Wednesday, February 6, 2013

Paired Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38/Sold 3 Harland Clarke 9.5% Senior Bonds Maturing in 2015 at 98/Sold 81+ AMAT at $12.86/Bought 100 NBB at $20.85-Regular IRA/ Pared Trade Toronto Exchange: Sold 500 XTR at C$12.5 & Bought 200 XDV at C$22.21/Sold 100 NRBAY at $11.265

Big Picture Synopsis


Stable Vix Pattern
Short Term: Neutral to Slightly Bullish (worried about Congress)
Intermediate and Long Term: Bullish

Short Term: Neutral to Slightly Bearish
Intermediate Term: Bearish
Long Term: Extremely Bearish


Both BAC and WFC have recently warned investors about bonds. 'Severe' Danger-CNBC WFC apparently advised clients to shift 5% of their bond positions into stocks.

Given the current abnormally low rates, it will not take much of a decline in a bond price to wipe out the value of an entire year of interest payments.

The ETF for the 20+ year treasury bond, TLT, closed at an adjusted price of $120.91 on 12/31/12 and closed at $115.99 yesterday. That 4% decline is more than an investor will receive in dividends for 2013.

As I noted in my last weekly post, the bond market may anticipate the end of QE long before the Fed actually makes an announcement. Recent positive economic news may be the culprit behind the recent rise in yields for two simple reasons. An improving economy will make it less likely that the FED will continue its bond fixing practices into 2014. And the prospect for inflation rises as the labor market and the economy improves coincident with the FED engaged in massive money printing unparalleled in history. Only time will tell whether the bond market has entered a long term secular bear market.

From my perspective, most bonds and bond funds are no longer worth the risk given their low yields. I have no positions in U.S. treasuries for example just for that reason.

The interest rate risk will be concentrated more in bond funds than in individual bonds since the investor has the option of holding an individual bond to maturity. Bond funds that invest in zero coupon treasury bonds would likely be the worst bond investment in a rising rate environment, followed by leveraged bond funds with long durations and high quality bonds.

Of course, the individual bond carries far more credit risk than the diversified bond fund.

There is also opportunity risk related to owning individual bonds when interest rates rise. Sure, you have the option to hold until maturity to avoid a loss in those circumstances, but you have lost the ability to earn more on the funds tied up in a low yielding bond. The risk of lost opportunity diminishes as the term shortens and the investor uses a ladder approach with maturities constantly rolling over.

I would also argue that credit risk increases with time for most issuers. With the passage of time, more things can and often will go wrong. So the investor may holding that 15 year bond until maturity only to find out that the company went under before maturity.

Most of my individual bonds mature prior to 2020.

I will occasionally add a small position in a longer term bond (e.g. 50 of KWN), but will pare that position with a floater.

As discussed below, I recently added 100 of the leveraged bond CEF NBB in the Roth IRA, but I entered a GTC limit order to sell 100 of a similar fund NBD in a taxable account. In that kind of trade, I am simply transferring a position to the ROTH where the dividend payments are tax free and consequently produce a larger after tax yield compared to holding the security in a taxable account.

Another Trust Preferred (TP)-NPBCO-Being Redeemed:

The trust preferred form of bond ownership is rapidly becoming an endangered species, a relic from the past. The impetus for its extinction is the Dodd-Frank law that requires banks with more than $15B in assets, as of 12/31/09, to phase out the use of TPs as Tier 1 equity capital starting on 1/1/13 and continuing for five years thereafter.

Another rule, presently under consideration by the Federal Reserve, would require their phase out as Tier 1 equity capital over a longer period for the smaller banks. (see discussion at Item # 1 SUSQ Redemption of TPs). I am not following the status of that particular rule change. ( see Harvard Law School: Federal Reserve Proposes Revised Bank Capital Rules)

National Penn Bancshares announced yesterday that it will redeem its 7.875% TP on 3/7/13 at its $25 par value plus $.36 per share in accrued interest. This security closed yesterday at $25.84 and I would anticipate a downdraft in price today. NPB Capital Trust II 7.85% Cum. Trust Pfd. Secs., NPBCO

I no longer own any TPs. All of mine have been called or sold in anticipation of being called at par value. I sold out of NPBCO last year. Sold 50 NPBCO at $26.17 and Bought 100 HTGZ at $24.6-ROTH IRA


Relevance of Energy to More Manufacturing Jobs in the U.S.:

Another positive force for the U.S. economy is the movement toward energy independence and relatively low cost and abundant natural gas. 

A recent Barrons' article focused on the long term implications for American industry and jobs. 

Here are some factoids from that article:

(1) U.S. production of petroleum and natural gas jumped to a twenty year high at 15 million barrels of oil-equivalent per day, while imports declined to 8 million barrels which was a 25 year low.

