Monday, February 10, 2014

Bought: 50 EMQ at $24.93, 50 MHNC at $22.8, 50 COP AT $63.68 /Sold 100 HUSKF at $29.39, 100 ISM AT $23.73+/Bought Roth IRA 50 NLYPRD at $22.87

Trades made after last Tuesday will be discussed in the next post.

Big Picture Synopsis:

Short Term: Expecting a 10%+ Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish

In my Vix Asset Allocation Model, a Stable Vix Pattern continues until a Trigger Event which then ushers in the Unstable Vix Pattern. The recent rise in the VIX was not a Trigger Event. Last Friday, the VIX closed at 15.29, down  -11.26% from Thursday's close. There was just one close above 20, VIX Historical Prices, and that would be insufficient to even restart the 3 month count of movement below 20 necessary for the formation of the Stable Vix Pattern.

This is what the two Trigger Events look like since data for the VIX started in 1990:

Asian Contagion October 1997:

Housing Bubble Pop August 2007: 

August 2007 Trigger Event

The Trigger Event in August 2007 had several Confirmation Events, a clear Get Out of Dodge set of signals including ones in November 2007 and January 2008:

November 2007 Confirmation Event

January 2008 Confirmation Event
Those two Confirmation Events are viewed as important given their magnitude, duration and closeness in proximity to the August 2007 Trigger Event. Something was obviously really bad, and I would not even have to know the nature of the serious problems triggering these Events, given the clear signals being flashed by the VIX. As I have noted in the past, it would be possible historically to make good allocation decisions based on nothing more than the VIX Chart and the Model.

In between the Trigger Event and first Confirmation Event, the VIX returned briefly to below 20 which was also the case after the Confirmation Events in November 2007 and January 2008. Since an Unstable Vix Pattern had formed in August 2007, those brief movements below 20 were signals to sell rather than to buy.

Prior to the VIX, there was a volatility index for the S & P 100 which flashed a Trigger Event in April 1987:

 ^VXO Historical Prices

So far, I would not  characterize the 2014 stock market declines as a "dip", more like a "blip". 

Short Term: Neutral
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization

I have been surprised so far this year with interest rates trending down even as the FED tapers its asset purchases.

The 10 Year treasury started the year at a 3% yield and closed last Friday at a 2.71% yield. The 20 year treasury has dropped from 3.68% to 2.29%. Daily Treasury Yield Curve Rates While that does not sound like much, it makes a significant difference in the price of vintage treasuries. For those unaware of how a 1% to 1.5% increase in rates can impact bonds, the price action from early May to September of last year provides instruction.

The break-even spread on the 10 year treasury inflation protected bond closed last Friday at 2.18%, the average annual increase in CPI over the next 10 years for the buyer of the 10 Year TIP to break-even with the buyer of the 10 year non-inflated protected security. I sold my ten year TIPs when they had a negative current yield of almost 1%. Their current yield is now .53%. Daily Treasury Real Yield Curve Rates The nominal 10 year treasury has a 2.71% current yield as of last Friday.  

Recent Developments:

Last week started off with an unfavorable ISM Manufacturing report that fed the fear gaining steam in the market. ISM reported that its January manufacturing PMI fell to 51.3 from 56.5 in December. The expectation was for a 56 reading. The new orders component declined precipitously to 51.2 from 64.4. The unusually cold weather and storms caused some of the decline.

The more important ISM services index was reported at a better than expected 54. The business activity index for January was 56.3, up from 54.3 in December. The new orders component rose slightly to 50.9. The employment index rose to 56.4 from 55.6.

ADP reported a 175,000 increase in private sector jobs, slightly less than the consensus estimate. The December 2013 number was revised down from 238,000 to 227,000.

Last Friday's job report from the BLS was a mixed bag of positives and negatives. The payroll increase of 113,000 was well below the 181,0000 consensus estimate. Private sector gains were better at 142,000.The November number was revised up to 274,000 from 241,000. The unemployment rate decreased in January to 6.66% from 6.7% in December 2013. Employment Situation Summary On the positive side, the labor participation rate increased to 63% from 62.8%; the household survey showed an overall gain of 638,000 in civilian employment during January; total hours worked increased by .1% and are up 2.1% from a year ago; and the U-6 number declined to 12.7% from 13.1%. Table A-15. Alternative measures of labor underutilization

The Federal Reserve' Senior Loan Officer Opinion Survey for January 2014  reported that banks on balance eased their lending standards for many kinds of consumer and business loans and experienced increase demand for loans.

