Wednesday, December 26, 2012

Bought 50 GSPRD at $20.6/Bought 50 FCG at $15.84/Paired Trade: Sold 100 GDO at $20.79 and Bought 100 BTZ at $13.83/Sold All of the Mutual Fund VASGX/Terex Bond Redempton

Big Picture Synopsis:

Stocks
Short Term: Slightly Bearish
Intermediate and Long Term Bullish 


Bonds:
Short Term: Neutral
Intermediate Term: Slightly Bearish
Long Term: Extraordinarily Bearish


I am just waiting to see whether Congress can resolve the fiscal cliff matter before deciding whether to change the short term stock outlook. I am assuming maximum dysfunction until proven otherwise. Guilty until proven innocent.

LB could solve the entire matter in an instant, on a fair basis, without breaking into a sweat, that would address the long term fiscal issues faced by the U.S.

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Resource Capital declared its quarterly on both is preferred and stock. The quarterly dividend on the preferred stock RSOPRB, which I own, is $.515625.  

According to a summary of a Sterne, Agee & Leach report on regional banks, Barrons, that firm added Berkshire Hills (BHLB), which is owned, as one of its 9 best picks for 2013. Of the remaining ones, I do not currently have a position, but have bought and sold ONB. Another one mention, PNC Financial Services, is too large for my approach.

The cover story in this week's Barrons has the headline "Europe on Sale". The author argues that the European stock market could "rally as much as 20% in 2013". Focus for a moment on the quoted phrase. What exactly does it mean? It really has no substance at all. The market may rally 1% or 15% or 20%. I would agree, however, with the general thrust of the argument that the European stock market has a large number of undervalued companies that could be bought by investors who are capable of thinking long term and who have somehow learned patience which is not a natural condition for our OG. Any investment now may not pay off in 2013, and there is certainly no way now to know, with any decree of certainty, whether the European market will be either positive or negative next year, let alone the amount of any gain or loss. Value investors can not think in those terms. The European market may take off next year, so maybe I need to increase my position in those equities now just in case Barron's upper target proves close to prescient. As the future turns into the past, I can make more decisions with later acquired information.

I own a few European companies. I also have a position in the ETF ADRU which currently owns 85 ADRs of European companies. I am not likely to add more to that one.

Instead, since I can buy Vanguard ETFs without paying a commission at Vanguard, I will simply keep ADRU and start to add the Vanguard MSCI Europe ETF (VGK) in small pieces. The expense ratio is .14%. Through 9/30/12, the annual average 5 year performance of that ETF is -5.46. Fine, that is precisely the point. I did not own it over that period and can add to it now.

As to ADRU, I briefly mention two purchases made in 2009 at $15.12 and $19.81, ADDED TO ADRU (August 7, 2009). I have been reinvesting the dividends and have not paid much, if any, attention to it. It has not been able to gather much assets.

ADRU Sponsor's page: ADRU | BLDRS Europe Select ADR Index Fund
List of Holdings: ADRU - BLDRS Europe Select ADR Index Fund Holdings

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I discovered recently that Vanguard has several low cost ETFs that trade on the Toronto stock. Vanguard Canada Individual- ETFs

MSCI Canada Index ETF has a .09% expense ratio and owns 100 Canadian stocks.

FTSE Canadian High Dividend Yield Index ETF (VDY) has a .3% expense ratio and owns 82 stocks.

FTSE Canadian Capped REIT Index ETF (VRE) has a .35% expense ratio and 19 holdings.

Canadian Short-Term Corporate Bond Index ETF (VSC) has a .15% expense ratio and owns 80 bonds.

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1. Bought 50 GSPRD at $20.6 (see Disclaimer):



Security Description: The Goldman Sachs Group Inc. Depository Preferred Shares Series D (GS.PD) is a floating rate equity preferred stock, with a minimum coupon, that pays non-cumulative, qualified dividends at the greater of 4% or .67% above the three month Libor rate on a $25 par value.

Prospectus

I generally describe the advantages and disadvantages of equity preferred floaters in Advantages and Disadvantages of Equity Preferred Floating Rate Securities

One of advantages is that some deflation/low inflation and inflation protection is built into just one security. The deflation/low inflation part involves the minimum coupon, in effect now of course, while the inflation component is the LIBOR float.

