Bought Roth IRA: 100 IGI at $19.43 & 50 GYC at $20/Intel/Bought 100 ISM at $22.8/Bought 50 AMNB at $21.16/Bought 50 MSPRA at $19.25-ROTH IRA/Bought 50 USBPRH at $18.83

Big Picture Synopsis

Stocks:

Stable Vix Pattern (bullish)
Friday's Closing Price:  VIX: 15.86 +0.09 (+0.57%) 

Vix Asset Allocation Model Explained Simply

Use of the VIX as a Timing Model

Short Term: Expecting a 10%+ Correction

Intermediate and Long Term: Bullish

Money Manager Clifford Asness, who founded AQR Capital Management, states as a fact that a typical balanced portfolio, 60% in stocks and 40% in bonds, "has been cheaper than it is now 98% of the time." Barrons Bonds have been cheaper "about 90% of the time" while stocks have "been cheaper than now more than 80% of the time". In short, both stocks and bonds are expensive in his opinion.

The technical analyst Ralph Acampora believes the market is on the cusp of a cyclical bear market. He has lowered his DJIA target to 12,000. WSJ I view that projection as unlikely, having less than a 1 in 10 probability without a severe recession.

Unlike Acampora, I do not view U.S. cruise missiles strikes in Syria as likely to have anything other than a temporary impact on stock prices.

The market reacted badly last Friday morning, shortly after Putin reportedly said that Russia would "assist" Syria if attacked. I regarded that statement as being nothing more than an affirmation that Russia would continue supplying weapons to Syria. It would just be idiotic in the extreme for Putin to engage in any military confrontation with the U.S. over limited cruise missile strikes in Syria after Assad used chemical weapons to murder civilians including children.

Iran is another potential problem. If Iran uses that attack as an excuse to have its proxies attack the U.S., then we could end up in a broader conflict that may be problematic for the markets. Last week the WSJ reported that the U.S. claimed to have intercepted messages from Iran's government instructing militants in Iraq to attack U.S. interests. WSJ.com; Reuters Those militants have fired rockets at the U.S. embassy in the past on orders from Iran's Revolutionary Guard's Qods Force. So that kind of attacks would not likely lead to any U.S. response.

Another one of his concerns is the upcoming debt limit negotiations. I would downplay the likelihood that the GOP will shut down the government unless Obama meets their demands for spending reductions and/or defunding Obamacare. US News and World Report

While the GOP did manage to accomplish that task during the first Clinton term, the brief shutdown ultimately backfired on them by giving Clinton renewed popularity. Salon.com While a government shutdown would be popular with the GOP's Tea Party wing, independents will likely view a government shutdown or a government default triggered by a refusal to increase the debt limit as irresponsible. While independents are not needed to win elections in frequently gerrymandered congressional districts, they do hold the balance in swing states for both Presidential and senate elections, as the GOP has discovered in recent elections.

Even Harry Reid won reelection by a comfortable margin when the GOP ran the likes of Sharon Angle against him. Nevada - Election Results 2010 And Akin (R) received only 39.2% of the votes in Missouri's 2012 senate race, which I view as a red state that Obama lost 53.9% to 44.3% to Romney: Senate Map - Election 2012 - NYT; President Map - Election 2012 - NYT

Bonds:

Short to Long Term: Slightly Bearish Based on Interest Rate Normalization (The Difficult Path to Interest Rate Normalization)

The bond forecast is based solely on the ongoing interest rate normalization process and assumes that the anticipated average annual inflation remains in the 2% to 2.25% range over the next ten years.

Bonds had a bad week until Friday, as the economic reports were positive and supportive of FED tapering starting this month. Another anemic jobs report, released yesterday, which included a 72,000 downward revision for the prior two months, provided support for bonds. While I still expect the Fed to start tapering this month, the poor jobs report may support only a baby step as a starting gesture.

The chief U.S. economist for Societe Generale, Aneta Markowska, expects the tapering to start in September and end in March 2014. By year end, the 10 year is expected to hit 3.25% and 3.5% by mid-2014. Aneta expects the tightening cycle to start in mid-2015, with the federal funds rate hitting 1.25%, rising to 3.75% by year end 2016 and 6.5% by 2017.

If that forecast proves prescient, and I have been predicting similar numbers (except for the 6.5%% federal funds rate in 2017), the floating rate securities that I am currently buying should work out long term, even though they are declining in price now. My current prediction for the federal funds rate in 2017 is 4%. A 6.5% rate would require consistently accelerating inflation numbers, probably moving over 3% and toward 3.5%-4% on a non-temporary basis. The market currently has benign CPI numbers, averaging close to 2% per year.

Bill Gross claims that the market is forecasting a 4% federal funds rate by 2018. The June 2015 federal funds future contract was trading at .74% on 9/3, MarketWatch, and had increased to .83% later in the week, MarketWatch. Ultimately, it will depend on inflation and inflation expectations.

A 4% to 5% federal funds rate is in the normal range historically. Effective Federal Funds Rate - St. Louis Fed My current best guess is that the federal reserve will have to raise the federal funds rate to 4% before 2018, most likely during 2017 due to rising inflation and inflation expectations. This kind of forecast will change with the inflation data.

The security discussed in Item # 1 below will hopefully look better when and if the federal funds rate hits 4%.

*********

Recent Economic Reports:

The BLS reported yesterday that 169,000 jobs were added in August and the unemployment rate declined to 7.3%. Employment Situation Summary. The consensus was for 175,000. The average workweek increased by .1 hour to 34.5 hours. Average hourly earnings increased by $.05 to $24.05. Over the past year, hourly earnings have increased by 2.2%. For June and July, the BLS decreased its job growth numbers by 74,000. July was revised from +162,000 to +104,000. The labor participation rate declined to 63.2%. If that rate had remained steady, the unemployment rate would have risen to 7.5%. In August, 7.9M Americans wanted full time jobs but could only find part time ones. The U-6 number declined to 13.7% from 14%. Table A-15. Alternative measures of labor underutilization

I view that report to be barely good enough for the Fed to start tapering its treasury and MBS purchases this month.

ADP reported that private sector jobs increased by 176,000 in August.

The ISM U.S. manufacturing PMI expanded at the fastest pace in more than two years, rising to a better than expected 55.7 from 55.4 in July. The new orders component surged to 63.2 from 58.3. The production index increased to 62.4.

