Tuesday, April 9, 2013

Exide/MKN/Sold 100 DRE at 17.24-Roth IRA/Bought 100 GDO at $19.8/Initiated Position in VHCOX/Bought 50 of the Bond CEF GHY at $18.77-Roth IRA/Sold 200 STL at $11.39/MSFT/Jobs/ARCC

Big Picture Synopsis


Stable Vix Pattern (Bullish)
Short Term: Slightly Bearish (expecting a 10%+ correction)
Intermediate and Long Term: Bullish


Short Term: Neural
Intermediate Term: Bearish
Long Term: Extremely Bearish

ARES Capital (ARCC) Stock Offering:

After the close on 4/2/13, Ares Capital announced that it intended to sell 16.65M shares of common stock, plus the usual over-allotment option. Before the announcement, the shares closed at $18.02. According to Forbes, the shares were sold at $17.61. The underwriters bought the shares at $17.43. Prospectus Supplement 

I currently own just 100 shares after selling 100 shares back in September 2012.

Item # 2 SOLD 100 ARCC at $17.54-IRAs in Two 50 Share Lots (September 2012)

Item # 4 Added 50 ARCC at $16.9-Regular IRA (May 2011)-SOLD

Item # 3 Bought: 50 of the BDC ARCC at 16.17 and at $16.3 (January 2011). I still own these shares in two brokerage accounts:

Bought 50 ARCC at $16.89 (DECEMBER 2010)-SOLD

Vanguard Taxable 50 Shares Bought at $16.3 January 2011
ARCC 50 Shares Total Average Cost=$16.33/Bought at $16.17 (Snapshot taken after the close on 4/2/13)

Taking into account the dividend, which is juicy, I am doing okay with these shares.

Net asset value per share was $16.04 as of 12/31/12: SEC Filed Press Release-2012 4th Quarter Earnings

2012 Annual Report

Yesterday's Close: ARCC: $17.59 +0.05 (+0.29%) 

Jobs-Labor Participation Rate Linkage to Liberally Granted Social Security Disability Benefits  

ADP reported last Wednesday that 158,000 private sector jobs were created in March. The consensus estimate was for 197,000 new jobs. However, the February number was revised up to 237,000 from 198,000. ADP National Employment Report - March 2013 | NER

I would note that the ADP reports are clearly showing a hiring slowdown by businesses with 50 to 499 employees. Those employers would be the most impacted by the employer mandate in Obamacare. 

Employers with 50 to 499 Employees
March = +37,000 jobs
February= +65,000 ADP Employment Report
January= +79,000 ADP Employment Report - January 2013
December 2012: +102,000 ADP Employment Report - December 2012

There is insufficient data to draw a firm conclusion about a connection between Obamacare and the hiring slowdown. Most employers with 50-499 employees would already provide health insurance. The exception would be employers with mostly low wage employees (e.g. maid services; caregiver services; restaurants and retailers)

There are already a large number of anecdotal reports that employers have already started to slash full time positions in favor of part time workers. An example would be a Wendy's franchisee who cut 300 workers to part time status recently. Wendy's Franchisee Reduces Employee Hours

Businesses with less than 50 employees may delay or forego hiring new full time employees in order to remain under the 50 employee.  (50 "full-time equivalent threshold". Employer Responsibility Under the Affordable Care Act - Kaiser Health Reform-30 hours per week is considered full time).   .

I would anticipate job growth to start ramping up later this year in businesses related to health services.

The Labor Department's jobs report, released last Friday, was disappointing. Employment Situation Summary Nonfarm payrolls increased by only 88,000 in March, substantially below the consensus estimate of 190,000 to 200,000. Private companies added 95,000 jobs. Federal government jobs declined by 14,000, mostly from the Postal Service shedding 12,000.  Retail jobs fell by 24,000.

The U-6 number declined to 13.8% from 14.3% in February. Table A-15. Alternative measures of labor underutilization

The Labor Department revised the numbers for January and February upward. The January number was revised to +148,000 from +119,000, and the February number was increased to +268,000 from +236,000 (+61,000 more jobs from those two revisions).

