Bought 50 WIN at 12/Bought 1 Select Medical 7.625% Senior Subordinated Bond Maturing 2/1/2015 at 98.21/VIX and Trading Rules in An Unstable Vix Pattern Within the Context of a Long Term Secular Bear Market

The market downdraft yesterday was primarily tied to the European sovereign debt problems. WSJ.com  MarketWatch That caused panic among many investors, whose worries about the European sovereign debt crisis became even more acute. Those concerns were reflected in the downdraft in both European bank shares and their hybrid securities. The hybrid securities are particularly vulnerable to fears.

Another reason was that the market finally realized that the odds of a double dip recession in the U.S.  had increased significantly based on recent data. The tipping point may have been the GDP report from last Friday. GDP and Inflation-Worrisome (8/1/11 Post). Floyd Norris discusses the dreaded "double dip recession" in his NYT this morning.

So the European sovereign debt problems are getting worse, not better. Is that news to anyone?

There is still excessive debt and now there is an abundance of fear about the possible problems lurking in the future caused by that debt, the need to refinance it, and the slowdown resulting from the Great Contraction of Debt.    Item # 3 Precipitating Cause of Long Term Bear Markets (6/30/11 Post);  The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets (6/27/11 Post); Underlying Cause of the Current Long Term Bear Market is Too Much Debt (June 2010 Post).

I liquidated yesterday all of my double short stock ETFs, which were being used as hedges. One of them was up 12% when I sold it. They served their purpose of cushioning the downward market crush. And I now have even more capital to invest after already significantly reducing my stock allocation. (see, e.g.:  LB is In a Slow Mo Trading Mode While Preserving Recently Raised Cash Stash (6/7/11 Post); Item # 2 SOLD: 100 EXC @ 44.67, 100 APF @ 17.47, 50 DLN @ 49.38, 100 PEO @ 30.62, 100 MSFT @ 27.9  (7/27/2011 Post); Sold 103+ of the Stock ETF OEF at $59.98 (7/25/11 Post);  Sold 100 of the stock ETF VV at $60.69 (3/1/22 Post);  Sold 100 VEU at 49.19 (3/3/11 Post);  Jobs (6/6/11 Post).

Generally, under the trading rules for an Unstable Vix Pattern within the context of a long term secular bear market, I am allowed to buy those hedges when the VIX falls below 20. More on VIX AND ASSET ALLOCATION (November 2008);  Trading and Asset Allocation in Stable and Unstable VIX Pattern (November 2008); Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming (7/28/11) I am then required to take them off when the VIX spikes toward 30. This is a mechanical trading strategy once the LB has identified the market as being in an Unstable VIX Pattern.  The  VIX closed yesterday at 31.66, up 35.41% for the day.

The pattern in the Phase of the Unstable VIX Pattern is a whipsaw action in the VIX, mostly between 20 to 30. Vix Asset Allocation Model Explained There are periods when the VIX will fall below 20, and the markets would be enjoying an up move at that time. This is the time that our Left Brain (LB) allows the Old Geezer (OG) to put on the hedge.  The LB does not allow the OG to think too much which makes his head hurt.

Another reason for taking the hedge off, other than a spike towards 30 in the VIX, would be the formation of the Stable VIX Pattern. The last Stable Vix Pattern was obliterated by the Trigger Event in August 2007, which was followed by multiple confirmation Trigger Events, a clear Get of Dodge danger signal under this model. 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 spike in the VIX yesterday was merely consistent with the Phase 1 stage of an Unstable Vix Pattern. I am not too worried unless a Phase 2 pattern emerges as it did in last September 2008. SEPTEMBER 2008: FORMATION OF THE DEADLY PHASE 2 OF THE UNSTABLE VIX PATTERN (May 2009) Heightened Volatility=More Risk=Potential for Lower Prices to Compensate for the Increased Risks (May 2009).

The most important hedge, which I have already accomplished, is to sell stocks until I reach a comfort level.  I started to deploy some cash yesterday in what I would call a typical fashion.  I bought 30 shares of a blue chip company at $33.4, having just sold over 200 shares above $40. I will discuss the trades from Thursday in the next post.  If there is another downdraft in the market today, I may place some odd lot buy limit orders.

P & G's CEO said that his company was preparing for a period of little or no growth in developed countries. I would not question that forecast for PG or many other companies. 

Bill Gross has not changed his pessimistic outlook for U.S. budget deficits, referring to the recent budget deal as one small step toward fiscal solvency: Kings of the Wild Frontier For sovereign bonds, he still favors nations with cleaner "dirty shirts" such as Canada, Brazil, and Germany. He also continues to recommend shading fixed income and equity investments toward non-dollar assets in faster growing developing countries.

Linda Evangelista is asking for $46,000 a month in child support. Video After watching this Video, I understand better now how the super rich create jobs. Perhaps, the Bush tax cuts, originally passed in the 2001 & 2003, and extended in 2010, will soon cause the Job Creators to actually create some jobs. WSJ Article: Bush On Jobs: The Worst Track Record On Record When you credit Bush with the jobs lost in 2009, which were already baked into the cake, then we are still waiting for the Job Creators to create jobs in exchange for their tax breaks.  I do not credit the Job Creators with the temporary jobs created as a result of a bubble in home prices.   "Blondes" and Fox "News"/Irresponsible Fools with Power/Taxes and the "Job Creators"  And the answer is to give them more tax breaks?

The rich are understandably skeptical that any increase in marginal rates will simply be a means to transfer funds from them to the Democrat voters. If either party had their focus on the underlying causes of the nation's predicament, and they do not, there would have been in early 2009 a bipartisan "stimulus" package of at least 1 trillion dollars devoted almost entirely to infrastructure projects over a five to seven year time span, roughly the period of time necessary to recover from a severe recession caused by a financial crisis. This is not what happened.

The Democrats would have had to accept that some people would suffer temporarily and that large transfer payments lasting a year or two solved nothing. Laid off local government workers would have to learn  how to use a shovel. That was the lesson that FDR taught the Democrats in 1933 which has been forgotten by them.

The GOP would have to recognize for the first time that tax cuts for the wealthy were not going to cause a pick up in demand. And the problem now is that private demand is at best lackluster and may recede further with no funds from government picking up the slack. In fact, governments are cutting back spending throughout the developed world, contributing to lower demand numbers and to the unemployment rate with layoffs.  In short, both political tribes in the United States are recklessly incompetent.

Eric Cantor, the GOP leader in the House, has a message for those under 55 now. He did not say it in quite this way, but he said "you are fuc---, get use to it".  WSJ  In case a TB reads this blog, which I doubt, I thought that it might be necessary to translate his comments into a framework capable of being understood.