The August ISM U.S. services PMI rose to 58.6 from 56 in July. The consensus estimate called for a decline to 55. The business activity index rose to 62.2 from 60.4. The new orders component rose to 60.5 from 57.7. The employment index rose to 57.2 from 53.2.

CoreLogic reported that home prices rose 12.4% in July Y-O-Y: CoreLogic

The government revised second quarter productivity to a 2.3% annual rate from the prior .9% estimate. Second Quarter 2013, Revised Output rose more quickly than hours worked by labor. 

China's PMI index for manufacturing rose to 51 in August from 50.3 in July. The new orders component rose to 52.4 from 50.6 in July.

The China HSBC services PMI rose to 52.8 in August from 51.3 in July. markiteconomics.com

European manufacturing PMI rose to a 26 month high in August, rising to 51.4 from 50.3 in July. The countries hitting two year or better highs include the Netherlands at 53.5 (27 month high); Germany 51.8 (25 month high); Spain at 51.1 (29 month high); and Greece at 48.7 (44 month high). markiteconomics.com

The UK manufacturing PMI hit a two-and-a-half year high at 57.2 in August. Output and new orders rose at the fastest rates since 1994. markiteconomics.com 

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Intel (own):

Intel's stock had an unusually good day last Wednesday:

Closing Price 9/4/13:  INTC: $22.64 +0.57 (+2.57%)

The occasion was the introduction of a portfolio of new datacenter products. The portfolio includes the second generation 64 bit Intel Atom C2000 system-on-a-chip (SoC) for microsevers, cold storage platforms, and for entry networking platforms. The new SoCs are Intel's first products based "on the Silvermont micro-architecture, the new design in its leading 22mm Tri-Gate process delivering significant increases in performance and energy efficiency," according to Intel.

The new product line was favorably reviewed by the analyst at RBC Capital Markets who reiterated an outperform rating and a $29 price target. (Tiernan Ray's Tech Trader Daily Blog at Barrons) According to Ray, a bearish analyst from Raymond James viewed the products differently, noting that there was an "impressive number" of them, not that the products were themselves impressive, and highlighted in his view only "Intel's sense of urgency to defend its server processor supremacy".

A transcript of the Q & A session during Intel's investor conference, held on 9/4/13, can be found at Seeking Alpha.

I apparently had changed my dividend distribution option back to cash.

My average cost per share is $17.91.

This is a link to a recent negative article about Intel: Seeking Alpha

I would agree with that author that Intel has been a disappointing investment. Without question, Intel has been slow to develop products for the tablet and smartphone. And, recent earnings reports have reflected the over reliance on the PC market where Intel had flourished for so long. As I stated in a comment to another article, I am giving Intel another year to get its act together and will be evaluating the success of its new products particularly those offered in the tablet and smartphone space. It is easier to find my recent Intel comments in my SA profile section: southgent1951's Comments on INTC

Friday's Closing Price: INTC: $22.67 +0.07 (+0.31%)

******************

1. Bought 50 GYC at $20 in Roth IRA (see Disclaimer)

Snapshot of Trade:

2013 Roth IRA Bought 50 GYC at $20 

Security Description: The Corporate Asset Backed Corp. CABCO Series 2004-102 Trust SBC Communication Inc. Floating Rate Certificates (GYC) is an Exchange Traded Bond. GYC is a Synthetic Floater in the Trust Certificate form of legal ownership.

For this security, UBS created a grantor trust, administered by an independent trustee, and sold to that trust senior unsecured SBC Communication bonds (now AT & T). Those bonds are commonly referred to as the underlying security. The AT & T bonds mature on 6/15/2034 and have a 6.45% coupon.

The grantor trust raised the funds to pay UBS through the public sale of trust certificates, each with a $25 par value. The owners of the trust certificates are the beneficial owners of those bonds.

UBS also entered into a swap agreement with the trustee. As a result of that agreement, the trustee delivers to the swap counterparty, originally identified in the GYC prospectus as UBS, the interest paid by AT & T, and the swap counterparty delivers to the trustee the amount owed to the GYC owners.

For as long as the swap agreement remains in effect, the owners of GYC are entitled to receive quarterly interest payments at the greater of 3.25% or .65% over the 3 month Libor rate, with a 8% per annum cap, on a $25 par value. GYC Prospectus

Assuming no early termination of the swap agreement and/or the trust, GYC matures at the same time as the underlying bond which is 6/15/34.

Prior Trades: Item # 2 Bought GYC at $15.5: Synthetic Floating Rate Bond (May 2009); Added 50 GYC at $21.60 in Roth IRA (February 2011); Item # 1 Stocks, Bonds & Politics: Sold 100 GYC at $22.22 (July 2012). 

2012 Roth IRA 100 GYC +$357.45 

I also had a 40 share flip in the regular IRA. Bought 40 of the TC GYC at $21 (September 2010)- Item # 4 Sold GYC at $22.3 in regular IRA (November 2010).

Rationale: This type of security does contain some deflation/low inflation and problematic inflation protection in the same security. It consequently provides some interest risk protection that the underlying fixed coupon AT & T bond does not provide.

I know now my minimum and maximum interest yield. The minimum coupon assumes the continued payment of the 3.25% minimum coupon while the maximum coupon is 8%. Since those coupons are paid on a $25 par value, my effective yield will be higher at both the minimum and maximum levels:

Assuming $20 Total Cost Per TC:
Minimum 3.25% Coupon=   4.06%
Maximum 8.00% Coupon= 10%

Depending on the future 3 month Libor rate, the yield will fluctuate between the minimum 4.06% to the maximum of 10%.

An increase in the coupon will occur when the 3 month Libor rate exceeds 2.6% during the relevant computation period.

At a 5% Libor rate, the coupon becomes 5.65% and the effective current yield at a total cost of $20 per TC would be about 7%. The effective yield at a 4% 3 month LIBOR, with the same assumptions, would be about 5.81% (.0465% x. $25 par value=$1.1625 annually dividend by $20 cost per share=5.8125%)

The owner of the trust certificate is exposed to the credit risk of the underlying bond. I am currently comfortable with the credit risk. The underlying bond is currently rated A3 by Moody's and A- by S & P. FINRA The underlying bond prospectus can be found at the SEC web site.

