Bought 30 PEP at $59.95/EK/Greeks and the Entitlement Mindset/Bought 100 MTY at $10.03/Louise Yamada on Stocks and Gold

The Greek civil servants are unhappy and have shut down their government in protest.  I read a number of interviews with those striking employees, none of whom blame themselves for the dire situation. Instead, the Greeks blame just about everyone other than themselves for their predicament. A common source of the blame is assigned to foreigners who lent the Greek government money, later consumed by those striking government employees. To an outside observer, these people are in aggressive denial and are simply unable to form rational judgments. Possibly, it needs to be made a felony for any national government or financial institution outside Greece to make a loan to the Greek government or to its citizens. In about thirty or forty years, a new generation of Greek citizens might be able to form rational judgments based on reality and to see the past more clearly. At least, that is conceivable. There is no hope for those Greeks alive today.

It is interesting that those living on the public dole in Greece, which appears to be most of the citizens since that country is after all a patronage state, want their outlandish benefits even when there is no money to pay for them. "I am entitled to what I want, when I want it, even if there is no money to give me what I want". 

The entitlement mindset is of course not unique to the Greeks. The Greeks simply take it to breathtaking proportions. Greece Governments and citizens in other developed countries are afflicted with the same disease. The general predisposition is to tell the government how much you want from it, and then the government borrows money to fund those wants and desires. The borrowing increases over time at ever growing amounts, since a corollary is that the citizens do not actually want to pay for that they want from government.  The Greeks just ran up against the wall first and others will join them in the years to come including the United States. Freedom from responsibility must be a fundamental human desire, nurtured, encouraged and even rewarded by most governments in developed countries. Our government is a master at promoting and rewarding irresponsible behavior.

Who has paid for the financial crisis in the U.S., just as an example of the point that I am making? Responsible Americans have paid for it, those who borrowed only what they could pay back, spent and saved like rational human beings, and never lied on a mortgage application. Those Americans did not cause the disaster but are paying for it now, without question, in many ways including the miserly income now generated on their savings as a result of the Federal Reserve's Jihad against the Saving Class.

The Masters of Disaster in America's financial institutions made a ton of money, billions of dollars, by enabling irresponsible Americans to purchase homes that they could not afford, all too frequently based on mortgage applications known to contain fraudulent financial information. Then, the toxic trash was bundled into securities that had to be designed by Satan.  When the bubble burst, people who should have never bought a home might lose it, but who really pays for their inconvenience of moving into an affordable apartment. The ones who pay are the homeowners who have seen the value of their properties decline due to the bursting of the housing bubble, created from easy credit provided to non-qualified mortgage applicants. Rather than leaving the home, a more plausible scenario is that the borrower will just default and live rent free for severals months or more frequently now for years, a policy encouraged by the actions of the federal and many state governments who make foreclosures difficult even when there is no question that the borrower signed a note and quit making payments.

Randall Forysth provides a lot of useful information to the staff here at HQ that would otherwise not be available. Needless to say, Headknocker is not going to spend money on research services (other than Morningstar), newsletters or anything else for that matter.  So we only know what Louise Yamada is thinking when someone is kind enough to provide us (HK, RB, LB, & the OG) with the details. I am always interested in his views. I sometimes link a CNBC interview with her. In his recent Barrons' column, Forsyth summarizes the latest advice given by Louise to her subscribers. To cut to the gist, she advises investors to emphasize preservation of capital. That seems wise to me. She is bullish on gold, viewing the $1600 range as providing the floor for consolidation. In a prior interview, she sees that gold could reach $5,200 by 2018. YouTube Her views on the world's stock markets seem to be identical to the opinions expressed by her in an interview last August. YouTube (that video may be taken down by YouTube)

Tiernan Ray summarizes a very negative report on Kodak in his Barrons column. While the 2013 bond price has recovered some since crashing into the 20s, I am still pessimistic about receiving par value at maturity and would be surprised now by a positive outcome. Needless to say, as an owner of 2 of those bond, I hope that I am wrong.   