The average workweek increased by .1 hour to 34.6.

The labor participation rate declined to 63.3%, the lowest since May 1979. Civilian Labor Force Participation Rate- St. Louis Fed The unemployment rate fell to 7.6% as almost 1/2 million people dropped out of the labor force.

The chief economist for JPM estimates that as mush as a 1/4th of the participation rate decline, since the recession, is due to worker flight to social security disability status. WSJ.com Disability claims have spiked due to the recession and the slow job recovery in the recession's aftermath, suggesting that many disability claims are worker responses to an uncertain job market.

About 5.4% of the civilian workforce between 25-64 are now drawing social security disability benefits compared to 1.7% in 1970.  Social security paid out $137 billion in disability benefits last year. Almost 2.5 million of the disability recipients are between 20 to 40. Those persons, mostly unskilled, have little incentive to ever leave the disability roles.

Only about .5% of the SS disability beneficiaries left the disability rolls for employment in 2011.

Anyone denied benefits can appeal with their lawyer paid by the government. ($1.4 billion in fees paid by the government to disability advocates last year)

Congress expanded the list of disabilities in 1984 to cover mental disorders and musculoskeletal problems such as back pain. Many of those problems are easy to fake for anyone desiring to be paid not to work, with the payments including extended unemployment benefits and possibly a workers compensation award.

The 10 year treasury note closed last Friday at a 1.71%.

China owns about 11% of all federal debt.

Home Prices:

CoreLogic reported that its Home Price Index (HPI) increased 10.2% in February year-over-year, the largest increase since March 2006 and the 12th consecutive monthly increase.

ISM Services:

ISM reported that its non-manufacturing NMI index fell to 54.4% in March from 56% in February. The new orders component declined to 54.6 from 58.2. Employment declined to 53.3 from 57.2.

Japan's Monetary Experiment

Kyle Bass, one of the intelligent, informed and capable hedge fund managers, views that the Bank of Japan's monetary experiment will eventually result in the BOJ losing control over interest rates and an implosion. CNBC Video Interview Japan already has a horrendous government debt to GDP ratio. The IMF estimates that this ratio stood at 237% at the end of 2012 and will grow to 250% by 2017.  TIME.com

The aggressive BOJ monetary policy is described in articles published by WSJ and Bloomberg.

Bass was one of the investors featured in The Big Short: Inside the Doomsday Machine by Michael Lewis, which is still worth a read. The focus is on investors who made fortunes shorting U.S. mortgage backed securities.


The Los Angeles Times reported that certain LA council were irate over alleged arsenic emissions from an Exide battery recycling plant in Vernon, CA. This plant melts down about 40,000 batteries a day and has been operating in Vernon since 1922.

This kind of news will bring out class action lawyers in force and it does not matter whether anyone has in fact been injured due to those emissions. I do not know whether Exide has any insurance coverage covering this kind of claim. It is probably not a good idea to have this kind of facility near populated areas.

There are other environmental remediation efforts ongoing at locations in Texas, Georgia and Florida. Pages 12-13 FY 2013 - 2012.12.31 Q3

There was a story during the day on 4/4/13 that Exide had hired Lazard and the Akin Gump law firm for advise on "restructuring", Bloomberg, which normally would be understood to mean a consideration of the bankruptcy option. Exide previously underwent a bankruptcy in 2002. {Page 11, FY 2013 - 2012.12.31 Q3}

I own two Exide senior secured bonds which took a hit in response to these two news items, falling close to 10 points in price on 4/4/13: FINRA Investor Information on 2018 Exide Bond The bond closed near 77.5 that day. The 2018 bond rose some last Friday and then fell again yesterday, closing at 74.75.

Those 2018 senior secured bonds are junior to the first lien credit facility. As of 12/31/12, Exide had borrowed $61.1 million under its first lien credit facility, up from $20M on 3/31/12. (Page 9: FY 2013 - 2012.12.31 Q3)

The company had cash and cash equivalents of $80M as of 12/31/12, down from $155.4M as of 3/31/12 (the end of the prior fiscal year). And, as of 12/31/12, the company had $81.7 available under its line of credit, down from $152.8M as of 3/31/12. Exide Technologies Reports Fiscal 2013 Third Quarter Results The company used about $109 in free cash flow in the first nine months of its current fiscal year. {Page 4 Earnings Call Transcript - Seeking Alpha}

Needless to day, the forgoing evidences a significant deterioration in Exide's financial position, compared to its  position when I bought just two of its senior secured bonds.

