David Stockman on GOP Tax Policy/Bought 100 MBC at 9.78/ADM EMR FE BKMU/Sold BKMU at 5.93

David Stockman, a former GOP Congressman and Reagan's Director of Management and Budget, wrote an interesting article in the NYT. He claims that the GOP has changed its stripes from a party of responsibility and fiscal conservatism, and I would certainly agree with that view. The GOP now is simply unrecognizable from the party that I knew as a young man, and the changes are not for the better. He regards the current GOP push to extend the Bush tax cuts as tantamount to filing a Chapter 11 bankruptcy petition for the U.S.

Since the next Governor of Tennessee is likely to be a Republican, I will vote in the August 5th Republican primary for the GOP Mayor of Knoxville, Bill Haslam, as the least objectionable candidate, the criteria used to make almost all of my voting decisions. And Howard Baker endorsed him, and Howard is more of a traditional Republican than the current ilk.

The personal savings rate rose to 6.4% in June, the highest rate in a year. News Release: Personal Income and Outlays, June 2010 The rate for May was revised up to 6.3% from the earlier estimate of 4%. Real disposable income rose .2% in June and .4% in May. During the Age of Leverage, the savings rate steadily declined as consumer's debt load increased as a percentage of disposable income. Eventually, the savings rate went into negative territory as debt soared to over 130% of disposable income at the start of the financial crisis. The ultimate causes of the financial crisis were too much debt and the improvident extension of credit which fueled the creation of a bubble in housing prices.

One of the most interesting series of charts which explain intuitively what happened can be found in this publication: invescoaim.com/.pdf I have previously referenced those charts on many occasions throughout this blog. Of course, money saved is not spent, but consumers have to repair their balance sheets by spending less and saving more before a sustainable economic recovery can take place. So, an increase in the savings rate may have short term negative impacts on the U.S. economy, but it will be a positive over the longer term.

1. Added 100 of MBC at $9.78 on Monday (see Disclaimer): I previously bought 100 MBC at 9.84 and I received the 3% annual guarantee for the first coupon period in May. Item # 8 MBC I will just copy my earlier discussion about this principal protected note and then add a few comments.

" MBC is another Citigroup Funding unsecured senior note that matures on 6/9/2014. This security has a similar structure to the others which I have recently purchased and discussed in this blog.

Par value is $10 which will be paid upon maturity provided the issuer is still solvent. I view the issuer's credit risk to be the main risk of this security.

Citigroup will pay annually a 3% guaranteed interest rate calculated on that $10 par value or $30 per year for 100 shares. As with the other Citigroup principal protected notes previously discussed, it is possible for the investor to receive more than that 3% guarantee. This particular note will pay up to 30% based on the increase in the Russell 2000 index from the starting value for each annual coupon period, with the usual proviso. I call this proviso the reversion clause. If there is one day when the Russell 2000 index closes above that 30% maximum amount, there is a reversion to the 3% guarantee and the closing value of the index is no longer relevant for that coupon period. The index could end up 28% for that period but the investor would still receive that 3% due to a maximum level violation."

When I bought the first 100 MBC, there had already been a maximum level violation and a reversion back to the 3% guarantee. The first coupon period ended on May 21, 2010. Final Pricing Supplement MBC is currently in its second annual coupon period. I believe that the starting value of the Russell 2000 index for this second period is 649.29, the index value on the closing date for the first annual period and the starting date for the second. ^RUT The second coupon period ends on 5/20/2011. MBC will pay the greater of 3% or the percentage gain in the Russell 2000 from the Starting Value to the closing date, but only up to 30%. And, as previously discussed, there will be a reversion to 3% irrespective of the increase if the Russell 2000 has just one closing day above a 30% increase from the Starting Value of 649.29. This places the maximum level at 844.077 in the Russell 2000 index. If there is one close in the Russell above 844.077 between 5/21/2010 and 5/21/2011, then MBC pays the guarantee of 3% again.

By way of example, assume there is no maximum level violation and the Russell has a closing value of 825 on the closing date of the second coupon period. The percentage gain over the starting value of 649.29 in that hypothetical would be 27.06%. That would mean an annual payment for the second period of .2706% x. $10 par value or $2.706 per share and $270.6 for 100 shares.