1. Added 100 MTY at $10.03 Last Wednesday in the ROTH IRA (see Disclaimer): I have discussed this security in several posts. This purchase brings me up to 200 shares. MTY is a senior, unsecured note issued by Citigroup Funding and guaranteed by Citigroup as set forth in the prospectus. For this kind of security, it is imperative to read and to fully understand the prospectus. 

MTY is sometimes called a "principal protected" note, which is a misnomer. The owner of this security is subject to the credit risk of Citigroup, just like any other buyer of unsecured senior bonds. Item # 1 Principal Protected Notes (April 2010 Post). 

MTY is traded on the stock exchange and volume is typically light. Last Wednesday, the volume was just 1000 shares and the shares traded in a $9.95 to $10.03 range. Par value is $10. 

MTY is an interesting security to me.  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 annual coupon period, with an important caveat. If there is one day, just one will do it, where the price of gold closes above that 35% increase, then MTY will pay the 3% coupon no matter how much gold increases during the coupon period. Final Pricing Supplement I call that proviso the Maximum Level Violation or sometimes the Reversion, just as a shorthand for long time readers.  

There are a few facts that need to be driven home with this security. 

The current annual period started on July 27, 2011. A potential buyer or current owner has to know the starting value of gold for the current period. This security will use the London P.M. fix. Kitco Inc. - Past Historical London Fix The London P.M. fix for gold on 7/27/2011 was $1,625. Gold can increase during the current annual period up to 35% without triggering the Reversion back to 3%. This would put the Maximum Level Violation number at $2,193.75 (1.35 x. starting value of $1,625=$2,193.75). One close above that number on or before the closing date of July 27, 2012 will cause the Reversion to 3%, no matter what happens to the price of gold. This happened in the last coupon period. MTY Reversion to 3% Minimum Coupon Today; see also discussion at Stocks, Bonds & Politics: MTY MTY did have a good payday during its first annual period. So, place your bets and take your chances, just like anything else. 

Since I paid close to par value, and this is a short term note maturing in 2014, the main risk is the credit risk of Citigroup. If Citigroup survives to pay off the note, the worst result would be to receive a 3% coupon for each of the three remaining payment periods (2012, 2013, 2014). I have the potential of receiving a lot more and have received more for similar type of notes tied to stock or commodity indexes. (see snapshots at Stocks, Bonds & Politics: MTY)

A few months ago, institutional investors were buying fixed coupon Citigroup bonds, maturing in 2014, and receiving yields around 2 1/2%. Those bonds have come down in price and up in yield. The YTM for the fixed coupon 2014 Citigroup senior bonds are now closer to a 4% to 4 1/2% range.

FINRA Information: Fixed Coupon 6.375% Maturing 8/12/2014
FINRA Information: Fixed Coupon 5.125% Maturing 5/5/2014 

MTY matures on 8/11/2014 at $10.

On the day of my purchase, the London P.M. fix for 10/5/2011 was $1617. The P.M fix yesterday was at $1635. That number is without much significance. There is a lot of room to run before triggering a Maximum Level Violation. And, there has been no Maximum Level Violation during the current coupon period so far. The highest close to date was on 9/5/11 and 9/6/11 at $1895. I sold gold for the first time on 9/6/11, snapshot at Recent Gold and Silver Sales.

I now have $9,000 in exposure to Citigroup senior bonds. Those bonds are my sole exposure to Citigroup. My limit is $10,000 in exposure to the securities issued by one firm. I am slightly uncomfortable being so close to that limit for Citigroup, even with the entire exposure in senior bonds. I do not own the Citigroup common, equity preferred or trust preferred securities.  I may sell down to $8,000 before the end of the year. One candidate for a sell would be MOL, which is also linked to gold, but with a smaller allowable increase in the gold price during its annual terms.  

The Citigroup exposure is now in the following exchange traded senior, unsecured notes:

Bought 100 MKN at 9.85

Bought 100 MOU at $10.12

Bought 100 MBC at 9.78

Bought 100 MBC at 9.84

Bought 100 MTY at 10.49 (plus the 100 bought on Wednesday in the ROTH IRA)

Bought 100 MKZ at 9.96

Bought: 200 MOL at 9.95 Sold 100 MOL @ 10.3

Bought 100 IFO at $9.35-Regular IRA

Information about gold prices can also be found at the LBMA website. 