I was hesitant to buy two and would have preferred to buy just one which indicates my views of the risk when Exide's financial position was far better than now:

Bought 2 Exide 8.625% Senior Secured Bonds Maturing 2/1/2018 at $81.375 (December 2011)("I would have preferred to buy just 1 bond, but two was the minimum order")

I will simply monitor the situation for now. I went from an unrealized gain of approximately $100 to an unrealized loss of approximately $100 as a result of these developments.

Exide has a busted convertible due this September. The last quarterly report noted at page 10 that $55.75M was outstanding on that note. FINRA - Investor Information on Exide 2013 Bond

The stock declined $1.24 (-47.51%) on 4/4/13. I sold out of my LT position in the common shares back in July 2012. Sold 70 EXIDE at $3.71-LT Category Trading in Exide common was halted briefly on 4/4/13, due to a single stock circuit breaker.

After the close on 4/4/13, Exide issued a press release that acknowledged that it had hired Lazard and made no mention of the Akin Gump law firm. Exide Technologies Retains Financial Advisor The purpose for hiring Lazard was to obtain advise "on financing alternatives to maximize the value of the company for all stakeholders" which would include common shareholders. The company also announced that free cash flow for the fiscal 4th quarter would be approximately $50M, higher than the previous estimate of $30M. {However, that previous estimate of $30M in free cash flow had been reduced from a prior estimate, when Exide released its third fiscal quarter results last February. Exide Technologies Reports Fiscal 2013 Third Quarter Results} Exide estimated that it had more than $230M in liquidity as of 3/31/13 consisting of cash and availability under its credit facility.

The recent earnings reports have been just awful:

FY 2013 - 2012.12.31 Q3

Form 10-Q for Q/E 9/30/12

Form 10-Q for QE 6/30/12

Moody's cut the rating on the 2018 bond to B3 from B2 in March and kept its negative outlook.  Moody's

Yesterday's Close for the common stock: XIDE: $1.46 -0.11 (-7.01%)

2018 Bond Closed at 74.6 on 4/8/13: FINRA

2013 Unsecured Convertible Bond Closed at 72.25 on 4/8/13

The market is telegraphing mucho trouble ahead, as manifested by the substantial decline in both the common share price and the 2013 convertible price.

The common has lost nearly 1/2 of its value since 4/3/13 through trading yesterday: XIDE Historical Prices

Microsoft (own 100 Shares)

MSFT was cut to neutral by the Merrill Lynch analyst who also cut the price target to $33 from $35. I would be pleased with a $33 price within 18 months and would probably sell my shares anywhere in the $31 to $33 range. The analyst has the usual concerns about MSFT being able to transition from PCs to tablets and smartphones. Windows 8 does appear to lack momentum.

Another report by Gartner predicts that Microsoft's Windows will become obsolete by 2017 unless it can make considerable headway in tablets and smartphones.

Yesterday's Close: MSFT: 28.59 -0.11 (-0.38%)

Oil Imports:

The Commerce Department reported last Friday that the U.S. trade deficit declined by 3.4% in February, as oil imports fell to the lowest level since March 1996. News Release: U.S. International Trade in Goods and Services


Citigroup Financial Inc. 3.00% Min Coupon Princ Protected Nts for Dow Jones AIG Community Excess Return Index (MKN) will pay its minimum 3% coupon for the annual period ending 4/1/13.  Par value for this senior unsecured note is $10, so I will receive on 4/8/13 an interest payment of $.3 per share. The ex interest date was 4/3/13.

Pricing Supplement No. 2009

As noted in Stocks, Bonds & Politics: Status of Citigroup Funding PPNs: MOU, MBC, MKN, MKZ (2/3/13 Post), MKN paid a 18% coupon in March 2010; a 25.56% coupon in 2011 and a minimum 3% coupon last year.

