Tuesday, January 4, 2011

Alcoa and Intel/Sold 100 GGN at 19.36/Bought 1 Senior USG Bond at 89 Maturing in 2016/Junk Bond Ladder Strategy

The ISM index for manufacturing increased in December for the 17th consecutive month rising to 57 from 56.6 in November. The new orders component rose 4.3 to 60.9.  Employment, however, fell 1.8 to 55.7.
Cramer believes that the DJIA will hit 13365 in 2011, and claims that estimate was not pulled out of an orifice.   CNBC.com  He believes that 2011 will "be the year of the banks". He further opined that the top three DJIA stocks will be Alcoa, Intel and American Express in that order.


1. Alcoa (owned): I own Alcoa with the last purchase made at $5.6 in March 2009.  Additional shares were purchased at around $11 along with fractional shares purchased with dividends.  My intention was to sell those shares for around a $1500 profit and use the proceeds at some point to buy an Alcoa bond.  I was critical in a post from last March of a J P Morgan analyst who reduced Alcoa to neutral and cut his earnings forecast for 2011 to just 48 cents per share based on a 2011 forecast of aluminum prices at $2027 per tonne.  Many investors no doubt sold AA in response to that forecast and downgrade.  This was my comment at the time about it:

"This is what I call short term thinking. The analyst apparently acknowledges that Alcoa has used the Near Depression period to take significant costs out of its operation. This appears to be the case. And, wouldn't this be good long term for the business? And how does one, by the way, come up with a 2011 forecast for aluminum prices? The current spot price is around $1.08 per pound if the Reuters numbers are correct from a story published last Friday. (Reuters says the current price is $2400 per tonne and there are 2204.622 pounds in a metric ton)
But, in the last analyst, it does not matter whether the J P Morgan's pessimistic forecast for aluminum prices proves to be prescient, though I would question the wisdom of that forecast. What matters is whether the current price is a good entry point for someone willing to hold for five years, giving time for the demand cycle to return, as opposed to focusing one's attention on the hear and now and trying to predict what will happen just in the next year. A rise in price to $20 from $14.4 at any point within five years would give the investor a 38.8% return before taking into account any dividend payments. Yet a $20 price would have been the time to buy, not sell, Alcoa in 1999 and 2002 based on subsequent price movements to the low 40s: Alcoa Inc. Common Stock Share Price Chart | AA"   Item # 2  Alcoa 
Alcoa (AA) closed at $15.8 per share yesterday, up 41 cents.   Aluminum Prices, London Metal Exchange 
2. Bought 1 USG Senior Bond Maturing in 2016 at 89.8 with Concession-89 limit order (see Disclaimer):  This may be the riskiest of the junk bonds that I have bought over the past few weeks.  While the other companies also have troublesome debt levels given their current operating performance,  they at least have earnings.  USG is estimated to lose $3.12 per share this year, and $1.8 next year.  USG has been shellacked due to the recession and the nationwide problems in housing that has resulted in anemic new housing starts.   USG sells building materials primarily under the "Sheetrock, Durock, and Fiberock" brands.  These are products used in buildings to finish the interior walls and ceilings.   Profile | Reuters.com
This is a link to the last earnings report for the third quarter of 2010, where the company lost $1 per share:  Form 10 Q  The company then had 400 million in cash and 1.952 billion in long term debt.  The maturity dates of the debt are referenced at pages 10-11.
I bought the senior note maturing in 2016 that has a 6.3% coupon.  There is a 9.75% coupon note maturing in 2014 and a 7.75% note maturing in 2018.   As stated in this 10-Q, all of those notes are senior, unsecured debt obligations that rank equally with one another.

This is a link to the FINRA information on the 2016 bond.  It matures on 11/15/2016.  Moody's rates it at Caa2 and S & P has it at B, both well within junk territory.
This is a link to the bond's prospectus:  USG 2016 6.3% Senior Notes Prospectus
At $89.8, my current yield is around 7% and the YTM would be higher due to the purchase at a 10+% discount to par value.  At the time of the trade, I estimated the YTM at around 8.55%.  My confirmation statement has 8.546% as my YTM.  
This one was bought primarily for diversity.
3. Junk Bond Basket Strategy:  I have been building a basket of junk rated bonds, maturing in the 2012 to 2020 time frame with one exception, which is an Albertson's bond maturing in 2029.  Except for two Cincinnati Bell bonds maturing in 2018 and 2 Alon Refining Krotz Springs bonds maturing in 2014, I have limited my purchase to just 1 bond for the other individual bonds in this basket.