The qualified dividend is another advantage. It remains to be seen, however, whether this favorable 15% tax cap will continue, particularly for the wealthy. I am working under the assumption that most "well off" investors are about to lose this advantage. The question is the dividing point in annual taxable income.

Short term rates are likely to remain artificially low for several more years. The Federal Reserve adopted its 0% to .25% federal funds rate in December 2008. Central bank monetary policy will keep the 3 month LIBOR rate at artificially low levels for an "extended period".

Prior Trades: I have traded this one lightly:

Bought 50 GSPRD at 21.58 (January 2011)-Sold 50 GSPRD @ 22.72 (April 2011)(paid too much)

Bought 50 GSPRD at $18.6 (September 2011)-Sold 50 GSPRD at $20.47 (March 2012)

Bought Back GSPRD at $18.9 (July 2012)- Sold 50 GSPRD at $20.47 (March 2012)(might as well held onto it, no harm-no foul)

Floaters: Links in One Post

Total Realized Gains Excluding Dividends=$168.13 (at least that number is green; snapshots are at the end of the Gateway Post, Advantages and Disadvantages of Equity Preferred Floating Rate Securities)

Rationale: (1) Income is Better Than Cash Earning Nothing/Some appreciation Potential Possibly to $22 with Risks (see below)/Deflation-Low Inflation-Problematic Inflation Scenarios Embodied in One Security.

I also discuss this security in a recent Silicon Investor comment.

Income Investing Message Board - Msg: 28617257

At a total cost of $20.6, the dividend yield at the 4% coupon is about 4.85%. The LIBOR float provision will activate when the 3 month LIBOR rate is over 3.33% during the relevant computation period. At a 5% LIBOR, the rate would be approximately 6.88%. This security was also bought in order to balance the interest rate risk of the senior fixed rate coupon bond, KWN, maturing in 2042 which was recently bought.

Risks: (1) Highly Volatile/Heightened Risk/Non-Cumulative: I started to invest in some of these securities during the Near Depression when they could be purchased at greater than 50% discounts to their $25 par values. The downside risk is zero as shown by what happened to those unfortunate souls who owned LEHPRG, a Lehman equity preferred floater, that is now worthless of course.

An equity preferred stock is only superior to common stock. It will be junior in the capital structure to all bonds. Given that low priority, the non-cumulative dividends paid by most of them, and the highly leveraged balance sheets of financial institutions issuing them, there will be no recovery in a bankruptcy for an owner of an equity preferred stock. Investors realized that would be the likely outcome and will behave irrationally when there is a whiff of a possible financial collapse. (a 75% chance of bankruptcy when a rational number would be less than 10%).

BAC equity preferred stocks, for example, could have been bought for less than $10 even in 2009. I bought ZBPRA, a Zions equity preferred floater for $7.8. Bought 100 ZBPRA at $7.8 (May 2009)(see snapshot in Gateway Post on this topic) None of those equity preferred floaters missed a dividend payment. (METPRA for less than $8, rational or irrational?, AEB for less than $5, rational or irrational?)

Periodically, these stocks will hit an air pocket and just fall as if a bankruptcy filing was imminent. I am just used to it.

I discuss an example from August 2011:  Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities I was able to buy Santander's floater at $13 during that one. A few weeks later, yet another downdraft, and I picked up HBAPRG at $16.18 (HSBC's US operation). Bought 50 HBAPRG at $16.8

I also discuss this issue in a recent post at Silicon Investor: Income Investing Message Board - Msg: 28625725

One of my earlier discussions about embracing their volatility in a trading strategy is discussed  in a May 2009 post. Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock

So, volatility and risk are just known hazards. Know what you are buying, its history and characteristics. 

2. Paired Trade: Sold 100 GDO at $20.79 and Bought 100 BTZ at $13.83 (see disclaimer): Both GDO and BTZ are leveraged closed end bond funds. I still own 120 shares of GDO in the ROTH IRA. I have elected to keep those shares for their tax free income generation in the ROTH IRA.   

Security Description for BTZ: Blackrock recently reorganization its four credit allocation funds with BTZ as the surviving fund. One of those funds which no longer exists had the symbol PSY.  I owned 215.573 shares that were converted into 172.808 shares of  BTZ.  This add brings me up to 272.808. I am no longer reinvesting the dividend.