Bought 100 MKN at $9.85 (Jan 2010 Post)

MKN is now in its final annual coupon period. The note will mature on 4/7/14.

For this last annual period, the relevant data points are as follows:

Starting Value: 136.36
Maximum Level Violation Number= 181.3588 (1.33 X. 136.36=181.36)
Closing Date= 3/31/14

The starting value would be the closing value on 4/1/13 for the DJ UBS Commodity Index Chart - WSJ.com

If the DJ UBS Commodity Index closes above 181.3588 during the current coupon period, MKN will pay its minimum 3% coupon. This note will also pay 3% in the event the Index does not increase by more than 3% over the Starting Value. If the index increases by more than 3% over its starting value as of the Closing Date (3/31/13), and there is no Maximum Level Violation during the annual coupon period, then MKN would pay as its annual interest payment the percentage increase in the Index from the Starting Value (136.36) to the Closing Value on 3/31/13. That amount could be anywhere from a tiny fraction over 3% up to 33%.

Yesterday's Close MKN: MKN: 10.15 +0.00


1. Sold 100 DRE at $17.243-Roth IRA (see Disclaimer): Duke Realty is a REIT that owns and develops industrial and medical properties. Home - Duke Realty The stock recently hit a 52 week high, causing the dividend yield to fall to fall below 4%.

Sold 100 DRE at $17.2423
The shares were bought in two fifty share lots. I could only find a reference to one of the two fifty share purchases. Bought 50 DRE at $13.79-ROTH IRA (11/9/12 Post)

I realized a gain of $309.69 on the shares bought last November in two fifty share lots:

2013 Roth IRA DRE 100 Shares +$309.69
The current quarterly dividend is $.17 per share, which has not been raised since April 2009. The quarterly dividend was cut from $.485 per share to one quarterly payment of $.25 in January 2009 before being cut again to the current $.17 rate. Dividend History | Investor Relations | Duke Realty

While Duke has recovery potential, I do not view that kind of dividend history favorably, which was one motivation for simply harvesting my profit.

Another reason is that the stock has moved too far, too fast in my opinion. The stock closed at $12.77 on 11/15/12 and had risen by approximately 35% since that close to my sale price.

In retirement accounts, I will not generally hold individual stock positions for a long period. I  have primarily invested in individual bonds, preferred stocks, and bond funds, with a smaller allocation to a hodgepodge of high yielding stock CEFs, REITs, individual stocks and BDCs. Those later types of securities are traded frequently, usually after brief holding periods. While the emphasis is on capital preservation and income generation, I have been successful in growing the pile. I view it as highly unlikely that I will spend any of the IRA money, mostly in a Roth IRA now, but the money better be there, rather than in money heaven, if I ever do need it.

I previously bought and sold a 50 share lot in the ROTH IRA. Bought 50 DRE @ 13.45-ROTH IRA (2/4/11 Post)- Sold DRE at $15.31 (5/5/11 Post)

Yesterday's Close DRE: DRE: 17.42 +0.18 (+1.04%)

2. Bought 100 GDO at $19.8-Main Taxable Account (see Disclaimer): I have bought and sold the bond closed end fund Western Asset Global Corp Defined Opportunity Fund  (GDO) numerous times. This fund is currently using a modest degree of leverage. CEFConnect (12.46% leverage)

I recently re-initiated a position in GDO. Item # 5 Bought Back GDO at $19.95-Roth IRA (3/27/13 Post)

Bought 100 GDO at $19.8
I may continue to add to my GDO position in order to generate some income. A detailed discussion of this bond CEF can be found in the post referenced above.

The yield at a total cost of $19.8 is currently 7.27%.

Data from Date of Purchase:

Closing Price 4/2/13= $19.85
Closing Net Asset Value Per Share= $20.78
Discount= -4.48%

Closing Net Asset Value Per Share 4/8/13= $20.93
Closing Price 4/8/13= $19.96 GDO: 19.96 +0.02 (+0.10%)
Discount to Net Asset Value 4/8/13=  - 4.63%

3. Sold 200 STL at $11.39 (Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST)(see Disclaimer):

Sterling Bancorp (STL)  has agreed to be acquired by Provident New York Bancorp (PBNY) in a stock swap.

