FSC, COP, BTZ/Bought 100 PWCDF at $27.29/ Sold 50 HAP at $40.78/Sold on the Toronto Exchange: 200 CAR_UN:CA at C$23.16 and 100 XMD:CA at C$26.1/Sold Roth IRA 50 DLRPRE at $25.5/Sold Taxable Account: 126 RMT at $12.6 and 100 CSQ at $12-Part of Ongoing Stock Allocation Reduction

Closing Prices Last Friday
S & P 500 1,967.57 +2.89 (+0.15%)
DJIA: 16,943.81 +28.74 (+0.17%)

VIX: 12.08 -0.51 (-4.05%) : VOLATILITY S&P 500
VXD: 11.21 -0.54 (-4.60%) : DJIA VOLATILITY
VXN: 13.66 -0.47 (-3.33%) : CBOE NASDAQ 100 Volatility
RVX: 18.80 -0.25 (-1.31%) : CBOE RUSSELL 2000 VOLATILITY


XLE: $98.41 -0.75 (-0.76%) : SPDR Select Sector Fund - Energy
XLI: $54.07 +0.31 (+0.58%) : SPDR Select Sector Fund - Industrials
XLK: $38.91 +0.19 (+0.49%) : SPDR Select Sector Fund - Technology
VNQ: $75.53 0.00 (0.00%) : Vanguard REIT ETF
XLU: $42.84 -0.32 (-0.74%) : SPDR Select Sector Fund - Utility ETF
KRE: $39.74 -0.05 (-0.13%) : SPDR S&P Regional Banking ETF


TLT: $113.58 +0.72 (+0.64%) : iShares 20+ Year Treasury Bond ETF
TIP: $115.31 +0.19 (+0.17%) : iShares TIPS Bond ETF
MUB: $108.14 -0.04 (-0.04%) : iShares National AMT-Free Municipal Bond ETF

GLD: $128.78 +0.24 (+0.19%) : SPDR Gold Trust
GLD Now Above its 200 and 50 Day SMA: SPDR Gold Trust ETF Chart
SLV: $20.57 +0.05 (+0.24%) : iShares Silver Trust

Big Picture Synopsis: 

Stocks: 

Stable Vix Pattern (Bullish)

Vix Asset Allocation Model Explained Simply

Use of the VIX as a Timing Model
Short Term: Market Needs a 15% Correction
Intermediate Term: Slightly Bullish (rise since the summer of 2011 borrows from the future)
Long Term: Bullish

I am continuing to reduce my stock allocation on a net basis. The short term goal is to simply remove the $31,000+ addition that was made between February and June. Stocks, Bonds & Politics: Stock and Stock Fund Update 6/6/14 To keep better track of what I am doing, I am now compiling a net number on a weekly basis.

I finally hit that $31,000 target reduction last Wednesday by selling several small ETF positions.

When paring my stock allocation, my preference is to generally eliminate or pare stock fund positions. This would include the jettisoning of underperforming funds, such as the ones described in Items # 1 and #5 below, and the paring of other funds that I intend to keep by selling the highest cost shares, as shown in Items # 6 and #7 below.

Ed Yardeni opines that the stock bull market may be in its final euphoric phase. Barron's

The perma bear Marc Faber believes the asset bubble has already started to burst. Faber also predicted that the price of gold would exceed the DJIA back in 2009: Barron's 2009 Roundtable The author of the Calculated Risk blog summarized some of Faber's most recent misfires.

The market allegedly declined last Thursday based on the problems being experienced by some bank based in Portugal. Another reason given by some pundits involved investors having second thoughts about the FED's tapering decision. Both items are not new. The Portuguese bank has been the subject of a number of unfavorable articles over the past several months, and everyone should know that the FED will end QE this year. Instead, renewed signs of economic weakness and abnormally low inflation in Europe were the likely culprits.  

Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization

The Difficult Path to Interest Rate Normalization

Back in March 2009, shortly after the FED announced QE1, I wrote a blog noting that stocks had a multi-year robust rally after the Fed announced a similar program back in 1933. Stock Rallies and Quantitative Easing (3/22/09 Post) This historical parallel is discussed in this article: stlouisfed.org.pdf

I was not aware until recently that the FED successfully pegged interest rates by buying treasuries in the 1940s. 

"By the end of the war, the Federal Reserve System held virtually the entire supply of treasury bills." Page 181 "Before the Accord: U.S. Monetary-Financial Policy, 1945-1951" nber.org/.pdf

FED Holdings 1942-1952

Ownership of securities topped out near $24B. By today's standards, that would be an irrelevant number. In 1946, $24B in treasuries would have been close to 10% of the debt. Government-Historical Debt Outstanding-Annual 1900-1949

Figure 1 shows that bond yields were near where the ten year treasury is now back in 1946-1948.

There is one interesting difference between then and now. Inflation was running hot in 1946 through 1948, until a recession cooled it down. Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis

CPI Increases
1946:  +8.5%
1947: +14.4%
1948: + 7.7%

This history is interesting in that it shows that the FED can keep rates in the low single digits, even when inflation is much higher than it is now. In that kind of setting, the primary determinants for bond prices, including inflation and inflation expectations, take a back seat to the Fed's power to manipulate with asset purchases, the bull in a china shop.

Another interesting aspect is the FED was worried about the excess bank reserves created through its asset buying during this earlier period, which "soared to more than $3 billion" in 1935 (see page 179), another quaint number compared to today. Excess reserves are currently over $2.5 trillion. Excess Reserves of Depository Institution- St. Louis Fed

What would interest rates be now without the FED owning almost $2.4T in treasuries, mostly maturing in 10 to 30 years? And will those excess reserves start to work their way into the real economy, potentially creating more inflation?