Nonfarm productivity increased at a 3.2% annualized rate in the 2013 4th quarter and is up 3.4% over the prior two quarters at an annualized rate. Fourth Quarter and Annual Averages 2013, Preliminary

Omega Healthcare (OHI)(own 100 shares)

Omega reported 4th quarter funds from operation of $79.9M or $.65 per share, beating the consensus estimate of $.63.

The consensus FFO estimate for 2014 was $2.73 at the time of that earnings release. OHI Analyst Estimates

Bought: 100 OHI at $29.85 

Coca Cola (own 265+ shares-average cost per share $25.41):

I was glad to see Coca Cola formulate a response to Sodastream. The Coca-Cola Company and Green Mountain Coffee Roasters, Inc. Enter into Long-Term Global Strategic Partnership KO and Green Mountain (GMCR) will cooperate on a GMCR's forthcoming Keurig Cold "at home beverage system". KO will be acquiring 16,684,139 GMCR shares at $74.98, which will be about a 10% stake in GMCR.

KO declined some last Friday after S & P cut its rating to 3 stars from 5 stars based on valuation. I have a minor issue with KO's current valuation which is why I am not reinvesting the dividend to buy more shares and have not done so in over 3 years. Instead, I will just total up those cash dividends and use the cash to buy shares in the open market when and if KO falls to around 15 times the forecasted earnings for the current calendar year. The current 2014 consensus E.P.S. forecast is $2.22 so I would be looking for a $33.3 price to buy more shares. Even a purchase at that price would raise my average cost per share.

Closing Price Last Friday: KO: $37.95 -0.08 (-0.21%)


1. Sold 100 HUSKF at $29.39 (see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2014 HUSKF 100 Shares +$280.88
Item # 2 Bought 100 HUSKF at $26.42 (7/6/13 Post)

Company Description: Husky Energy (HUSKF:OTN) is a Canadian integrated energy company. The HUSKF listed shares trade on the pink sheet exchange and are bought with USDs. HUSKF Husky Energy- The ordinary shares are traded on the Toronto exchange and can be bought there only with CADs. Husky Energy (HSE:TOR) The share price in the Toronto market converted into USDs will establish the price for the HUSKF listed shares.

HUSKF is not an ADR. I pay a smaller brokerage commission buying the shares using USDs on the pink sheet exchange.

On the day of my trade, the Toronto listed shares closed at $33.09, roughly equivalent to $29.74 USDs. Currency Converter The price of Husky recovered some on 1/31 after I sold my shares.

Prior Trades: This trade brings me up to $1,213.94 in realized gains for Husky, plus dividends. Snapshots of the prior realized gains can be found in Canadian Dollar (CAD) Strategy.

Sold 200 HSE:CA at $28.13 CADs October 2012-Bought 100 HUSKF at $23.81 January 2012 (converted by broker into Toronto listed shares) and Bought 100 HSE:CA at C$26.59 CADs July 2011Sold HSE:CA @ 27.70 CAD February 2011-Bought 100 HSE:TO at C$26.25 CADs July 2010Sold HSE:TO at $30.48 CADs April 2010-Bought 100 Husky at $28.99 Canadian January 2010

Rationale: While part of this trade was motivated by profit taking, the rationale for selling the shares was primarily related to the ongoing weakness in the Canadian dollar. I just wanted to stop the currency bleeding on this position.

I bought these shares when one USD would buy about C$1.05. The CAD has recently started to slide against the USD which was causing me to lose a significant part of my profit. This was the exchange rate at the time of my Husky sell order: USD-CAD= 1.1117

The following snapshot shows the impact of the exchange rate on the pricing of the Toronto listed ordinary shares and the ordinary shares traded in USDs on the pink sheet exchange:

HUSKF (Red Line) vs. HSE:CA 
Both HUSKF and HSE:CA are the ordinary shares issued by Husky Energy. The only difference is that HUSKF is traded in USDs rather than in CADs. The decline in the CAD against the USD was flowing through into HUSKF even as the ordinary shares retained most of their value when priced in CADs since the start of 2014.