BlackRock Credit Allocation Income Trust IV (BTZ) is a leveraged closed end bond and preferred fund. The percent of leverage will generally be over 30%. Dividends are paid monthly.

The fund is weighted in investment grade issues, but the fund does have significant in junk rated securities (primarily BB and B)

I took this snapshot from the fund's site that shows the credit quality breakdown as of 9/28/12:

BTZ Credit Quality as of 9/28/12 Subject to Change

The baseline allocation is 50% for investment grade; 30% high yield and 20% in capital securities (TPs and equity preferred stocks), but that breakdown is more of a guideline.

Sponsor's webpage: BTZ : Fund Profile
BTZ Page at Morningstar (rated two stars; average 3 year discount 10.52%)

BTZ Page at the CEFA
GDO Page at the CEFA

Prior Trades: I sold out of BTZ earlier this year. With bond CEFs, I am pleased to receive any profit and simply to harvest the dividend.

2012 BTZ Sold 388.058 Shares +$279.19
Hopefully I will not own any leveraged closed end funds when rates start to rise with a vengeance. Anyone holding this kind of fund will suffer the infamous triple whammy.


Rationale: (1) Fast Profit on GDO: The purchase of GDO was made during a downdraft of bond CEFs during a few days in November. I bought 100 shares on 11/15/12:

2012 GDO 100 Shares +$173.05 (+two monthly dividends)

The sequence of events that led me to buy GDO are discussed in this post: Item # 2 Bought 100 Shares of GDO at $18.9 For no reason, the price for this bond CEF had fallen $.65 when I purchased shares from the prior day's close. I knew by checking bond prices that virtually all or all of that decline was causing an expansion of the discount to net asset value. Over the next month, this security went ex dividend twice for its monthly distribution and rose from $18.9 to a close at $20.91 last Friday, 12/21/12.

GDO has been reducing its distributions some. GDO The current monthly dividend is $.12 per share.

The discount to net asset value had been eliminated altogether when I elected to sell the shares. Most of my realized gain was due to that shrinkage. So, basically, I took advantage of a temporary aberration in pricing to reap a quick 10.38% total return in slightly over a month.

(2) Rationale for the Pared Trade: GDO and BTZ have a similar yield and credit quality characteristics. Both pay monthly dividends. BTZ was, however, selling at close to a 10% discount to net asset value while GDO had eliminated its discount since purchase. Possibly, BTZ has more room to run on price by simply narrowing the discount by half.

This rationale is a relative discount trade for similar bond CEFs. The trade was made with the following data in hand.

When making these trades, I only have the prior day's closing net asset value. I can check to see how bond ETFs are doing just to form an idea of how the fund may be performing.

12/21/12 ETF Closing Prices
Investment Grade Bond: LQD: 121.24 +0.21 (+0.17%)
Junk Bond: JNK: 40.88 -0.09 (-0.22%)
Preferred Stock: PGX: 14.61 -0.04 (-0.27%)
TLT: Long Treasury: TLT: 122.25 +1.32 (+1.09%) 

GDO Data Prior to the Date Sold:
Closing Net Asset Value Per Share=$20.8
Closing Market Price=$20.73
Discount: -.34%

GDO Data on Date Sold (12/21/12)
Closing Net Asset Value Per Share= $20.83
Closing Market Price: $20.91
Premium to Net Asset Value= +.38%

BTZ Data Prior To Sale:
Closing Net Asset Value Per Share= $15.28
Market Price=$13.85
Discount= -9.42%

BTZ Data on Date Sold (12/21/12)
Closing Net Asset Value Per Share=$15.32
Market Price=$13.83
Discount: -9.73

So I was correct in surmising that the discount was widening on 12/21/12.

3. Sold All of the Stock Mutual Fund VASGX (see Disclaimer):

2012 VASGX Sold 198+ Shares Realized Gain $995.5

During the summer months, I decided to liquidate one mutual fund to capture a long term capital gain this year, when I at least know that the maximum rate is 15%.