The ultimate downside for all principal protected notes is the bankruptcy of the issuer. Since this is a senior unsecured note, such an event would cause a loss of most of my investment. Assuming Citigroup survives to pay off the note in 2014, then my downside is the receipt of the minimum guarantee of 3% for each of the remaining coupon periods (2011, 2012, 2013, 2014). The maximum upside is 30% per year plus a small profit on the shares at maturity. A more realistic maximum upside is one year of 3%, one year over 20%, and two years between 10 and 20%.

I also own MOU, which is also tied to the Russell 2000, but has a higher maximum level of 37% and a lower starting value for its second annual period. Bought 100 MOU at $10.12 This one had a reversion to 3% in its first coupon period too. The next closing date is 2/23/2011. It was a tough call whether or not to buy another 100 of MOU or the MBC bought Monday. One reason for buying MBC was that shares were available at a discount to the $10 par value on Monday, which was not the case for MOU. Still, at some point, I might sell 1/2 of MBC and buy another 100 of MOU, depending how the situation develops over the next few months.

2. Archer-Daniels- Midland (ADM)(Owned): ADM reported fiscal 4th quarter net income of 446 million or 69 cents a share, a major improvement over the 9 cents earned in the linked quarter. For the fiscal year ending 6/30/2010, ADM earned $3 per share. The consensus estimate was for 52 cents.

ADM saw improvements in operating profits from all of its business segments. The operating profit in the oilseeds processing unit increased 132 million "due to improved margins and higher volumes". The corn processing unit operating profit rose 151 on "stronger bioproducts results". The agricultural services unit saw an operating profit surge of 195 million on "good global supply of grains and oilseeds and modestly improving demand, particularly in Asia".

Bought 50 ADM at 28.05

3. SOLD Bank Mutual (BKMU) AT 5.93 (See Disclaimer): When discussing this bank's last quarterly report, I mentioned that its efficiency ratio was a pathetic 98.03. Item # 4 BKMU This indicates to me that the managers of this bank need to be replaced. Generally, investors want to see this ratio below 50 and certainly no higher than 75. Efficiency and Operating Ratios The efficiency ratio is arrived at by dividing operating expenses by the sum of net income income before loan losses and non-interest income. The abnormally high expense ratio was one reason for placing this bank in category 1 of the Regional Bank Stocks strategy.

Another reason for my low regard was the bank's negligible profitability which did not support the current dividend payout. I mentioned that I would not be surprised to see a dividend cut. Item #2 Bought 50 BKMU at 5.51. The Board just cut the dividend from 7 cents to 3 cents. This does not bother me except on a couple of levels. The bank did not mention in the press release that it was cutting its dividend. I abhor that practice. And, while shareholders take a hit, I am confident that management will not do the same for themselves or do much to improve the bank's efficiency and profitability in any meaningful fashion. The only way for that to improve is for another bank to acquire BKMU and then do what needs to be done.

After writing the foregoing, RB said BKMU needed to be sold before LB's negativity infected the Old Geezer requiring a transfusion of a cocktail of anti-depressants. OG did not care one way or the other about BKMU, a typical response, and went ahead and sold the 50 shares at $5.93 to avoid having to listen to more of LB's criticisms.

4. Emerson Electric (owned): My last purchase of Emerson shares, other than through reinvestment of dividend, was at $33.33 in November 2008. EMERSON Emerson beat the consensus estimate for earnings per share by 10 cents and raised its guidance for FY 2010 to a range between $2.60 to $2.7. Emerson reported net income for its 3rd fiscal quarter of 585 million or 78 cents per share, an increase of 53% from the 51 cents earned in the linked quarter.

After initially popping to $51.8 in trading yesterday, EMR shares closed down 1 cent at $50.84.

5. FirstEnergy (FE) (non-core electric utility holding): FirstEnergy beat the consensus estimate by 4 cents and raised its guidance for 2010 to a range of $3.6 to $3.7. The consensus for 2010 had been $3.54 prior to this report. FirstEnergy reported net income of 256 million on a GAAP basis or 87 cents per share, and 82 cents on an adjusted basis. Distribution sales increased by 8% compared to the 2nd quarter of 2009 "driven by a 13 percent increase in usage from industrial customers, particularly in the steel and automotive sectors."