(2) By 2025, U.S. will be a net energy exporter. The U.S. is anticipated to become the largest energy producer by 2020. 

(3) The range of natural gas costs in the U.S. has been between $3 to $5 per million BTUs for several years now. The cost is expected to remain in that range due to increased production. Natural gas costs almost $12 per BTU in Europe and $16 in Japan.  

(4) To buy land for a new factory in Tennessee, the average square foot cost would range between $1.3 to $4.65. The average cost in China is $10.22, and considerably more in the coastal cities. 

(5) Labor costs are rising 15% to 20% per year in China. 

(6) And this fact was very interesting. A graduate of the South Dakota School of Mines and Technology has a 16% higher starting salary than a graduate from Yale.

A similar article was published in the WSJ last Friday.


One of the scariest charts, prepared by Credit Suisse, shows that Medicare, Medicaid, Social Security and interest payments on the national debt will consume 100% of federal revenue by 2025 (Exhibit 22 at page 17:

Those three programs are virtually untouchable in today's political arena.

Jobs Report:

Last Friday, the Labor Department estimated that the U.S. economy added 157,000 jobs in January. Private employers added 166,000 jobs, while governments shed 9,000. The government made substantial revisions in November, revised to +247,000 from +161,000, and in December where the change was increased to +196,000 from +155,000. Importantly, the average hourly earnings for private nonfarm employees rose by 4 cents per hour. Employment Situation Summary The U-6 number was unchanged at 14.4%. Table A-15. Alternative measures of labor underutilization The unemployment rate ticked up to 7.9% from 7.8%.

Liz Ann Sonders stated that housing related activity could start producing 700,000-750,000 jobs. Daily Ticker

ISM Manufacturing:

ISM reported that its manufacturing index rose to 53.1% in January, up from 50.2 in December. The median forecast was for a smaller rise to 50.7. The new orders component rose to 53.3 from 49.7. Employment increased to 54 from 51.9.

Prior to that release, the Chicago ISM's business barometer was reported at 55.6 in January, the highest level since April 2012.

ISM Services:

ISM reported that its services index declined to 55.2% in January from 55.7% in December. The new orders fell 3.9% to 54.4, while employment rose 2.2% to 57.5.

Car Sales: 

GM reported that it sold 194,699 cars and trucks during January, up 16% over January 2012.  All four brands had double digit increases.

Ford announced that it sold 166,501 vehicles in January, a 22% increase.

Chrysler reported an increase of 16% compared to January 2012, with 117,731 in sales.


Yesterday, Toyota raised its forecast for full year earnings by 10%, with the new number being a five year high for the company. Bloomberg


China PMI Services:

China's official PMI for services rose to 56.2% in January. The service sector generated about 44% of China's GDP in 2011.


Home Prices:

CoreLogic reported yesterday that home prices rose 8.3% Y-O-Y in December, the largest gain since May 2006.  Home Price Index (HPI) by CoreLogic; Reuters.

Dell Buyout:

I would agree with Andrew Bary who  stated that Michael Dell "is trying to steal his company from public shareholders" by offering just $13.65 per share in cash. That price values the company at around 8 times estimated forward earnings. The institutional shareholders just need to vote no.


1. Sold 3 Harland Clarke 9.5% Senior Bonds at 98 (Junk Bond Ladder Strategy)(see Disclaimer): Effective in October 2012, I am no longer updating posts relating to the junk bond ladder strategy. That would include these posts for example. Junk Bond Ladder StrategyPersonal Risk Ratings For Junk Bonds I am gradually winding down the positions in this basket and expect to break-even on the bonds.

Sold 3 Harland Clarke Bonds at 98
The adjusted price shown in this snapshot reflects the commission cost.

I made a small profit on these bonds. For most of my ownership period, I had an unrealized loss.  Bought 1 Harland Clarke Senior Bond Maturing 2015 at 98.875ADDED 2 Harland Clarke 9.5% Senior Bonds Maturing on 5/15/2015 at 91.375

FINRA Information: FINRA


SEC Filings For HC:  Harland Clarke Filings

10-Q for 2012 Third Quarter: HCHC-2012.9.30-10Q

My main reason for selling these bonds is that I did not want to assume the credit risk when I had the opportunity to harvest several interest payments and was able to exit the position at a small profit.  I am not concerned about interest rate risk for this bond maturing in 2015.

2. Bought 100 NBB at $20.85-Regular IRA (see Disclaimer):

Security Description: The Nuveen Build America Bond Fund (NBB) is a closed end bond fund that invests in taxable municipal bonds. Of course, I would never buy a tax free municipal bond in a retirement account and have only owned such funds in a taxable account. The taxable municipal bonds will have a higher yield than the tax free ones. In an IRA, the taxable municipal bond becomes in effect a tax free one.