I chose the Vanguard Life Strategy Growth Fund primarily due to its low level of income generation. I had two other Vanguard funds with greater long term profits which I decided to keep due to their higher income generation. I took snapshots of those funds, Equity Income and Star, in two previous posts: Item # 3 Vanguard Star and Life Strategy Growth Funds; Item # 5 Stock Funds Table (snapshot of Vanguard Equity Income and Permanent Portfolio).

I elected to keep several funds with much larger unrealized gains such as the Permanent Portfolio and Matthews Pacific Tiger, since those funds fit into niches in my overall asset allocation. I have a few funds that were sold down in 2007 to 100 share lots which I am keeping since I have already realized gains on them (e.g. SSEMX at 100 shares) After evaluating all of them, I decided to jettison the low yielding Vanguard Life Strategy fund.

After the latest example of dysfunction in the political system, I did not see any reason to wait a few more days before yearend.

I intend to reinvest the proceeds into a Vanguard ETF that reflects my totally involuntary, God given, natural, contrarian instincts.

(4) Bought 50 FCG at $15.84 (see Disclaimer): This is a starter position in what may turn out to be a super cycle for natural gas demand. Only time will tell. By buying 50 shares of this ETF now, and possibly more later, I will at least focus some attention on how this cycle is unfolding in subsequent months and years.

2012 Bought 50 FCG at $15.84

Security Description: First Trust ISE-Revere Natural Gas Index Fund (FCG) is an ETF that owns natural gas energy producers. This energy sector is out of favor currently given the low natural gas prices.

The disfavor is manifested by FCG's chart: First Trust ISE-Revere Natural ETF Chart In June 2008, this ETF traded over $31 per share. It has just about been cut in half since hitting that high.

Natural gas producers pay almost nothing in dividends. The dividend yield will not contribute to total return potential as shown by this fund's distribution history. Dividends

The net expense ratio is currently .6%

Sponsor's web page: First Trust ISE-Revere Natural Gas Index Fund (FCG)

FCG Holdings

Rationale: 

(1) Super Cycle for Gas Demand Emerging: When playing super cycles, I could care less what happens to a stock next year or the year after. Instead I am looking way out into the future. No one will be able to time when, or even whether, natural gas demand will cause a substantial non-temporary rise in price. I do not know, nor does anyone else who is not a divine being. I am going to admit up front that the Lord has not given me any guidance on this one, possibly draining the well of divine stock advice after sending me a sign about reinvesting the GE dividends. Stocks, Bonds & Politics: GE (introductory section near snapshot of GE buys)

The article in a UK trade journal intrigued the LB so it proceeded to read it: GE bets on 25-year gas super-cycle - Gas to Power Journal UK The main guy at GE Power was predicting a 25 year natural gas super cycle. LB is always interested in super cycles, such as the one recently discussed in connection with the parabolic rise of middle class consumers in emerging markets or the super cycle that led to the long term bull market starting in 1982. The next article read had the following title and was even more intriguing: Gas-fired CCPPs will dominate US power market – Siemens VP product sales - Gas to Power Journal UK That guy was saying that the competitive advantage of large coal fired plants was being eroded by the economics of low cost gas generation.

Back in the day when LB knew something about energy production from natural gas turbines, approximately 30 years ago, gas fired turbines were used by electric utilities over short term cycles to meet peak demand (e.g. the hottest part of a summer day). When that demand fell off, they would be turned off. The power cost from those units was high cost. Power produced by large coal and nuclear units was much cheaper, due to economies of scale, and those units were used to provide what is known as the base load requirements. Base Load and Peaking PowerSmartPlanet Those units would be running 24/7 except when shutdown for periodic maintenance. The guy from Siemens was saying that the cost advantage of coal generation was eroding in favor of the natural gas fired units. Coal units are only used to meet base load. So will the natural gas fired units be the new base load, running 24/7, burning up all of that natural gas to produce energy instead of coal?

It just appears to me that there may be no other choice. Nuclear plants take an incredibly long time to build, and utilities are not exactly beating down the door to build new ones in the U.S.

Yet, the Obama administration has clearly embarked on an environmental policy to shut down a significant number of coal generating stations by making it uneconomical to retrofit those plants with pollution devices to meet new clean air standards promulgated by the EPA.

I am not going to repeat my discussion about those EPA rules, contained in the comment section of this seekingalpha article:  Seeking Alpha The author of that article was recommending an Illinois Basin coal producer, so I took issue with that recommendation based on what was happening with the EPA.