In early June 2014, the interest rate on Spain's ten year bond hit a level last seen in 1789. It was only a couple of year ago that it looked like Spain was heated for a debt implosion. Does that sound kosher? France's ten year bonds sank to just 1.7%, a nominal rate last seen in 1746. France's debt to GDP is rising fast, France Government Debt to GDP, and that government's debt was downgraded by S & P last year to AA. NYT; Bloomberg

Global Government Bonds - Markets Data Center - WSJ.com

Spain 10 Year Government Bond Bond Yield

Germany 10 Year Government Bond Benchmark Bond Yield

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Recent Developments: 

The minutes of the last FED meeting reveal an agreement to end QE this October. FRB: FOMC Minutes - June 17-18, 2014 (see last full paragraph before the heading "Committee Policy Action"). 

Goldman Sachs moved forward its prediction for the first FF increase to the 2015 third quarter. The prior estimate was for the 2016 first quarter. GS predicts that the FF rate will move gradually back to 4% by 2018.

Bloomberg highlighted that repurchase agreements, where treasuries are used as collateral, are failing at an increasing rate due to the shortage of treasuries. Those failures to complete a repurchase agreement by providing that collateral have averaged $65.6B per week this year and hit $197.6B in the week ending June 16th.

Bonds received a lift last Tuesday when stocks slid and there was sobering economic news from Europe. Germany reported that May exports declined by 1.1%, and imports fell by 3.4% which was the sharpest decline since 11/2012. The sources of the problem are discussed in this MarketWatch article. Energy costs for heavy users are much higher in Europe, causing competitive problems, and the slowdown in China is also negatively impacting Germany's exports. High energy costs drove BMW to build a plant in the U.S. rather than in Europe. The Seattle Times

France's industrial production plunged 3.7% Y-O-Y in May and declined 1.7% compared to April. German industrial production declined 1.8%. Italy also reported a negative industrial production number (-1.2% April to May) as did the Netherlands at -1.9%. It remains to be seen whether these weak numbers are just a pothole or the start of something more significant.

France's inflation was also reported at a lower than expected .5% Y-O-Y in June (+.6% when using a methodology harmonized with other EU countries). Core inflation was up only .1% Y-O-Y. Insee-The Consumer Prices Index Those numbers are disconcerting.

The three year treasury note was auctioned last week to yield .992%. Announcements, Data & Results The five year treasury was auctioned on 6/30/14 to yield 1.67%. The break-even spread for the five year TIP that day was 2%. The then current yield on a five year TIP was -.38%. Daily Treasury Real Yield Curve Rates

*************************
Fifth Street Finance (FSC) 

The BDC Fifth Street Finance raised its monthly dividend from .0833 per share to $.0917. FSC has cut its monthly rate several times since the 2010 4th quarter. The first cut was a small decline from $.11 to $.1066. The next cut was to $.0958 in January 2012 and then to $.0833. Fifth Street Finance Corp. (FSC) Dividend Date & History - NASDAQ.com

In response to this "increase", the stock went up slightly on a down day last Tuesday:

Closing Price 7/8/14: FSC: $10.03 +0.06 (+0.63%)

I own shares in both the Roth IRA, which turns the dividends into tax free distributions, and in a taxable account. BDCs do not pay qualified dividends.

Item # 4 Roth IRA: Bought 50 FSC at $9.08 (12/17/13 Post); Item # 7 Bought 100 FSC at $9.47 (12/3/13 Post);  Item # 4 Bought Roth IRA 100 FSC at $10.1 (10/19/13 Post)

When any BDC is owned in an IRA, the general idea is to harvest several dividend payments, generally a year or more, and then to sell when the market price exceeds the net asset value per share by 5%.

As of 3/31/14, the FSC's net asset value per share was $9.81, down from $9.9 on 3/31/13. (page 3 FSC- 2014.03.31-10Q). That would give me a possible exit price of $10.3 for the shares owned in the Roth IRA.

After the price finally worked its way back over $10 per share, FSC Interactive Chart, FSC announced after the close last Thursday that it was going to sell stock, one of the well known and perpetually annoying risks associated with BDCs. Fifth Street Finance Corp. Commences Public Offering of Common Stock

FSC priced 13.25M shares at $9.95 per share yesterday. There is an over-allotment option of up to another 1.9875M shares at that price.  Fifth Street Finance Corp. Prices Public Offering of Common Stock

Closing Price Last Friday: FSC: $9.73 -0.37 (-3.66%)

*********************
BlackRock Credit Allocation Income Trust (BTZ)(own in taxable and Roth IRA accounts):

BTZ received favorable write ups in two recent articles:

Morningstar: Scrounging

Barron's: Niche

CEFConnect Page for BTZ

My last open market trade was to sell shares: Sold Roth IRA: 210+ BTZ at $13.62 (3/17/14 Post)

My most recent buys are discussed in these posts: Item # 3 Added 50 BTZ at $12.35 (8/31/13 Post)(snapshots of realized gains=$413.8); and Item # 4 Added 70 BTZ at $12.63 (7/13/13 Post)

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

ConocoPhillips: 

ConocoPhillips increased its quarterly dividend by 5.8%. The new rate will be $.73 per share, up from the prior quarterly rate of $.66. ConocoPhillips (COP) Stock Dividend History The new rate represents slightly more than a doubling of the 2006 $.36 quarterly rate.