Bank of New York is starting to charge large customers for holding their cash (WSJ), yet another consequence of the Federal Reserve's Jihad against savers.

For those interested in asset allocation theory, yesterday provided a real time lesson in the correlation of asset classes. Most asset classes have been running together since the U.S. stock market hit bottom in March 2009. (see chart at Item # 2  Unusual Allocation Funds). When this happens, it is hard to find an asset class with negative correlation with the market averages. I did have some securities go up in value yesterday, but not enough.   Excluding the large cash allocation which is very important and the double short stock ETFs, those negatively correlated assets included three Canadian bond ETFs, several investment grade corporate bonds and synthetic floaters, and a few securities like SCEDN and UL.  I will also look for securities with very low positive correlations on a day like yesterday, and I had several of those.  So, I need to work some on my allocation.

For U.S. securities, the most negatively correlated asset classes yesterday were treasury bonds, investment grade corporate bonds and the USD. (see, e.g.,  iShares Trust Barclays 20+ Year Treasury Bond Fund, TLT +3.56%;  iShares iBoxx $ InvesTop Investment Grade Corp. Bond Fund, LQD +.73%; PowerShares DB US Dollar Index Bullish Fund, UUP +1.61%)

Yesterday, the S & P 500 saw 497 of its stocks fall in value.  

1. Bought 50 WIN at $12 Last Tuesday (see Disclaimer): This brings my position up to 300 Windstream shares. I view this position as an alternative to owning the WIN's senior bonds that have lower yields than the common stock. I would consider buying one of the bonds, provided I could make the purchase at below par value and capture a yield greater than 7% for a bond maturing prior to 2021. Windstream Bonds The benefit of the senior bond is that its payout can not be cut. 

At a total cost of $12, the common stock yield is around 8.33%. Windstream is not likely to raise its dividend. A consistent increase in the dividend is one benefit for owning the stock rather than the bond.  For investors buying the common, the question has generally been whether or not it will cut this high payout.  While the dividend payout ratio  was around 150% in 2010, the dividend is supported by free cash flow. S & P estimates that WIN will use about 55% of its free cash flow to pay the dividend in 2011.  S & P rates the common 4 stars with a 12 month price target of $14. 

I have bought WIN shares as low as $6.36. Windstream My last add was 50 shares at $12.46. Item # 5 Added 50 Windstream at 12.46 (March 2011).  I am now near break-even after the shares decline 47 cents yesterday to close at  $11.47. Windstream Corp., WIN Stock Quote 

WIN recently announced an agreement to acquire PAETEC Holdings (PAET) for $2.3, including PAET's debt. SEC Filed Press Release  S & P does not believe that this all stock deal will impact WIN's ability to support the current dividend payout.

Given the dividend yield, taxed currently at the qualified dividend rate, I would be satisfied to sell shares for any profit.  In the event the shares approached that $14 target, I would likely pare my position some. 

Windstream reported net income of just five cents for the first quarter of 2011, down from 17 cents in the first quarter of 2010. The quarterly dividend is $.25 per share. Form 10-Q The debt is high as shown in note 5 at page 11. As of 3/30/11, Windstream had 3.3 million access lines and 1.3 million internet customers in 29 states.   

This is a link to the Reuters' Profile Page and to its  Key Developments page.

After I published this post, WIN posted earnings for the 2nd quarter, reporting adjusted E.P.S. of 19 cents per share, meeting estimates, on $1.03 billion in revenue. Windstream Reports Second-Quarter Results Adjusted free cash flow was $227 million, a 15% increase year-over-year. Consumer broadband revenue increased 10%. Business services revenues increased 3%. Access lines declined by 30,100 or 3.6% year-over-year.

2. Bought 1 Select Medical 7.625% Senior Subordinated Bond Maturing on 2/1/2015 at 98.21 (Junk Bond Ladder Strategy)(see Disclaimer): A bond in this ladder, issued by Warner Music, is about to be redeemed, and this Select Medical bond is its replacement. The Warner Music bond would have matured in 2014.

Select Medical Holdings (SEM) is a publicly traded company that operates, through its subsidiary Select Medical Corporation, speciality hospitals and outpatient rehabilitation clinics. I took a chance in buying this bond since earnings were going to be released the day after my purchase. It is usually better to wait and make sure that there are no unpleasant surprises.  But, this bond is normally not available in small lots so I went ahead and bought 1 while I had the chance.

This bond is rated well into junk territory at Caa1 by Moody's and CCC+ by S & P.

This is a link to the FINRA Information about this bond.

The bond was originally issued as a private placement and was then exchanged for a bond registered with the SEC:  Prospectus  Interest is paid semi-annually on 8/1 and 2/1.  I paid the seller less than two bucks in accrued interest.

I am rating this bond at a 7+ in my Personal Risk Ratings For Junk Bonds.

Select Medical Corporation recently completed a refinancing of its senior secured facilities.  The company announced that $266.5 million of that refinancing would be use to repurchase the 7.625% note. The senior secured facility includes $850 million seven year term and a $300 million five year term, both expiring after the 2015 senior subordinated note.

Select Medical Holdings announced second quarter earnings after the close yesterday. Excluding a change relating to the early retirement of debt, the company had a net income of 20 cents per share. Net operating revenues increased 20%. The consensus estimate was for 19 cents. SEM Analyst Estimates

My confirmation states that the current yield at my cost is 7.7% and the YTM is 7.955%.


3. Junk Bond Ladder Table: This is how my junk bond ladder table looks now:

Given the risks, I anticipate at least one default and would not be surprised by two or three.  The first default may be in the General Maritime senior bond that I rate at a 10+.

I am tracking realized gains and losses at Item # 5 Realized Gains Junk Bond Ladder Strategy.


See also Item # 5 More on Rationale for Junk Bond Ladder Strategy

Needless to say, junk bonds will not fare well during an economic downturn. Since I am focusing on individual bonds, mostly maturing in 2014 to 2018 time frame, I am concerned with the company surviving to pay off the loan, rather than temporary price declines caused by investor panic and fears. 

MTY/Sold 300 WIW at 12.85-Bought 100 IGI at 20.69/Bought 1 First Tennessee Capital II 6.3% Maturing 4/15/2034 at 95.5

I am glad to read that the Social Security Administration is going to step up reviews of continuing eligibility for disability benefits. Historically, these reviews found that around 12% of the recipients did not qualify for benefits. Over 10.4 million people are receiving disability benefits claiming to be totally disabled from performing gainful employment. Unfortunately, there is a significant number of people who are able to work but who prefer to paid not to work.

The ISM services index for July slipped to 52.7%. The consensus estimate was for a slight rise to 53.5. The new orders component declined 1.9 to 51.7. Employment fell to 52.5 from 54.1 in June.