In my capacity as an investor, it is irrelevant whether I agree or disagree with the EPA policy. The relevant consideration starts with a very simple question that trial lawyers always want to know: "what are the facts". Once an investor has a grip on the relevant facts, the issue then is simply how to respond. Knowing about the direction and potential impacts of EPA's new emissions rules, which have already resulted in plant shutdowns, I would not be in the market for a coal stock. The product is in abundance and the demand is about to fall.

I suspect that the estimate made by a consultant group will be close to what will happen. America is about to lose 20% of its coal fired generation, though the matter is still being litigated and anything is still possible. I discuss those legal issues in the comment section to the aforementioned SA article.

I have also started to discuss long term super cycles, natural gas and coal in the comment section to this Seeking Alpha article.

I will cite the following here:

Reuters Article Containing Consultant Estimate of 20% Closure Rate: Reuters

EPA Explanation of its Cross Border Emission Rules:  Basic Information | Air Transport | US EPA

A three judge panel of the U.S. Appellate Court for the District of Columbia Court of Appeals affirmed the EPA's greenhouse gas rules. About a week ago, the full Circuit voted to deny a petition for a rehearing en banc, filed by industry groups, of that decision. Unless the Supreme Court grants a petition for review and later reverses the Appellate Court's decision, those EPA rules will become the law of the land.

Interview with Obama in 2008 relating to his views about coal: YouTube

An article in the New York Law journal, written by a Columbia law professor, describes pending EPA regulations and how they could negatively impact electric utilities operating when and if adopted by the EPA. A link will not work. If you are interested, it can be found using these search words:  obama reelection EPA regulations Gerrard. The selection would be the PDF version available at the Arnold and Porter website.

Another way to play this theme would be with natural gas infrastructure plays (pipelines, storage and processing). Most of those firms are MLPs but there are several ETNs that incorporate those type of companies.

Risks: The normal risks for stocks in a sector, particularly one such as natural gas producers where current prices do not reflect optimism about the future or a foreseeable rebalancing of supply/demand in favor of demand and higher prices.

Future Buys: With a starter position, I have seen something to perk my interest and simply want to monitor more closely what is happening in the months and years ahead. I will likely average down on up to 150 more shares. With more proof of the super cycle leading to higher prices, I would likely become more aggressive and branch out into other securities.

I am likely to average down on the ETN AMJ recently bought in an IRA.

I am not likely to buy an ETN issued by UBS. ETRACS Alerian Natural Gas MLP Index - UBS Investment Bank

There are some CEFs that own MLPs (e.g., NTG-Tortoise MLP FundJMF - Nuveen Energy MLP Total Return Fund)
Cautionary Article on CEF MLPs
Positive Article on CEF MLPs

Another choice could be FSNGX (Fidelity Select Natural Gas)

For mutual funds, the purest choice for pipelines, storage and processing that I could find was the  MLPAX Oppenheimer SteelPath MLP Alpha A Fund (holdings all MLPs: Top 25) I quit looking at that one after seeing the load and expense fees. I have never paid a load and never will under any circumstances.

5. Terex Bond Redemption: I received the proceeds today from Terex's redemption of its 8% subordinated bond maturing in 2018:


Bought: 1 Terex 8% Senior Subordinated Bond Maturing on 11/15/2017 at 96.947 (August 2011).


Politics and ETC:

1. Republican Senators From Idaho: One thing is clear to me about Idaho. The citizens of that fair state are "social  conservatives" who choose like minded individuals to represent them in Congress. When making these selections, it would be important also to select a strong proponent of "family values" and "traditional marriage, not to mention a strait laced responsible person.

So, I am not sure what is happening in Idaho anymore. Senator Mike Crapo (R), sort of sounds like an appropriate name for him to the RB, was arrested after running a red light in D.C. and low and behold. Guess what? He was drunk. Okay, everyone makes mistakes, LB was even known to make one about 40 years ago. I glad that he did not kill someone.