NBB invests in Build America Bonds: NBB - Nuveen Build America Bond Fund As noted at the sponsor's website, this fund has a contingent term provision. If there are no new issuances of BABs or similar U.S. treasury subsidized taxable municipal bonds for any 24 month period ending on or before 12/31/2014, the fund will terminate on 6/30/20. The fund may without shareholder approval extend that deadline for 6 months.

Both of the Nuveen Build America Bond Closed-End Funds (NBB and NBD) will implement that contingent term provision as expected. There were no Build America Bonds issued after 2010. Consequently, no new BABs were issued in 2011 and 2012, a continuous 24 month period. The fund may liquidate earlier than 6/30/20.

Both NBB and NBD have become term bond funds. That would normally lessen interest rate risk provided the bond fund owned bonds maturing in 2020 or earlier, which is not the case with either NBB or NBD, both of which own long term bonds (see risk section below)

I also own 200 shares of NBD, with 100 held in the ROTH IRA:

After buying 100 more of NBB in the ROTH, I entered a AON GTC limit order to sell 100 NBD held in a taxable account slightly above the current market price.

{I can use All or None orders on 100 share lots at several brokers including Fidelity and Ameritrade. I have to go to 101 shares or more at Vanguard  and 200 shares at Schwab.}

Given my negative views about bonds and particularly bond funds, I am likely to hold this security for less than one year and hopefully exit this position at a small profit after collecting several monthly dividend payments.

The fund does use leverage which will give it a higher yield than the two ETFs that invest in BABs: PowerShares Build America Bond Portfolio (BAB) and SPDR Nuveen Barclays Build American Bond ETF (BABS)  Leverage is of course a two way street. Leveraged bond funds have been working in recent years given their low short term borrowing costs and the rally in bonds. Short term borrowing costs are likely to remain low for as long as the Fed continues ZIRP. Through 12/31/12, the annual interest cost for NBB's short term borrowings was .99%. NBB Fund Data

The credit quality of the portfolio is weighted in "A" or higher:

NBB - Nuveen Build America Bond Fund

NBB page at the CEFA
Morningstar page for NBB

When I bought these shares, the price had declined by 18 cents per share when I believed the bonds owned by the fund were rising slightly based on the trading of the Build America Bonds ETFs.

Prices at Time of Purchase:
NBB: 20.85 -0.18 (-0.87%)
NBD: 21.54 +0.07 (+0.33%) (similar CEF from same sponsor)
BAB: 29.93 +0.05 (+0.16%) (ETF)
BABS: 60.88 +0.13 (+0.21%) (ETF)

Data as of 1/29/13 (day before purchase)
Net Asset Value Per Share=$22.16
Market Price Per Share=$21.03
Discount -5.1

Data as of 2/4/13
Net Asset Value Per Share=$22.34
Market Price $21.08

I was correct in drawing the conclusion that the NBB net asset value per share would increase. The shares declined 21 cents with the NAV per share moving up two cents.

Data as of 1/30/13 (day of purchase)
Net Asset Value Per Share=$22.18
Market Price=$20.82
Discount= -6.13

In this week's Barron's Roundtable Part 3, Bill Gross recommended another leveraged BABs CEF, the BlackRock Build American Bond Trust (BBN), which closed last Friday at a -5.1% discount to its net asset value per share. Gross mentioned that the discount was -2, but the discount has expanded some since his statement due primarily to a decline in market price. (BBN page at the CEFA; $23.02 on 1/14/13 to 22.01 on 2/1/13,  BBN Interactive Chart)

Prior Trades: My last purchase was in the Roth IRA. Item # 1 Bought 50 NBB at $20.73-ROTH IRA (June 2012). I still own those shares.

I included in that post snapshots of three prior trades that resulted in a total profit of $184.16.  Sold 100 NBB at $20.13-ROTH IRA November 2011Added 50 NBB at $19.55 in the ROTH IRA September 2011; Sold 100 NBB at $20.07 November 2011Bought Back 50 NBB @18.4 in IRA December 2010; Sold 50 NBB @ 19.24 in the Regular IRA December 2010; Bought 50 NBB @ 19 November 2010Bought 50 NBB at 19.67 June 2010.

Rationale: (1) It is all about generating tax free income in the retirement account. I would not be buying this security with money market yields at 3% or higher. Since the yield on the money market account is likely to hug zero for at least another year, and probably two, I have to take chances to generate some income. This fund does hold high quality paper and generates over a 6% yield at my cost. Importantly, it also pays monthly dividends.

The last two monthly dividends have been $.111 per share. NBB Distributions Assuming a continuation of that rate, which may change at anytime, the yield at a total cost of $20.85 would be about 6.39%.