FE shares closed at $38.6, up 16 cents in trading yesterday. I recently sold 50 of my 150 FE shares and invested the proceeds in an ETF: Sold 50 FE at 38.77 & Bought 100 DHS at 35.32.

KO/Sold COP at 57.44/Bought BKRS and MWA as Lottery Tickets/Added 200 GDV at 13.33 & Sold ETF PIQ at 20.97/Bought 100 of the CEF CSQ in Roth at 8.49

The July purchasing manager's index for the 16 countries using the Euro was revised up to 56.7 from an earlier estimate of 56.5. .markiteconomics.com PDF. This index is similar to the ISM index in that any reading over 50 indicates expansion.

The ISM manufacturing July survey was a better than expected 55.5. New orders, however, contracted to 53.5 in July from 58.5 in June. The employment component increased .8 to 58.6. ISM

The S & P 500 closed several points above its 200 day moving average yesterday. ^GSPC: Summary for S&P 500

The outlines of the strategy summarized briefly in yesterday's post, Coping with the Federal Reserve's Jihad Against Savers, is similar to all of LB's multi-prong strategies, with layers on top of layers and a lot of moving parts. RB just added that the more appropriate descriptions for all of the plans hatched by the LB would be "convoluted" and "overly complex". The most important part of the strategy was the time period of its inception along with the initial identification of securities in the summer of 2008 that could work in both inflation and deflation scenarios. Prior to that time, I had not devoted any time to identifying, or learning about synthetic floaters and floating rate preferred stocks with minimum guarantees.

1. Coca Cola (own): Barrons had a follow-up in this week's edition on earlier article in 2009. The article points out the remark made be the CEO Muhtar Kent that North America will be a "growth market" for the next 10 years and beyond. What stunned many analysts from the second quarter report was a 2% volume gain in North America, the first such gain since 2006. Prior to the last quarter, the consensus view- which I shared- was that KO's growth opportunities were primarily in emerging markets. The article quotes an analyst, Caroline Levy, who believes the shares will hit $63 in a year. A more subdued analyst, Todd Lowenstein, believes that the market will not give KO any credit for a resumption of North American growth until a sustainable trend is established. I would tend to agree with that opinion, but I would agree with Ms. Levy's one year target as doable. I doubt that KO needs growth in North America to reach that price target. At a $63 price and a current estimate of $3.47 in 2011, KO would be selling at a 18.15 P/E. Historically, such a multiple would be closer to the lower end of KO's range than to a top. I would not add shares at that price, however. The historical yearly P/E range can be found in the S & P report on Coca Cola. An 18 P/E is shown in the S & P report as the low for 2006 and 2007, and lower than the low number for 2000-2005. S & P has KO rated 5 stars with a $65 price target in its report dated 7/31/2010.

My primary reason for owning KO shares is its long standing history of growing its dividend, with the recent history of dividend growth resulting in a doubling of the dividend in seven years. I discuss this point in more detail in Item # 1, Barrons Recommendations and My Trades. Buy of KO at 38.72 ADDED 50 KO AT 54.26 The position in KO is near the maximum permissible limit allowed by one of LB's rules.

2. Added 200 CEF GDV at $13.33 and Sold 50 of the ETF PIQ at 20.97 (see Disclaimer): PIQ was bought at $19.81 in November 2009. Bought 50 ETF PIQ at $19.81 I was not satisfied with its performance against any benchmark. Possibly it would perform better during a long term secular bull market in stocks. Another consideration is its negligible dividend.

In the place of PIQ, I added another 200 shares of the CEF Gabelli Dividend & Income Fund (GDV) at $13.33. This stock CEF pays a monthly dividend, currently at six cents, but the fund recently announced an increase to 7 cents for the September distribution. The Gabelli Dividend & Income Trust Continues Monthly Distributions of $0.06 Per Share for July and August and Raises the September Distribution from $0.06 to $0.07 Per Share. If the fund continues that 7 cent per month distribution, the annualized yield based on a $13.33 total cost would be about 6.3%. I do not reinvest the dividend for GDV.