Yesterday there was a tug of war in the market. The formation of a head and shoulders pattern seemed to be completed when the market pierced the neckline around 1250 on the S & P 500.  The Barrons technician acknowledges the break below the 200 day moving average and the neckline (see chart in his column), but is not yet convinced that this last decline will be the last straw in the cyclical bull market starting back in March 2009.  The break below the neckline of the head and shoulders pattern brought in more sellers early yesterday. Another group of investors used that level as a trigger to buy, and those investors were able to overcome the sellers later in the trading day. Possibly, the market may continue to rally today. If so, I will consider adding to a double short ETF position as a hedge, having sold three of them on Tuesday. I am certainly not convinced that stocks are cheap in the context of a deteriorating economy. Martin Feldstein, a republican economist, believes that there is a 50% chance of another recession. Bloomberg While that may be too pessimistic, recent data seems to support at least a one in three chance.

I see no reason to disagree with the historical evidence that points to a slow recovery from a recession caused by a severe financial crisis. Sometimes the past is prologue, and this time is not different. The recovery from such an event takes much longer than a recovery from a normal business cycle recession. Unemployment will generally remain elevated for five years.  There will also be a prolonged period of belt tightening which places a drag on growth. Kenneth Rogoff As previously discussed, most of the growth over the past thirty years has originated from consumers and governments in the developed world spending borrowed money at accelerating rates. What Will Produce Growth after the Age of Leverage? The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets Underlying Cause of the Current Long Term Bear Market is Too Much Debt This is no longer an option.

1. MTY (own: exchange traded bond): MTY, the unsecured senior note issued by Citigroup Funding paid its 3% minimum annual coupon on 8/3/11. MTY Reversion to 3% Minimum Coupon Today No doubt, those who owned this note were disappointed in that payment since this unusual security came close to paying over 30%.  For anyone unfamiliar with this so-called "principal protected" note, it will make an annual interest payment at the greater of 3% or up to 35%, based on the percentage increase in the price of gold during the note's annual period. Final Pricing Supplement There is a catch.  If P.M. London gold fix exceeds 35% on just one day during the annual period, then the owner of MTY receives the minimum 3% coupon irrespective of gold's percentage gain.  This is called the "maximum level reversion" here at HQ.

For anyone venturing into this type of security, it is important to make a note of the "starting value". That number is necessary to compute the number that triggers the maximum level reversion.   The starting date for the current annual coupon value is July 27, 2011.  On that day, the London P.M. gold fix was at $1625. Kitco Inc. - Past Historical London Fix This places the maximum level for the current coupon period at $2,193.75. (multiply 1.35 x. $1625).  I would hazard a guess that there will be plenty of things to worry about when and if gold exceeds $2000 an ounce.

Assuming Citigroup survives to pay the interest on the note and the $10 par value in 2014, the worst that can happen is a 3% annual interest payment. If Citigroup is seized by the FDIC before the note is paid off, I am screwed.

2. Sold 300 WIW at $12.85 and Added 100 IGI at 20.69 Last Tuesday (see Disclaimer):  I am in a trading mode for bond closed end funds. I have bought and sold WIW, which owns primarily U.S. government inflation protected bonds, repeatedly over the past year or so.  This last round trip started in mid-July with a 300 shares purchase at 12.47 (July 11, 2011 Post). That last linked post has snapshots of my trading profits for WIW and IMF, a similar bond fund. 

I stayed around long enough to collect one monthly dividend payment.  

I substituted for WIW the higher yielding investment grade bond CEF IGI and the security mentioned in Item # 3 below. All of these securities will pay non-qualified distributions taxed at my highest marginal rate since all of the trades discussed in this post have occurred in a taxable account. I also own 100 shares of IGI in the ROTH IRA as a result of a recent purchase.  Bought 100 IGI at 20.7 in Roth IRA

I have traded IGI a number of times.  Added 100 of the CEF IGI at 19.78 (February 2010); Bought 100 CEF IGI at $19.89 in IRA (February 2010); Sold 100 IGI at 21.26 In IRA (June 2010); Sold:100 IGI @ 20.75 (November 2010); Added 100 IGI at 19.65 (March 2011); Sold 100 IGI @ 20.76 (May 2011). 

As previously discussed, this bond fund liquidates in 2024 and currently pays monthly dividends at the rate of 10.45 cents per share which gives me roughly a 6% yield.  

IGI Page at the  Closed-End Fund Association

Last Filed SEC Shareholder Report: www.sec.gov

Morningstar Page: Unrated

Sponsor's web page: IGI Details

On Tuesday, IGI closed at $20.79 and had as of 8/3 a net asset value per share of $20.79, creating then a discount to net asset value of -4.46.

3. Bought 1  First Tennessee Capital II 6.3% at $95.5 Maturing on 4/15/2034 at 95.5 Last Tuesday (see Disclaimer): This security is a trust preferred (TP) traded in the bond market. I believe that it is the only TP currently outstanding issued by First Tennessee, now known as First Horizon National (FHN). It is the largest bank operating in Tennessee. FHN is viewed by some as a potential takeover target due to its presence in the greater Nashville and Memphis markets. 

This is a typical trust preferred security, explained in more detail at Trust Preferred Securities: Links in One Post and at Regular Preferred and Trust Preferred. 

Interest payments are made quarterly and can be deferred for up to five years. Any deferred amount will accrue interest at the coupon rate. This TP has a typical "stopper" provision which would not allow the bank to make a cash distribution on a junior security while deferring interest payments to the TP owners.  The junior bond owned by the Delaware Trust First Capital II may be redeemed by FHN now. 

Prospectus:  www.sec.gov 

FTN is sufficiently large enough that it will have to phase out the use of this TP as TIER 1 capital. The bank acknowledges that requirement at page 13 of its last filed Annual Report.  This does not mean, by itself, that FHN will redeem the bond when it can no longer be used as part of its TIER 1 capital.  Other banks with more than 15 billion in assets have started to redeem TPs.  

I am not including this bond in my junk bond ladder category since it is rated investment grade by two of the three rating agencies.  According to FINRA, the bond is currently rated Baa3 by Moody's, BBB- by Fitch,  and B+ by S & P.  

This is a link to the Reuters' Profile page and to its Key Developments page. This is a link to the Morningstar page on FHN.

My confirmation states that the current yield at my cost is 6.542% and the YTM is 6.616%.  Maybe there is truth to the cliche that Beggars Can't Be Choosy.

I added to a common stock position also on Tuesday which I will briefly discuss in the next post. 