COP was one of my better buys this year: Item # 6 Bought:  50 COP at $63.68 (2/10/14 Post); Item # 1 Bought 50 COP at $68.87 (January 2014 Post)

COP, TOT and CVX are Citigroup's three top picks in "Big Oil". MarketWatch

Energy stocks tumbled last Friday after oil sank for the 4th consecutive day. Apparently, investors are less worried about events getting out of control in Iraq.

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

1.  Sold 50 HAP at $40.78 (see Disclaimer):

Snapshot of Trade:

2014 Sold 50 HAP at $40.78

Snapshot of HAP Profit: 

2014 HAP 50 Shares +$62.09

The Market Vectors Natural Resources ETF (HAP) was an unsuccessful investment. The primary headwinds have been the declines in metal and mining stocks over the past three years. The main problem has been, and likely will continue to be the slowdown in China's construction activity due to overbuilding. Bloomberg; Reuters; MarketWatch; WSJ; Morningstar "Real Estate a Warning Sign for Commodities"

Rationale: I am in the process of paring my stock allocation. My general approach when performing that kind of task is to identify underperforming stock funds for disposition. I will also pare stock funds that I intend to keep longer term by selling the highest cost shares.  

Some of the reasons for HAP's poor performance are likely to continue for the foreseeable future. The HAP price benefited over the past several weeks due to the price spike in energy names.

Closing Price Last Friday: HAP: $40.39 -0.03 (-0.09%)

2. Sold 200 CAR_UN:CA at C$23.16 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Quote Before Trade:

Canadian Apartments was my lowest yielding Canadian REIT at the then current market prices.

Snapshot of Trade: The price rose slightly after I made the preceding snapshot:

2014 SOLD 200 CAR_UN:CA at C$23.16/Proceeds C$4,613 

Snapshot of Purchase Confirmation:

Purchase Confirmation: Total Cost =$C4,153. 

Profit in Canadian Dollars: C$460

I received the dividends in Canadian Dollars which were converted for tax purposes into USDs which reduced the amounts:

2014 CAR_UN:CA Monthly Dividend Paid in CADs

2014 CAR_UN:CA Dividends =USD $105.09

2013 CAR_UN:CA Dividends =USD$54.94

Total Dividends USD$160.03

Snapshot of Taxable Profit:

2014 Canadian Apartments 200 Shares +USD$275.8

Item # 1 Bought 200 Canadian Apartments at C$20.67

Security Description: Canadian Apartment Properties REIT (CAR.UN:TOR) is a Canadian REIT that owns apartment complexes in 6 Canadian provinces.

Website: CAPREIT

Rationale: Both Canadian and U.S. REITs cratered in price starting in May 2013 when interest rates started to go up. I would anticipate that both REITs and utility stocks will decline when interest rates start to move back up, just as both sectors have benefited by a decline in rates during the 2014 first half.

I consequently elected to sell first my lowest yielding Canadian REIT before rates start to rise.

Another consideration is difficult to explain. What happens if the CAR_UN:CA remain stable in price with the Canadian dollar rising in value against the USD?

In that scenario, my U.S. tax obligation rises while I receive no more CADs for selling this security. My intention is to generate more CADs through dividends/distributions and some profit taking. I would view it as less desirable to increase my tax obligation associated with selling a Canadian security at a profit without increasing my CAD stash.

Future Buys: I will consider repurchasing shares after a 10% to 15% pullback in the price. One option would be to buy the ordinary shares on the pink sheet exchange using USDs, which is more cost effective on a brokerage commission basis. CDPYF Canadian Apartment Properties Real Estate Investment Trust The CDPYF price will reflect the ordinary share price in Toronto converted into USDs. The CAD declined last Friday against the USD but is still above the 200 day SMA:  CAD/USD Currency Conversion Chart

Closing Price Last Friday: CAR-UN.TO: C$22.90 -0.03 (-0.13%)

3. Sold 50 DLRPRE at $25.5-Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Sold 50 DLRPRE at $25.5

Snapshot of History:

Roth IRA History DLRPRE

DLRPRE went ex dividend on 6/11/14, and I received another quarterly dividend on 6/30/14.

Snapshot of Profit:

2014 Roth IRA 50 DLRPRE +$92.97 

Total Return: $136.71 or 11.64% (holding period 4+ months)

Item # 3 Bought 50 DLRPRE at $23.36 (2/25/14 Post)

Security Description: Digital Realty Trust 7% Cumulative Preferred Series E  (DLR.PE) is an equity preferred stock that pays cumulative and non-qualified dividends at the fixed coupon rate of 7% on a $25 par value. Digital Reality has the option to redeem this security at its $25 par value, plus accrued dividends, on or after 9/15/16. Prospectus

Related Trades: I nibbled at the common stock and still own those shares. Bought: 30 Digital Realty (DLR) at $53.4 (3/3/14 Post) I intended to average down when and if the shares declined below $50, which happened over a two day period in late March, but I failed to respond appropriately to that decline. DLR Historical Prices I did notice it. I am now more inclined to simply harvest the profit on the common shares provided I can sell the shares in the $58-$62 range.

Rationale: The yield fell below 7% which the current marker for selling an equity preferred stock. At a total cost of $25.5, the current yield is about 6.86%.

The DLRPRE price traded over $27.5 in early May 2013. When interest rates started to rise thereafter, the price cratered before bottoming near $21.5. DLR.PE Stock Chart That rapid decline in price (21.8%) highlights the interest rate risk issue. It is not helpful to receive a 7% annual dividend while losing 22% in the share price.

Future Buys/Sells: As with other equity preferred stocks, I will simply wait until there is a better entry point. At $21.5, the yield would be about 8.14%.