All of the bonds in this basket were bought at discounts to their respective par values. I am using a ladder approach for this particular basket. This basket now includes the following junk bonds arranged by maturity date:
1 United Refining 10.5% Senior Bond Maturing 11/15/2012 (Redeemed at Par by Company 4/2011)
1 SNV 4.875% Junior Bond Maturing in 2/15/2013   Sold 1 Synovus Bond 
1 Circus Circus 7.625% Senior SUB Bond Maturing 7/15/2013 (added 2/12011)  Sold: 1 Circus Circus 
1 Eastman Kodak 7.25% Senior Bond Maturing 11/15/2013 (Added 1/27/2011)
Added 1 Eastman Kodak 7.25% Senior Bond Maturing 11/15/2013 (added 5/18/2011) FILED FOR BANKRUPTCY JANUARY 2012
1 Cenveo 7.875% Senior Sub Bond Maturing 12/1/2013 (added 3/23/2011) Sold see below
1 Cenveo 7.875% Senior Subordinated Maturing 12/1/2013 (added 11/10/11) Sold 2 Cenveo 
1 Solo Cup 8.5% Senior Sub Bond Maturing 2/15/2014 (added 3/17/2011) Sold 1 Solo Cup 
1 Warner Music 7.375% Senior Sub Bond Maturing 4/15/2014 (Added 2/28/2011) Redeemed at 101.229 by issuer on 8/19/11
1 Travelport 9.875% Senior Bond Maturing in 9/1/2014 (added 3/8/2011)
1 SuperValu 7.5% Senior Bond Maturing 11/15/2014 Sold 1 SuperValu 
1 AGY Holdings 11% 2nd Lien Senior Bond  Maturing 11/15/2014 (Added 5/16/2011)
1 Edgen Murray 12.25%  Senior Secured Bond Maturing 1/15/2015 (Added 3/22/2011)
1 Select Medical 7.625% Senior Subordinated Bond Maturing 2/1/2015 (added 8/2/11) 
1 Hawker Acquisition 8.5% Senior Bond Maturing 4/1/2015 (Added 2/3/2011) SOLD 1 Hawker
1 Harland Clarke 9.5% Senior Bond Maturing 5/15/2015 (added 2/10/2011)
2 Harland Clarke 9.5% Senior Bonds Maturing on 5/15/2015 (added 6/21/11)
1 Forest City Enterprises 7.65% Senior Bond Maturing 6/1/2015 (added 5/2012)
1 Gray Television 10.5% Second Lien Bond Maturing 6/29/2015 (added 11/3/11)
1 Nextel 7.375% Senior Bond Maturing on 8/1/2015  (added 8/16/11) SOLD 1 Nextel  
1 Quicksilver Resources 8.25% Senior Bond Maturing 8/1/2015 (added 7/12)
1 ArvinMeritor 8.125% Senior Bond Maturing 9/15/2015 (added 1/2012)
1 Reddy ICE 13.25% Second Lien Senior Bond Maturing 11/1/2015 (added 3/29/2011) Filed For Bankruptcy/1 Bond Later Exchanged for 43 shares of new common shares
1 Norcraft 10.5% Senior Second Lien Bond Maturing 12/15/2015 (added 3/2012) Sold 1 Norcraft 
1 Appleton Papers 11.25% 2nd Lien Bond Maturing 12/15/2015 (added 3/11/2011) Sold 1 Appleton Papers
2 OfficeMax Senior Bonds Maturing 2/1/2016 (Added 1/10/2011)
1 Regions Bond 7.5% Sub Bond Maturing 5/15/2018   Sold 1 Regions Junior Bond at 105.5 
1 Vulcan Materials 7% Senior Bond Maturing 6/15/2018 (added 8/23/11)  Sold 1 Vulcan Materials  
1 MetroPCS 7.875% Senior Bond Maturing 9/1/2018 (added 8/24/11)
1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 (added September 2011) SOLD 3 Sears 6.625% 
1 Sears Holding 6.625% Senior Secured Bond Maturing 2018 (added May 2012) 
2 Sears Holding Senior Secured 6.625% Bonds Maturing 10/15/2018 (added August 2012) Sold (see above)
1 Boyd Gaming 9.125% Senior Bond Maturing on 12/1/2018 (added October 2011)
1 GMAC 6.25% Bond Maturing 5/15/2019 (added 4/4/2011) Sold 1 GMAC  
2 Windstream 7% Senior Bonds Maturing on 3/15/2019 (added 8/10/11) Sold Winstream 2019s 