Provident New York Bancorp and Sterling Bancorp to Merge, Creating a Premier New York Metro Banking Franchise

STL shareholders will receive a fixed ratio of 1.2625 PBNY shares.

The press release also contains a statement that PBNY expects to raise $80M in a bond issuance, using part of the proceeds to redeem STL's trust preferred STLPRA.

I have previously bought and sold STLPRA many times and no longer have a position since I believe that this security would be redeemed at its $10 par value plus accrued interest. Stocks, Bonds & Politics: Trust Preferred Securities: Links in One Post The last transaction was to see 200 STLPRA shares at $10.5 in the ROTH IRA.

This announcement caused close to a 13.5% pop in STL's price, and my position was already profitable before the announcement.  I decided to harvest my profit:

Sold 200 STL at $11.39

2013 STL 200 Shares Total Realized Gain =+$491($200.61 ST; $290.39 LT)

BOUGHT 88 STL AT $8.98Added 112 STL at $8.69 The 88 shares were bought as a partial fill of a limit order. I later added the 112 shares at a lower price to bring the position up to 200 shares.

This completes my second round trip transaction in STL shares. The previous transaction involved only a 50 share lot: Bought 50 STL at $6.58-Sold STL at $10.5 ($176.1 profit)

Total Profit Trading STL Shares=$667.1

Snapshots of trades can be found at the end of my Gateway Post on this basket strategy: Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST

As part of my regional bank basket, I have also bought and sold PBNY. Bought 100 PBNY at $7.4-Sold 100 PBNY at $9.05 (Profit $149.36)

I am monitoring the price of PBNY for a potential buy. My first reaction to this merger is a positive one, based entirely on my pre-existing favorable view of both banks. I simply would like to buy PBNY close to $8 per share rather than at its current price.

The initial market reaction to the proposed merger was positive, as the shares of PBNY rose $.27 cents per share to close at $9.08. {4/4/13 Close: PBNY: $9.08 +0.27 (+3.06%)}

Yesterday's Close STL: STL: $11.16 +0.04 (+0.36%)

Yesterday's Close PBNY: PBNY: $8.84 -0.01 (-0.11%)

4.  Bought 50 of the Bond CEF GHY at $18.77-ROTH IRA (see Disclaimer):

2013 Roth IRA Bought 50 GHY at $18.77

Security Description: Prudential Global Short Duration High Yield Fund (GHY) is a new closed end bond fund that focuses on short term junk bonds.

The fund's benchmark index is Barclay's Global High Yield 1-5 Year Index.

Sponsor's website: Prudential Global Short Duration High Yield Fund, Inc. - Prudential Investments

Holdings: Holdings - Prudential Investments

The fund is currently paying a monthly dividend of $.125 per share. prudential.com.pdf The next one goes ex dividend on 4/17/13.

SEC Filed Semi-Annual Report for the period ending 1/31/13: Prudential Global Short Duration High Yield Fund, Inc. In note 7, the fund notes that has borrowed funds under a credit facility, with a $65M balance outstanding as of 1/31/13.

As noted in that report, the inception date for the fund was 12/26/12. Shares were offered at $20 to the public. There was a sales load of $.90 per share. The fund initially sold 37M shares and later closed on an additional 3,902,005 after the exercise of the underwriters' over-allotment option.

As stated in the Prospectus at page 3, the Fund "will seek to maintain a weighted average duration, including the effects of leverage, of three years or less and a weighted average maturity of five years or less" under "normal market conditions".

GHY page at the CEFA

GHY page at CEFConnect

GHY page at Morningstar

Data from Day Prior to Purchase
Closing Net Asset Value Per Share= $18.99
Closing Market Price: $18.79
Discount: -1.05%

Data From Day of Purchase (4/5/13)
Closing Net Asset Value Per Share= $19.02
Closing Market Price: $18.92
Discount: -.53%

GHY Credit Quality as of 1/31/13:

Snapshot from Semi-Annual Report at page 2
Rationale (1) Tax Free Income Generation in the ROTH IRA: My IRAs are focused on income generation. Of course, under current law, I do not pay taxes on income paid by securities held in the ROTH, nor do I pay income taxes when I withdraw the money. Those two considerations are important in developing my investment approach in that account. The other main consideration is that I do not need to grow the IRA accounts through appreciation, since I am unlikely to ever need the money. Consequently, I am more focused on capital preservation than capital appreciation.