I would again mention a peculiarity of the tax law.  I have not researched the issue, nor am I going to make even an attempt to do so. I would just note the following article found using a google search on this issue: Tax This will make one's eyes roll back into your head.

If I had bought the ordinary shares listed in Toronto using my CAD stash, rather than buying HUSKF using USDs, my broker would compute my gain and loss from such a transaction by converting the CAD values into USDs.

I could consequently have more of a profit in CADs with a lower tax liability, or even a profit in CADS reported as a tax loss, due to the Canadian dollar declining in value against the USD.

For example, when I sold the Husky shares on 1/31/14, I had at the time an unrealized gain in CADS for my 300 shares of Artis. If I had elected to sell those shares then, I would receive more proceeds in CADs than I used to purchase the shares, but the broker would be reporting a tax loss to Uncle Sam in my 1099, since the CAD has fallen in value against the USD since my purchase. Both the purchase and sell prices are converted from CADs into USDs for purposes of computing the tax, even though I used CADs to make the purchase and received CADs when I exited the position.

I took this snapshot during the day (1/31/14) showing a 4.62% gain in CADs and a -4.33% in USDs

Item # 1 Bought 300 of Artis REIT at C$14.36 (9/28/13 Post)

While I am long term positive on the Canadian Dollar, the short term looks like more downside but no one really knows. MarketWatchRelease of the Monetary Policy Report - Bank of Canada

I recently discussed how the slide in the exchange rate has caused the NYSE listed ERF to underperform the ERF Toronto listed shares by about 15% over the past year. And that slide has in effect acted as a dividend cut for owner's of ERF, even though the dividend has remained constant in Canadian dollars:  Comment Section at Seeking Alpha

Future Buys and Sells: I am in a trading mode for Husky shares and will consider buying back these shares, either on the Toronto exchange using my CADs or using USDs again to purchase HUSKY.

2. Bought Back 50 EMQ at $24.93 (see Disclaimer): After seeing the anemic inflation numbers for both Europe and the U.S., released on Friday 1/31/14, I responded by buying back this long term investment grade, senior secured bond.

Snapshot of Trade:

Security Description: The Entergy Mississippi Inc. 6.00% Series First Mortgage Bonds 2032 (EMQ) is a first lien bond issued by Entergy Mississippi, a wholly owned subsidiary of Entergy Corp. (ETR). Entergy Mississippi is engaged in the distribution and transmission of electricity that serves 440,000 or so customers in 45 of Mississippi's 82 counties. A map of its service area can be found at Entergy Mississippi - Service Area.

EMQ is a first lien bond on "substantially all" of Entergy Mississippi's property. The coupon is 6% on a $25 par value. EMQ mature on 11/1/2032, but may be called now at par value plus accrued interest. This security just went ex interest on 1/29/13 for its quarterly distribution. Prospectus The secured interest is described starting at page 5 of the Prospectus.

Moody's recently upgraded this bond to A3 from Baa1.

Prior Trades: I flipped this one recently.Item # 2 Paired Trade: Sold 50 EMQ at $26.49 and Bought 50 EFM at $24.99-Item # 5 Roth IRA:  Bought 50 EMQ at $24.83 (8/31/13 Post)

Rationale and Risks: I will at least generate a positive after tax real return with this bond, which is not happening now, or for the next two years or so, for the funds idled in a money market account.

There is also some potential for exiting the position at a small profit, as shown by the inexplicable pop to the mid-26 level late last year. EMQ Stock Chart I sold the previously owned 50 EMQ shares at $26.49 on 10/25/13 and would do so again if given that opportunity.

Interest rate risk is the dominant risk.

That risk is asymmetric between the owner of this bond and its issuer. Entergy Mississippi could redeem it at anytime now when it is in its interest to do so. The reason for a redemption would be that the issuer could refinance this debt at a lower coupon rate and possibly even extend the maturity.

On the other hand, if rates rise, the owner of the security would be stuck with the two undesirable options: sell at a loss and then reinvest the proceeds into a higher yielding security or keep EMQ as the price falls and forego the increased income from another security that could have been acquired with the funds tied up in EMQ.  In this kind of heads the issuer wins, tails the owner loses, there is not much upside when buying near par value but the downside risk could be considerable with a significant spike in long term rates given the long duration of this bond.