Risks: (1) Interest Rate Risk Is Huge: The average maturity in years is 27.9 as of 12/31/12. While there will be of course more yield with long maturity, the interest rate risk inherent in those bonds is substantial. That risk may become significant if the 2020 liquidation date proves to be an untimely one for selling the long bonds owned by the fund. Conversely, the term date could be beneficial assuming the bonds have retained their current values or even increased some by the liquidation date.

In either event, I am not likely to be holding this fund for more than a year, or two at the most.  I may liquidate 100 shares of NBD before summer.

I am in a trading mode for bond funds. In the event that I still own a leveraged bond fund when rates start to rise, I will cap my loss at 10% below my purchase price.  

Quote: Nuveen Build America Bond Fund (NBB)

3. Sold 81+ AMAT at $12.86 (see Disclaimer):

While I have never lost money investing in AMAT, I have never made much either. I just got bored holding this one. I made just $54.22 on the shares:

2013 AMAT 81+ Shares +$54.22

Bought 50 AMAT at $12.45 (June 2011); Added 30 AMAT at $10.99 (May 2012). Maybe, after a hiatus from reading AMAT's lackluster earnings reports, and a decline in price to below my last purchase price, I may try again.

4. Paired Trade Roth IRA: Sold 120 of the Bond CEF GDO at $20.73 and Bought 100 GSPRD at 21.377 (see Disclaimer):

2013 Pared Trade Roth IRA

Security Descriptions: Goldman Sachs Group Inc. Dep. Shs Pfd. Series D (GS.PD) is an equity preferred stock issued by Goldman Sachs that pays non-cumulative qualified dividends at the greater of 4% or .67% above the 3 month LIBOR rate on a $25 par value. Prospectus

I recently discussed this security and have nothing to add: Item # 5 Bought 100 GSPRD at $21.18 (1/22/13 Post) I also discussed it when buying 50 shares back in December. Item # 1 Bought 50 GSPRD at $20.6 (12/26/12). I now own 250 GSPRD shares.

Western Asset Global Corp Defined Opportunity Fund (GDO) is a closed end bond fund.

GDO Data (Day Before Purchase 1/31/13)
Net Asset Value Per Share: $20.81
Closing Market Price: $20.63
Discount:  -.86

GDO Data (day of sale 2/1/13)
Net Asset VAlue Per Share= $20.83
Closing Market Price: GDO: $20.70 +0.07 (+0.34%)
Discount: -.62%
Discount at $20.73= .48%

Prior Trades: I no longer own any GDO. I have bought and sold this bond CEF several times. The shares sold on 2/1/13 were bought in 2010:

2013 Roth IRA 120 GDO +$340.33
My last GDO trade was a quick flip: Item # 2 Sold 100 GDO at $20.79 (12/26/12 Post)-Item # 2 Bought 100 Shares of GDO at $18.9 (11/21/12 Post).

A discussion and links to prior trades can be found in  Item # 2 GDO

Rationale: (1) Unlike GDO, which owns fixed coupon bonds, GSPRD is a floater which provides a measure of inflation protection.

I do give up some current yield.

I do not currently anticipate that GSPRD will pay more than its minimum 4% coupon prior to 2015. At a total cost of $21.38 and a 4% coupon, the current yield would be about 4.68%. The GDO current yield is around 2.2% higher at a total cost equal to my sales price. However, I expect GDO's dividend to trend down, as noted below, while GSPRD's current yield can not go lower than its current rate.

(2) Profit Taking On GDO: This is probably the most important consideration given my negative views about bond funds.

With GDO selling at near its net asset value per share, I decided to harvest a $340 profit, which is tax free in the Roth IRA, rather than to risk losing some or even all of it over time. I owned those shares for slightly over 2 years and received 25 monthly dividend payments.

(3) I expect the GDO dividends to trend down over time, as high yielding securities mature, while GSPRD's current dividend yield is the lowest possible yield. GDO has a 2024 liquidation data. Given that liquidation period, the fund has a relatively short weighted average maturity of 6.3 years. The dividend has already started to trend down slightly. When I first bought this CEF, the monthly distribution was 13 cents per share, which was then reduced to $.1275 in September 2011; to $.125 in September 2012; and to $.12 in December 2012 GDO Distributions

I do not currently anticipate that GSPRD will pay more than its minimum 4% coupon prior to 2015.  At a total cost of $21.38 and a 4% coupon, the current yield would be about 4.68%.

(4) I anticipate that there is more profit potential in GSPRD shares compared to GDO over the next few years. This is a future forecast, and no one can really predict the future. I am postulating that inflation will become problematic in a few years, and the Fed will consequently have no choice but to raise the federal funds rate. This will cause a rise in the 3 month LIBOR rate. When the 3 month Libor crosses 3.33% during the applicable computation period for GSPRD, the Libor float provision will be activated and this security will pay more than its minimum 4% coupon. If it appears that the rate rise will be significant, I would anticipate that GSPRD will rise closer to its $25 par value. It was selling at close to $26 in 2007.