2. Bought 30 Pepsico at $59.95 Last Wednesday & Trading Strategy for Unstable Vix Pattern for this Type of Security (Large Cap Valuation Strategy and Common Stock Dividend Growth)(see Disclaimer): With the recent price decline, Pepsico shares qualify under both of these strategies. However, in an Unstable Vix Pattern within the context of a cyclical bear market, I will anticipate that the risks are to the downside and will chop orders up into small pieces. 100 shares could be bought, but only in three odd lot increments. The first and second purchases will generally be 30 shares and the third would be 40 shares. Each increment has to be at least $2 per share lower than the last purchase.  I am expecting to average down, but I am not 100% sure that I will be afforded that opportunity.

I may also sell the first bought shares at over $65, assuming a completion of the entire purchase, and possibly buy those shares back at below the price paid for the last shares bought. That strategy is catered to the probable volatility in the share price, where some profits are taken when they become available and the average cost of the remaining shares are lowered as a result.  If I get caught holding the security by a serious and long term downdraft in the stock price, then I would prefer that happen with a dividend paying company that is sound financially. I would then have the option of using that dividend to buy shares at lower prices. Eventually, provided I do not pay too much initially for the shares, I would expect the price to recover allowing me to exit the position at a profit within a reasonable amount of time, measured at most in a few years, barring a second Great Depression whereupon the wait would be considerably longer to recover my original principal.   

Pepsico meets the criteria set out in this Post for the Dividend Growth Strategy: Item # 6  Common Stock Dividend Growth vs. Long Term Investment Grade Bonds The current yield is over 3%. PEP has a long history of paying the dividend and increasing it.  The payout ratio will generally be below 50%, or slightly above. The rate of dividend growth is supported by the rate of earnings growth. There has not been a dividend cut. See generally PepsiCo Dividend Information | PepsiCo.com

The current quarterly dividend rate is $ .515 per share or $2.06 per share annually. At a total cost of $59.95, that would equate into an annualized yield of 3.44%. In the annual payment period starting in May 2001, the annual rate was 58 cents, so that is a significant increase over a decade. While the historical rate of dividend increases is not assured for the future, the prior history is nonetheless an important consideration for investors looking for increasing income on a constant cost basis.

The stock also qualifies for purchase under the Large Cap Valuation Strategy, based on the P/E and the P.E.G. The current estimate for 2012 is for an E.P.S. of $4.77. At a total cost of $59.95, that estimate gives me a forward P/E of 12.57, at the low end of historic ranges for this stock. The PEG ratio, estimated for the next five years, is currently 1.59 which is reasonable for this type of company. PEP Key Statistics

PepsiCo closed at $60.47 in trading yesterday.

In two prior posts, I mentioned an interesting story about Herman Lay, the "Lay" in Frito-Lay, Pepsico's jewel of a snack food business.  Pepsico Buy at less than $50 May 2009   PEP & Origins of Frito Lay

Herman was a Nashville businessman. Actually, when he was in his mid-20s during the Great Depression, he was delivering and selling potato chips for a company called Barrett Food Company.

There was an Esso (now Exxon) gas station near Belmont University, owned by Ed Johnson and his wife Bernice, who often extended Herman credit for gas to keep his trucks running.  In 1947, he offered the Johnson's an opportunity to invest $8,000 in his effort to buy the Barrett Food Company. That was about the entire life savings of this couple. There was some disagreement, with Ed wanting to make the investment and the Mrs. being fearful of losing their retirement savings Ultimately, all of that was resolved somehow, possibly with Mr. Johnson not telling the Mrs. until the check had cleared the bank. nashvillepost.com In 2008, the Johnson's estate made a ten million dollar gift to Belmont University,  Belmont Receives $10 Million Donation from Johnson Estate | Belmont University News and Media Eight million dollars had previously been given to the University. Belmont was one of the beneficiaries of the Johnson's fortune, originating from that stock purchased in Lay's company. Those funds did not come from pumping gas during the Great D and few years thereafter.