Closing Price Last Friday: DLR-PE: $25.71 +0.13 (+0.52%)

4. Bought 100 PWCDF at $27.29 (see Disclaimer):

Snapshot of Trade:

2014 Bought 100 PWCDF at $27.29

Quote Snapshot Made Shortly After Trade:

Prior Trades: None

Security Description: Power Corp. of Canada  (PWCDF:OTC) is a Canadian holding company that has interests, directly and indirectly, in financial services, communications and other business sectors. Power Corporation of Canada | Home

Profile Page at Reuters

I bought the ordinary shares traded on the U.S. pink sheet exchange using USDs.

Closing Prices 6/25/14
USD Priced Shares:  $27.39 PWCDF Historical Prices
CAD Priced Shares: $29.35 POW.TO Historical Prices
Currency Conversion C$29.35 into USDs=$27.32
Currency Conversion as of 7/3/14: $27.5158

Those holdings include other publicly traded businesses including Power Financial (PWF:TO), Great-West Lifeco (GWO.TO) and IGM Financial (IGM:TO).

Power Corporation of Canada has a 65.8% interest in Power Financial. Power Financial 2014 1st Quarter Earnings Report (net earnings of C$467M, up from C$394M in the 2013 first quarter).

Power Financial owned 67% of Great West Lifeco's common shares and 58.6% of IGM Financial's common shares. IGM also owned 4% of Great West Lifeco's common shares; and Great-West Lifeco owned 3.6% of the IGM's common shares.

So Power Corporation of Canada directly controls Power Financial and consequently has an indirect controlling interest in Great-West Lifeco and IGM Financial.

Great West Lifeco which operates through a number of companies worldwide including Great-West Life, London Life, Canada Life, Great-West Financial and Putnam Investments. Great-West Lifeco; GWO 2014 First Quarter Earnings Report (net earnings of C$587M, up from C$417M in the 2013 first quarter)

IGM Financial is a financial management company.

An organization chart can be found at the firm's website: Organization Chart

Power Corporation of Canada is profiled in a recent Motley Fool Article.

The company is currently paying a quarterly dividend of C$.29 per share. Power Corporation of Canada | Dividends

Power's senior debt is rated "A" by S & P: Credit Ratings

2013 Annual Report .pdf (net earnings of C$2.12, up from C$1.78 in 2012)

POW:Toronto- Bloomberg

Recent Earnings Report: For the 2014 first quarter, Power Corporation of Canada reported operating earnings attributable to common shareholders of C$440M, up from C$407M in the 2013 first quarter.

Rationale: There is some dividend support at the current annual rate of C$1.16 per share. The consensus estimate, as of 7/3/14, was for C$2.54, Bloomberg, so the P/E is reasonable. The P/B ratio was shown at Bloomberg at 1.32. If the Canadian Dollar rises against the USD subsequent to my purchase, this will give a boost to the ordinary shares traded in the U.S. and priced in USDs.

Risks: Currency risk is present for me since I elected to use USDs to buy the ordinary shares listed on the U.S. pink sheet exchange. The shares cratered during the recent Near Depression, with the Toronto listed shares falling about 50% in value: POW.TO Interactive Chart Consequently, there is obviously the usual risks associated with recessions. The company discusses risks starting at page 81 of its 2013 Annual Report. AR_2013.pdf

Yesterday, the CAD declined against the USD after a lousy Canadian jobs report. Seeking Alpha Employment fell by 34,000 in Ontario: Survey, June 2014 (employment increased just .4 or 72,000 compared with 12 months earlier).

Closing Prices Last Friday (CAD declined in value last Friday):
PWCDF: USD$28.40 -0.12 (-0.42%)
POW.TO: C$30.42 0.00 (0.00%)

5. Sold the Canadian ETF XMD:CA at C$26.1 (Canadian Dollar (CAD) Strategy)(see disclaimer):

This was not a successful investment which is one reason why I elected to sell it as part of my stock allocation reduction.

Security Description: iShares S&P/TSX Completion Index ETF (XMD:TOR) is a Canadian ETF that tracks an index of Canadian stocks that excludes those in the S & P/TSX 60 Index. So, this ETF is more of a small and mid cap index fund. XMD Overview - iShares Canada ETFs

Quote Shortly Before Order Entry:

Another reason for selling this security is its low dividend yield.

Snapshot of Trade:

2014 Sold 100 XMD:CA at C$26.1

Snapshot of Purchase Confirmation:

Profit in CADs: +C$210

Bought 100 of the ETF XMD:CA @ C$23.62 CAD (4/20/11 Post)

Snapshot of Loss Due to Currency Exchange:

Closing Price Last Friday: XMD.TO: C$26.07 -0.06 (-0.23%)

6. Continued Paring of RMT: Sold 126 Shares at $12.6 (see Disclaimer):

All of these shares were purchased with dividends and were my highest cost shares.

My previous pare involved a 200 share lot purchased in 2007. Sold: 200 RMT at $12.8-Lowers Average Cost Per Share to $8.61 The following snapshot includes the slight profit from that disposition.

Snapshot of Trade:

2014 Sold RMT 126 Shares at $12.6

Snapshot of Profit:

2014 RMT 126 Shares + $149.91 

Snapshot of Position Before Trade:

559.164 RMT Shares Average Cost Per Share=$8.68

Snapshot of Position After Pare:

RMT AFTER PARE As of 6/30/14: Average Cost Per Share =$ 7.91

Snapshots of Shares Bought With Last Two Dividend Reinvestments:

For both of the above reinvestments, I had selected the cash payment option, but received shares purchased with the dividends. All of those shares were included in the 126 share lot that was sold. All of the remaining shares reflected in the preceding snapshot were purchased with quarterly dividends.