At the time of my purchase GDV was selling at more than a 14% discount to its Net Asset Value. GDV had a NAV of $15.33 on Friday, 7/30/2010 and a closing price that day of $13.13, resulting then in a discount to NAV of 14.25. WSJ.com; CEFA - Closed-End Fund Association

On Monday, 8/1/2010, GDV closed at $13.33 and the NAV was $15.73. So the market price increased 20 cents and the NAV was up 40 cents. This expanded the discount to -15.26 as of yesterday's close.

This fund uses leverage. This is a link to its last filed quarterly report filed with the SEC. This is the link to the Morningstar page on GDV.

3. Bought 100 of the CEF CSQ in the Roth IRA at $8.49 (see disclaimer): CSQ is classified as a preferred stock CEF even though its portfolio includes about 49% in common stocks. Calamos Investments - Strategic Total Return Fund I bought it to give the bond heavy retirement accounts a tad more exposure to stocks. CSQ was selected since it pays monthly dividends, the yield was close to 7.45% at a total cost of $8.49, and the shares were bought at over a 12% discount to net asset value. CSQ

This fund is leveraged, and CSQ did reduce its monthly distribution from $.0625 to the current $.0525 in November 2009: Calamos Investments - Strategic Total Return Fund I will start to reduce my exposure to leveraged funds when the 3 month LIBOR rate rises above 1.5%. I would be more likely, however, to reduce my exposure to leveraged bond CEFs before leveraged stock ETFs.

This is a link to the SEC Filed semi-annual report for the period ending 4/30/2010.

As of yesterday's close, this CEF had a NAV of $9.71 per share and was selling at a -12.87% discount to its NAV based on the closing price of $8.46. WSJ.com

4. Bought 40 BRKS on Monday at $7.72 and 50 MWA at $3.74 Last Friday ( LOTTERY TICKET category) (see disclaimer): As with all LT purchases, it does not matter what happens on the downside given the immaterial exposure in the investment. I mentioned in an earlier post that I was re-starting this strategy primarily to entertain the RB and keep it from causing any real trouble. Re-Starting LT Strategy

Since I discussed both of these companies in earlier posts, I will simply refer anyone interested in them to those earlier posts. I previously bought Brooks Automation (BRKS) at 8.62 and sold those shares at 10.2. The small profit allowed me to increase my exposure over the $300 limit permitted for Lottery Tickets, since this rule permits adding previous profits to the $300 maximum. I was therefore able to buy 40 shares of BRKS this time rather than just 30 shares.

Mueller Water (MWA) was previously purchased at $3.62 and sold at $5.61.

Brooks did report a profit for the Q/E 3/31/2010 of 33 cents, and 16 cents on an operating basis. e10vq On 7/13/2010, the stock popped over a buck to $9.03 per share (BRKS) after the company raised guidance for the 3rd quarter to 22 to 24 cents on better then expected revenue of 156 to 157 million. SEC Filed Press Release The street was then expecting 19 cents.

5. Sold 50 COP at $57.44 Yesterday (see Disclaimer): COP just went ex dividend and the percentage gain from my recent purchase at 48.75 was just too much (almost $500), too fast (less than a month), to pass up. The COP shares were bought in one of the satellite accounts, where the stock purchases are simply viewed as temporary placeholders for money market funds earning nothing. It would take a lot of money earning .1% to generate almost $500 in a year, something like $500,000. This transaction will be consequently viewed as a success, irrespective of what happens to the upside hereafter in the COP price, particularly given that it was funded out of idle funds in a money market account.

I also bought an exchange traded, principal protected note from Citigroup Funding yesterday which I will discuss in the next post.

Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans & the Potential Major Correction in Bonds Down the Road

A WSJ article pointed out the obvious, the yield alternatives for savers are bleak and becoming bleaker. Bank of America slashed its five year CD rate by 1/2% to 1.75% and its new 3 year CD rated declined to 1.1%. A two year treasury note hit a record low last Friday at .539%.

The 3 and 6 month treasury bill yields are .147% and .198% respectively. A ten year treasury is at 2.905%. The Vanguard Prime money market fund has a seven day yield of .12%. Fidelity Cash Reserves is at .1%. Taxable Money Market Funds - F Huge sums of money are sitting in these money funds earning those rates. An online savings account may yield around 1%, less if maintained at a branch location.