And, depending on the circumstances then existing, GS may even elect to redeem the security at its par value, rather than to be tied to an open ended rise in the coupon due to the Libor float provision.

Risks: (1) Equity Preferred Stocks Issued by Leveraged Financial Institutions Can Be Volatile: Given the non-cumulative characteristic of the dividend, and the low priority of equity preferred stocks in the capital structure, they can be exceedingly volatile during times of stress. There was a day in August 2011 where there was a significant downdraft in equity preferred stocks and European hybrids, as noted in a contemporaneous post from that time. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities

Goldman Sachs had three equity preferred floaters outstanding during the Near Depression period. Each of them were crushed in price, falling below $10 per share for awhile. GS did not miss a quarterly dividend payment on any of them.

GS.PD Stock Chart
GS.PA Stock Chart
GS.PC Stock Chart

(2) Other disadvantages are discussed in the gateway post on these securities. Advantages and Disadvantages of Equity Preferred Floating Rate Securities I would highlight one of the risks. If GS filed for bankruptcy, its equity preferred stocks would likely become worthless.

Quote: Goldman Sachs Group Inc. Dep. Shs Pfd. Series D, GS.PD
Quote: Western Asset Global Corp Defined Opportunity Fund Inc., GDO

5. Pared Trade Toronto Exchange: Sold 500 of the Balanced ETF XTR at C$12.5 and Bought 200 of the Stock ETF XDV at C$22.21 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

2013 Pared Trade Toronto Stock Exchange

Security Descriptions:
iShares Dow Jones Canada Select Dividend Index Fund (TOR: XDV) is a Canadian ETF that owns the 30 stocks that have the highest dividend yields in the Dow Jones Canada Total Stock Market Index.

Sponsor's Website: XDV Overview - iShares ETFs (expense ratio .55%)

XDV Holdings - iShares ETFs

I took this snapshot of the top 10 holdings as of 1/31/13:

Prior Trades: I bought 800 of XTR in three lots: Bought 200 XTR:CA at 11.9 CAD October 2011;  Bought 300 of the Canadian ETF XTR at $12.34 CADs March 2011; Bought 300 of the Canadian ETF XTR:CA at 12.27 CADs-Toronto Exchange November 2012 Using FIFO accounting, I sold the first two lots and still own the last 300 shares purchased in November 2012. Fidelity will also convert the CAD prices into USDs which will impact my overall profit or loss numbers on these foreign transactions. Since the Canadian dollar had fallen some recently, that decline negatively impacted my profit on the 500 shares, which is not a bad result since I end up with the same number of Canadian dollars either way:

2013 XTR 500 Shares +$38.3

As previously noted, XTR is a fund of funds weighted in bonds:

XTR Overview - iShares ETFs

Rationale: (1) Reducing Exposure to Bond Funds Without Significantly Reducing Income: There is not much difference in yield between these two ETFs which is not surprising given the abnormally low rates paid by bond funds now. And, unlike fixed coupon bonds, most of the stocks owned by XDV will at least be increasing their payouts over time.

I am keeping my significant exposure to two short term Canadian bond funds that use a ladder approach for individual bonds, keeping equal weights in 1 to 5 year maturities. There is far less interest rate risk associated with that kind of roll. I own 700 of the iShares 1-5 Year Laddered Government Bond Index Fund (TOR: CLF) and 300 of the iShares 1-5 Year Laddered Corporate Bond Index Fund (TOR: CBO). Both of those funds pay monthly dividends to me in CADs after a 15% Canadian withholding tax.

I also recently bought 200 of a floating rate Canadian bond fund. Bought 200 of the Canadian Bond ETF XFR at 20.13 CADs

Risks: (1) Currency Risk: I am a long term holder of Canadian dollars. Anyone buying a foreign security is subject to currency risk, irrespective of whether the U.S. investor buys ADRs using their USDs or ordinary shares purchased on a foreign stock exchange.

From my perspective, I simply want to diversify out of assets priced in USDs and want to add to my CADs over time, either by receiving dividends paid in Canadian dollars or generating profits on securities bought on the Toronto exchange with my CADs. Given that long term perspective, I do not view myself as being exposed to currency risk, except in the limited sense that my U.S. tax obligations can be positively or negatively impacted by the currency movement occurring from the date of purchase to the date of sale.  An investor with a shorter term focus can have their total returns significantly impacted by currency movements, both up and down.

There is also risks in owning a stock ETF, particularly one that owns a relatively small number of stocks which is the case for XDV.