Security Description: Royce Micro-Cap Trust is a leveraged stock CEF that invests in micro-cap stocks. Leverage is light at around 9% to 10%. As of 7/3/14, the average annual total return was 23.33% over five years and 12.4% over 15 years. RMT is a long term holding. However, given its recent outstanding performance, I viewed it as prudent to pare the position some by selling my highest cost shares.

CEFConnect Page for RMT

Sponsor's webpage: Royce Micro-Cap Trust (RMT)

Data on Date of Trade (6/30/14):
Closing Market Price: $12.62
Closing Net Asset Value Per share= $14.02
Discount: -9.99%
Average Discounts:
1 Year = -12.07%
3 Years= -12.46%
5 Years= -13.65%

Rationale: This transaction achieves several objectives.

(1) I lower my average cost per share from $8.68 to $7.91.

(2) I sold only shares purchased with dividends, and all shares were sold profitably. I consequently enhanced the value of those dividends.

(3) By selling only the highest cost shares, I will incur less of a tax liability.

(4) I am reducing my stock allocation and this transaction is a baby step in that ongoing process.

(5) I am very concerned about valuations in small caps.

Closing Price Last Friday: RMT: $12.45 -0.06 (-0.48%)

7. Sold 100 of CSQ at $12 (see Disclaimer): I reduced my position by about 20% with this sell. I sold my highest cost shares, even though those shares were held for less than 12 months:

Snapshot of Trade:

2014 Sold 100 CSQ at $12

Snapshot  of Profit:

2014 CSQ 100 Shares +$171.54

I suspect that this profit number will be adjusted up some when the fund reports ROC for 2014 during the 2015 first quarter. Part of the dividend is supported by ROC.

Snapshot of Position Before Trade:

501+ Shares Average Cost Per Share=$9.12

Snapshot of Position After Trade:

401+ Shares Average Cost Per Share=$8.85 

I quit reinvesting the dividend after receiving the February 2012 monthly dividend.

Security Description: The Calamos Strategic Total Return Fun (CSQ) is a leveraged balanced CEF. As of 5/31/14, the fund had the following weightings:  54.4% in common stocks; 17.2% in corporate bonds, 6.5% in convertible preferred stock; 4.9% in synthetic convertibles; and 15.5% in convertible bonds.

Sponsor's website: Calamos Investments - Strategic Total Return Fund

Last SEC Filed Shareholder Report: N-CSR (period ending 4/30/14)

CEFConnect Page for CSQ

Data on Date of Trade (6/30/13)
Closing Market Price: $12.01
Closing Net Asset Value Per Share: $12.83
Discount: -6.39%
Average Discounts:
1 Year = -9.61%
3 Years= -8.76%
5 Years= -10.09%

Prior Trades: I discussed buying shares, which are currently owned, in these posts: Item # 2 Added 50 of the Balanced CEF CSQ at $8.28 (12/27/11 Post); Item # 2 Added 50 CSQ at 9.2 (8/3/11 Post); Item # 4 Bought 100 of the CEF CSQ at $9.66 (6/3/11 Post); Item # 2 Added 70 CSQ at $9.63 (4/19/11 Post); Item # 7 Bought:  100 CSQ @ $8.94 (11/29/2010 Post)

Prior to this last trade, I have netted some small gains in this CEF.

Rationale: The reasoning discussed in connection with the RMT pare applies here and this fund has some bond exposure unlike RMT.

Closing price Last Friday: CSQ: $11.97 -0.01 (-0.08%) 

Quantitative Easing Redux?/More on Investments for Deflation/Bought 50 PFX at 16.12/Sold 50 OKSB at 13.19

1. Another Round of Quantitative Easing?: A few weeks ago, the pundits were saying a prayer over the grave of the Euro and announcing the ascendancy of King Dollar. Now that the EURO has regained its footing and the USD has resumed a decline against most major currencies, the talking heads have given up on the USD and found a new crisis brewing. Based on the recent small decline in the CPI, which remains in positive territory year-over-year, the brainiacs are now forecasting a Japanese style stagnation lasting for years or even decades. Consequently, these pundits are already urging the Federal Reserve to embark on another quantitative easing campaign to jump start inflation, as I understand the underlying basis of this theory. The Fed ended its earlier program in March 2010, having purchased 1.7 trillion dollars of treasury debt, GSE debt and mortgage-backed securities with money created by it.

Jonathan Laing in a column in this week's Barrons summarizes the arguments given by those who favor this approach now. Jan Hatzius, the chief economist for GS, believes the FED will return to "unconventional monetary easing" late in 2010 or early 2011 with the purchase of at least 1 trillion more in assets. NYT

Back in March 2009, I discussed the relationship of quantitative easing launched by the Federal Reserve shortly before FDR's inauguration in 1933 and the subsequent spurt in GDP growth and one of the most robust stock market rallies in history. Stock prices quadrupled during the Great Depression period from 1933 to 1937 after the 80% or so collapse between 1929 to 1933. Stock Rallies and Quantitative Easing If the Fed embarks on another QE campaign, I would anticipate that the USD will accelerate its decline, as its value is cheapened by money creation. Bonds would most likely fall based on renewed fears of inflation creation. Stocks and commodities would probably rise as investors reassess the prospects for GDP growth and corporate earnings. (see generally: Quantitative Easing May Change Stock Market Dynamics) Though, there is no guarantee that such a program will accomplish any of those results, but that would be the playbook based on history. The most recent proof would be what happened in all of those markets after the FED embarked in 2009 on its quantitative easing program.