As of 7/30/2010, the SEC yield for the Vanguard Total Bond Market ETF was 2.87%. Vanguard - Total Bond Market ETF (BND) Vanguard's Intermediate term government bond ETF had an SEC yield of 1.81%.

The Federal Reserve's Jihad against savers is likely to continue for at least several more months, continuing to punish those who had no role in causing the financial crisis in order to provide assistance to those who did. The punishment occurs of course in the forced wealth transfer from the responsible citizens to the irresponsible, greedy and reckless. Even after the Fed ends its Jihad, those savers who piled into bond funds seeking any kind of yield will be skewered again as those investments lose value as interest rates rise.

The general consensus is that the low yields indicate economic weakness for years to come, an American version of the Japanese economy from 1989 to date. I suspect that this opinion is based on an incorrect conclusion currently being drawn from the low interest rates and bond yields prevailing today. The low yields are more due to the Fed's zero interest rate policy for federal funds that has dramatically lowered all short rates to abnormally low yields. This in turn has a caused a stampede into bonds, as investors search for yield, a feeding frenzy reminiscent of the final stages of a parabolic move in any asset class, such as the upward spiral at the tail end of the last long term secular bull market in stocks in the late 1990s.

It is more the overwhelming demand for bonds caused by the Federal Reserve's policy, and the prospect of that policy continuing for an "extended period" of time, that is causing the formation of an unprecedented bond bubble across the spectrum. The low yields do not reflect so much an opinion on the prospects of future economic growth as the confluence of abnormal demand for bonds and the Fed's Jihad against savers. Over 700 billion dollars has flowed into bond funds over the past 18 months. USATODAY.com

If that turns out to be a correct forecast, then the Fed's policy will end up being a disaster for individual's failing to exercise appropriate caution, first in depriving them of an acceptable rate of return for their savings for several years and then causing a bond bubble to inflate, drawing individuals end near or at the top, only to burst it with a greater than expected rise in short term rates later on to combat emerging inflation.

One problem about the future is that it is ultimately unknowable. So, given my particular financial situation, overall knowledge about securities, daily attention to what is happening in the world, and my tolerance for risk, I will plan for many alternate scenarios. One scenario, viewed as unlikely but possible, is a long period of low inflation and occasional deflation, sub-optimal and stagnant economic growth, and abnormally low interest rates. For this type of scenario, I want long term investment grade bonds and bond funds. I will also continue to stay out of debt as one important way to deal with this kind of scenario. I am naturally inclined to avoid debt anyway so this is easy for me to do, and I have none now.

Debt, particularly excessive debt and leverage, can be a hazardous to one's fiscal health in a deflation scenario. For example a person buys a house for $400,000, now worth $300,000 and has a mortgage of $380,000. The borrower's income growth is virtually non-existent, and their job is not exactly secure. Some bills are resistant to going down, however, such as medical insurance which still increases at a rapid rate, college tuition for the kids, and property taxes. The fixed coupon payments of the mortgage obligation become harder to service with virtually nothing in the way of income growth, interest on savings or appreciation in investments over their cost of purchase.

In addition to staying out of debt, I have bought a large number of securities that may do well in the low inflation to deflation economic scenario. The following is a brief summary of my plan for this type of scenario, which interestingly involves some securities that can swing both ways particularly when purchased at advantageous prices. If I had to implement a plan now with new purchases, I would have to do it differently. Fortunately, many of these purchases made in furtherance of this plan were made at far more favorable prices than prevailing today. I have almost zero interest in adding to bond positions at current prices.

1. Floating Rate Securities with Minimum Guarantees: The first group of securities, which I started to purchase during the Near Depression period, have the capability to work in both the deflation and inflation scenarios. I say "capability" to emphasize that many of these securities are non-cumulative floating rate equity preferred stocks issued mostly by financial institutions. In short, the security could work in both scenarios assuming the issuer continues to pay the dividends. Some of these securities are synthetic floaters tied to both junior and senior bonds. One disadvantage of the synthetic floaters is that they have a maximum yield which would make them work less well in a hyper inflationary environment with skyrocketing short term rates then the equity preferred floaters with no maximum yield level. I discuss these securities in greater detail in posts discussing their purchase: Floaters: Links in One Post Introductory discussions are provided in Advantages and Disadvantages of Equity Preferred Floating Rate Securities and Synthetic Floaters.