Some of that history can be found, along with other interesting stories about Nashville entrepreneurs, in Fortunes, Fiddles and Fried Chicken : A Business History of Nashville.

I will discuss in my next post my recent email correspondence with Mark Hulbert on the use of the VIX as a timing model for stock allocation. 

More Discussion on Asset Allocation in Unstable Vix Patterns/Sold 50+ ONFC at $9.35/Added 50 BTZ at 11.24

According to the WSJ, the government is going to allow borrowers, who were in some stage of foreclosure in 2009 or 2010, to claim compensation for bank mistakes. This could impact as many as 4.5 million homeowners.

A couple of economic reports yesterday suggested that the market is too negative about the U.S. While not great, the ISM services index was 53% for September, staying above the 50 threshold showing expansion. The new orders component actually increased to 56.5 from 52.8. The other report was from ADP showing an increase of 91,000 private sector jobs from August to September. adpemploymentreport.com.pdf  While that is unsatisfactory, that snapshot of the labor market appears to me to be inconsistent with the doom an gloom pervading the markets now.

I will add something with cash flow after viewing news inconsistent with Mr. Market's forecast about the future. I will discuss that small add in tomorrow's post, a 30 share buy of Pepsico at $59.95. 

I am on automatic pilot in making certain investments, notwithstanding my negative view of the market. One way to dig out of a bear market is use cash flow to purchase more securities, particularly on down days. I was able to recover quicker from the meltdown after Lehman's failure by following that simple dictate.

I have also flagged certain securities for repurchase after being sold recently. As an example, I previously mentioned that I would buy back 50 shares of Microsoft below $25 after selling 150 shares at higher prices. SOLD 100 MSFT @ 27.9 (July 27, 2011 Post); Sold 50 MSFT at 26.7 (9/6/11 Post). I am reinvesting the dividend to buy additional shares.

The only requirement for this repurchase is that the price has to be below $25. The timing of the purchase after that condition is met is flexible.

Instead of buying MSFT when it fell to below $25 earlier this week, I waited to see whether PEP would decline below my $60 buy target. In an Unstable VIX Pattern, I will continue buying common stocks but in very small lots and will focus on financially sound companies. (see e.g. posts from March 2009 including the following: Buy of KO at 38.72 Buy of HNZ at 31.67 Buys of CPB at $25.8 and SYY at $19.46 Buy of UL at $18.22 BOUGHT Kraft at $22.26 & Nestle at $31.28 Bought PG at $47.59; currently own SYY, KO, UL)

The market is being driven by fear feeding on itself, which will likely present long term buying opportunities. Many stocks seem to me to be attractively priced now, but could easily trade lower in the current environment. It almost becomes a matter of feel when to take a position. Since I view the risk to be to the downside, I will chop purchases into multiple small odd lots and will space them out in time. It would not be surprising to see a waterfall decline when and if the solvent European nations decide to let Greece fend for itself, one realistic scenario for the future.

1. Sold 50+ of ONFC at $9.35 on Tuesday (Regional Bank Stocks' basket strategy)(see Disclaimer): The shares of this small bank, headquartered in NY, were bought at $7.7 and I reinvested one dividend to buy additional shares.

The updated total for realized gains for this strategy is $7,959.01. Item # 3 Realized Gains Regional Banks The unrealized loss in the remaining positions is growing. Some of the banks are trading at levels now below their low point in March 2009, and I will likely average down on a few of those.

2. Added 50 BTZ at $11.24 on Tuesday (see Disclaimer): This bond CEF has not done well since my initial purchase. BTZ invests mostly in investment grade bonds, congregated in the BBB category. The fund recently announced a small raise in its monthly dividend.  The new monthly rate per share will be $.0765. BlackRock The old rate was $.069. BTZ Distribution History Assuming a continuation of the new rate, which would not be prudent, the yield at a total cost of $11.24 would be around 8.17%. I am currently taking the dividends in cash. The total BTZ position is now close to 600 shares with 200 held in the ROTH IRA.