This buy has a chance of being productive with longer term interest rates and inflation remaining about where they are now for several years. A 1% rise in long term rates would cause this security to decline significantly in value. I would roughly estimate that a 1% increase in rates for similar quality and maturity bonds would cause about a 10% to 12% slide in EMQ's price using a Bond Calculator available at SIFMA to formulate a reasonable range. The duration is slightly more than 11 years. The rise in rates starting in May 2013 resulted in a slide from over $26 to below $25. EMQ Interactive Chart If this bond was not subject to being called, it would likely have been trading well over the prevailing prices in May 2013.

Closing Price Last Friday: EMQ: $24.78 -0.07 (-0.28%)

I will frequently accept a lower yield for more security and safety, particularly after buying a risky security such as the one described below.

3. Bought 50 MNHC at $22.8 (see Disclaimer): Normally, I would buy an exchange traded bond in the ROTH IRA when I have plenty of surplus cash earning nothing in a money market account, as I do now. In the Roth IRA, I in effect turn taxable bonds into tax free ones. This security, however, was bought in a taxable account, since it is viewed currently as too risky for the retirement accounts.

Snapshot of Trade:

2014 Bought 50 MNHC at $22.8
Security Description: The Maiden Holdings Ltd. 7.75% Notes 2043 (MHNC) is a senior unsecured baby bond issued by Maiden Holdings North American and guaranteed by Maiden Holdings Ltd. (MHLD), a Bermuda based holding company that provides through its operating subsidiaries reinsurance solutions.

MHNC was sold to the public at $25 back in November 2013. My purchase at $22.8 was 8.8% below that IPO offering price. Prospectus The reason for the abrupt decline is discussed below.

MHNC is a senior unsecured bond that will make quarterly interest payments at the rate of 7.75% per year. Par value is $25. The notes mature in 2043. The issuer has the option to redeem at par value plus accrued interest on or after 12/1/2018.  The proceeds of this bond were used to redeem a 14% coupon trust preferred with a face value of $152.5M issued in 2009. 8-K Redemption of 14% Trust Preferred Securities I put the 14% TP coupon in red for two obvious reasons. First, Maiden will save a lot of money in interest payments by refinancing a 14% bond at 7.75%. Second, the high coupon for the TP is a cautionary flag. One non-obvious reason is that 61.12% of that TP was purchased by trusts controlled by Michael and George Karfunkel, two of Maiden's founding shareholders.

At a total cost of $22.8 per share, the current yield would be about 8.5%.

According to Quantumonline, this bond is rated by S & P at BBB-. It is not being priced by the market as an investment grade credit. I do not have anywhere near the comfort level of a BBB- rated credit.

Maiden Holdings Profile Page at Reuters

Maiden Holdings Key Developments Page at Reuters

In a 12/17/13 Post (Item # 6 Bought 50 AGIIL at $20.2), I noted that the exchange traded bonds issued by Maiden Holdings took a hit after the publication of a negative Seeking Alpha article about another Bermuda based reinsurance company known as AmTrust Financial Services (AFSI). That article was written by "The Geo Team" that was short the stock. An article published by Bloomberg contains AmTrust's response to that article.

Maiden does business with AmTrust as noted in the Reuters' Profile section referenced above. Barry Zyskind is a large shareholder and director of Maiden, and is also a large shareholder and CEO of AmTrust. ZYSKIND

Another Seeking Alpha article published in January by the same firm, called "The Geo Team", cited "additional evidence" to support its assertions about AmTrust's accounting.

Last Saturday, Barrons published an article about AmTrust noting that it will report earnings this Thursday and needed to convince investors that its profits were legitimate.

As of 12/31/13, the AFSI's short interest as a percentage of the float was at 39.1%. AFSI Key Statistics. The short interest in MHLD's stock as a percentage of the float was far lower at 8.5%.

I do not have any accounting background and consequently can not access the validity, or lack thereof, of the charges. I find insurance accounting to be particularly opaque and impossible for a lay person to understand. There were a number of critical comments to both articles.

The chart of AmTrust's common shares show a sharp drop in December in response to this development. AFSI Interactive Chart. Maiden's stock experienced a less severe decline.