2 RadioShack 6.75% Senior Bonds Maturing 2019 (added 3/2012)
1 Quicksilver Resources 9.125% Senior Bond Maturing 8/15/2019 (added 2/2012)
1 Quicksilver Resources 9.125% Senior Bond Maturing 2019 at 97-ROTH IRA (added 5/12)
1 J.C. Penny 5.65% Senior Bond Maturing 6/1/2020 (added 6/2012) Sold 1 J.C. Penney 
1 Senior Texas Industries 9.25% Bond Maturing 8/15/2020 (7/14/2011)
1 Goodyear Tire 8.25% Senior Maturing on 8/15/2020 (added 10/7/11) Sold  Goodyear Tire Senior Bond
1 United Rentals 8.37% Senior Subordinated Bond Maturing 9/15/2020 (added 8/29/11) Sold 1 United Rentals 2020 
1 Cincinnati Bell 8.375% Senior Bond Maturing 10/15/2020 Sold  Cincinnati Bell Senior 
1 Windstream 7.75% Senior Bond Maturing 10/15/2020 (added 8/11/11) Sold Winstream 2020 
1 Cricket Communications 7.75% Senior Note Maturing on 10/15/2020 (added 6/27/11)
1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 (added Feb 2012) Sold 1 RRD 
1 R.R. Donnelley 8.875% Senior Bond Maturing in 2021 (bought back May 2012)
1 Vulcan Materials 7.5% Senior Bond Maturing 6/15/2021  (added 6/15/2011) Sold 1 Vulcan Materials 
1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 (added 6/2011)
1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 (added 9/2012)
1 U.S. Steel 7.5% Senior Bond Maturing in 2022 (added 9/2012)
1 Brunswick 7.375% Senior Bond Maturing 9/1/2023 (added 3/31/2011)
1 Senior 7.5% HCA Bond Maturing 12/15/2023 (added 5/4/2011)
1 Senior 7.69% HCA Bond Maturing 6/15/2025 (added 4/29/2011)
1 Tenneco Packaging7.95% Senior Bond Maturing 12/15/2025  (added 3/4/2011)
1 Wendy's Int 7% Senior Bond Maturing 12/15/2025 (added 2/17/2011) Sold 1 Wendys  
1 Albertsons 7.75% Senior Bond Maturing 6/15/2026 (added 2/7/2011) SOLD: 1 Albertsons 
1 Albertsons 7.75% Senior Note Maturing 6/15/2026 (bought back 4/2012)
Bought 1 MBNA Capital Series A 8.278% TP Maturing 12/1/2026 (added 11/7/11) Redeemed by Issuer at Premium to Par Value July 2012
1 Belo Senior 7.75% Senior Bond Maturing 1/1/2027 (added 4/13/2011) Sold 1 Belo 7.75%  
1 Cooper Tire 7.625% Senior Bond Maturing 3/15/2027 (added 4/6/2011)  Sold 1 Cooper Tire 
1 Tenneco Packaging 8.375% Senior Bond Maturing in 4/15/2027 (added 3/16/2011)
1 Dillards 7.75% Senior Bond Maturing 5/15/2027 (added 5/12/2017) Sold 1 Dillard's  
1 Albertsons 7.11% Senior Bond Maturing 7/22/27 (added 2/2012)
1 7.55% CoreLogic Senior Bond Maturing 4/1/2028  (added 4/26/2011)
1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 (added 2/2012)
1 R.R. Donelley 6.625% Senior Bond Maturing 4/15/2029 (added 5/16/2011) Sold 1 RRD 
1 Hercules 6.5% Junior Bond Maturing on 6/30/29 (added 6/23/11)
I also have some investment grade corporate bonds that fill some of the gaps in this ladder.  For example, in 2007 when I was buying investment grade corporate bonds, I bought 2 Prudential 5.6% senior internote bonds maturing on 7/15/2012, and that note pays monthly. (Cusip: 74432ATU4).  That bond is infrequently traded now.    The investment grade bonds are not part of this strategy.   The Prudential bond was the type of short term bond that I was buying in 2007 as I moved out of stocks.