{There has been one example where the swap counterparty declared bankruptcy. That entity was Lehman. The trustee took the position that the bankruptcy filing was a swap termination event, not a trust termination event, and consequently started to pay the owners of JBK the payments made by the underlying security whether then the synthetic floating rate, Bought 50 of the TC JBK at $16 June 2009; Bought 100 JBK at $16.15 July 2009; New Information about JBK July 2009; Sold 100 JBK @ 21.59 October 2010; Sold 50 JBK @ 21.59 October 2010; Bought 50 JBK at $21.75-ROTH IRA; Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater Positions}

Risks: (1) Interest rate risk is currently the primary risk. This security has a low minimum coupon that is not likely to increase, as intermediate and long term rates rise due to interest rate normalization. The recent decline in the share price is probably due to that rise in rates.

GYC hit $25 in 5/17 and was trading over $24 late in May before hitting the skids. GYC Interactive Chart

A different situation would be presented when the rise in intermediate and long term rates was caused by an increase in inflation and future inflation expectations that would provoke the Federal Reserve into raising the federal funds rate. I would then expect this security to rise or at least maintain its value in that type of scenario, depending on the GYC market price when the short rates start to rise and the market's expectations of the potential rise in short term rates.

At some future time, the 3 month Libor rate may rise sufficiently to trigger an increase in the coupon. The increase will occur when the 3 month LIBOR rate rises above 2.85% during the relevant computation period.

A 4.5% to 5% 3 month LIBOR has historically been an average range, sometimes higher or much higher, and substantially lower now and for at least the next several years

Daily Data-Federal Funds Rate Since 7/1/1954
Daily Data-3 Month Libor Since 1/2/1986

A rise in the coupon above the minimum 3.25% level will not happen for as long as the FED continues ZIRP and for an uncertain period thereafter. A lot depends on future inflation numbers that will impact both the size and the pace of Fed tightening. The 3 month Libor rate will be linked to the federal funds rate.

In the prior tightening cycle, the federal reserve raised the federal funds rate from 1% to 5.25% between June 2004 to July 2006. The 3 month Libor rate followed in tandem the increases in the federal funds rate.

Currently, I do not anticipate that the FED will start a tightening cycle by raising the federal funds rate prior to 2015. Unless there is a significant pick up in inflation and inflation expectations, I would further anticipate a much slower rise in the federal funds rate compared to the prior tightening cycle.

(2) The second risk involves what I will generally call the GJN problem. There is a NYT article describing what Wells Fargo did to the mops and pops who owned GJN. NYTimes.com; Stocks, Bonds & Politics: GJN-Wells Fargo-New York Times I brought this matter to the attention of Floyd Norris at the NYT.

In a prior post, I discussed this potential risk in great detail. Sold 100 GYC at $22.22-Ongoing Reassessment of Synthetic Floaters (July 2012).

I am not going to copy or repeat that lengthy and frequently complicated discussion. Instead I will just briefly summarize this complicated issue and emphasize the importance of both reading and understanding the prospectus prior to making an investment.

There is an important difference between GYC and GJN.

AT & T can not redeem the underlying senior bond and avoid a make whole payment.

In the now infamous GJN situation, J P Morgan relied on an escape hatch that purportedly allowed it to avoid a make whole payment. I am surprised that no one has challenged JPM on whether or not it invoked that escape clause in a timely manner. Stocks, Bonds & Politics: District Court Decision in Turkle Trust v. Wells Fargo (N.D. Cal)/Summary of Argument: JPM Potential Obligation to Pay Make Whole for its Recent 2035 TP Redemption/Other JPM Capital Trust Preferred Securities: Language on Make Whole Payment and Capital Treatment Event

A make whole payment made by AT & T could be used to pay the swap termination fee triggered by an early redemption of the AT & T senior bond.

Another possibility is that the owner of the call warrant will redeem the certificates at par value plus accrued interest when and if AT & T redeems the bonds. That would occur when the make whole payment would exceed the swap termination fee.

The swap termination fee is payable after certain trust termination events that do not involve a redemption of the underlying bonds by AT & T, Prospectus at pp. S-7, S-32-33. Those events include the bankruptcy of AT & T; an AT & T payment default without a bankruptcy; a legal change that makes it unlawful for the trust to perform; and a SEC reporting failure by AT & T. Any of those occurrences listed in the prospectus, while unlikely, would be disastrous for the owners of GYC, since any such event would trigger a swap termination fee without a make whole payment being received from AT & T. At the present time and for the foreseeable future, I am not simply not concerned about AT & T filing for bankruptcy or defaulting on its debt,  and I can not reasonably foresee a law change that would cause the trust to default. Those are black swan type of events.

While I can not say with certainty that a make whole payment for an early redemption would be sufficient to cover the swap termination fee, both amounts would be calculated by taking the principal amount and all future interest payments and then discounting to present value. The major difference is that there is a specific provision in the AT & T bond prospectus that specifies exactly how that calculation has to be done.

The existence of a make whole payment would also make it highly unlikely that AT & T would redeem the underlying bond for the foreseeable future. It was the redemption of the underlying bond that triggered the swap termination fee payment in the GJN situation.

While it is just my opinion, nobody in their right mind would redeem a long term bond with a 6.45% coupon when the optional redemption requires a make whole payment.

The make whole payment would just be huge, at least until shortly before the maturity of this bond. It would consist of the principal amount of the bond ($1,000) and all interest payments from the time of redemption until the scheduled maturity date on 6/15/34, discounted to present value using the rate of a comparable maturity treasury security plus .2%. A low discount (3%) rate juices the make whole payment, compared to a higher rate. (see underlying security prospectus at page S-11 to S-12).  

Still, the GJN situation has put a damper on my enthusiasm for these currently low yielding securities.

Future Buys/Sells: Unless this security falls significantly, I am not likely to add more. By significant, I would need a price near $15 with no adverse event causing the decline. Even at a $15 price, the yield at the minimum 3.25% coupon would just be 5.42%. The security would also be more attractive at that price due to higher potential yield due to the Libor float. My first purchase was at $15.5 in 2009 as noted above.

I will likely sell the 50 shares at a price north of $23. This security has a limited purpose in my IRA, which involves an effort to create some balance and interest rate sensitivity to the heavier weighted fixed coupon bonds and bond funds that are owned in those accounts.