The foregoing does make me extremely cautious about Maiden.

In response to the Geo Team's allegations the two exchange traded bonds issued Maiden Holdings North America sold off.  The other exchange trade bond is Maiden Holdings North America Ltd. 8.25% Notes due 2041 (MHNA).

Prior MHNC Trades: None-new issue

Related Trades: I previously bought and sold another exchange traded senior unsecured bond issued by Maiden Holdings. Item # 1 Bought 50 MHNA at $24.9 (8/3/2011Post)-Item # 3 SOLD 50 MHNA at $25.75 (March 2012)

Last Earnings Report: For the 2013 third quarter, Maiden reported net income attributable to the common shares of $21.904M or $.30 per share. Net income for the 9 months was at $.91 per diluted share.

Under the heading "related party transactions", Maiden discusses its business relationship with AmTrust starting at page 29.

Q3 2013 10Q

As of 1/31/13, the consensus E.P.S. estimate for 2014 was $1.46. MHLD Analyst Estimates

Link to Maiden Holdings SEC Filings: EDGAR Search Results

Rationale: Assuming (1) Maiden's accounting is legitimate, (2) earnings accelerate as contemplated by the analysts in 2014, and (3) long term interest rates remains stable or decline in the coming months, then with all of those assumptions, it is possible that this bond may work its way back to $24-$25 while providing decent income generation.

As noted above, the current yield at a total cost of $22.8 per share is about 8.5%.

Risks: I discuss some of the credit risk issues above. I regard both the interest rate and credit risks issue to be substantial for this security.

Future Buys and Sells: Given my assessment of the heightened risks, I will not buy more than 50 shares of a Maiden bond. The common stock at below $10 would be considered for a possible LT purchase.

The company discusses risks incident to its operation starting at page 31 of its 2012 Annual Report filed with the SEC: MHLD-2012.12.31-10K

The prospectus for MHNC discusses risks starting at page S-8.

Friday's Closing Price: MHNC: $22.85 +0.04 (+0.18%)

4. Bought Back 50 NLYPRD at $22.87-ROTH IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Bought 50 NLYPRD at $22.87
Security Description: The Annaly Capital Management Inc. Preferred Series D (NLY.PD) is an equity preferred stock issued by the Mortgage REIT Annaly Capital Management (NLY).

This security pays cumulative and non-qualified dividends at the rate of 7.5% on a $25 par value. NLY has the option to redeem this security on or after 9/13/17.

Prospectus (change of control provision summarized starting at page S-3 and S-18)

For as long as NLY pays a cash common share dividend, NLY can not defer payment on its preferred shares.

Dividend Stopper Provision at page S-17
An equity preferred stock will be senior only to common stock and junior to all debt in the capital structure.

Prior Trades: I bought and sold a 50 share lot at higher prices. Item # 1 Sold 50 NLYPRD at $26.01 (5/20/13 Post)-Item # 6 Bought 50 NLYPRD at $24.99 (1/3/13 Post)

One of the risks is highlighted by that trade. I sold 50 shares at $26.01 and bought them back at $22.87 a few months later.

Recent Earnings Report: For the 2013 third quarter, Annaly reported GAAP net income of $192.5M or $.18 per share and core earnings of $.28 per share. Leverage has been reduced to 5.4:1, down from 6.0:1 for the year earlier quarter. SEC Filed Press Release 2013 Third Quarter

Book value per share was reported at $12.7 per share as of 9/30/13, down from $16.6 at the end of the 2012 third quarter. Annaly Capital

The annualized interest rate spread for the quarter was just 1.01%. NLY paid out a $.35 per share common dividend in the quarter. One risk for the preferred shareholder is that large sums are flying out the door every quarter to the common shareholders.

The common share dividend has been repeatedly cut as income has been trending down. Annaly Capital Management Inc (NLY) Dividend History - In the 2010 third quarter, NLY paid out a $.68 per share common dividend, down just one cent from the 2009 third quarter. The high point was hit with a $.75 per share dividend for the 2009 4th quarter. The dividend was cut again in the 2013 4th quarter to $.30 per share.