But what about this other guy, Senator Craig (R), whose reputation for practicing what he preaches is also well known. I am not not going to mention his issue, well maybe I will just a bit. Do you remember that public bathroom incident? Larry Craig scandal - Wikipedia

2. When Prophecy Fails: This is the title of a recent OP ED piece from Paul Krugman. It is also the tile of a book published by three social psychologist that focused on how True Believers react when facts undermine their prophecy. The psychologists joined a cult that was predicting the end of the world as of a certain date. The purpose was to observe what would happen when the world did not actually end. Guess what?  True Believers are not going to change their belief just because of an indisputable fact.

Those who actually pay any attention to a Rush Limbaugh or Glen Beck have no interest in gathering accurate information. Instead, they are only seeking validation of their core beliefs formed with little or no accurate information.

When I confront a person, invariably a member of a particular political tribe, with a balanced account   of what actually has already happened, the reaction will be like I am trying to put worms in their head.

A recent example was an exchange with a True Believer who knows what caused the Near Depression. Knows it for a fact. It was all about the Democrats (of course) support for Fannie and Freddie and the Community Reinvestment Act, the standard line of the deaf, dumb, and blind set. So I try to present this gentleman with a more balanced account of what actually happened and all of the forces that coalesced to create the Near Depression. I provided links to multiple sources. Of course he did not read any of it. Why bother with anything that resembles facts. He had no idea about the SEC Rule change from 2004 that allowed investment banks to increase their leverage and how that increased leverage played a role in the collapse of several institutions and the near collapse of others such as Citigroup. This is just one of many example. He even said that I was lying and had some purpose for making those comments other than "truth telling". In short, he was a typical True Believer. Facts will never matter to them, information is tailored to conform to pre-existing beliefs, balance is out of the question.

Some of the beginner references that I gave this TB, where he could start his truth finding expedition, include the following;

A. The excellent series from 2008 from the NYT called "The Reckoning".  I recommended that he start with the articles on the 2004 SEC Rule change, Merrill Lynch, AIG and Citigroup. The Reckoning - Series - The New York Times

One SEC commissioner who approved that rule change made a prophetic remark in 2004:

"If anything goes wrong, it is going to be an awfully big mess"

US SEC Clears New Net-Capital Rules For Brokerages - 04/28/2004

I cited that comment thinking that it might perk his interest some on his truth seeking mission, but you know, he already knew the truth. The problem with this point for all TBs was that the GOP representatives voted for that rule change and they already know that the Democrats "own" what happened

B. Just to Show the TB that it was not all about the CRA and the GSEs, I cited voluminous material on mortgage fraud, and the large contributions made by private mortgage banks financed by private investment banks. Just a huge amount of material. Did he read any of it?  No way, all of that was caused by Alan Greenspan, a republican sometimes confused as a democrat. I recall what Rick Perry wanted to do with Bernanke, the TBs have little love for central bankers and some may even know what a central banker does. Rick Perry On Ben Bernanke: ABC News ("we would treat him pretty ugly down in Texas")

It is futile to have a fact based discussion with a TB. Unfortunately, there are tens of millions of TBs in the U.S. which is just one of many explanations for how the U.S. ends up in wars like Vietnam and Iraq.

LB will frequently explore the TB mind with this kind of thought experiment. 

2 comments:

  1. Would you buy PFK @ <26? Has some inflation protection,
    an A rating, and maybe the most attractive feature,
    matures in 2018.

    I see you had traded this in the past, and that at >$28,
    was a good sell. The question is, at what price would it
    now be a buy? Last trade today: 25.66

    ReplyDelete
  2. I still own PFK. I may have sold some, just do not recall, but I still own at least 200 or possibly more. I know that I own 100 in my main taxable account and 100 in the ROTH. I saw the price was down today when I was in those accounts.

    Good question about whether to buy it now. I may devote some time discussing this security in my next post if it can be bought lower than $26.

    The last price was $25.66 as I write this response and it has traded over $28. Par value is $25. This senior Prudential bond is non-callable and matures on 4/102018, both important points when paying more than par.

    You can find several discussions of it by going to the Gateway Post on Floaters and then scroll down to CPI floaters. I bought in the $17.83 to $20.88 when I just quit buying.

    Personally, I am just content keeping 200 shares.

    But I will keep an eye on it for my trust account which does not have a position now.

    I have not run a monthly computation on this one in a long time. See Item # 3 August 29. 2011 Post on how to do it. I suspect that the penny rate will be trending down in the subsequent months.

    ReplyDelete