If and when I become rationally concerned about AT & T's solvency, I would of course sell this security. The owner of the TC bears the credit risk and there is the additional risk in the event of insolvency that triggers a debt payment default of a swap termination fee being paid without a make whole payment offset.

GYC: $20.11 (+0.02%)

2. Bought 100 ISM at $22.8 (see Disclaimer):

Snapshot of Trade:

2013 Bought 100 ISM at $22.8-Taxable Account

Security Description: The SLM Corp.  CPI-Linked Medium Term Notes Series A 2018 (ISM) is functionally equivalent to OSM. Both are senior unsecured notes issued by SLM Corporation, also known as Sallie Mae. Both have $25 par values and make monthly interest payments based on a spread to CPI. The only differences are that ISM has a slightly higher spread and matures a few months after OSM.

ISM pays a 2.05% spread to a CPI calculation and matures on 1/18/2018. Prospectus OSM has a 2% spread and matures on 3/14/2017. Given my concerns about SLM, particularly in 2009-2010, I would buy OSM before ISM, due to the shorter maturity.

I recently discussed repurchasing a position in OSM: Bought 100 OSM at $23.12-Roth IRA I mentioned in that post that I would not buy another bond issued by SLM in a retirement account, due to the risk.

The next monthly interest payment will be $.0724 per share:

That penny amount is calculated as follows, using the non-seasonally adjusted CPI numbers (stlouisfed):

May 2013: 232.945
May 2012: 229.815
Difference: 3.13
Divide: 3.13 by 229.815=.01362% (annual CPI increase)
Add Spread of .0205 to .01362= .03412% (coupon)
Multiply .03412% x. $25 par value=$.853 (annual rate)
Multiply $.853 x. 31/365=$.0724 per share (monthly rate per share)

So this calculation is basically adding the spread to the annual CPI increase, with a 3 month lag, and then figuring out the number of days in the monthly coupon period.

Rate for November Payment:

July 2013: 233.596
July 2012: 229.104
Difference: 4.492
Divide 4.492 by 229.104= .01961% (annual CPI Increase)
Add Spread of .0205% to .01961%= .04011% (coupon)
Multiply .04011% x. $25 par value= $1.00275 (annual interest)
Multiply $1.00275 x. 31/365= $.08517 (monthly rate per share)

Prior Trades: I have traded OSM more. My prior ISM trades can be found in these links: Item # 4 Bought 50 ISM in IRA at $11.85 (August 2009)- Sold 50 ISM at $12.25 (October 2009); Item # 4 Bought 50 of the CPI Floater ISM at $20.62-Item # 1 Sold 50 ISM at $23.4 (9/27/12 Post); Item # 1 Bought 50 ISM at $19.5 (October 2011)- Item # 1 Sold 50 ISM at $23.84 (11/2/12 Post)

This is a snapshot of the two 50 share lots sold in 2012, both at higher prices than my recent re-entry price of $22.8:

2012 ISM +$322.64 (2 lots) 

Rationale and Risks: The same rationale and risks discussed earlier, in connection with the OSM buy, are applicable to ISM.

Credit risk is far more relevant than interest rate risk. The relatively short maturity (1/18/18) and the floating rate tied to CPI mitigate interest rate risk to an inconsequential level in my opinion. Credit risk is certainly present given SLM's huge debt load and is reflected in the junk ratings from two of the three main rating services.

However, I am more comfortable now with SLM's credit risk now than I was in 2009-2010 which caused me to have a hair trigger on both of the SLM CPI floaters. I was far more comfortable back then holding PFK, a similar CPI floater issued by Prudential.

Assuming SLM survives to pay the principal at maturity, I have a built in profit of about $210 plus the monthly interest payments that will vary, up and down, depending on the reported CPI numbers.

If I assumed an average annual CPI rate of 2%, then the current yield with the 2.05% spread would be about 4.44% at a total cost of $22.8 per share. The YTM with those assumptions would be about 6.77%.

Fixed Coupon Senior SLM Notes For Comparison
4.45%  12/15/17
5.6% 3/15/18

I suspect that the recent decline in ISM's price is related to the rise in interest rates rather than to any credit risk concerns. ISM Interactive Chart During May, this security was trading over $24.5 before hitting an air pocket.

Given the short maturity and CPI float, I question the rationality of that decline. This security matures in less than 5 years and has a built in protection for an unexpected rise in inflation. The $22.8 is a 8.8% discount to the $25 par value which juices the YTM.

Even at par value, ISM would most likely provide something close to a 4% yield, assuming only a 2% average annual CPI from now until maturity. The inflation protection has some value in addition to the current yield.

The 5 year treasury has risen from a .65% yield on 5/2/13 to 1.6% when I purchased ISM. Daily Treasury Yield Curve Rates A further rise in the five year treasury is likely to be restrained by a continuation of ZIRP and benign inflation expectations built into the 5 year TIP pricing. On 8/29/13, the break-even spread for the 5 year TIP was 1.8%. The 2 year nominal treasury closed at a .39% yield on 8/29.

Future Buys-Sells: I am not likely to buy more SLM bonds. I may sell ISM if and when the price exceeds $24. The price was over $24.5 during May: ISM Interactive Chart

Friday's Closing Price: ISM: $22.65 +0.13 (+0.58%)

3. Bought 100 IGI at $19.426-ROTH IRA (see Disclaimer): I have never bought this unleveraged bond CEF at a lower price. I could have bought it cheaper yesterday.

While the bond CEFs owned in the Roth IRA contributed to a small percentage loss during August, the income generation almost offset most of the market value losses. IGI pays monthly dividends which is also viewed positively since the two Roth IRA accounts are geared primarily toward income generation and the use of that cash flow to buy more income generating securities.

Snapshot of Trade:

2013 Roth IRA Bought 100 IGI at $19.426

Security Description: The Western Asset Investment Grade Defined Opportunity Trust  (IGI) is an unleveraged closed end fund that invests primarily in investment grade bonds.

Dividends are paid monthly at the current rate of $.10 per share. Western Asset Investment Grade Defined Opportunity Trust Inc. (“IGI”) Announces Distributions for the Months of September, October and November 2013

At that rate, the dividend yield at a total cost of $19.43 is about 6.18%.