It would not be surprising to see the Fed restart massive money creation when and if the economy starts to sputter. This may start to occur when fiscal stimulus winds down and additional options for fiscal stimulus are already practically non-existent given the budget deficit and the current political situation. A worsening in unemployment may be another factor causing the Fed to pursue quantitative easing again.

Quantitative easing may prove more beneficial over the short term than other policy prescriptions. However, money creation does not address the structural problems created during the Age of Leverage and may aggravate them when coupled with a continuation of zero short term interest rates. One structural problem is that consumers borrowed and spent too much money and consequently saved too little. It will just take time for that kind of structural problem to correct itself. Keeping interest rates at zero aggravates that problem, as individuals are deprived of any return on their savings. The current 2 year treasury yield of around .5% indicates that the market currently believes that the federal funds rate will remain near zero until 2012.

2. Investments for a Deflation to Low Inflation Scenario: I previously discussed some of planning for this scenario which I do not view as the likely one over the intermediate or long term. Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans & the Potential Major Correction in Bonds Down the Road This article in the WSJ also discusses investments for a deflationary environment. I discussed in the preceding linked post the categories of investments mentioned in this WSJ article, except for zero coupon treasury bonds which I do not currently own. The article quotes a financial advisor from Nashville who believes that zero coupon treasury strips provide the "best protection" as a deflation hedge.

Treasury zero-coupon bonds are created by the financial industry. The interest and principal portions of the security are separated. The zero coupon bond does not pay interest and is sold at a discount to its par value. Zero Coupon Bonds Types of Bonds

The Nashville based financial advisor may be correct in his contention, but treasury strips would also be a bad investment in the event inflation starts to accelerate and treasury bond prices fall. The strips will give an investor more bang for the buck when treasury bond prices are rising (and yields declining), but the converse is also true. The strips would be one of the worst investments in a rising rate scenario since there prices would decline more than comparable maturity bonds . And, importantly, treasuries will be more sensitive to interest rate increases than other types of bonds as explained in this T. Rowe Price publication from the Spring of 2010 at page 9: individual.troweprice.com Spring 10.pdf

Given the tax issues with strips, I would buy them only in a retirement account. Bond Taxation Rules eHow.com I am familiar with one ETF that invests in treasury strips, EDV, that is offered by Vanguard. Vanguard - Extended Duration Treasury ETF - Overview Late last year, EDV had a short term capital gain distribution of $11.108, Vanguard - Extended Duration Treasury ETF - Distributions. That would be another reason for owning it only in a retirement account. I have no position in EDV based on my views that inflation will be the end result of too much fiscal and monetary stimulus maintained for too long.

There are also some mutual funds that invests in zero coupon bonds:

American Century Target Maturity 2015 BTFTX - Fund Top 25 holdings

American Century Target Maturity 2020 BTTTX - Fund Top 25 holdings

American Century Target Maturity 2025 BTTRX - Fund Top 25 holdings

I have no position in any of those funds. In addition, the treasury strips are actively traded which gives the investor the option of buying individual securities and holding them to maturity.

I do own a small amount of a trust certificate that contains a treasury strip as one of its sixteen underlying securities. Bought 100 of the TC IPB at $16.99 Calculations On How to Recreate Trust Certificate IPB

3. Bought 50 PFX at 16.12 (see Disclaimer): PFX is a senior bond issued by the Phoenix Insurance Company (PNX) that is deservedly rated junk. I am most likely a short term holder of this security due to my opinions of its credit risk, an opinion manifested in the minimal investment made yesterday. The coupon is 7.45% on a $25 par value. This translates into a 11.55% yield at a total cost of $16.12. Interest payments are made quarterly with the last ex date in late June. That kind of yield suggests heightened danger in the current rate environment.

The bond matures on 11/15/2032.

This is a link to the prospectus: www.sec.gov

I have successfully traded PFX in the past, noting on more than one occasion during the Near Depression period that its price movement was causing heartburn to the OG and was even too wild for the LB. Phoenix Senior Bond: To Wild for LB/ Sold PFX at $17.57/ PHOENIX SENIOR BOND: PFX /

The recent earnings report that showed a operating loss led to a small downdraft in this bond's price. THE PHOENIX COMPANIES 10-q For Q/E 6/2010 One of the main problems is that Phoenix lost its main distribution channels for its annuity products in 2009, as both State Farm and Nationwide dropped Phoenix products. Those firms accounted for around 80% of annuity deposits and 30% of life insurance sales. Phoenix is trying to develop new distribution channels but it remains to be seen whether those efforts will successfully resurrect its business.

I view PFX as high risk.

4. SOLD 50 OKSB at $13.19 (see Disclaimer): LB, now in charge of the trading desk, is going to be more aggressive in managing the regional bank basket strategy. For those banks with a large percentage gain, and no or minimal dividend support, serious consideration will be given to harvesting the gain. OKSB was bought at 6.84 in January 2010 and currently pays no dividend. The last small dividend was paid before the bank entered into a memorandum of understanding with the Controller of the Currency on 1/27/2010 (item # 10 OKSB). While the last earnings report was better than expected by the analysts (item # 3), the 2011 consensus estimate of 4 analysts is only 63 cents (OKSB), which gives the stock a forward P/E of almost 21. Given the large percentage profit, the lack of a dividend, and the current valuation, the Stock Stud decided to harvest the profit.

Aegon and ING News/ MS on the U.K./ Bought IDG/Gold and Chinese Demand/Quantitative Easing and 1932 Stock Rally

1. Aegon: In an important event for the owners of Aegon's hybrids, AEGON announced yesterday that it had paid back one-third of the capital received last year from the Dutch government via Aegon's largest shareholder. As explained in prior posts, the funds were loaned by the Dutch government to Aegon's largest shareholder who then used those funds to buy securities junior to the hybrids from Aegon.