Bought 50 MHNA at 24.9/Added 50 CSQ at 9.2/DUK/Swiss Franc

The Senate passed the budget limit increase by a vote of 74 to 26. Senate Vote 123 Nineteen GOP senators voted against it because the cuts were not draconian enough, including the newly elected Senator Kelly Ayotte from New Hampshire, one of the Tea Party favorites who also voted to advance the Ryan budget. Senate Vote 77.

The S & P 500 fell below its 200 day moving average yesterday, closing at 1254.05, down 32.89. S&P 500 INDEX,RTH Index Chart

An article at MarketWatch discusses the safe haven status of the Swiss Franc.  There are several ways that I play the Swiss Franc. I have owned for example the currency ETF for the Swiss Franc which is the most direct way to gain exposure. That security rose $3 yesterday. CurrencyShares Swiss Franc Trust, FXF I do not currently have a position, and would not consider buying it at its current level, having moved up from a low of $85.54 on 6/4/2010 to $129.33 yesterday, up $3 for the day.

Another way to gain exposure to the SF is to buy securities that are valued in Swiss Francs. I mentioned yesterday adding to my existing position in the Swiss Helvetia fund.  Added 50 SWZ at 13.75 I also own a mutual fund, the Permanent Portfolio (PRPFX), that maintains a relatively constant position in Swiss government bonds.  Item # 2 B Unusual Allocation Funds Based on the last filed SEC Form N-Q, that fund had a 9.81% weighting in Swiss government bonds priced in Swiss Francs of course.  As previously discussed, that fund has a large allocation in gold and silver bullion too. PRPFX did decline .34% yesterday, showing low positive correlation with the stock market, as the S & P 500 fell 2.56%. The other unusual allocation fund mentioned in the preceding linked post, PAUDX, actually rose one cent or .09% yesterday.

The Swiss Central bank took action today in an effort to stem the rise of the SF.  NYT

The technical analyst at Barrons believes several industrial stocks, including General Electric (owned), are showning weak technicals. The Spider for the S & P 500 industrials, XLI, has broken below the neckline of a head and shoulders formation. GE fell 4.23% to close at $17.21 yesterday. GE Interactive Chart

Let's have a show of hands. Who wants to lend our destitute Uncle Sam money for five years at a minus .89% coupon?   That was the current yield, -.89%, for the  5 year TIP yesterday according to Bloomberg.  Maybe the purchasers of that five year TIP will break even after the inflation accretion.  I am not yet to the point of paying our destitute Uncle for the privilege of holding my money, promising based on its Full Faith and Credit, subject to political machinations, to return it more or less intact in five years.  

Consumer spending fell in June and their savings rate rose to 5.4% of their disposable income. News Release: Personal Income and Outlays, June 2011 Just prior to the onset of the Near Depression, the savings rate fell to below zero.

In a recent UBS analysis, it was estimated that 450,000 individuals working for federal and local governments will lose their jobs in fiscal 2012. Reuters With the GOP in control over the House and having veto power under the Senate's Cloture rule, there is no possibility of more government fiscal stimulus, as consumers and corporations husband their cash.

I have positioned my portfolio for a downdraft in stocks.  Based on my personal psyche profile, I believe that the best hedge for my stock allocation is to sell stocks until the OG becomes comfortable under the circumstances.  I will also use at times double short ETFs to hedge a tad only. I had  several of those double short ETFs in place, maybe around 7 grand altogether before I started to sell them this week. I sold three of them near the close yesterday and may sell one or two more in the event the S & P 500 holds 1250 today. Otherwise, I will keep them for awhile longer.  Mostly, they have a beneficial psychological effect on the OG, sort of like hooking him up to an IV for the liberal dispensation of chill pills. I sold one double short ETF yesterday that was up almost 7% near the close.

Due to my reduction in stocks, some profit taking in bonds, a number of bond redemptions, and some double short ETF sales, I am sitting on more cash now than in March 2009, and I was waiting to deploy a lot then which I started to do in early March. So, I have a lot of firepower including more cash in the ROTH IRA than I have ever had. I am starting to deploy cash flow into stock purchases, which is usually my first step after a reduction, and I have my eye on a number of common stocks for nibbles. I will generally start with odd lot purchases of blue chip type companies previously sold at higher prices.

In an Unstable VIX Pattern within the context of a long term bear market, I will seldom take an entire position all at once. And, I will attempt to use volatility to my advantage.  Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming (July 28, 2011 Post); The Roller Coaster Ride of the Long Term Secular Bear Market (May 2010 Post);  The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets (June 2011);  Underlying Cause of the Current Long Term Bear Market is Too Much Debt (June 2010); 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009); More on 1982 or 1974 (September 2009); Buy and Hold or Dynamic Asset Allocation/Trading: Long Term Secular Bull and Bear Markets (February 2010); Trading and Asset Allocation in Stable and Unstable VIX Pattern (November 2008)


1. BOUGHT 50 MHNA at 24.9 on Monday (see Disclaimer):  MHNA is a new senior bond issued by Maiden Holdings North America LTD (MHLD). Maiden Holdings Announces Closing of $107.5 Million Offering of 8.25% Senior Notes Due June 15, 2041  The bond has a 8.25% coupon on a $25 par value. Interest is payable quarterly. According to  QuantumOnline.com (free site, registration required), the bond is rated BBB- by S & P. My current yield and yield to maturity would be close to the coupon amount of 8.25%. 

Maiden is a reinsurance company based in Bermuda. I will never take a significant position in a reinsurance company. Given the FED's tiresome Jihad against the Saver Class, I am willing to risk minimal funds for the yield provided by this senior bond.

This is a link to the Prospectus.

This is a link to Maiden Holdings Reuters Profile Page and to the  Reuters' Key Developments Page. 

The current consensus earnings estimate is for $1.02 per share in 2011 and $1.3 in 2012. MHLD Analyst Estimates

MHNA closed at $25 yesterday, up 10 cents. 

Exchange Traded Bonds

2. Added 50 of the CEF CSQ at 9.2 on Monday-Cash Flow Purchase (see Disclaimer):

The shares closed on Monday at $9.26, with a net asset value then of $10.59 per share, creating a discount to net asset value of -12.56%. 

I am currently reinvesting the dividend to buy additional shares. 

This is a link to the sponsor's web page:  Calamos Investments - Strategic Total Return Fund

As previously discussed, this is a leveraged balanced fund with a 54.5% weighting in common stocks as of 6/30/11. The remainder consists mostly of corporate bonds at 19.3%, convertible bonds at 12.9% and convertible preferred stock at 6.3%. CSQ Composition The bonds are mostly in the BBB and junk BB rating categories. 

The current monthly dividend is $.0525 per share. At that rate, the yield at a total cost of $9.2 would be about 6.85%. The next ex dividend date is 8/8/11.

Morningstar rates the fund 3 stars. 