More about this strategy can be found in a subsequent post: Item # 5  More on Rationale for Junk Bond Ladder Strategy

I am tracking realized gains and loss in Item # 5 Realized Gains Junk Bond Ladder Strategy.  My  Personal Risk Ratings For Junk Bonds can be found in a later Post from May 2011. See also:  FINRA Links to Bonds in Junk Bond Ladder Strategy
I am excluding all GMAC bonds from consideration since it is against my religion to buy one of those.   I am also excluding all American General Finance bonds. (added 5/3/2011: Please note that the OG's religion has changed since there are now 3 GMAC bonds in the preceding list)


I also own a few trust certificates containing longer term junk rated bonds.  For the most part, those securities have either been sold (e.g. DKR) or redeemed by the call warrant owner (e.g. KRH).   I would view my current holdings of TCs as containing higher quality junk such as the junior bond from Hanover Insurance maturing in 2027 (PKM), a senior Goodyear Tire bond maturing in 2028 (XKK), a senior CoreLogic bond maturing in 2028 (PJS), a senior Liberty Media bond maturing in 2030 (PIS), a senior Qwest Capital bond maturing in 2031 (PJA), a senior Sears Acceptance bond maturing in 2032 (SSRAP),  and a senior Sprint Capital bond (DHM) maturing in 2028.   I have bought and sold many of these bonds and currently have an insignificant position in them as a group.  I also own 50 shares of the junk rated TPs ZBPRB and RFPRZ {I am not counting the KRBPRE and KRBPRD since Moody's rates those TPs as investment grade while S & P have them still at junk: Bank of America | Investor Relations | Credit Ratings.   The same applied to 150 shares of SIVBO and to 150 shares of the exchange traded CPI floater OSM which matures in 2017}.   These junk rated exchange traded securities start to fill out the 2020 to 2032 time frame and are far easier to trade:
2027 PKM 150 SHARES   Hanover Junior Bond Bought 150 TC PKM
2028 XKK 100 SHARES  Goodyear Tire Senior Sold: 100 of the 200 XKK at 9.96
2028 DHM 50 Shares Bought 50 DHM @ 24.51
2028 PJS 150 SHARES  CoreLogic Senior (formerly  First American, see  #3  Bought 50 of the TC PJS at 24.84)
2030 PIS 50 Shares  Liberty Media Senior Bought 50 PIS at 24.88 in Roth IRA
2031 PJA 100 SHARES  Qwest Capital Senior  Bought 50 PJA at 19.45
2032 DKQ 50 shares Macy's Senior  Bought 50 DKQ at 22.06 
2032 SSRAP 100 SHARES  Sears Acceptance senior Bought 100 SSRAP at $17.25
2032 ZBPRB 50 SHARES  Zions Junior /bought 50 zbprb in roth at $19.9
Trust Certificates: Links in One Post 
Exchange Traded Bonds: 
Trust Preferred Securities: Links in One Post
The post references are just as a starting point for anyone interested in reading about those TCs and exclude many buys and sells for several of these securities. In this grouping I have realized the most profit from PJS (one buy at an unbelievable $7.2 during the Dark Period) and to a lesser extent a variety of TCs containing Sprint Capital bonds, including DHM, DKI, and GJD.  I hope with a little luck to be playing with the house's money on the junk bonds maturing in 2020 to 2030 that are exchange traded before the end of this year.
I will add to this list when I purchase a new security under this strategy or discover one that I already own that is not included already which is highly likely.  