Like the bond CEF GDO, IGI will liquidate on or about 12/2/2024

Data as of Thursday 8/29/13 (Day Before Purchase)
Net Asset Value Per Share: $21.14
Market Price: $19.51
Discount: -7.71%

Data as of Friday 8/30/13 (Day of Purchase):
Net Asset Value Per Share= $21.18
Market Price= $19.59
Discount: -7.51%
Discount at $19.43 Purchase Price= -8.27%

The fund has normally sold at a premium to its net asset value:

Average for 3 Years: +.17%
Average for 1 Year: +1.12%

CEFConnect Page for IGI

Morningstar Page

Sponsor's webpage: Individual Investor

As of 6/30/13, the sponsor claims that the "effective duration" was 6.79 years.

The credit quality is weighted in BBB and A rated bonds:

(located under "portfolio characteristics" at sponsor's website; CEFConnect provides this information also)

Last SEC Filed Shareholder Report: Period Ending on 5/31/13 (net unrealized appreciation at $26.948+M)

Prior Trades: I have traded this bond CEF for small profits in the IRA and taxable accounts.

It probably makes more sense to buy it in the Roth IRA where I transform the distributions from taxable non-qualified dividends into tax free dividends. A 6+% tax free rate looks more enticing than a 6+% taxable one.  

2010 Taxable $89.55

2011 Regular IRA $120.13

2011 Roth IRA +$65.78

2011 Taxable +$186.61

Total Realized Gain to Date: $462.07

Bought 100 CEF IGI at $19.89 in IRA; Added 100 of the CEF IGI at $19.78 (February 2010); Sold 100 IGI at 21.26 In IRA (June 2010); Sold 100 IGI at $21.26 In IRA (June 2010); Sold:100 IGI @ $20.75 (November 2010); Added 100 IGI at $19.65 (March 2011); Sold 100 IGI @ $20.76 (May 2011); Bought 100 IGI at $20.7 in Roth IRA (July 2011); Bought 100 IGI at $20.69 (August 2011); Sold 200 IGI at $21.52+ (August 2011)

Rationale: I am simply attempting to generate some income in the ROTH. The funding source for this purchase was a money market fund yielding .01%.

The fund is weighted in investment grade bonds, and I am comfortable with the credit risk associated with a diversified fund owning over 200 investment grade bonds (total # 249 as of 6/30/13)

Risks: The two main risks are interest rate risk and the risks associated with bond CEFs. Some of the interest rate risk is mitigated by the relatively short duration and the fund's 2024 liquidation date

A CEF type risk is illustrated by the 10%+ loss in value associated just with the movement from a 3.55% premium to net asset value, as of 5/6/13, to a discount of 7.71% on 8/29/13. A new buyer missed that loss, but may catch another one with a further expansion of the discount.

When the net asset value per share is declining as the discount to net asset value expands, then that is just known here at HQ as the Double Whammy-Not Good for those unfamiliar with that colloquialism.

Unadjusted for dividends, the net asset value per share declined from $22.63 on 5/6 to $21.14 as of 8/29, a decline of 6.58%. Yet the market value has gone from $23.43 to $19.51 as of 8/29, a 16.73% decline. The difference is to the change from a premium price to a discounted price.

The fund had 4 ex dividend dates for its monthly $.1 per share distribution. Adjusting for those dividends, the decline in net asset value per share is reduced to 4.8%.

Future Buys and Sells: I may start to average down with 50 share purchases, when and if the discount expands to over 12% and the current yield exceeds 7%.

Friday's Closing Price: IGI: $19.34 (0.00%)

4. Bought 50 AMNB at $21.16 (REGIONAL BANK BASKET STRATEGY)(See Disclaimer):

Snapshot of Trade:

Security Description: The American National Bankshares (AMNB) is the holding company for American National Bank headquartered in Danville, Virginia. American National has 16 banking offices in Virginia and 9 in North Carolina. Locations

I have had this bank on my regional bank monitor list. Recently, I reviewed an SEC filed investor presentation and was sufficiently impressed to buy a 50 share lot. SEC Filed Investor Presentation That presentation has a number of charts that illustrate AMNB's outperformance, compared to their peers, on what I view as key metrics. Those metrics include the NPL ratio and charge offs to total loans (p.16) ; net interest margin, efficiency ratio and ROA (page 12); and dividend yield (page 9).

AMNB acquired MidCarolina Financial on 7/1/11 in exchange for 1,612,157 shares. This acquisition added 8 branches in Alamance and Guilford counties in NC.

Recent Earnings:

2013 2nd Quarter vs. 2012 2nd Quarter:
SEC Filing
Net Income: $4.21M / $4.274M
E.P.S. Diluted: $.53 / $.54
Net Interest Margin: 4.16% / 4.57%
Efficiency Ratio: 57.06% / 55.56%
NPA Ratio: .88% / .99%
NPL Ratio: .73% / .99%
Coverage Ratio: 217.5 / 151.33%
Annualized Net Charge Offs (recoveries) to Total Loans: (.07%) / .16%
ROAA (return on average assets): 1.29% / 1.31%
ROAE (return on average equity): 10.14% / 10.86%
ROTE (return on tangible equity):  14.66% / 16.62%
Tangible Assets to Tangible Equity: 9.6% / 9.11%

Prior Trades: None

Rationale: AMNB appears to be a conservatively run bank that is gradually expanding its geographic footprint. The current annual dividend rate is $.92 per share or $.23 paid quarterly. Stock Splits & Dividend At that rate the dividend yield is good at about 4.35% based on a total cost per share of $21.16. The dividend was not cut during the recent Dark Period, but it has not been raised either since the 2007 second quarter.

The quarterly rate was $.075 in the 1996 first quarter and was raised every year until the bank froze the quarterly payment at $.23 per share. Hopefully, the bank will return to a dividend growth path soon.

The capital ratios are good:

10-Q at page 53.

As shown in the data above, the ROA, ROE, coverage ratio, net interest margin, NPL and NPA ratios, charge offs and the coverage ratio are good. Those are the kind of metrics that give me some comfort as an investor. I am not looking for regional banks populated by masters of disaster.

Risks: The usual ones for a small regional bank.

The most significant risks are loan losses suffered during a serious economic downturn, increased regulation that drives up costs and net interest margin compression caused by the federal reserve's abnormal monetary policies. Hopefully, that last risk has started to abate some, as intermediate and longer term rates rise due to the anticipated end of QE, while the cost of funds remain near zero as the FED continues ZIRP.