(2) Concentration Risk in Financials: XDV owns a number of the large Canadian banks which performed admirably during the Near Depression. However, there are currently concerns about Canada's housing market and the debt levels of Canadian citizens who have borrowed money from the banks. That concern led Moody's recently to downgrade the ratings of the large Canadian banks. Moody's downgrades Canadian banks The ratings are still good, but those concerns are nonetheless worth noting. Six of the top ten holdings are large Canadian banks.

Quote: iShares Diversified Monthly Income Fund, XTR
Quote: iShares Dow Jones Canada Select Dividend Index Fund, XDV

6. Sold 100 NRBAY at $11.265 (see Disclaimer): Nordea Bank AB ADS (NRBAY) is a large European banking institution.  The stock spurted after the bank reported better than expected earnings for the 2012 4th quarter. MarketWatch I met my long term price target in a few months, so I decided to harvest the profit:

2013 NRBAY 100 Shares +$175.06

BOUGHT 100 of the ADR NRBAY at $9.36 (October 2012)

Quote: Nordea Bank AB ADS, NRBAY

I will discuss one purchase made yesterday in next week's post. This one is already long enough.

Politics and ETC:

1. How to Win A Presidential Election with Gerrymandered Congressional Districts: I would not be against eliminating the Electoral College system for presidential elections, and instead basing the outcome on the total vote cast.

The most anti-democratic proposal would be to award electoral votes based on who wins each congressional district.

In several battleground states controlled by the GOP at the state level, including Virginia Ohio, Michigan, Wisconsin and Pennsylvania, the republicans are starting to push allocating electoral votes by congressional district which would make it more likely that a republican would win the presidential election even after losing the popular vote. If every state had allocated electoral votes by congressional district, Romney would have won the last election with 276 electoral votes even though he lost the popular vote by approximately 5 million votes. CBS News

Basing electoral votes on congressional districts would further award the inherently anti-democratic process known as gerrymandering.

Most Americans understand that congressional districts are gerrymandered by the political parties. That process is unquestionably anti-democratic. The polarization in American politics is due in significant part to gerrymandering. Both political tribes are responsible.

In a republican controlled legislature, for example, swing and democratic precincts would be taken out of a GOP congressional district and swapped with strong GOP precincts in a Democrat's district.  Even where no party controls both branches of the state legislature, horse trading among the two political tribes can result in shoring up congressional districts held by incumbents.

The end result is a congressional district map that has nothing to do with geography and everything to do with voting patterns of every precinct. (see Slate Magazine; the most frequently gerrymandered district may be Maryland's third, was called by a federal judge a "broken winged pterodactyl, lying prostrate across the center of the state" New Republic; the ten contorted districts: MAPS

My congressional district (7th Tennessee) was drawn many years ago with only one thought in mind-to insure the election of an extreme right wing republican. The district started its winding path near the Kentucky border to catch Clarksville, a military town near the Ft. Campbell military base. It then swings through farmland, bypassing Nashville, and then picks up Brentwood, an affluent community likely to vote 80% republican. After picking up Brentwood, the district meanders down Franklin Road to pick up a few GOP precincts in Franklin, and then moves through farmland again for over two hundred miles, all the way to the outskirts of Memphis, reaching its final objective, a town known as Germantown, an affluent suburb of Memphis likely to vote 80% for a republican. In more populated areas, it would not be necessary to be so obvious but the result would be the same.

Democrat votes are concentrated in large cities. Even without gerrymandering, the Democrat candidate could easily win the presidential vote by several million and lose the election based on an electoral collage vote based on the winner of each congressional district.

2. Lindsay Graham's Brain Has Been Deep Fried: The republican senator keeps making statements that indicate to me that he has more than a few malfunctioning brain synapses. His most recent bizarre statement was that Hilary Clinton "got Away With Murder' in Benghazi. What really has Graham upset is that Hilary might become President in four years, and that would be more than most republicans could bear, particularly after 8 years of the beanpole.

3. Young Mamas Need Assault Weapons With Large Capacity Magazines Capable of Spraying over 30 bullets in a Few Seconds to Protect Their Youngins: The self described "conservative" Gayle Trotter told a congressional committee that young mothers needed assault weapons, a really 'scary looking weapon", to protect their babies when multiple criminals invade their home. Ms. Trotter is opposed to the Violence Against Women Act which in her view infringed on the rights of men.  I was captivated by her testimony. Ms. Trotter was not able to refer to a single person who used an assault weapon or large capacity magazines to defend themselves from criminals.

4. 53% of Americans Believe the Government Threatens Their Personal Freedoms: For the first time, a majority of Americans now believe that the government is a threat to their personal freedoms. Pew Research Center for the People and the Press If the person owns a gun, then the number jumps to 62%. Unsurprisingly, 76% of the "conservative" republicans hold this view.