4.  Sold 100 GGN at $19.359 on Monday (see Disclaimer):  This is one of RB's "feel" trades.   There is a dispute among staff about the sustainability of gold's parabolic move.  LB wanted to hold GGN, even though it was probably selling at over a 5% premium to its net asset value when the shares were sold yesterday.  Headknocker sided with RB who felt that gold was overdue for a significant pullback.  HK was heard to say what goes up a lot can come down a lot.   This is the second round trip on GGN shares.  The 100 shares sold yesterday were bought at  17.85 about 1 month ago.
GGN closed at $19.25 which represented a 5.89% premium to its net asset value.   WSJ.com
5. Intel (own): A Piper Jaffray's analyst, Gus Richard, believes that Intel is "less relevant" and is being left behind in the fourth wave of computing which consists of smart phones and tablets according to this analyst.  Otellini recently represented that it had secured 35 design wins for its Atom chip for tablets.  Richard reduced his rating on Intel from Overweight to Neutral while cutting his price target to $21 to $25. Barrons.com
The phrase "less relevant" sounds like one of those less than transparent musings of a trial lawyer arguing a case before a jury.  The jury thinks that they heard "not relevant" or "irrelevant" when the actual meaning of the phrase is so ambiguous as to be meaningless.  If I judged relevancy on a scale of 1 to 100, and Intel was at 90 before the tablet introduction by Apple, then it could be a 89 now, by way of example, and be "less relevant".   I wonder what that makes AMD, lesser relevant I suppose. 
I am certainly no tech nerd.  But I wonder whether those who use a laptop consider the tablet to be a substitute?   Some may for awhile, but I suspect most will not abandon their laptop for a tablet.  Maybe Mr. Richard needs to write a blog on an IPAD or IPhone keyboard, or anything other than one of those text messages that use a letter or two as substitutions for words. 
I have bought Intel shares between $14.46 and $19.08. Bought INTC at 14.46 Bought Intel at 15.25 Bought Intel at $15.87 Added to Intel at $19.08. The last two purchases were in late August at 18.35 and at 19.16 last  October.  I have been reinvesting the dividends. 
Cramer was critical of the Piper analyst in his show last night, CNBC.com, as he picked Intel to his second largest Dow gainer for 2011.  
I will discuss the remaining trades from Monday in the next post. 
Posted by at 1 comment:

Monday, January 3, 2011

Regional Bank and CEF Tables as of 12/31/2010/Municipal Bonds/ Bought 50 PYS at 22.6/Retirement Accounts-2010 Performance & 2011 Strategy