One reason for the decline is that the discount to net asset value has been expanding recently. On 10/3/11, BTZ reported a net asset value per share of $13.37. Based on a closing price that day of $11.39, the discount to net asset value was -14.81 at that time which is high for a fund with a lot of investment grade bonds. The decline in price last Tuesday was almost sufficient to pay for my $7.99 brokerage commission on a 50 share purchase, and that was another factor for making the add.

Another reason for the decline is that this fund does invest in junk bonds which have been clobbered over the past several weeks. As of 6/30/11, the fund reports a 28.3% weighting in high yield bonds and a 49.6% in investment grade. The remaining allocation is primarily in what the fund calls "preferred stocks" which are mostly "trust preferred". BTZ Portfolio Those securities are in reality junior bonds. Regular Preferred and Trust Preferred The ones issued by financial firms have been hit hard in recent days.

BTZ does use leverage. This will work when the assets bought with borrowed money appreciate in value and generate a good spread over the cost of funds.  When short and long term rates rise in tandem, then this kind of fund will suffer with that double whammy, likely to turn into a triple whammy as the discount to net asset value expands as investors flee in the face of buying interest drying up.

This is a link to the SEC filed shareholder report.  The BTZ holdings list starts at page 34. The "preferred" securities are listed starting at page 36. Unfortunately, at least for now, those issues are mostly from financial institutions including banks and insurance companies.

Before the market started to rally on Tuesday late in the day, I noticed that the bond ETFs TLT and LQD had turned negative. The 20+ year treasury bond ETF had been up, trading as high as $125.03 early in the morning, before closing down $1.54 at $122.27. It was as if the large investors lightened up on their fear trade by selling TLT and then took stocks up later in the day.  

On Tuesday, the day of my purchase, BTZ closed at $11.26, with a NAV per share of $13.16, creating a discount to net asset value as of that time of -14.44.

BTZ closed at $11.34 yesterday. The next ex dividend date for the monthly dividend is 10/12/11.  The net asset value as of yesterday's close was $13.1 per share, creating a discount at that time of -13.51.

Junk bonds continued to be slammed by the market, and this fund has a significant weighting in that category (see underlining above)

3. Allocations in Stable and Unstable Vix Patterns: I have repeatedly discussed this topic since starting the blog back in October 2008. I view it as the most important category in this blog.  Two of the earlier posts are the following:

More on VIX AND ASSET ALLOCATION (November 2008)
When VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks (March 2009)

The model is flexible in that the individual must tailor their reaction to the Model's signals to their own unique circumstances.

Once the model identifies an Unstable VIX Pattern, the reaction to it should vary among individuals. Those circumstances include unique situational risks, usually involving a need to spend money invested in stocks, the tolerance for for volatility and risk, and the ability to form a constantly shifting allocation plan based on a knowledgeable assessment of big picture issues. Financial planners will not want to perform the dynamic asset allocation necessary to navigate a Unstable VIX Pattern. Vix Asset Allocation Model Explained Simply  It is just too difficult for them, so the parrot phrase buy and hold has proven useful as an alternative to thoughtful advice.  

For the lazy and time challenged, a Mr. Nervous, one response would be to sell all stocks and buy some kind of alternative investment after the Trigger Event. That investment could be treasury bills, FDIC insured bank CDs, and money market funds for those interested in preservation of capital. Depending on the circumstances then prevailing, another alternative might be a bond ETF (e.g. TLT, IEF, or BND). I am not referring to a purchase of this kind of investment now.

For example, the model flashed a Trigger Event in August 2007 that would require a reduction in the stock allocation. The historical experience, which may not be repeated, is that the investor will be able to sell stocks when the VIX returns to below 20 after that Trigger Event, allowing for a better exit point than prevailing during the Trigger Event. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern This occurred in October 2007.  The Unstable VIX Pattern has continued since that Trigger Event, and our Mr. Nervous is waiting for the Green Light signal before buying a single stock. And then this person would buy a total stock market ETF only.  This hypothetical investor bought IEF in October 2007 and Sold IYY at the same time.