Both of these security types pay the greater of a guarantee, usually somewhere in the 3% to 4% range, or some percentage above a short term rate such as the 3 month treasury bill or the 3 month LIBOR rate. Historically, the 3 month LIBOR rate would be higher than the 3 month treasury bill. I would therefore expect a .75% over 3 month LIBOR to be a better float than .75% over the 3 month treasury bill. These securities were very appealing during the Dark Period, when the market crushed their prices, which enhanced both their deflation and inflation protection to me.

A simple way to understand the effect of purchasing these securities at a large discount is my purchase of METPRA at $7 and then again at $12.5. (the decline in a similar security, AEB, was even more extreme) This equity preferred floater was bought at the $12.5 price in April 2009, Added To METPRA, and earlier in the Dark Period at the $7 price. Par value is $25. METPRA pays the greater of 4% or 1% above the 3 month LIBOR rate. If I bought METPRA at $25, the 4 % guarantee is worth 4%. Buying the security at 1/2 of par value results in a guaranteed yield of 8% (assuming MET LIFE pays the dividend!). The $7 price results in a minimum yield of 14.29% (4% x. $25 par value=$1 per share per year dividend by a cost of $7 per share=14.29%). A purchaser at last Friday's close of $23.27 would have only a 4.3% minimum yield. So the guaranteed minimum of 4% applied to the $25 par value is the deflation protection. The inflation protection is the LIBOR float which is activated when the 3 month LIBOR rate exceeds 3% during the relevant computation period for METPRA. This could be due to a number of factors, most likely a rise in the benchmarks rates set by central banks in an effort to control inflationary pressures which would be smashing the value of fixed coupon bonds. LIBOR Rates History (Historical)

For the METPRA bought at $12.5, a 6% 3 month LIBOR rate during the relevant computation period would result in a 14% yield for those shares. (6% + 1% spread=7% rate x. $25 par value=$1.75 per share per year dividend by the $12.5 cost=14% or 8% over the 6% LIBOR rate). This is the inflation protection. Inflation or Deflation: Bond Alternatives/

2. Long Term Investment Grade Corporate Bonds: I have bought a large of these securities since September 2008, mostly in trust certificate legal form. A trust certificate represents an undivided interest in the asset of a trust, administered by an independent trustee, and that asset will be a bond. Trust Certificate Links in One Post

I also own some Trust Preferred Securities which are in essence junior bonds, though many of those are rated below investment grade as a result of the financial crisis. The last category are baby bonds or mini bonds traded on the stock exchange. Exchange Traded Bonds. Almost all of these securities have enjoyed huge rallies in recent months, as investors bid up prices trying to secure some kind of yield.

For purposes of my strategy, I divide those bonds into two general categories: those bought at prices to yield more than 10% (no longer available for new purchases) and those yielding less than 8%. I have a few that are in between but most are in one or the other category.

For those with yields over 10% at my purchase cost, I intend to hold them even if inflation becomes a problem. The income stream now is another reason to keep them. Many of those purchases are yielding more than 15% and the bonds are investment grade bought during the height of the financial crisis. (some REIT equity preferred stocks also fall into this category with one yielding 70% per annum at my purchase cost of $2.9, as does several but not all of the ING and AEG hybrid purchases: Buy of AEH at $4.63 in IRA; Bought 50 AEF at $16.82, Buy of 50 INZ at 7.82- all still owned)

The other category contains a number of bonds purchased with less than 8% yields over the past year as I cope and adapt to the continuing Fed Jihad. We must all do our part to help the Masters of Disaster get back on their feet quickly, which they have already done, and start earnings tens of millions for being doofuses and the most overpaid persons in the history of mankind and the universe in all of its dimensions. I would postulate that there must be a very clear advantage to looking and/or acting like you know what you doing.