This is a link to the last SEC Filed Shareholder Report. 

CSQ Stock Quote

This is a link to discussions of my last two purchases: Bought 100 CSQ @ 8.94 (November 2010);  Added 70 CSQ at 9.63 (April 2011)

This is the kind of purchase made with cash flow from dividends and interest.

CSQ closed yesterday at $9.09, down 1.84% or 17 cents.

3. Duke Energy (own):  Duke Energy reported net income of 435 million or 33 cents per share on revenues of $3.534 billion, up from $3.287 billion in the year ago quarter. The consensus estimate was for 30 cents.  As of 6/30, book value per share was $17.05.

After paring my position in DUK which reduced my average cost per share to $15.14, I am content to hold my remaining shares.   Pared 50 DUK at 18.42

DUK closed at $18.55 yesterday, down 15 cents. 

ISM Manufacturing/Added 50 SWZ at 13.75/EARNINGS: BC FHN ASH SLM BYD MWV HCA SUSQ NPBC EXAR RTIX PLXT/FNFG Dilution/Nursing Home Smackdown By Medicare

The House passed the "Budget Control Act of 2011" by a vote of 269 to 161.  Gabrielle Giffords made her first appearance since being shot in the head and voted for the measure.  The Washington Post 95  Democrats and 66 Republicans voted no. House Vote 690 

This is a link to the text of the bill: Text of the Debt Ceiling Agreement I feel sorry for the staffers who had to write this 74 page bill virtually overnight.

The only GOP candidate running for President who supported this bill is Jon Huntsman, NYT, who appears to be the only candidate unwilling to bend over for the Know Nothing Zealots.

Interest on the national debt is running this fiscal year at about 1.6% of national output. The interest on the debt was frequently over 3% of GDP during the Reagan administration. TIME

The  ISM July report on manufacturing was downbeat. The reading of 50.9% was much lower than anticipated, but consistent with my estimate of business conditions now. This reading represented a 4.4% decrease from June. Importantly, the new orders component slipped to 49.2%, indicating contraction for the first time since June 2009.

There are currently 15 countries with AAA credit ratings from both Moody's and S & P. They include Canada, Australia,  Germany, France, Sweden, Netherlands, and Switzerland.

It is interesting to view polls where Americans express their disgust with Congress. Washington Post-Pew Research Center Poll The voters need to blame themselves for what just happened in Washington. And, the voters have no one but themselves to blame for the current fiscal crisis. If they want to elect a few more GOP senators and Michelle as the nation's next President, the noisy kind of democracy can be replaced with a streamlined reactionary agenda. The GOP has already revealed what it wants to do in their near unanimous approval of the Ryan budget plan. Possibly the implementation of those plans will be a form of divine justice for tea party crowd.

1. Earnings Reports For Companies Where My Position Consists Solely in Owning Bonds except for Boyd Gaming:  

Brunswick (BC) reported earnings of 73 cents, beating expectations by 19 cents.  SEC Filed News Release I only own a senior BC bond:  Bought 1 Brunswick 7.375% Senior Bond Maturing 9/1/2023 at 94.2

Ashland (ASH) reported earnings of 82 cents per share, excluding items, beating expectations by six cents. SEC Filed News Release I own a bond originally issued by Hercules which was later acquired by Ashland. 1 Hercules 6.5% Junior Bond Maturing on 6/30/29 at 86

SLM Corporation (SLM) reported "core" earnings of 48 cents compared to the consensus analyst estimate of 42 cents. SEC Filed News Release I own 100 shares of a senior exchange traded SLM bond, OSM, with a total average cost of $15.73 (see snapshot at Item # 3 Stocks & Politic). OSM matures in 2017 at $25 and pays monthly interest at a spread over CPI.  An explanation of the calculation can be found at Item # 1 Stocks & Politics: OSM  (December 2010). 

Boyd Gaming (BYD) reported net revenues of $574.4 million and a net loss of 3 cents per share. Total adjusted EBITDA was $118.4 million for the quarter.   SEC Filed Press Release I own the common as a LT and one senior subordinated bond, which is called a junior bond here at HQ:  Bought 1 Boyd Gaming Senior Sub 7.125% Maturing 2/1/2016 at 89.55 with concession 

MeadWesvaco (MWV) reported net income of $89 million or 51 cents per share ($.54 excluding items), meeting expectations.  Revenues increased 9 percent to $1.56 billion. The company expects modest improvement in earnings for the third quarter. Bought 1 MeadWestvaco 6.8% Senior Bond Maturing 11/15/2032 at 92.926

HCA disappointed their common stock investors by reporting earning of 43 cents per share, which included a 8 cent per share charge for debt retirement, on a 4% increase in revenue. The common shares subsequently dipped below their recent IPO price. The company blamed the disappointing results on declines in expensive surgeries.  Bought 1 Senior 7.5% HCA Bond Maturing 12/15/2023   Bought 1 Senior 7.69% HCA Bond Maturing 6/15/2025 


Companies providing medical care and products fell yesterday in response to the budget deal which would reduce medicare payments to medical providers automatically in the event Congress is unable to approve the second 1.5 trillion dollar deficit reduction. The market acted as if that eventuality was already a done deal, taking HCA down $1.74 to close at $24.94. The major 11.1% cutback in F/Y 2012 to skilled nursing home providers added to that angst. See item # 4 below, Reuters and WSJ.

2. Earnings from Companies in the LOTTERY TICKET strategy: I barely pay any attention to my common stock positions in the LT category, except where I also own the firm's bonds which is the case for National Penn.  I will only make brief notes of the earnings:

Susquehanna Bancshares (SUSQ) reported earnings of 9 cents per share, meeting expectations.

National Penn Bancshares (NPBC) reported earnings of 15 cents a share up from 10 cents in the year earlier period.  The quarterly cash dividend was increased to 3 cents per share. Since I also own 150 share of NPBCO in addition to a LT position in the common stock,  I will discuss National Penn's earnings in more detail.  Bought 100 NPBCO at 24.91 Bought 50 of the TP NPBCO at $24.93 As of 6/30/11, the tangible equity to tangible asset ratio was 10.25%; the net charge offs to average loans decreased to .62% (hit 1.7% in second quarter of 2010); NPLs as a percentage of total loans were at 1.41%; the net interest margin was at 3.53%; the efficiency ratio was at 58.25%; and the tangible equity to tangible assets ratio was 10.25%. Tangible Common Equity excludes preferred stock and intangible assets.   

EXAR reported a GAAP loss of 3 cents for its first fiscal quarter (+ 2 cents Non-GAAP) on net sales of 37 million, generating 2 million in cash from operations. The company ended the quarter with $202.4 million of cash, cash equivalents and short term marketable securities

PLX Technology (PLXT) reported a 14 cent GAAP loss per share (-6 cents Non-GAAP) on revenues of $30.745 million. The consensus estimate was for a loss of 7 cents, so that is a one cent beat.