Historical Prices IYY and IEF for October 2007:

IEF Historical Prices | iShares 7-10 Year Treasury
IYY Historical Prices | iShares Dow Jones U.S. Total  Stock

I will use the adjusted close numbers and assume a purchase on October 15, 2007. The adjusted number is reduced from the closing price on 10/15/2007 to reflect subsequent dividends and would consequently be a benchmark for total return. If I am doing that incorrectly, one could just take the unadjusted numbers and call the income generation a wash which would be close given the low yields of both securities:

Period: Unstable VIX Pattern 
Bond IEF Adjusted Close 10/15/2007: $72.58    Close 10/4/2011 $105.83 Net Gain 45.8%

Stock IYY Adjusted Close 10/15/2007: $70.64    Close  10/4/2011 $56.23 Net Loss 20.39%

Mr. Nervous is a genius, and arrived at that point due to a strong desire to avoid heartburn and motion sickness, no up and down nonsense for Mr. Nervous.  While he has missed a lot of fun since October 2007, I would not quarrel with the results compared to that buy and hold stock investor following the advice of their financial planner.

The same type of analysis could be performed after the May 1991 Green Light Signal, lasting until October 1997, where the investor would have moved from bonds to stocks; the Unstable Vix Pattern from October 1997 until March 2004 (actually a few days before 3/1/04, ^VIX Historical Price), when this investor would have stayed in bonds; and the Green Light Period from March 2004 to August 2007, back to stocks from bonds until the August 2007 Trigger Event.  I will just run the analysis for Mr. Nervous for the last Green Light period. In this comparison, I will use the unadjusted numbers to see what happens.

Period: Stable VIX Pattern
Stock: March 1, 2004  IYY  3/1/04  $55.08 IYY Historical Prices  Close 10/15/2007 $75.6 IYY Historical Prices Net Gain Before Dividends: +37.25%
Bond IEF March 1, 2004  $86.52  (IEF Historical Prices)   Close 10/15/2007 $83.13 IEF Historical Prices  

The dividend yield for the bond ETF IEF would take its total return into the green slightly for this period. The dividends paid by IYY would also increase its total return, possibly over 50% on a cumulative basis. I did not try to run those numbers but just eyeballed them. I am really not set up to compare total return numbers, including dividends, for these kind of securities.

Another investor is bolder. I will call him Mr. Stock Jock (SJ). The SJ realizes there is money to be made during the Unstable VIX Pattern period. The largest rallies can occur during such periods and why miss all of that fun.  We all know the identity of the Stock Jock. The SJ is willing and able to withstand risk and has either no or minimal situational risk. For the Stock Jock, the Trigger Event is just a signal to send the LB into hyperdrive.

The entire trading strategy changes in an instant. No longer will this investor hold most stocks for the long term. Sell the rips becomes the new mantra. Still, even this Stock Jock wants to raise cash for later use and reduces the stock allocation significantly after the Trigger Event. SJ may be a wild and crazy guy but he is not an idiot.  Cash is the fuel for what is about to happen, a means to play the volatility.  Funds will flow into and out of stocks based on several indicators, sometimes with major shifts into or out of stocks.

One indicator is the movement of the Vix as interpreted by the Model. When the VIX falls below 20 during the Unstable Vix Pattern period, stocks are sold. Stocks are bought in small increments when the VIX moves to and exceeds 30. This is the whipsaw pattern characteristic of the Unstable VIX, Phase 1.

In addition, the more adventuresome investor would be timing hedges based on the movement of the VIX. Hedges are bought during those brief periods when the VIX falls below 20 and then pared or sold on spikes to 30. The movement below 20 would be occurring during a stock market rally, so stocks are sold and hedges are bought.  This pattern will repeat itself over and over during the Unstable VIX Pattern, Phase 1. This can be a mechanical strategy or an active one as to security selection.