For that reason, it is important to examine how a bank fared during the Near Depression period. AMNB did not cut its dividend and remained profitable. The NPA ratio did exceed not 1% in either 2008 or 2009. Charge-offs to total loans did not exceed .24% between 2008-2012. This kind of data can be found in an Annual Report, SEC Form 10-K. I found the relevant table at page 23, Item 6 of the 2012 Annual Report. dec312012_10-k

While that kind of performance is not a guarantee that the bank will successfully navigate the next recession, AMNB's numbers for the last recession indicate to me that the bank's managers are prudent and conservative. Those downturns certainly expose those banks who are making poor lending decisions.

While only 3 analysts follow this company, the current consensus estimate is for $1.99 this year and $1.58 in 2014. AMNB Analyst Estimates If that forward estimate proves prescient, this stock could easily lose market value. I can only say that these analysts have been way off in their 2013 second quarter estimate, as well as their 2012 2nd quarter consensus forecast.

Without reading their reports, which I do not have access, and cross examining the analysts, I can not know why their estimates are so low.

Raymond James did downgrade the stock to market perform on 7/22/13, purportedly based on valuation. The share price closed at $24.61 on 7/22, AMNB Historical Prices. At about the same time, Keefe, Bruyette and Woods raised their target price from $21.5 to $24.

Future Buys and Sells: Before buying another 50 shares, I would want to see an improvement in the E.P.S. numbers Y-O-Y.  There is room to the upside provided the bank can establish modest earnings growth and at least start raising the dividend again. I would be a seller at $24+, unless I see those improvements. E.P.S. and dividend growth are my major concerns.

Friday's Closing Price: AMNB: $20.95 -0.14 (-0.66%)

5. Bought 50 MSPRA at $19.25-Roth IRA (see Disclaimer): Except for SCEDN, which is owned, the equity preferred floating rate securities have been in a downdraft since intermediate and long term interest rates started to move up. BOUGHT 50 SCEDN AT $84 (October 2009) SCEDN is unusual in that it is currently paying a spread to the 30 year treasury (1.45% over the highest of the 3 month Libor, the 10 year treasury or the 30 year treasury). The issuer, Southern California Edison, has already redeemed some of the shares. Partial Redemption SCEDN (May 2012). The rise in the 30 year treasury consequently makes it even more likely that the issuer will redeem this security at its $100 per share par value plus accrued dividends, which is another reason why it is probably hugging the $100 price level.

Snapshot of Trade:

2013 ROTH IRA Bought 50 MSPRA at $19.25

Security Description: The Morgan Stanley Non-Cumulative Preferred Series A (MS.PA) is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .7% above the 3 month LIBOR rate on a $25 par value. Prospectus

A general discussion of this type of security can be found in Advantages and Disadvantages of Equity Preferred Floating Rate Securities.

This security will be senior only to common stock. The prospectus does contain a standard "stopper" provision that would prevent Morgan Stanley from paying a cash dividend to the common shareholders and eliminating the MSPRA dividend. (see pages S-2 to S-3; S-14 to S-15). Once the common dividend is eliminated, there would be nothing legally that could stop MS from eliminating the MSPRA dividend.

However, as a practical matter, it would be unwise for MS to eliminate the MSPRA dividend to preserve capital. If you were an institutional client, what kind of message would such an elimination send to you?

For an investment bank, dependent on customer confidence in its financial viability, the only practical course would be to pay the preferred stock dividend until the company does a Lehman Brothers. A failure to pay prior to a bankruptcy filing could easily cause that result.

MSPRA has a typical stopper clause:

The stopper clause is the legal mechanism that assures the preferred stock owner that their dividend will be paid in full for as long as a cash dividend is paid on the common shares. As soon as that common share cash dividend is eliminated, however, there is no remaining legal impediment to prevent the elimination of the non-cumulative preferred dividend.

Prior Trades: With this 50 share purchase, I now own 200 shares. The existing lots were bought in two taxable accounts: Bought 50 MSPRA at $16.6 (September 2011-Main Taxable Account) and Added 100 MSPRA at $18.9 (March 2012)(a satellite taxable account)

As noted below, my last trade in the Roth IRA was to sell 50 shares at $21.03 back in 2011.

In a taxable account, my most recent actions were to sell 50 shares at $22.04 and another 50 at $20.8 earlier this year.

I have bought and sold this security several times.

Item # 1 Bought 100 MSPRA at $12.88 in May 2009-Item # 4 SOLD 100 MSPRA at $21.43 (January 2010)
Item # 2 Bought 50 MSPRA at 15.7 (May 2010)- Item # 6 Sold MSPRA at 18.50 (July 2010)

2010 MSPRA +$962.47

Item # 1 Bought 50 MSPRA @ 19.57 in IRA (January 2011)-Item # 4 Sold 50 MSPRA at $21.03 in Roth IRA (March 2011)

2011 ROTH IRA +$58.47

Item # 2 Bought 50 MSPRA at $19.71 (December 2010)-Item # 3 Pared 50 of 250 MSPRA at $20.8 (January 2013)

Item # 5 Added 50 MSPRA at $19.53 (January 2011)-Item # 5 Sold 50 of 200 MSPRA at $22.04 (March 2013)

2013 MSPRA +$147.66

Total Realized Gain= $1,168.6

Rationale: (1) A Measure of Deflation-Low Inflation and Problematic Inflation Protection in One Security: The main advantages of this type of security are as follows: (1) the security pays qualified dividends when purchased in a taxable account and (2) provides a measure of deflation/low inflation and problematic inflation in the same security.

The deflation/low inflation scenario is addressed by the minimum coupon, while the protection for problematic inflation involves the LIBOR float activation. By buying at a discount to par value, I juice the yield in both scenarios.

Even though I normally buy securities that pay qualified dividends in a taxable account, I will buy in small amounts these equity preferred floaters in a retirement account. The primary reason is to sensitize the bond portfolio-some-to a potential rise in rates caused by inflation, particularly problematic inflation.

The recent rise in rates has not been caused by an increase in either inflation or inflation expectations, and consequently the floaters have actually declined in price as their minimum coupons became less desirable.