RTI Biologics (RTIX) experienced a good percentage increase in its share price after releasing earnings before the market opened last Thursday, moving from $2.98 to $3.24 in trading that day on heavier than normal volume.  RTIX Historical Prices  The company reported net income of 4 cents per share on $43.5 million in revenues.

First Horizon reported net income of 43 million or 16 cents per diluted share for the second quarter.

3. First Niagara (own: Regional Bank Stocks' basket strategy): First Niagara agreed to acquire 195 branches in New York and Connecticut from HSBC for about 1 billion dollars.  FNFG anticipates issuing $750 to $800 in stock before completing this acquisition. Once completed, the bank estimates that the additional branches will add 10% to 12% in operating earnings next year and 11% to 12% in 2013. First Niagara Accelerates Growth Strategy With Acquisition of HSBC Branches Across Upstate New York and Connecticut, Strengthening the Bank's Northeast Regional Franchise (Nasdaq:FNFG) FNFG expects to earn back the dilution caused by the share offering in 4 to 6 years.

First Niagara Financial fell 33 cents to close at $11.92 yesterday. Many investors are apparently dissatisfied with the dilution.

4. Medicare Slashes Reimbursement Rates for Skilled Nursing Care: For those dependent on the generosity of our destitute Uncle Sam, the future is not bright. Medicare announced that it would slash prospective payments to Skilled Nursing Facilities by 11.1% in Fiscal Year 2012 compared to payments in F/Y 2011.  www.ofr.gov/.pdf The change is summarized in this article.

I do not own any nursing home stocks or REITs that own nursing homes. That entire sector was smashed yesterday including REITs that cater to this industry. (see articles at MarketWatch and Kaiser Health News) The nursing home association claimed that the cuts will destabilize the industry. WSJ

5. Added 50 of the Stock CEF Swiss Helvetia Fund (SWZ) at 13.75 on Monday (see Disclaimer):  This CEF just went ex dividend for its semi-annual distribution that consisted mostly of a long term capital gain dividend of $.727 per share. Swiss Helvetia Fund Historical Distributions I have been reinvesting the dividend to buy additional shares.

My last open market purchase was a 50 share buy in December 2009. Added to CEF SWZ at $12.15

I suspect that the fund was selling on Monday at slightly more than a 10% discount to its net asset value.

As of last Friday, the net asset value per share was $15.46 and the closing price that day was  $13.85.

Information about the fund can be found at the sponsor's web site: SWZ.com - Swiss Helvetia Fund

As the name suggests, the fund invests in companies based in Switzerland.  For a U.S. investor, the net asset value  will be impacted by the value of the USD against the Swiss Franc. The USD has been losing that battle since June 2010. USD/CHF Currency Conversion The Swiss Franc is viewed as a safe haven type of currency. The Swiss market hit an air pocket today due to the strength of its currency.  MarketWatch

The fund is heavily weighted in the two large Swiss pharmaceutical companies Roche and Novartis along with Nestle. Those three companies have a combined 36.63% weighting as of 5/31/2011 and would be viewed by most investors as defensive.

CEFA - Closed-End Fund Association Page on SWZ.
Morningstar Page on SWZ
Last SEC Filed Shareholder Report Swiss Helvetia Fund, Inc. for period ending March 2011.

Swiss Helvetia Fund closed at $13.87 yesterday, up 3 cents for the day.

I will mention the other trades from Monday, including the purchase of a new exchange traded senior bond, in the next post.

GDP and Inflation-Worrisome/McConnell and Reid Agree to Framework on Debt Limit Increase/Husky (HSE:CA)/ONFC VLY UBCP/Edison Mission Bonds/Bought 50 of the TC GJR at 19.31

Consumer confidence slipped to the lowest level since early 2009. thomsonreuters.com.pdf

The GDP report last Friday was depressing. The government revised the 2011 first quarter GDP growth to .4% from an anemic 1.9%. News Release: Gross Domestic Product The estimate for the second quarter was 1.3%, below the consensus of 1.8%. The government also revised its GDP estimate for the 4th quarter of 2010 to +2.3% from 3.1%. This report was ominous, particularly since government stimulus is already being withdrawn and is likely to be cut further. A decline in government spending at all levels is already contributing to a contraction in GDP.

Output in the Near Depression was also revised down to show a bigger dip. The cumulative decline was revised to 5.1% from 4.1%.  The economy declined by 3.5% in 2009 rather than 2.6%. CNBC

I started to cut back on my stock allocation during the Spring after seeing evidence of a slowdown. I did not expect that the GDP deceleration would be so drastic in the first half, as now estimated by the government.

I had also anticipated a slowdown in the U.S. economy greater than the consensus estimates prior the release of the last GDP report. Some economists have started to revise down their robust growth estimates for the second half, still anticipating nonetheless a sharp bounce in economic activity. I would not be surprised by a slightly positive GDP number for the 3rd quarter.

Some economists believe that the stage is set for "marked acceleration" in the second half:  www.ftportfolios.com  Deutsche Bank lowered its forecast for the 3rd quarter GDP by one percent to 2.5%, and its 4th quarter estimate by 1.3% to 3%.  WSJ.com Still, given the sharp reduction of government spending at all levels, the still over leveraged American consumer, high unemployment, dismal construction activity, and many other negative drags, even the reduced estimates for the next several quarters are too high in my opinion and are based primarily on wishful thinking.

I did mention in a prior post that the current political turmoil has taken investors attention off a slowing economy which would in my opinion cause a correction even with a majority of sane and responsible politicians in Washington.

There is also growing evidence of problematic and incipient inflation that may tie the Fed's hands and cause them to raise rates, even with the economy weak, in an effort to nip inflation from gaining too strong a foothold. Some of these recent data points include the following. The Labor Department reported last Friday that its employment cost index rose .7%, seasonally adjusted, in the 2011 second quarter. Employment Cost Index news release text Based on the last CPI report, inflation has increased at 3.6% rate from June 2010 through June 2011.  Consumer Price Index Summary In the GDP release on Friday, the government estimated that the price index for domestic purchases increased 3.2% in the second quarter.