The interest rate spread in the 2009 third quarter was 2.65%, SEC Filed Press Release for Q/E 9/30/2010

Rationale: When a security is purchased in the ROTH IRA, it does not matter whether a distribution is classified as qualified or non-qualified, dividend or interest. All distributions made into the ROTH IRA are tax free. By buying this preferred stock in the ROTH IRA, I in effect convert the distributions from non-qualified dividend income to tax free income that generates a current yield of about 8.2%, assuming a total cost per share of $22.87. Assuming no taxes and a 8.2% rate, money will double in about 8.74 years. Estimate Compound Interest

If the break-even spread for the 10 year TIP proves prescient in predicting the average rate of inflation over the next ten years, then the average annual real rate of return at 8.2%, with that assumption, would be slightly over 6% per annum. The funds used to purchase this security currently have a negative real rate of return.

Risks: Given NLY's leverage and debt, I seriously doubt that the owners of its preferred shares would receive anything in a bankruptcy. In the event of a BK, NLY's preferred stocks would likely become worthless. So, the downside risk is a zero share price.

Nonetheless, I currently view interest rate risk for this potentially perpetual equity preferred stock to be at the top of my worry list, followed closely by volatility risk. Credit risk is important and potentially the most important risk given the leverage.

The common shares were pummeled last year but appear to have stabilized above $10. NLY Interactive Chart

The company summarizes risks starting at page S-9 of the NLYPRD Prospectus.

I have no expertise in evaluating the risks of Mortgage REITs. I do know that last year was rough for all of them. Both their book values and shares plummeted last year, and their common share dividends were cut multiple times.

Seeking Alpha has a large number of articles written about this company.

As a preferred stock owner, the NLY common share price plunge and dividends cuts do not matter as long as NLY continues to pay a cash dividend to its common shareholder. NLY has to pay a common dividend to maintain its tax status as a REIT as long as it has net income. So long as that cash dividend continues, the preferred shareholder has to be paid in full.

This is a link to a document published by LDR Capital Management regarding REIT preferred stocks: PreferredSecurityPrimer.pdf

As noted earlier, I view Mortgage REIT preferred stocks to be riskier than equity preferred stocks given the significant differences in debt to assets. Stocks, Bonds & Politics Item # 2

I generally discuss the advantages and disadvantages of equity REIT preferred stocks in a 2009 Gateway Post: Stocks, Bonds & Politics: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages

Future Buys and Sells: I am at my limit with a 50 share buy. I also own 50 shares of ARRPRA and CYSPRA, both of which are in the red. I  prefer buying an equity REIT preferred stock and accepting less yield. Some recent equity REIT preferred shares buys including CBLPRE, CBLPRD, NNNPRE, NNNPRD, SLGPRI, AMHPRA, FPOPRA, OFCPRL, BDNPRE (bought and sold) and DREPRL (to be discussed)

Friday's Closing Price: NLY-PD: $23.00 +0.01 (+0.04%)

5. Sold 100 ISM at 23.73+ (see Disclaimer):

Snapshot of Trade:

2014 Sold 100 ISM at $23.73+
Snapshot of Profit:

2014 ISM 100 Shares +$77.57
Item # 2 Bought 100 ISM at $22.8 (9/7/13 Post)(snapshot of gains realized in 2012)

Prior Trades: Item # 2 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 (August 2011)-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)

The two 50 share lots sold in 2012 netted a combined realized gain of $322.64  

Related Trades: I have bought and sold the functionally equivalent security OSM on multiple occasions. The realized gains in OSM are higher at $1,300.15 (snapshots and links at Item # 4 Bought 100 OSM at $23.12-Roth IRA (8/24/13 Post) and at  Item # 3 Sold 100 OSM at $23.76-Roth IRA)

Security Description: The SLM Corp.  CPI-Linked Medium Term Notes Series A 2018 (ISM) is a senior unsecured exchange traded bond issued by SLM that pays a 2.05% spread to a CPI calculation on a $25 par value. Prospectus The note matures on 1/18/2018.

Rationale: I am transitioning to higher yielding bonds. ISM's coupon has been declining due to the low inflation numbers. A 3% to 4% coupon is the most likely scenario for at least two more years. The bond also has limited upside potential, while retaining some downside credit risk, particularly in light of SLM's proposed split into two companies. MarketWatch; Reuters Moody's currently has a junk rating of Ba1 on SLM's senior unsecured notes.