I am trading those bonds some, clipping some interest payments and attempting to lower my average cost by trimming on pops and hopefully buying back on dips. Many of the trades are in 50 share lots. (e.g. Sold 50 REPRB at 21.9 & discussion in Item # 4 CPP) If interest rates start to spike I am likely to start dumping most of those bonds. The risk of loss is just too great in a rapidly rising interest rate environment. Some of the bonds that fall into this category include the following: Bought PJL at 24.42; Bought 100 MJV at $24.8; Bought 100 of the TC JBI at $25.1; Bought 50 JBI at 24.81; Added 50 PJI at 20.17; Bought 50 KRBPRE at 24.62 in Roth IRA; Bought 50 Shares of FPCPRA at 25; Bought 50 PJS at 23.73; Sold 50 of 150 DKK (all DKK shares); Added 50 KTX at 25; /Bought 100 AMPPRA at $24.75; Bought in ROTH 50 VNOD at 24.86; /BOUGHT 50 VNOD AT 24.85 in Taxable Account; Sold 50 of the 150 of VNOD at 25.54; Bought 100 UZV at $24.42; Bought 50 AFE at 22.87; Bought 50 AFE at 23.17; Bought 100 TDA at 25.22; Bought 50 NPBCO at 23.09/; Bought 50 of the TC PZB at 19.85; Add 50 PYS at 19.59; Bought 100 of the TC DKF at 25.87; and Bought 50 TP SBIBN at 23.2. I have already started to pare some of these positions such as AMPPRA, FPCPRA and DKK.

There is a lot of interest rate risk baked into a bond with such a distant maturity. {Item # 1 Impact of Rising Rates on Bond Prices & Item # 2 Interest Rate Risks- Bonds, see also SIFMA's discussion at Rising Rates and Your Investments)

Besides trading in and out, I will use one or more triggers to sell these positions, such as a rise in the LIBOR to over 1.5% or the 10 year treasury piercing a 4% yield with gusto. I am not adverse to buying the 10 year non-inflation protected treasury note, just not at 3% or even 4%, or 5% for that matter. At 6%+, I may start to nibble. (historical weekly 10 year CMT treasury since 1962 www.federalreserve)

On the other hand, if the Japan type scenario unfolds, these bonds referenced above will continue to do well (assuming no serious credit risk issue which is always a concern with corporate bonds!) and provide me with a good stream of interest income compared to the alternatives, some of which are summarized at the beginning of this post.

3. Use of Bond CEFs and Some Bond ETFs: I am simply not able to buy a bond fund such as BND yielding 3%. This is just not going to happen. Instead, I have recently added some bond CEFs selling at a discount to par value as an alternative, but many of those have rallied since my purchase and I would consequently have no interest in them. The yields on these purchases (CEFs and ETFs) vary, but generally fall in the 5 to 9% range, depending on the fund. Added 100 BDF in the Roth at 17.1 Bought 100 BAB at 25.98 Preferred Stock ETFs: Bought 200 PGX at 13.53 Bough 50 NBB at 19.67 Bought 100 of the CEF HPI at 17.76 Bought 100 BTZ at 12.05 (current 200+ position in PSY is similar to BTZ); Added 50 of the CEF ERC at $14.14 (bringing position up to 250 shares); Added 400 ACG at 7.85 (later sold 200); Bought 200 ACG at $8.12 in Roth The purchase of 300 shares of both WIW and IMF, provide less of a current yield, but those CEFs do own inflation protected securities and consequently provide some dual protection with their current yields in the 3 1/2 to 4% range Bought 200 WIW at 12.29 Bought 300 of the CEF WIW at $11.94 Sold 200 WIW at $12.5 Bought 300 of the CEF IMF at 16.51

I prefer the bond ETFs and CEFs that pay monthly distributions. All of the the foregoing (PGX, NBB, HPI, ERC, BTZ, PSY, WIW and IMF) pay monthly except for BDF which was recently trimmed from 200 to 100 shares after it went ex dividend.

I also own three Vanguard bond mutual funds that I have been trimming (TIP, investment grade intermediate corporates, and intermediate tax free).

Again, there needs to be an exit strategy for bonds funds with no term dates.