Another simple indicator is to wait for the catastrophic phase of a long term bear market. One will happen. By catastrophic, I am referring to a greater than 50% decline in the market over a short period of time.  This kind of decline occurred in the long term bear market starting in 1966 during 1974. The catastrophic phase in the current long term bear market started to develop in September 2008 and hit its apex in early March 2009. Generally, the trigger is to wait for a greater than 50% decline and then increase stock buying.

Possibly the SJ will have to make a judgment on whether a garden variety cyclical bear market is in the offing or the catastrophic one. This can be made with reference to the elevation in the VIX and confirmed by an assessment of external events. For example, look at the VIX chart after Lehman's failure. ^VIX Historical Price This was obviously a catastrophic event formation. The clear marker was the move on 9/29/08 with the spurt to 46.72 from a prior close of 34.78 on the prior Friday, 9/26/2008. On 9/26/08, the S & P closed at 1,213.37.^GSPC Historical Prices The closing high was at 1565.15 on 10/9/2007. Take 50% of that last number, or 782.575, and a close below that number would trigger the buying under this rule. That day occurred on 2/19/09:  ^GSPC Historical Prices

Another indicator is to identify the general area of long term support in the structural bear market.  I believe that support is mostly at S & P 950.  The characteristic of a long term bear market is frequent up and down moves, but the market continues to return to a level close to where it started that long cycle.  The long term bull cycle is more like a gradually slopping, 45 decree angle, with a few short term blips along the way. The Roller Coaster Ride of the Long Term Secular Bear Market  For this assessment, it is important to identify the long term cycle and the reasons for it.

During Phase 2 of the Unstable VIX Pattern, the current one, the Stock Jock reverts to extreme caution. The world has become a more dangerous place for investors. Dangers always lurks, but now it is on amphetamines and steroids.  With that danger comes opportunity. No matter how fearful, cash flow will be used to buy securities during those periods, preferably in income generating stocks and bonds, assuming a significant decline in price.  The Trust Certificate exchange traded bonds were crushed over the Lehman failure and provided excellent buying opportunities for several months after September 2008. Trust Certificates: New Gateway Post Buy orders will be sliced into smaller increments and spaced out over time.

Even the SJ will revert to a buy and hold strategy, with several broad based stock ETFs, when and if the VIX forms a Stable VIX Pattern. HK has decreed that no more than 3 stocks can be sold per month during that pattern. There is no limit on the number of purchases.

Please note that there was constant buying from September 2008 to March 2009 that accelerated in March-May 2009, close to 100 grand flowing into stocks during that period. This trading system requires buying with cash flow and a reduction in the cash allocation when valuations become compelling.  Would you buy now Pepsico at less than $50: Pepsico Buy/ DJIA volatility index below 30 (5/6/09 Post, later sold).

Bought 200 IMF at $17.45/Italy Debt Downgrade/ADX Distribution Rate/Deficiency Judgments for Strategic Defaults/Cash Flow into Main Taxable Account/

I did unload my last double short stock ETF yesterday morning. Based on the preponderance of evidence and after a careful investigation here at HQ, Headknocker (HK) ruled that the Nerd Machine (LB) had violated its own rule book when purchasing the last three double short stock ETFs, notwithstanding LB's protestation that such purchase was allowed under a modification to those rules (e.g., LB's assertion in last ¶ 8/31/11 Post)  Since those ETFs were sold for a profit, HK decided to leave the matter alone, after publishing this public reprimand, based on the OG's philosophy that All's Well That Ends Well, lifted from  the title of a Shakespeare play "since the OG has never had an original thought in his life and never will", the LB said in closing.