Those folks will frequently be heard to argue that assault weapons are needed to keep the government from taking away their other rights. The most important right in their view is to own as many guns as  they can afford, including assault weapons equipped with large capacity magazine clips bought at gun shows with no background checks whatsoever.

The real threat to freedom is from the 53% who answered that question in the affirmative. I have noticed over the years that True Believers will frequently find ways to disparage or restrict freedoms that do not involve the ownership of guns. They are generally intolerant of diversity in any shape or form. Those folks are incapable of questioning their core beliefs and are easily swayed by cliches and talking points.

It is impossible to engage True Believers in a rational discussion on virtually any topic, since they are simply incapable of a rational discussion based on anything resembling reliable evidence rather than their own personal reality creations. The concept of the U.S. government taking away rights is just one of many such reality creations.

Maybe the government has taken away the right to eat contaminated meat or to sell unsafe drugs, or the right to pollute the air and water with impunity and the right to employ child labor in sweat shops.

How exactly has the federal government interfered with the rights to free speech, to practice religion, to petition the government for redress of grievances, to travel freely anywhere in this country, to change jobs, to choose your friends or enemies, to read anything, or to be free from unreasonable searches and seizures?

How exactly would the President take away those important freedoms? Send an order to the Joint Chiefs to do what exactly? It is the same idiotic mind set that was on display when a republican judge in Texas who argued that a civil war would erupt in the event Obama was elected? Why? Well, Obama planned to give away U.S. sovereignty to the United Nations. And, when those U.N. tanks rolled into Lubbock Texas, he and his fellow Texas patriots, armed with their assault weapons, could defend their freedoms just like the minuteman did at Lexington and Concord.

How would you argue with Sharon Angle, the former GOP candidate for Senate in Nevada, who mentioned that the people had "second Amendment remedies" to deal with the "tyrannical" U.S. government? Sharron Angle Floated '2nd Amendment Remedies' As 'Cure' For 'The Harry Reid Problems'

5. Guns in Households: I do not own a gun and have no plans to buy one. There are places in the U.S. where I would want to own a handgun to protect against home intruders. I understand why many would want to keep a gun in the house for such purposes.

However, it must be noted that a gun in the house is more likely to cause injury or death to a member of the household than to an intruder. Over the years, I have read a number of stories about an argument between a husband and wife escalating to the point where a gun comes into play.  A study in the Southern Medical Journal found that having a gun in the house was 12 times more likely to cause the death of a family member or a guest rather than an intruder. Guns in homes 


  1. What is your opinion regarding buying the floater bonds directly, instead, or in addition to the floater preferreds like GSPRD?

    What about buying an ETF of preferred floaters, like
    FLOT, FLRN or FLTR? Aren't the NAVs of these ETFs likely
    to increase if interest rates go up? In the meantime you "get payed to wait" but only a (very very) small yield.

    Do you like the idea of a basket of floater bonds at all?

  2. And if an etf of floaters is not good, what about the individual bonds?

    For example, one of the top holings of FLOT is a GS
    floater bond expiring 03/22/2016, which is trading under $98. Would you buy it?

  3. I believe those ETFs own bonds rather than equity preferred floaters. Both the equity preferred floaters and the synthetics floaters will provide significantly more yield than those ETF investment grade bond floaters.

    The bonds owned by FLOT are mostly rated "A" or higher. As a consequence, it will yield less than 1% given the low short term rates. FLTR offered by Market Vectors is likewise a floating rate investment grade bond bond and yields less than 1%. FLRN is the investment grading floating rate bond offering from SPDR.

    Since the Fed is likely to maintain ZIRP for two more years, I have elected to postpone buying U.S. ETFs that own floating rate investment grade bonds. Those funds will simply guarantee me a negative real rate of return. My target time frame for initiating a purchase would be the later half of 2014. I may start earlier if the economy is really performing well later this year.

    I did discuss investment grade ETF floaters some when buying a Canadian ETF that owned high quality floating rate bonds from Canadian issuers. The yield for that ETF was higher than the U.S. ETFs. I discuss the purchase of that ETF, XTR, in the 1/9/2013 post.

    I also discuss in that same post buying a starter position in BKLN, which is a junk bond floater that pays close to 5%. (item # 2). I mention in that section the investment grade ETF floaters with U.S. bonds. Those bonds are highly risky and many investors would understandably avoid that kind of investment due to the credit risks. I deal with that kind of issue frequently by just keeping my investment small rather than by avoiding the security altogether, and then slicing orders in small pieces, averaging down, and selling some on pops.

  4. I think that you may enjoy giving me work to do. In order to answer your question, I had to first locate the bond.

    GS.VQ / CUSIP: 38141GEG5

    I then had to find the prospectus which is no easy thing to do given the huge number generated by GS.