4. Bond Funds With Term Dates: These investments are more of a compromise between deflation an inflation fears. By having a term date, when the fund liquidates, I receive a salve about inflation risk inherent in owning a bond fund. The deflation fear receives some solace due to locking in yields with fixed coupons. As previously discussed in great detail, these investments include bond CEFs and bond ETFs. The bond CEFs that I have owned have a 2024 term date whereas the bond ETFs will work only if the low inflation/deflation scenario persists only for a few more years. I have sold all of my shares in IGI when it started to sell at a premium to its NAV. { Bought 100 BSCH at 20.13; Item # 4 Bought 100 BSCE at $20.16; Item # 7 Claymore Introduces Term Corporate Bond ETFs Bought BSCF at$20.18; Bought 200 of the CEF GDO; Bought 100 of the CEF GDO at 18.6; Bought 70 of the CEF GDO in Regular IRA at 18.61 /Sold 100 IGI at 20.74 and Bought 100 GDO (GDO now at over 550 shares with dividends from 300 shares in taxable account used to buy more shares); Added 100 of the CEF IGI at 19.78; Bought 100 CEF IGI at $19.89; (see generally Managing Interest Rate Risk & Interest Rate Risks- Bonds } A similar approach is the use of the Canadian bond ETFs from Claymore, thought that product is different from the BulletShares.

5. Common Stocks with a History of Dividend Growth: In a number of recent posts, I have discussed the dividend growth strategy and the purchase of large cap dividend stocks that currently pay more than the 10 year treasury and who have a long history of raising dividends. (see e.g. Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds; BOUGHT VZ at $26.74; Bought 100 KMB at 60.58; (discussion of Cola Cola's dividend growth history in Item # 1: Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009; Bought 50 COP at 48.75; discussion of Sysco dividend growth history at Item #1 SYSCO; discussions of Heinz dividend growth history at Item # 1 Heinz (HNZ) & Buy of HNZ at 31.67)

This strategy to deal with a low interest rate environment also involves the purchase of ETFs, along with some buying and selling of those ETFs. Bought 100 OEF at 49.61 & Sold 102 VV at 49.43 Sold 101 VTI at 55.21 and Added 100 OEF at 49.11; Bought 100 of the ETF DTN at 42.45; Bought 100 DHS at 35.32; Bought ETF DTD at 41.7. In a deflation or long term low inflation scenario, however, I would expect the rate of dividend increases to slow down or stagnant even for the largest, most financially secure corporations with stable businesses.

While large money city banks have proven to be an unreliable source of steady dividend income, I have bought a large number of smaller banks in my regional bank strategy that have either maintained or increased their dividends during the Near Depression period.

Another source of dividend income would be electric utilities and I own several of them. Their dividend increases will generally be far more modest than consumer staple stocks like Coca Cola and Sysco. But, many of them do provide over 5% current yields at today's prices which is more than 2% greater than the 10 year treasury bond. My two core holdings are Duke (DUK) and Consolidated Edison (ED), where I will occasionally add to positions and use the dividends to buy additional shares. I also currently have positions in FE, POM, and PNW. Bought 100 POM shares at 15.96 Sold 50 FE of 150 at 38.77 Pared PNW at 39.25

Another point about stocks vs. bonds is made in this WSJ article. A graph in that article compares the gap between the earnings yield from the S & P 500 versus the 10 year treasury. The advantage for stocks is accelerating.

Lastly, I have not yet broke down and bought many bonds yielding less than 7%. It is conceivable that I may nibble some in this sub-optimal category, as I recently did with USBPRF. But, given the balance of the yield and interest rate risk, I will be trading quickly in and out of those issues with small positions. Sold 50 USBPRF at 23.94 I would add some comments about that USBPRF. It was yielding less than 7% when I bought it and it is a TP from a bank maturing in 24 years, a ton of interest rate risk and some credit risk. While I regard U S Bank more highly than a Citigroup or Bank of America, it is still a bank and that security is still a TP, a deeply subordinated piece of paper with liberal deferral rights. Last Friday, I could have added a senior bond (no deferrals permitted) to an existing position, with a higher rating and a shorter maturity, that yielded 1/2% more than USBPRF. So comparatively speaking, I have several better alternatives for my capital.

But, any long bond bought now is nothing more or less than a trade, and I will not risk much capital given what I perceive to be the present balance between yield and interest rate risks.