Nail on the Head for Aegon Mandatory Payment Event?

More on ING and AEGON Stoppers

More on ING and AEGON Mandatory Payment Events/Alternative Payment Mechanism:

Pay Back Dutch Government=Buying Junior Security=Mandatory Payment Event/Bond Investing Process

To unwind that transaction, Aegon buys back those Junior Securities and then the majority shareholder pays back the Dutch government. In addition to buying back those Junior Securities, Aegon made a payment on them. Both the purchase of, and the payment on a Junior Security is a Mandatory Payment Event within the meaning of the prospectuses for the hybrids. Since the Junior Securities are classified, by me at least, as Annual Payment, this would trigger 4 mandatory payments on the hybrids, starting with the payment to be received soon on December 15th. I currently own AEH, AEB, and AEF.

2. ING: I do not own any ING common stock. But I was curious about how I would sell the rights subscription in the event I did not want to buy additional shares. This document filed with the SEC explains that the right can be surrendered and then sold by the ADS rights agent on Euronext Amsterdam and/or Brussels exchange. fwp This document also explains how much needs to be tendered for the shares by a U.S. owner to buy 6 additional shares for each 7 owned. The prospectus for the offering can be found at e424b5. I own only ING hybrids, which are similar to trust preferred securities issued by banks in the U.S. The European hybrids are bonds that are classified as capital only for regulatory purposes. Unlike American TPs, however, the European hybrids do not have maturity dates and would legally allow an indefinite deferral of distributions provided the stopper clause was not activated by some event involving a Junior Security.

3. Morgan Stanley on U.K. Debt & Angela Merkel Is Worried: I read yesterday an interesting article that the U.K. was in danger of a sovereign debt crisis in 2010, according to a report issued by Morgan Stanley. Telegraph Another surprise development for 2010 according to the MS report would be the strength of the dollar.

Another report in the U.K. papers yesterday was the Angela Merkel's government in Germany was preparing an aid package for its lending institutions after the Bundesbank opined that German banks faced another 90 billion Euros in charge offs and a recent survey indicated tightening credit conditions. Telegraph

4. Japan's Central Bank: In an emergency meeting, and apparently in response to political pressure, the Bank of Japan voted to provide 115 billion dollars ( or 10 trillion yen) in short term loans to banks to bolster liquidity. NYT The title of this action was "Enhancement of Easy Money Conditions" www.boj.or.jp .pdf

5. Existing Home Sales: The National Association of Realtors reported yesterday that executed sales contracts for existing homes rose 3.7% in October, the ninth consecutive month of increases, with the reading now 32% over the year ago number. Nine Consecutive Gains for Pending Home Sales

6. Philadelphia Fed President Calls for Higher Rates: I previously discussed a speech by Charles Plosser, the Philly Fed President, who was concerned that the Fed was repeating the same mistakes now with its easy money policies that an earlier Fed committed back in the 1970s. Item # 9 Sold LT Sunopta at $4.06/Bought 50 LT SNV at $3.73/Wolseley & Landec Earnings/Repeat of the 1970s Inflation? In a speech yesterday, Plosser became to the first major Federal Reserve official to call for an interest rate rise:

"Ultimately, inflation is a monetary phenomenon and there is no question that current monetary policy is extraordinarily accommodative. The Federal Open Market Committee has maintained the federal funds rate near zero for just about a year now and the Fed has more than doubled its balance sheet in the process. Without appropriate steps to withdraw or restrict the massive amount of liquidity that we have made available to the economy, the inflation rate is likely to rise to levels that most would consider unacceptable. The great challenge facing the Fed is getting those "appropriate steps" right. ..

An alternative view shared by many others is that the just-described conventional wisdom misses the mark and without a more deliberate policy of reducing liquidity and raising interest rates sooner rather than later, we could very well see inflation become a serious concern. In this view, inflationary expectations play an important role in the dynamics of inflation. It is the Fed's credibility to keep inflation low and stable that is key to anchoring those expectations. So, the Fed must act in a way that assures the markets and the public that it will take the necessary steps to keep inflation low and stable. If it does not do this, expectations can become unanchored and inflation will rise regardless of the amount of unemployment in the economy.

This view is consistent with both theoretical and empirical evidence that finds that economic slack or low resource utilization is not a very reliable predictor of inflation. Moreover, several empirical studies have shown that economic slack is difficult to measure with any accuracy." Speech: Monetary Policy and the Wisdom of Wayne Gretzky (December 1, 2009) - Philadelphia Fed

He may very well be right but that is not going to change the path that the FED is now on.

I did not mean to imply in yesterday's post that the Federal Reserve is currently conducting a Jihad against the responsible persons in our society who saved money and spent within their means (just a slight Fib here). No, what I meant to say then was the responsible members are just collateral damage.

7. Citigroup on the Banks: The Citigroup analyst, Keith Horowitz, has Zions (ZION) as a sell, and I am staying away from the common stock. Reuters It is impossible for me to have any confidence whatsoever in the management of a bank that helps to funds a massive bubble in real estate in Arizona and Nevada. I do have small positions in Zions equity preferred issues (at parity with the government's preferred) and its TP issue. Horowitz has a low opinion about KeyCorp and Regions, and I share that low opinion. I recently added a small position in a Regions and a KEY TP. I own lottery tickets in both KEY and RF common shares. LOTTERY TICKET PURCHASES: LINKS IN ONE POST

I have placed both Key and RF in my category 1 for regional bank stocks which means that I have little confidence in these banks, NO CONFIDENCE IN MANAGEMENT, and I will not invest more than $300 in the common shares. I recognize that over a long period of time the bank at least has the potential to recover. Regional Bank Stocks It may take five or more years, however, to recover from the flagrant errors made by their managements, many of whom still have their jobs.