    I see that it pays only a .45% spread to three month LIBOR and matures on 3/22/16. The 3 month LIBOR is currently at .3%. The bond was selling close to 90 last summer and makes more sense at that price than at 98.

    I am not interested in buying this security. I do not foresee a rise in the coupon above 1% for another two years. I did put the bond on my monitor list and will occasionally look at it to see whether it can be bought at close to 90 which would juice the current unsatisfactory yield a tad and give me something on YTM.

    If you want me to look at something like this again, you will need to provide me with a link to the prospectus and to the FINRA information. Otherwise, I will just ignore it.

  5. Thanks for your thoughts on GDO. I'm trying to decide whether to sell or hold the 200 shares I own in my ROTH. I have over 9% gain on the shares and 2 years of dividends. I recognize the risk of loss of the gains, but am loath to give up the 8% dividend income based on my cost. I've been following your thoughts on the coming bond market "correction" for some time. To help me assess the risks in GDO better, could you share your thoughts on how a fund such as this, which is comprised mostly of corporate debt, would be impacted if the bond scenario you forsee comes to pass? Many thanks!

  6. Cathie: GDO will fair better than many bond funds in the event interest rates start to rise. That is due to its weighted average maturity of 6.33 years and its liquidation date in 2024. It will do better than NBB that I discussed buying in today's post. We are all taking chances searching for yield now.

    Still, GDO would suffer when and if there is a significant correction in bond prices.

    As I mentioned in the post, my main reason for selling the position was profit taking. The fund had a 21.6% return in 2012 based on net asset value per share on top of the dividend payments. The market return last year was even higher at 24.59% due to shrinkage in the discount. I am pleased with that kind of return and do not expect a repeat performance.

    The discount to net asset value had narrowed to almost zero when I sold, and I will frequently sell CEFs when I buy at a significant discount, collect several dividends, and the discount narrows to near zero, particularly when the net asset value has increased too, all of which were applicable in GDO's case.

    The fund also has a 30%+ weighting in junk rated bonds, which I view as significantly overvalued based on risk, price and yield.

    I am in a trading mode for bond CEFs now.

    I would likely buy GDO again if and when it hits an air pocket which happens with some regularity. So I would be looking for an entry point where the discount expands to 7% to 10% with the price declining below $19.5. My last purchase was a flip with the purchase made on 11/22/12 after a fast decline in price and then sold at $20.79, as noted in today's post. I will do that again.

    I substituted a security that pays me less now but has the potential to pay me more. GSPRD would not be subject to the same interest rate risk as a bond fund given its LIBOR float provision.

    I also anticipate that the GDO dividend will slowly go down. So your yield will gradually shrink for several reasons. One has to do with higher yielding securities maturing. Another reason is that the portfolio has to be managed with the 2024 termination date in mind, which means bond maturities will need to be kept short with some of the longer term and higher yielding bonds sold when the worm starts to turn.

    For now, the FED is still in the bond price fixing business. It is buying close to 80% of the new treasuries. But when the market senses that will end, and it has to end, bond funds could be in for a significant downdraft as bond prices start to return to levels justified by market conditions.

    The market is currently forecasting over a 2.5% annualized inflation rate over the next years, based on the current spread in pricing of the 10 year TIP and the 10 year nominal treasury. That inflation forecast is simply not consistent with bond prices at their current levels. I calculated the break-even number at 2.57% based on today's prices.

  7. I have seen your useful comments on the slm floaters OSM and ISM.

    Without attempting to give you additional work, I was wondering if you have already studied and could share your opinions on SLMBP (float 1.7%+LIBOR, w/o maturity. par 100, trading <$58 ) and SLMAP (fixed 6.97%)?


  8. SLM makes me nervous given the sheer magnitude of its debt, and the government is no longer guaranteeing SLM's student loans. I have kept PFK where I am comfortable with the credit risk and have sold out of OSM and ISM. SLM's common has been doing better lately. It did increase the quarterly common dividend to 15 cents per share and authorize a buyback, neither of which would be viewed positively by me in the event I owned a SLM senior bond. The preferred stock has a stopper clause that would prevent a dividend elimination for the SERIES B or deferral for the SERIES A unless the common share dividend have been eliminated first.

    Both SLMBP and SLMAP are equity preferred stocks and would be junior to all debt. When I think about that issue, I see a downside risk of a zero price and not much upside for the fixed coupon cumulative preferred which is selling near its $50 par value.

    I would prefer buying WBSPRE which has a 6.4% coupon, and is non cumulative, because I am more comfortable with the credit risk of Webster Financial.
    Two other options would be the new senior bonds TANN and PNTA. I do not currently own any of those, but I am actively monitoring the price.

    The non-cumulative floater is really risky and I do not own it. If I was going to buy it, I would limit my purchase to 30 shares.