A recent Sandler O'Neill report, summarized in Barrons, offers a bleak assessment of municipal bonds for the foreseeable future.  The negatives are generally known:  the likely continued deterioration in state and local government finances caused by the recession (high unemployment, lower home values for property taxes); the expiration next spring of transfer payments from the federal government that were part of the stimulus package passed early in Obama's administration; the extension of the Bush tax cuts; rising costs including unfunded pension/health care plans; and continued headline risks.   I would agree with all of those points, but I would place them in a broader context of the looming sovereign debt crisis at the national level. Financial Armageddon-Avoided or Just Delayed  I would add that a large number of financial firms, particularly in the insurance industry, own significant amounts of municipal bonds.     Barrons had a recent article on the insurance companies most exposed to municipal bonds, as a percentage of their equity.  That article summarized a Credit Suisse report.    
The SUV Capital of the World, Brentwood, TN., has a AAA rating on its debt (City’s AAA Bond Ratings Reaffirmed), as does its neighbor Franklin, TN.   Moody’s and Standard and Poors Reaffirms City’s AAA Bond Rating  I would add that Tennessee has no state income tax on earned income, and my property taxes are a tad over $2000 per year on my house. 
1. CEF TABLE AS OF 12/31/2010: The following table is my CEF portfolio as of 12/31/2010.  I have updated some of the positions with recently acquired shares purchased with dividends.  The largest recently acquired position was 500 shares of the bond CEF FAX: Bought 500 FAX @ 6.71
CEF PORTFOLIO 12/31/2010
2. REGIONAL BANK BASKET AS OF 12/31/2010: This is my year end table for the regional bank basket:
Regional Bank Basket as of 12/31/2010
The realized gains in 2010 from this strategy was $3,133.37:  Item # 3  2010 Realized Gains Regional Bank Stock  Dividends would be in the $1500 to $2000 neighborhood for 2010.  As previously noted, I use FIFO accounting.  Where shares were bought on more than one occasion, the share price noted in the foregoing table is the average weighted cost, excluding commission, and the trade date for multiple purchases would be the date of my last purchase.  As shown in the table the unrealized gain is close to $7,500.  The realized gains and losses include commission costs.   The yield shown on this table is at the closing price from 12/31/2010, and not at my cost.  The dividend yield in virtually all cases would be higher, sometimes much higher based on my total cost.   All of the banks in category 1 of this strategy, except for WBS, have been sold.   I may start to add some of those back, not as part of the regional bank basket, but as lottery tickets.  Last Friday (12/31/2010), a number of the banks in this portfolio fell in the last fifteen minutes of trading, impacting the unrealized gain number by about $500.  
3. STATUS OF VIX ASSET ALLOCATION MODEL:  This is an update of the current status of the Vix Asset Allocation Model, last discussed in August 2010:  Current Status of The Vix Asset Allocation Model Signal (August 2010)
 The ^VIX has been continuously moving below 20 starting on 12/2/2010.  ^VIX Historical Prices  During the month of December, the DJIA rose 5.2%, almost 1/2 of the 11% increase for 2010.   The continuous movement in the VIX below 20 is bullish, but I will require three months of such movement before declaring the formation of a Stable VIX Pattern.   Some movement below 20 is also consistent with the  the Unstable VIX Pattern. In that pattern, a movement below 20 will soon be interrupted by another surge in the VIX, as it moves back into the mid or high twenties, possibly spiking into the low 30s.  That movement would be accompanied by a market sell-off which is what happened when the VIX spiked in April 2010 after moving below 20 for several weeks.   VOLATILITY S&P 500 Index Chart   During the Unstable VIX pattern, the movement below 20 would provide an opportunity to lighten up on stock positions and to establish hedges for a stock portfolio.    Then, when volatility spiked again, moving back to the high 20s or low 30s, stocks could be re-purchased and the hedges sold.    This is a characteristic of the Phase 1 movement of the Unstable Vix Pattern:  Vix Asset Allocation Model Explained Simply  Multiple Confirmations of VIX Model-Canary in a Coal Mine VIX and S & P Compared 1990 to 1997 VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2
The market has been in an Unstable Vix Pattern since the Trigger Event in August 2007: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern  That trigger event mandated both a reduction in stock exposure and a far more active trading strategy.    During the Unstable VIX Pattern, buy and hold investing is mostly thrown out the window, and my trading activity will hit close to a 1000 trades per year.   Some long term positions can be added during the catastrophic phase of the Unstable VIX Pattern, which I refer to as Phase 2.  I would wait until the market has declined at least 50% before doing so however.  The catastrophic phase lasted from late September 2008 until early Spring of 2009, hitting a crescendo in the first week of March 2009.  During the prior long term secular bear market, which started in 1965 and ended in August 1982, the catastrophic phase hit its nadir in October 1974
To form a Stable Vix Pattern, I will require three months of continuous movement below 20, allowing for some minor and temporary movement above 20 during that 3 month period.   For as long as the Unstable VIX Pattern remains in force, I am cautious and following a hyper-active trading strategy.   Once the Stable VIX Pattern forms, I will not be inclined to add hedges, and I will increase my long stock position.  More importantly, I will gravitate to buy and hold at least until the next Trigger Event.    
Headknocker has decreed that no more than 2 trades per week may occur during a Stable Vix Pattern. 
4. MKZ and the DJ UBS Commodity Futures Index (own 100 MKZ):  The DJ UBS Commodity Futures Index rose 2.7 or 1.69% last Friday to close at 162.39.   As noted in a post from last June, MKZ will revert to its 3% guarantee if there is a single day where this index closes above 165.8198 during the second annual coupon period (round to 165.82?).   Item # 4 MKZ  Given the spurt in this index, I would view that reversion event to be highly likely at this point. The second coupon period ends on June 23, 2011.   Pricing Supplement at page PS-2.
According to Fidelity, a majority of their customers do not understand this security and therefore none of their customers can purchase it now.  