8. Bought 30 IDG at $18.33 in Regular IRA Yesterday (see Disclaimer): When ING was having their tussle with the EC, the possibility of a deferral of the ING hybrid dividends was a real possibility. In fact, Moody's said it was highly probable that the EC would demand a deferral. I did sell a 50 share position of ISF during that fear period to lock in a profit in my regular IRA, and that one had a huge percentage gain over a short period of time. The buy was at $4.6 in February 2009 (BUY OF ISF) and I sold those shares at $14.65. I do not regard that decision as a mistake under the prevailing circumstances at that time. With the dividend, my overall profit in that transaction was close to $500. With the recent settlement with the EC, and the statement made by the EC that no deferral will be required now, I decided to increase my position in ING hybrids by using the profits on the ISF transaction to buy shares in IDG, a functionally equivalent security. I went with IDG because it has different payment periods than my other ING hybrids, with the next payment due in January. The other hybrids that I own pay in December. The coupon on IDG is 7.375% on a $25 par value. The yield at a total cost of 18.33 is about 10.06%.

For those unfamiliar with the European hybrids, they are bonds. However, we call them hybrids because they qualify as equity for regulatory purposes in determining capital. Unlike the TPs issued by U.S. banks, the European hybrids pay qualified dividends, and IDG is listed at the Quantum site as one of the ING hybrids that pay qualified dividends. Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.com Based on my own 1099s received to date, I can only verify that IND and INZ do, since those were the only ING hybrids owned by me prior to this year. My 1099 for 2008 did classify the entire payments made on those 2 securities as qualified dividends subject to a maximum tax rate of 15%. (the bulk of ING hybrids are consequently owned in a taxable account) I would expect the ones bought in 2009 will show up in my 2009 1099 as paying qualified dividends when that form is received next year.

I also own INZ in the regular IRA which was bought opportunistically at $7.82, also in February: Buy of 50 INZ at 7.82 At that price, the yield is around 22.5%.

This is a link to the prospectus. 424B5 Dividends are cumulative. There is a stopper provision that is typical and I have discussed it many times in this blog. Unlike U.S. hybrids, there is no maturity date, a major negative, and no limitation on the period for a deferral, usually five years for a U.S. bank TP.

So, for the ING hybrids, I now own 200 IND, 100 IGK, 50 INZ and 30 IDG.

9. David Rosenberg/Gold/Chinese Demand: I could not help but notice at YF a story that David Rosenberg was predicting that gold was headed to $2600. Rosenberg The story was originally published at the online site Business Insider Rosenberg's missives can be found at Scribd, and this is a link to his discussion about gold at yesterday's Breakfast with Dave: Breakfast With Dave:

David is a frequent subject of my barbs about his stock market predictions since March, along with his soulmate Alan Abelson. Alan's main contribution to the philosophy of investing is the maxim: "the glass is either empty or full of untreated raw sewage". I did not know what to make of David's forecast. On the one hand, I own gold and silver and would profit significantly by the rise predicted by him. Then, if he proves to be more prescient about gold than stocks, what would that mean for other asset classes, other than a few foreign currencies?

He does bring up some facts that are interesting. The China Gold Association recently stated that China's gold demand was on pace to increase 14% in 2009 to 450 metric tonnes. Then he notes a quote from a Chinese official, quoted in a Bloomberg story, who recommended that the Chinese government increase its gold reserves significantly. Wow! Having said that I am not about to buy gold at the current prices. (I also own a sizable position in the Permanent Portfolio that has a significant ownership of gold and silver bullion: see Comments on Barron's Roundtable and Permanent Portfolio Family of Funds, Inc. Semi-Annual Report Form N-CSR-July 31, 2009).

After reading all of that yesterday, I cancelled an order to sell 100 RJZ, Bought MSPRA RJZ & ADX/ COMMODITIES AS AN ASSET CLASS, and to buy 50 shares of GLL with a below market limit order, per my plan to hedge my gold holdings, in order to further assess these developments. I am not talking about Rosenberg's opinion when I refer to developments, but to the Bloomberg story.

Another reason to cause some pause in adding GLL was this article written by Niall Ferguson in this week's Newsweek. I would concur with his observation made at the bottom of page 3. After reading that article, I asked myself whether gold is going up because foreigners have lost confidence in the U.S. government's ability to control spending.

10. Quantitative Easing and the 1932 Experience: In early March, I ignored the advice of David Rosenberg and Alan Abelson (Abelson and Rosenberg Again and Again/Shiller on Improving Psychology), who were predicting a further decline after the S & P 500 fell to 666. As an aside, hopefully hitting that number is merely a coincidence, and not a technical signal from the Lord, and that has worried the Old Geezer. Number of the Beast - Wikipedia This happened on March 6th: ^GSPC: Historical Prices for S&P 500 INDEX An email from a reader today reminded me why I had more confidence in that buying spree. In 1932, the Fed embarked on a quantitative easing program and the market took off. /Stock Rallies and Quantitative Easing

The LB pointed out that the low was 666.79, so not precisely 666, and that the Old Geezer was scared of his own shadow. The RB pointed out that it had to engineer a coup d'etat on 3/3 at the trading desk here at HQ since both the LB and the Old Geezer were hiding underneath the sheets crying for mama. RB Touts His Horn as HQ Closes for the Evening RB's Coup D'Etat on 3/3