is up closer to 80%. If I go back to the launch date for DWX in 2/2008, the difference becomes even more pronounced, with DWX down close to 35% compared to a 5% or so loss in DVY, excluding dividends.

The international dividend ETFs have been hurt recently by the decline in European shares.

I looked at two broad based international dividend ETFS, both of which are discussed in recent articles published by Zacks and Barrons

Expense Ratio: .5%
Holdings: 101 Holdings
12 Month Yield as of 8/31/12: 5.15%

Expense Ratio: .45%
Holdings: 125 DWX
Annual Dividend Yield: 7.19% as of 9/13/12

Last Shareholder Report: starting at page 184,

I decided to go with DWX due to the higher dividend yield and slightly lower cost. I am more familiar with the IDV holdings. DWX contains a number of companies that are not well known to U.S. investors including me.

I have owned in the past another stock ETF that is competitive in this space, WisdomTree Global Equity Income Fund (DEW) The problem with that fund is the frequently large bid/ask spread on low volume.  WisdomTree Global Equity Income Fund (DEW). I owned DEW for slightly over 2 months back in 2010:

2010 DEW 100+ Shares +$354.45

Sold:  100 DEW @ 42.51-SBought 100 DEW at 38.82