If by chance there was no close above the reversion level of 165.82 before the closing date, then it would be likely that this security would pay more than its 3% guarantee.  A close at 162 on 6/23/2011, with no reversion trigger before then, would be a 27.98% increase from the starting value of 126.578 (6/23/2010 close), which would translate into an annual interest payment of $270.98 on 100 shares.  Most likely, the payment will be $30, based on the 3% guarantee, on my 100 shares. So, as the OG is fond of saying, you place your bets and take your chances.   
5. Retirement Accounts 2010 Performance and Ruminations on a Possible 2011 Strategy for the IRA accounts:  My retirement accounts are heavily weighted in bonds.  At the end of 2010, the stock weighting was probably less than 2%, consisting entirely of stock CEFs like BCF and JSN that have high dividend yields.  When judging my performance for the year, I will use as a benchmark the Vanguard Total Bond Index mutual fund, VBMFX, or its total bond market ETF, BND .   This low cost bond fund was up 6% in 2010 according to the table at Barrons.com. I was up about 11% in my retirement accounts for 2011.  I suspect that 2011 will be a  down year for those accounts, including interest and dividends, unless I change my strategy.  In other words, I anticipate that my bonds will lose value in 2011, if held for the entire year, in an amount exceeding the distributions paid by them. 
My performance was roughly in line a mixture of the  Vanguard Intermediate Term Investment Grade  bond fund (VFICX)  and the Vanguard High-Yield Corporate bond fund (VWEXH), weighted about 80% in favor of VFICX.   I would also look for comparison purposes at a mixture of those two funds and include the   Vanguard Long-Term Investment-Grade bond for about 1/2 of the investment grade weighting since I have a number of long term investment grade corporate bonds in my IRA accounts.  No matter how I look at it, I performed just about in line with those benchmarks after substantially outperforming them in 2008 and 2009.  Of those mutual funds, I own only the Vanguard Intermediate Term Investment Graded and I pared it toward the end of last year. 
I anticipated a modest performance from bonds at the beginning of 2010:  2010 Strategy/Interest Rate Risks- Bonds
When discussing the reasons for my outperformance in 2009, I made the following comment in that post from 1/1/2010:  

"The first reason for the huge percentage gains was the performance of REIT preferred stocks, Trust Certificates, Trust Preferreds, floating rate preferred stocks, European hybrids, synthetic floaters and other bond like securities. For those who read this blog regularly, you might be under the mistaken impression that investing in TCs, TPs, European hybrids, & preferred stocks was something ordinary and business as usual here at the trading desk. Actually, prior to October 2008, I would doubt more than 10 grand was devoted to those sectors in total over the ten year period prior to 10/2008. Those types of securities were viewed as worthwhile during their meltdown period so concentrating buying activity in them was an exception to normal trading activity. So the shift of assets into those sectors was viewed more as a one off event, a brand new development, possibly a once in a lifetime opportunity for someone my age, a very spry 58 years old. This opportunity has now passed.
Staff here at HQ does not expect any further capital appreciation in these securities as a group, and will test this thesis by keeping a list of the year end 2009 and 2010 values. However, given the income generation, most of them will be kept."