Nonetheless, the compounding effect of income generation and some excellent buys over the years, particularly in 2009, have resulted in a good total return.

While GHY invests in junk bonds, the fund does have a diversified portfolio which lessens the credit risk issue. The short duration lessens interest rate risk.

The yield at a total cost of $18.77 would be about 8%. I do not know now how much of the dividend will be supported by a return of capital. At 8%, money doubles in 9.01 years. Estimate Compound Interest

The general idea with this type of investment is to collect several monthly dividends and to exit the position at any profit whatsoever.

Risks: (1) Credit Risks: Needless to say, junk bonds have a much higher default rate than investment grade bonds. The recovery rate after a default will generally be significantly lower for junk bonds. A zero recovery for senior unsecured bond owners is not unusual when there is a lot of senior secured debt and the enterprise is insolvent.

(2) Currency Risks: This fund does own foreign junk bonds which exposes investors to currency risk.  Prudential has a similar fund, ISD, that has a lower weighting in foreign securities. (report for the period ending 11/30/12 Prudential Short Duration High Yield Fund, Inc.). That fund closed last Friday, the day of my GHY purchase, at a 5.07% PREMIUM to its closing net asset value that day of $19.33. (ISD page at CEFConnect)

(3) Junk Bonds Yields Are Low: The composite junk bond yield is currently less than 6%, which is abnormally low as shown in this chart:  BofA Merrill Lynch US High Yield Master II Effective Yield - St. Louis Fed There is certainly more room for a decline in price and a rise in yield than for a rise in price and a decline in yield. The short duration of the fund will provide some protection for a rise in yields due to declining prices, as the fund could hold existing issues to maturity and then reinvest the redemption proceeds in higher yielding securities.

(4) Normal CEF Risks: One of the most prominent CEF risks is the expansion of the discount to par value after an investor purchases shares significantly greater than any change in net asset value per share or even when net asset value has increased some. The reverse is also true. The investor could receive a benefit from a narrowing of the discount accompanied by a rise in the net asset value per share. In some cases, the CEF may even go from a discount to NAV per share to a premium, or vice versa.

Risks are discussed in the Prospectus starting at page 42: Prospectus

Future Buys: I may average down by buying another 50 shares. I would prefer buying any additional shares at a greater than 5% discount to net asset value and at least 5% below my last purchase price.

Yesterday's Close GHY: GHY: 18.85 -0.07 (-.35%)
Closing Net Asset Value Per Share= $19.04 (up 2 cents from Friday)
Closing Market Price= $18.85
Discount= -.98%

5. Initiated Position in the Vanguard Capital Opportunity (VHCOX) Fund (see Disclaimer): This fund is managed by the PRIMECAP Management Company.

I initiated this position last Friday.

I read an article at Morningstar that Vanguard had reopened this fund on 4/3/13 to new individual investors. The fund had been closed to new investors since March 2004. Just to put my foot in the door, I initiated a position.

VHCOX is currently rated 4 stars by Morningstar.

Sponsor's webpage: Vanguard - Vanguard Capital Opportunity Fund Investor Shares

The expense ratio is .48%.

This is a snapshot of this fund's historical performance compared to its benchmark:

While the fund uses a midcap growth index as a benchmark, one has to use a liberal definition of midcap to find one of those in the fund's top ten holdings as of 2/28/13:


As of 2/28/13, the fund owned 121 stocks.

Dividends are paid annually in December. I would not anticipate much of an income dividend. Any meaningful dividend yield would have to be sourced from capital gains. Vanguard - Capital Opportunity Fund Investor Shares - Distributions

Yesterday's Close: VHCOX: $38.72 +0.27 (+0.70%) 

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