At some future time, presently unknown, inflation will cause a rise in short term rates sufficient to trigger the floating rate provision in these equity preferred floaters. Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis; Historical Inflation Rates: 1914-2013, Annual and Monthly Tables

At a total cost of $19.25, the minimum yield will be 5.19%. There is no maximum coupon. If the coupon becomes too high for MS due an increase in the LIBOR rate, then the security can be called at the $25 par value, which will generate a decent percentage profit, plus the accrued dividend at the time of any such redemption.

At a 5% three month LIBOR rate during the applicable computation period, the yield would become 7.4% at a total cost of $19.25. (.057% x. $25 par value=$1.425 dividend by total cost per share of $19.25=7.4%).  At a 8% 3 month Libor rate, the yield becomes 11.3% using the same assumptions.

Chart 3 Month Libor

3-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar - St. Louis Fed

The 3 month LIBOR will track the federal funds rate fairly closely:

Effective Federal Funds Rate- St. Louis Fed

The federal funds chart starts much earlier. To see the similarity, compare the two charts starting 1/1/1986 when the data starts for the 3 month Libor.

1/1/1986
3 month Libor at 8% research.stlouisfed.org
Federal Funds at 8.14% research.stlouisfed.org

According to Quantumonline, this security is rated Ba3 by Moody's and BB+ by S & P.

Assuming no material adverse credit risk change, I would expect this security to approach its $25 par value during a Fed tightening cycle. My guess would be when the federal funds rate hits 4%. I am currently expecting a 4% federal funds rate during 2017. If that proves prescient, patience may be required for this security.

Risks: (1) WORTHLESS IN THE EVENT OF A BANKRUPTCY: 

This security would likely become worthless when and if Morgan Stanley files for bankruptcy.

Generally, I would expect the senior note owners to recover less than 25 cents on the dollar. Owners of more junior securities, including trust and equity preferred stocks, will most likely be wiped out completely. The Lehman equity preferred shareholders were left holding a worthless pieces of paper. Lehman had a floating rate equity preferred stock that was traded on the stock exchange (formerly under the symbol LEHPRG).

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? or AEB for less than $5, rational or irrational?)

(2) VOLATILE:

This type of security can be extremely volatile in price, as shown by my trading history, and by a long term chart. MS.PA Interactive Stock Chart This stock fell to below $8 during the Near Depression period. I first bought shares at $12.88. The two year low was on 12/30/11 at $14.71 and the high was $23.46 hit on 5/17/13.  I do not regard that price action as rational. And, anyone investing in this sector just has to deal with it.

I do not believe that the recent decline is related to credit concerns. The fear of a security going to zero is a powerful one. That fear was not irrational in October 2008 for MS, but was borderline irrational when I first bought MSPRA in May 2009.

Periodically, these stocks will hit an air pocket. I am just use 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

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.

(3) NO COUPON BUMP LIKELY FOR SEVERAL YEARS: 

The recent rise in interest rates makes the minimum coupon paid by this security less competitive to more senior and higher rated securities.

The likely continuation of ZIRP for two more years and the likely slow pace of the subsequent tightening cycle after ZIRP's end will combine to keep the 3.5% minimum coupon as the applicable rate for several years. It would take a rise in the 3 month LIBOR rate to over 3.3% during the relevant computation period to trigger any increase in the coupon. I do not currently see that happening before 2017.

However, on the flip side, inflation may rise unexpectedly and cause the FED to start raising the federal funds rate earlier and faster than currently expected by the market. Effective Federal Funds Rate - St. Louis Fed The beauty of the floating rate security is that the coupon will start to increase at some point in that cycle. For MSPRA, a coupon increase is triggered after the 3 Month Libor exceeds 3.3% during the relevant computation period. 

And, MSPRA will at least produces a current real rate of return of slightly more than 3%, before taxes, based on the currently forecasted inflation rate embodied in the ten year TIP price. And, it is important to note that this security has some inflation protection due to the Libor float provision. As noted above the current yield is 5.19% at a total cost of $19.25 based on the 4% minimum coupon.

As of 9/5/13 10 Year

Daily Treasury Yield Curve Rates:  2.98% 

Daily Treasury Real Yield Curve Rates (.92%)

Break-Even= 2.06% 

Future Buys and Sells: I am not likely to own more than 250 shares of this security, and my total exposure to all MS securities is not likely to exceed $7,500. Since I currently do not own any other MS securities, having already sold the common and an ETN, I have room for another 50 share purchase, but would wait until the price fell below $17. I am likely to pare my existing holdings some above $21 and probably over $22.

With equity preferred floaters, I have been a trader rather than a long term investor. With relatively small purchases, I have racked up almost $11,000 in trading profits (snapshots at the end of Advantages and Disadvantages of Equity Preferred Floating Rate Securities). I am will to become a long term investor at current prices, but will prefer to continue trading their volatility.

I will be buying other ones if their prices continue to decline. Some additional purchases will be discussed in the next post. By buying 50 share lots, I am able to average down without exhausting my exposure limit with what turn out to be an ill-timed all-in purchase. I am certainly buying the equity preferred floaters at lower prices with the 50 share adds.

Friday's Closing Price: MS-PA: $19.35 +0.25 (+1.31%)

6. Bought 50 USBPRH at $18.83 (see Disclaimer):

Snapshot of Trade:

2013 Bought 50 USBPRH at $18.83

Security Description: The U.S. Bancorp Non-Cumulative Perpetual Preferred Series B (USB.PH) is a equity preferred stock issued by U.S. Bancorp (USB) that pays non-cumulative and qualified dividends at the greater of 3.5% or .6% above the 3 month LIBOR rate on a $25 par value. Prospectus

I will buy this one due to its investment grade quality and to diversify my equity preferred stock positions.

At a total cost of $18.83, the current yield would be about 4.65%.

Given the lower minimum coupon, the USBPRH Libor float provision will activate sooner than with MSPRA which has a 4% minimum coupon and a .7% float over the 3 month Libor. That is the only advantage to the lower coupon. A rise in the 3 month Libor above 2.9% during the relevant computation period will trigger the USBPRH Libor float as the applicable coupon while it would take a rise above 3.3% to trigger the MSPRA float provision.

For USBPRH, a 5% 3 month Libor would result in about a 7.43% yield at a total cost of $18.83.

As these floaters decline in price, they become more interesting since the lower prices juices both the current yield using the minimum coupon and the yield under the Libor float when it becomes the applicable coupon rate.