For anyone interested in these mutual funds, referenced above, information about them can be found at the Vanguard web site:
Vanguard - Intermediate-Term Investment-Grade Fund Investor Shares - Overview
Vanguard - Long-Term Investment-Grade Fund Investor Shares - Overview
Vanguard - High-Yield Corporate Fund Investor Shares - Overview
Vanguard also offers several ETFs in these bond categories: 
Vanguard - Intermediate-Term Bond ETF - Overview (BIV)
Vanguard - Total Bond Market ETF - Overview (BND)
Vanguard - Long-Term Bond ETF - Overview (BLV)
Vanguard - Intermediate-Term Corporate Bond ETF - Overview (VCIT)
Vanguard - Long-Term Corporate Bond ETF - Overview (VCLT)
Vanguard - Short-Term Bond ETF - Overview (BSV)
I do not own any of those bond ETFs.   I sold out of both  BND and BSV in 2008 at $79, in order to focus more on individual bond selections. For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal Possible See also:  Total Bond Market Index (BND) and IEF as Non-Correlated Assets to Stocks (May 2009);  Links to Fed Tables: Real & Nominal Rates/Dividends & Interest/The Importance of History in the Investing Process (DEC 2009); What is the More Rational Prediction for the Future-Inflation or Deflation (July 2010);   Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans & the Potential Major Correction in Bonds Down the Road (August 2010);  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)
BSV closed at $80.45 last Friday.  BND  closed at $80.27. 
I currently anticipate that the decline in bonds will gather steam as 2011 progresses.    Junk bonds may continue to outperform investment grade bonds, particularly U.S. government debt of comparable maturities.    That outperformance may just be losing less. 
I am in general agreement with the opinions expressed by Ben Inker in his Barrons' interview that bonds yields are "too low, for the most part" and do not adequately compensate investor's for their risk.   Inker does recommend buying New Zealand and Australian government debt, however, since both governments have the capability of actually paying back their obligations and the yield is in excess of the expected inflation rate.    As noted in a prior post, I expect the U.S. to default on its debts sometime in the 2020 to 2025 time frame, which will be manifested by a series of failed treasury auctions.  It could happen sooner than 2020, but not later than 2025. {The 79 million baby boomers have just started to draw on Social Security and Medicare.  A History of the Baby Boom  The gross debt of the U.S. in 1980, just before Reagan took office, was 909 billion, United States public debt.  The fiscal 2010 deficit was 1.3 trillion dollars and 1.42 trillion in F/Y2009.  CBO  The deficits are likely to be in excess of 1 trillion in the 2011 and 2012 fiscal years.   The main wild card now is how much will the interest cost on the debt increase after hitting 413 billion in 2010, Government - Interest Expense on the Debt Outstanding, when the treasury was paying almost zero interest for treasury bills: 3 month treasury bill rate-monthly data since 1982:   www.federalreserve.gov; 6 month treasury bill rates monthly data since 1982:   www.federalreserve.gov; five year treasury note monthly data since 1953:  www.federalreserve; 30 year treasury bond yields since 1977,   www.federalreserve.gov).  A return to more normal interest rates could easily balloon the annual debt service cost in a few years to over 1 trillion dollars per year}
While I am not inclined to make major changes, I will probably need to be more aggressive with the investments purchased with the cash flow generated in the retirement accounts.  Part of that increased risk will be the incorporation of the LOTTERY TICKET strategy in the ROTH IRA account, which has been forbidden up until now.   Under that strategy,  I can spend up to $300 buying shares in a beaten down common stocks.  In the Roth, that purchase could only be made with interest received from the bond holdings.   Some of the LTs under consideration would be regional banks sold last year, primarily those in Category 1 of the  Regional Bank Stocks basket strategy. 
Another alternative would be to buy a small number of junk rated bonds, maturing in the 2015 to 2020 time frame, where I believe that the company has a good chance of survival,  a decent capital gains potential due to the purchase at a  discount to par value, and an interest rate in the 8% to 15% range.   I have purchased already some of those bonds in very small amounts in a taxable account.  
I would add that my IRAs are not important to me.  If I have need them, I will be in a mess financially, and the money will need to be there.  That  is one reason why I manage them so conservatively, and I do not try to shoot the lights out.   Still, I want to do better than a bond ETF or a bond mutual fund.  And I want to generate a positive return even when bonds decline in value.  To accomplish that last objective in 2011, I believe now that I will have to do something different than what I have done between 1/1/2008 to 12/31/2010, as documented in this blog starting in October 2008.    
6. Bought 50 PYS Position at 22.6 on Friday (see Disclaimer):   PYS is a trust certificate and that certificate represents an undivided beneficial interest in the assets of a Grantor Trust which consists of senior bonds issued by RR Donnelley.   I sold my last 50 shares of PYS at  24 last November, shortly after this security went ex interest for its semi-annual payment.  I bought those shares  at 19.59 last June. 
The underlying bond and the TC mature on 4/15/2029.  The TC has a $25 par value and a 6.3% coupon.  At a total cost of $22.6, my current yield would be about 6.97%, hardly worth a 50 share buy in my opinion.  The YTM would be better due to the discount to par value.  I came up with a YTM of 7.4% using the Morningstar Bond Calculator: Yield to Maturity.
Interest payments are made in April and October.
Finra Information on Underlying Bond: FINRA 
PYS Prospectus: www.sec.gov
Underlying Bond Prospectus: www.sec.gov
The FINRA data shows that the underlying bond is rated investment grade and is currently trading near or slightly above its par value, depending on the trade and the day.   The coupon on the underlying bond is 6.625%.


 Trust Certificates: Links in One Post 
If for some reason the underlying bond continues to increase in value, further above its par value, there is a possibility of a call by the owner of the call warrant.  That exercise can not occur before 4/15/2011. 
Posted by at No comments:
Subscribe to: Posts (Atom)