It is of course deliberately misleading for both Boehner and Cantor to say that an approval of a debt limit without spending cuts gives the President a "blank check". That statement was rated by PolitiFact as False which it is without question.  The same conclusion was reached by an Editorial in USATODAY and at  FactCheck.org. No other conclusion can be drawn given the constitutional powers of the President and the Congress that are well known to both Boehner and Cantor. Only Congress can pass spending bills. The debt limit increase pays for the spending already made by Congress or approved by it. FactCheck.org I repeatedly mention these kind of false statements, which are intended to mislead the weak minded and ignorant, since I view them as interfering with sensible solutions to the nation's problems. Ultimately the solution involves the voters to become more informed, far more knowledgeable than they are now.  And I say that recognizing that at least 30% of the voters are hopeless ideologues who create their own reality and do not care about making sound judgments based on reliable factual information.

Suze Orman explains the debt limit issue in terms that most voters can understand. CNN.com

A republican columnist, Kathleen Parker, has started to call the Tea Party crowd in the House the "The Tea Fragger Party".  The Tea Party crowd has always been with us, going under different names from time to time. They are for the most part the same reactionaries and extremists who listen to the gospel according to Rush and Sean.  They are virulently opposed to Democrats in general and to any social programs that does not benefit them. For many, their opposition to the Democrats and those social programs have racial overtones.

The budget limit increase is still uncertain in my opinion. It is not clear whether the deal announced by the leaders last night can pass the House.

Last Friday, to obtain enough votes, Boehner had to amend his budget plan a way that insures that it would never be approved by the Senate or the President. The amendment would require Congress to approve a balanced budget amendment to the Constitution before the second increase to the debt ceiling. WSJ So under the House plan, in a few months, both the Senate and House would have to approve- by two-thirds vote- a Constitutional Amendment requiring a balanced budget and the spending decreases recommended by yet another commission. This is a link to the roll call vote on Boehner's last plan:  House Vote 677  Some GOP members voted against the revised plan since it was not extreme enough for them including Michelle Bachmann.

Several GOP senators joined all of the Senate Democrats to kill the House bill. The vote was  59 to 41.  Washington Post The extremist Senator from Kentucky, Rand Paul (R-KY) voted against the House bill since the bill was not draconian enough. The two Republican senators from Maine (Collins and Snowe), the vulnerable republican senator from Massachusetts (Scott Brown) and Lisa Murkowski of Alaska also joined the Democrats in opposition for different reasons. Conditioning a debt limit increase on the passage of a Constitutional Amendment is off the charts irresponsible.

The GOP members in the House have shown their willingness to use of the full faith and credit of the United States in an effort to extort changes in spending for ideological reasons. That constitutes an abuse of power. Their intent, as Paul Krugman noted (NYT), is to eviscerate the government's safety nets, by using their political power in the House to condition their approval of a debt limit increase. The balanced budget amendment is not being advanced for legitimate fiscal reasons but to achieve a reactionary agenda. The U.S. does not need to "balance the budget" unless the purpose is to appease ideological extremists. Instead, a sensible balance is required in the amount of money being borrowed and spent, along with a tax policy designed to generate more revenues primarily by closing tax loopholes and minimal increases in taxes on the wealthy.

Those who advocate a balanced budget, which includes all GOP members in the House and Senate, do not recognize their role in creating the current obligations that have to be financed with a debt limit increase. Their view was expressed by Mitch McConnell over the weekend that Obama's policies led to the current problem. As long as substantial parts of the population believe in those kind of delusions, a solution will be hard to achieve.  An accurate statement would be that the serious problem began with President Reagan in the early 1980s, the "deficits do not matter" crowd, and have accelerated by both spending and revenue actions undertaken by both political tribes since that time. A discussion of Reagan's contribution, christened "borrow and spend" as opposed to "tax and spend", is mentioned by historian Richard Reeves in a NYT column.

{During George W. Bush's administration, the gross debt increased from $5.7289 trillion in January 2001 to 10.7 trillion by 12/31/2008, leaving office just prior to the onset of the Near Depression which would dramatically decrease revenue and increase expenses regardless of the party in power. The debt calculations can be performed at the Treasury's web site: Debt to the Penny (Daily History Search Application I was not able to run a similar search for the entire Clinton term, but was able to go from September 1994, when the debt stood at $4.685 trillion, and that number increased to $5.73 trillion by 1/2/2001.  National debt by U.S. presidential terms - Wikipedia}

The two major contributors to the debt problem over the past decade, originating from the GOP, are Bush's IRAQ War on the spending side and the Bush tax cuts on the revenue side.  Over 90% of the nation's 11 trillion in debt, accumulated prior to Obama's Presidency, originated during the Administrations of three recent Republican  Presidents.  Salon.com National debt by U.S. presidential terms  A former Reagan official lays out how the Bush tax cuts contributed to the current debt problem in a NYT opinion column. Those cuts are not set to expire on 12/31/2012, unless extended again. Washington Post The Ryan budget plan would deepen the tax cuts for the rick by reducing their top tax bracket to 25%. Bloomberg

Late last night McConnell and Reid announced that they had agreed to a framework for a deal.  Obama agreed to support it.  NYT  The Washington Post

While the House leaders appear to have accepted the compromise last night, it is impossible to predict what the rank and file will do. I would not make the assumption that the debt limit will be raised based on this compromise until the House vote is taken.  I suspect a large number of liberals who are furious with Obama will vote against this deal, along with a substantial number of GOP House members who are in Maureen Dowd's apt description "adamantine nihilists"  Paul Krugman has already called it a disaster.  NYT The editorial page at the  NYT calls it a terrible deal.

I would not anticipate a problem with the Senate.  The Senate does have the Filibuster and Cloture rules that would require 60 votes to close a filibuster and allow for a vote. A few senators have already announced their opposition to the plan including the two republican senators from Utah, Mike Lee and Orin Hatch. Deseret News

The plan appears to call for $2.417 trillion in spending cuts over 10 years in two stages based on news reports last night.  The first stage of $917 billion would be approved now, including 350 billion in defense cuts.  WSJ. A bipartisan Congressional commission will be formed to find the other $1.5 trillion in cuts. If those additional cuts did not materialize by 12/23/11, there would be automatic cuts of $1.2 trillion over 10 years. One-half of those cuts would come from defense. Washington Post The remaining cuts would come from nondefense spending, including payments to providers of Medicare, but would not affect Social Security or Medicaid.  Unlike the House bill, however, the raise in the debt limit would not be conditioned on both the Senate and House approving the balanced budget amendment.  There would be no revenue increases as part of this deal.

This is a link to the White House's summary of the plan: Fact Sheet: Bipartisan Debt Deal: A Win for the Economy and Budget Discipline | The White House

This is a link to Boehner's powerpoint presentation of the framework to his caucus, which he humorously titled "Two-Step Approach to Hold President Obama Accountable", as if it it was the President that initiated and approved spending bills.  NYT I would just note that both the House and Senate have to approved legislation before the President has the opportunity to sign or to veto it which seems like an introductory comment made by a teacher in a 9th grade civics class that most people must have missed.