If the split into two companies actually happens, it is my understanding that the SLM bondholders will lose the earnings, cash flow and market value of one of those entities tentatively known as SLM Bank, which have provided the parent of over $1B in dividends over the past several years.

Future Buys and Sells: With inflation running low, and a price within 5% of the $25 par value, I have lost interest in this security. I may develop some interest when and if the security falls below $23.

Last Friday's Closing Price: ISM: $23.42 +0.01 (+0.05%)

6. Added 50 COP at $63.68 (see Disclaimer): I was on automatic pilot for this purchase. ConocoPhillips (COP) is an E & P company focused on exploring for and developing crude oil and natural gas globally. 

Snapshot of Trade:

Prior Trades: I recently discussed Conoco after purchasing 50 shares. I decided at that time to average down with another 50 share lot below $65, unless some adverse and material development relating solely to this company changed my favorable opinion.

Item # 1  Bought 50 COP at $68.87 (January 2014) Other prior trades are detailed in that prior post (total realized gains 2009 to date: $1,038.66-Snapshots in preceding linked post)

The shares have slid some since that purchase and have fallen below the 50 and 200 SMAs. COP Interactive Chart

Recent Earnings Report: I had an overall favorable opinion about COP's 4th quarter earnings report.

For the 2013 4th quarter, Conoco reported earnings of $1.4 per share, seven cents better than the consensus estimate. The company guided to 3% to 5% production growth in 2014. Proved reserves rose 3% from a year earlier. "Annual organic reserve replacement" was reported at 179%. Liquids "comprised approximately 60 percent of the reserve additions and another 15 percent were tied to liquids pricing through liquified natural gas." Liquid rich production in Eagle Ford, Bakken and Permian increased by 31% compared to the 2012 4th quarter. SEC Filed Press Release

At the time of my last purchase, the consensus E.P.S. estimate for 2014 was $6.05 and $6.12 for 2015. COP Analyst Estimates  The P/E based on a total cost of $63.68 per share and an E.P.S. of 6.05 is 10.53.

Earnings Call Transcript - Seeking Alpha

Rationale and Risks: I have nothing to add to my previous discussion.

There are several recent articles about COP published by Seeking Alpha.

This is a link to a favorable ConocoPhillips article published by Motley Fool after my purchase.

Subsequent to my last purchase, COP declared its regular quarterly dividend of $.69 per share. ConocoPhillips Announces Quarterly Dividend At that rate, the dividend yield would be about 4.33% at a total cost of $63.68 per share.

Historically, COP has a history of raising the dividend but there was no increase at all between the first quarter of 2011 until the 2013 third quarter. ConocoPhillips (COP) Dividend History -

The quarterly dividend rate was $.31 in 2005 (after a 2 for 1 stock split) and had more than doubled to $.66 by the 2nd quarter of 2011.

COP qualifies for purchase under both my dividend growth and large cap valuation strategies:

Item # 3 Large Cap Valuation Strategy (May 2010 Post)

Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds (March 2010 Post)

Future Buys and Sells: I may buy another 30-40 shares when and if the price sinks below $60. If I make that buy, I will be more prone to sell the highest cost 50 share lot, purchased at $68.87, whenever the price crosses $70 again. I will be reinvesting the dividend whenever the price is below $70.

As part of my risk mitigation practices, I have a $10,000 limit on the amount of money which can be invested in the securities of one company. I do not own any COP security other than the common stock.

Closing Price Last Friday: COP: $64.97 +0.67 (+1.04%)

I mentioned in the comment section to a recent blog that I had averaged down and would have done so regardless of whatever the market was doing or my opinions about the near term future of stocks in general. Stocks, Bonds & Politics: Still Waiting for My 2012 Tax Refund/Tom Perkins' Persecution Complex/Sold 50 SANPRB at $19.8 and Bought 50 IRT at $8.17-Roth IRA/Sold 150 ACG at $7.54-Regular IRA/Eliminated Royal Dutch After Profit Warning-Sold: 52+ RDS/A at $70.85 and 51+RDS/A at $70.83/Sold 343+ Alcoa at $11.36/Bought: 50 AMHPRA at $24.55, 50 PFGPRB at $24.42, 100 IRT at $8.87/GE, SAN, SWZ, ARCP, Unilever, Argentina and Emerging Markets