Prior Trades: I have only bought this one twice:

2010 USBPRH 50 Shares +$128.03

Item # 5 BOUGHT 50 USBPRH at $17.47 (September 2009)-Item # 2 Sold USHPRH at $20.35 (June 2010) 

This next 30 share lot was held for only a few days:

2011 USBPRH 30 Shares +$95.68

Item # 1 SOLD 30 USBPRH AT $21.84 (August 2011)-Item # 2 Bought: USBPRH at $18.12 (August 2011)

Total Realized Gain= $223.71

Rationale and Risks: The rationale and risks are the same as previously discussed above for MSPRA and in other recent posts discussing the purchase of equity preferred floating rate stocks. A general discussion can also be found in Advantages and Disadvantages of Equity Preferred Floating Rate Securities.

The U.S. Bancorp preferred stock is a higher rated security than the equity preferred floaters issued by Morgan Stanley, Zions, Bank of America (which includes the floaters originally issued by Merrill Lynch) and Santander, all of which have junk ratings. According to QuantumOnline, USBPRH has a Baa1 rating from Moody's and BBB+ from S & P. The HSBC USA floaters also have a Baa1 and BBB+ rating.

I would view the credit risk of USBPRH to be slightly less than the MSPRA. I have no concerns at the present time, or any that are reasonably foreseeable, about USB's ability to pay the dividends on this security.

The current consensus USB E.P.S. for 2013 is $3.02 and $3.21 next year. USB Analyst Estimates In 2012, USB reported net income of $5.647B, up from $4.872B in 2011. 2012 Annual Report, page 21.

The trading range for USBPRH last Friday was $18.61 to $18.99.

Friday's Closing Price: USB-PH: $18.70 -0.20 (-1.06%)

The volume was extraordinarily heavy for this security last Friday at 630,185 shares.

This one was trading near $24 back in May: USB.PH Stock Charts

Future Buys and Sells: I will likely buy another 50 shares at below $17.5 and sell the first 50 share lot purchased at over $21.85.

*************

Politics and Etc.

1. The GOP and Guns: I have difficulty understanding the modern day GOP's affinity for gun rights. Once the republicans came to power in the Tennessee legislature, their highest priority was to enact legislation to allow guns in bars, playgrounds and state parks. I simply do not understand the mental process that views such legislation as either important or desirable.

There are places in the U.S. where I would own a handgun and a smaller number where I would want to carry one in a holster. Their are certainly neighborhoods in the  U.S. where that would be the prudent course of action. Brentwood Tennessee is not one of those places. I have never needed a handgun for self protection, nor do I know anyone who has ever needed one.

How many stories are there about the successful use of a gun in self defense anyway, as opposed to a child accidentally shooting another child or a parent, or one family member shooting another in a fit of rage. Guns kill far more children than cancer. Epidemic: USAToday; Guns in the Home and Risk of a Violent Death in the Home: Findings from a National Study; The health risk of having a gun in the home | MinnPost (43 times more likely that a gun in a home will be used to kill a family member than an intruder: Medscape)

The Missouri republicans have taken the inanity to a new level with a law entitled the "Second Amendment Preservation Act".

The Missouri GOP stands ready to pass legislation that will nullify all federal gun laws and make it a crime for federal agents to enforce those laws in Missouri. Any citizen arrested for a violation of a federal gun law would have the right to sue the arresting federal officer. NYT

It is not like federal laws actually interfere with gun ownership, including those automatic weapons that can fire a blizzard of rounds from one clip. Gun law in the United States - Wikipedia How could any sensible person even be upset with the federal gun laws?

Maybe the GOP, having been successful in passing laws permitting guns in bars, wants to protect the citizens constitutional rights to carry guns into airports and onto planes, or maybe they want to protect the Second Amendment rights of a convicted felon, previously adjudged criminally insane, from being arrested for the unlawful position of a machine gun.

The law would also make it illegal for a newspaper to publish any identifying information about gun owners. Fox News

The First Amendment is one of those pesky "liberal" ideas that can not be nullified by the powerful reactionary forces who prefer to call themselves conservatives rather than an appropriate label.

2. Jay Leno's Quiz Show for Celebrities: On an hourly basis, I see ignorance on display somewhere, and usually it is not humorous. Leno does a great deadpan when asking simple questions to celebrity contestants who of course have no clue about much of anything. Battle of Celeb All-Stars: YouTube

3. Check Engine Light: Given the sheer number of items being monitored electronically in a car now, it is not surprising to see the check engine light. Back in the day, my first car, a 1957 Ford, had no check engine light and no fancy electronic gizmos that could malfunction. Consequently, I would check the oil periodically and change the filters, and everything would be just fine.

My Saturn Aura's check engine light lighted up the other day. I had noted no performance issues. The car is running just fine. Without question, that light produces a lot of businesses for dealer service departments and gas station mechanics. Most of the time, I suspect that a $100+ is charged just to replace one of those malfunctioning gizmos.

I generally like to make informed decisions, so I went to Amazon and found an inexpensive code reader that would tell me the nature of the problem. Amazon.com: Autel MaxiScan MS300 CAN Diagnostic Scan Tool for OBDII Vehicles

That device was easy to use, just plug it into the 16 pin Data Link Connector found under the steering wheel and then turn the ignition on without starting the engine.

I received an error code PO113 indicating a problem with the IAT Sensor-Circuit High Input. I then spent about ten minutes researching that issue. It did not appear to be a serious problem, but it was apparently one that could cause my car to flunk the once a year emissions test. OBD-II Trouble Code: P0113 Intake Air Temperature Circuit High Input

The sensor is apparently picking up a reading that my engine is operating at -40 decree temperatures which is absurd. The engine then enters a "fail-safe" mode where the temperature is estimated to be -20 decrees, and the ECM then causes an increase in the fuel injection volume to improve performance.

It is of course clear to any person that the engine is not operating in -40 decree weather during the late summer in Tennessee. Since this kind of code could cause the car to flunk the emissions test and prevent me from renewing my license tag, I will at least check out the cost of repair armed with some knowledge about the potential cost of repairs.

The Autel MaxiScan device can clear the error code, but it comes back soon after the car starts up again.

*********

I will be busy next week on other matters, so I will mostly be discussing in the next post trades made last Thursday and Friday. This post is already long enough.