Since there has not been enough of downdraft in the market, I am sitting on my cash and did not make a trade last Friday. I suspect that it will take longer to recover from the aftershocks of the Age of Leverage. If the S & P 500 decisively breaks the neckline at 1250, I will likely sit on my hands for longer than I currently anticipate.

1. Earnings Regional Banks (UBCP VLY ONFC FBSS)(own: Regional Bank Stocks' basket strategy):

Valley National Bancorp (VLY) reported net income of 36.9 million or 22 cents in the second quarter, one cent better than the consensus, and up from 20 cents in the second quarter of 2010. VLY is one of my largest positions in this basket. VLY expanded it footprint out of NJ and into NYC with FDIC assisted acquisitions and is in the process now of expanding into Long Island with its proposed acquisition of State Bank and its 17 branch network. As of 6/30/11, the net interest margin was at 3.71%; non-accrual loans tot total loans were at 1.19%; the risk-based total capital ratio was at 13.09%; the efficiency ratio was at 54.95%; and the allowance for losses as a percentage of NPLs was at 105.41%.

Oneida Financial (ONFC), a small savings bank operating in NY, reported net income of $1.7 million or 24 cents, up from 11 cents in the year ago quarter.  Oneida also announced a stock repurchase program of up to 5% of its outstanding stock. As of 6/30/11, the bank had a total risk-based capital ratio of 15.97%; net interest margin was at 3.38%; tangible book value per share was $9.3; the efficiency ratio was at 77.29% (I prefer a much lower number); the tangible equity to tangible assets ratio was at 10.36%; the allowance for loan losses to NPLs was a sturdy 174.43%; and the NPLs to total loans was much better than average at .62%

United Bancorp (UBCP), a small bank operating in Ohio, reported net income for the second quarter of $752 thousand or 15 cents per share, up from 14 cents in the year ago quarter. The quarterly cash dividend is 14 cents per share. The net interest margin is better than average at 4.23%. Non-accrual loans to total loans stood at 1.52% as of 6/30/2011, with the allowance for loan losses to non-accrual loans at 65.97%.

Fauquier Bankshares (FBSS), a small bank operating in two Virginia counties, reported second quarter net income of $1.14 million or 31 cents per share, up from 28 cents in the year ago quarter.  As of 6/30/11, the efficiency ratio was high for banks in this basket at 71.46%; the net interest margin was at 4.06%; NPAs to total assets was at 1.13%; the tangible equity to tangible assets ratio was at 7.7%; and the total risk-based capital ratio was at 13.07%.

2. Husky (own: Canadian Dollar (CAD) Strategy): Husky Energy reported net income of $669 million or 71 cents per share, up from 19 cents int he 2nd quarter of 2010. Production for the 2011 second quarter averaged 311,600 barrels of oil equivalent per day, an increase from 283,900 in the 2010 second quarter.  Cash flow from operations was $1.511 million. All amounts are in Canadian dollars which are worth currently more than USDs. 

3. Impact of EPA Proposed Rules on Owners of Coal Plants-Edison Mission Bonds: The consulting firm ICF International has estimated that up to 20% of the nation's coal fired generation will be shut down this decade due to the EPA's new emission regulations.  Reuters  Those smaller and mostly older coal fired plants would not be able to meet new standards without prohibitive cost retrofits. The EPA estimates that 1.6 billion dollars will have to be spent every year for the next 30 years to comply with the new EPA rule.

This is a link to the EPA's news release on its new rule:  EPA

Duke Power (DUK) has already announced that it will shut one of its Ohio coal plants by 1/1/2015 due to the EPA regulation. Reuters While I own shares of Duke Energy, I am more concerned about the impact of the proposed rules on my Edison Mission senior bonds.

Energy Future Holdings announced that it may have to close 12 coal burning plants in Texas.  Southern Company announced that it would shut two coal stations in Georgia.

As previously discussed, Edison owns a number of coal plants in the 27 states which will be subject to the new rules. These new rules, EM's high leverage and weak margins recently caused Fitch to downgrade the EM senior bonds. Fitch Downgrades Edison Mission Energy & Midwest Generation's IDRs to 'B-'; Outlook Negative I do not know yet whether EM will shut one or more of its coal plants or engage in costly retrofits.  Either choice would be a negative for bondholders.

I intend to sell one or two Edison Mission bonds before the end of this year.

4. Bought 50 GJR at 19.31 on Thursday-ROTH IRA (see Disclaimer):  GJR is a Synthetic Floater in the Trust Certificate legal form of ownership.  The TC GJR represents an undivided interest in  senior Proctor & Gamble bonds owned by a trust and a swap agreement that creates a floating rate. I discuss synthetic floaters, a type of exchange traded bond, in the the Gateway Post for Synthetic Floaters. The reasons for buying this floater in the ROTH IRA are the same as previously discussed in connection with other recent synthetic floater purchases.  Added 50 GYC at $21.60 in Roth IRA;  Bought Back Synthetic Floater GJP at 22.25-ROTH IRA; Bought Back 50 GJT at 18.15-Roth IRA;   Bought Back 50 GJO at 18.55: ROTH IRA. All of those trusts own investment grade senior bonds (AT & T, Dominion Resources, Allstate, Wal-Mart and PG),  the float tied to a short term rate provides some protection against rising rates, and all are selling at discounts to their par value giving me the potential of capital appreciation.  

The main disadvantage for GJR is that there is no minimum payment. For as long as the swap agreement is in force, GJR will pay a monthly interest rate of .7% above the three month treasury bill rate (now very, very close to zero) but no greater than 7.5% based on a $25 par value. In effect and for all practical purposes, the minimum rate is .7% (unless the T Bill yield goes negative) and the maximum rate is 7.5%. The minimum is likely to be paid at least for several more months.

Based on a total cost of $19.31 and a $25 par value, the yield at the maximum rate would be about 9.7% which would be hit when the 3 month T Bill rate exceeds 6.8% during the relevant coupon period. The rate now at that total cost number is close to 1%.

The main advantages of this security is the good credit risk, the possibility of capital appreciation as the spread narrows between my cost and par value, and the float which will make this security more attractive when rates start to rise.

According to FINRA, the underlying PG bond is rated Aa3 by Moody's and AA- by S & P. It matures on 8/15/2034.

GJR Prospectus: www.sec.gov
Quote: Synthetic Fixed-Income Securities Inc. Fltg Rate STRATS Series 2006-1 for Procter & Gamble Secs. Seies 2006-1, GJR

I have previously bought and sold GJR:  Bought 100 GJR at 11.29 Sold GJR at $16+

This buy will likely be my last buy for a few days, at least for a long position.

When making this kind of investment, I have to look way into the future. I do not expect much now.