As noted in the current profile section to the right, the double short stock ETFs, bought in compliance with LB's "stinking rules," RB added, had to be sold under those same rules when the VIX spiked to and over 30, climbing to a close of 31.66 on August 4, 2011.  ^VIX Historical Prices The VIX Asset Allocation Model allows for the purchase of double short stock ETFs as hedges only when the VIX is below 20 during an Unstable Vix Pattern.  More on VIX AND ASSET ALLOCATION (11/26/2008 Post) Those hedges will be sold when the VIX spurts to around 30. The recent August 2011 sales included SDS, SRS, EFU and TWM.  There was some discussion among staff members about keeping one or two just in case the VIX headed even higher. But no modification of the trading rule has ever been adopted by HK permitting the purchase of one of these securities when the VIX is over 20.  LB nonetheless proceeded to make three such purchases after becoming HT on 8/4/11, during periods of market rallies, apparently upset about the Old Geezer disposing of all of the hedges in early August, as noted in the current profile section, just prior to resigning as the Head Trader to pursue spiritual matters.  

RB chimed into this discussion, desiring to defend the OG from the hypercritical and judgmental LB, noting that the "Old Goat was wise for someone who was past his prime and in constant need of chill pills. Besides, LB needs to chill out, the RB is reprimanded about every ten seconds by the HK. Go all in."

Tomorrow, I will go into more detail about stock allocation strategies for an Unstable Vix Pattern, using two hypothetical investors.  I will name one Mr. Stock Jock and the other Mr. Nervous.

The market staged a strong late day rally, with the DJIA closing up 153.41, based on reports that the EU was working on a bank aid plan. That was already known. The DJIA had traded as low as 10.404.49 before closing at 10,808.71.  The  ^VIX had another wild day, hitting 46.88 intraday, before spiking lower as the rally gained steam, closing down 4.63 at 40.82. I would expect a negative correlation, in terms of directional moves, most of the time.

Moody's downgraded Italy's sovereign debt after the market closed yesterday. The rating was reduced from Aa2 to A2 with the outlook kept at negative.  Articles discussing this downgrade can be found at Bloomberg and Reuters.

Forty-one states allow a lender to sue a borrower for a deficiency judgment after foreclosing on a property and selling it for less than the loan balance plus expenses associated with the foreclosure. The WSJ published a story claiming that some banks were becoming more aggressive in suing borrowers, particularly those viewed as strategic defaulters.

For borrowers who have assets and/or good incomes, and live in one of those states, one way to cut down on the number of such defaults would be to pursue deficiency judgments with some publicity attached to that effort.  Strategic defaults contribute significantly to the supply of foreclosed homes and the downward pressure on home prices. A sixty minutes report estimated that there have been over one million strategic defaults in the year prior to that May 2011 program. CBS News (see also Item # 4 Strategic Defaults May 2010 Post; Item # 2 Delays in Foreclosure Encouraging Defaults) Government is adding and abetting strategic defaults by making it difficult to foreclose on properties when there is no dispute that the borrower signed a note and quit paying on it. The incentive is to renege on the loan and to live in the house rent free until the mortgage company is able to foreclose. (see stories at NYT  CNBC)

While many argue that the banks are at fault for tempting people with easy credit, which is true, the bank's conduct is unrelated to the personal responsibility issue of the borrower. Each individual is responsible for their own decisions and must bear the consequences of erroneous ones.

I have no sympathy for anyone who incurs a debt and then decides to engage in a strategic default. The possibility of a deficiency judgment needs to be kept in mind by the borrower when making the decision to buy and how much to borrow.

I noticed my shares of Coca Cola were weak last Monday. JP Morgan downgraded KO shares to neutral based on a "tough macro environment". The stock target price was also reduced to $76 to $80 per share. I have quit reinvesting the dividends. I would consider buying more shares only below $55.

Coca-Cola shares were trading over $70 a few days ago and closed yesterday at $65.23.  I have elected to keep the KO shares. Instead, I sold HNZ when I noted the probable formation of a Phase 2 Unstable Vix Pattern. Sold HNZ at $50.10/Probable Formation Phase 2-Unstable Vix Pattern/Fear and Enhanced Volatility in Certain Classes of Income Securities I had to sell something with a large unrealized percentage gain at that time.

I am a long term holder of the stock CEF Adams Express (ADX) which of course has not fared well over the past several weeks. I will periodically visit the website for the CEFs that I own. I visited the ADX site last Monday, for the first time in months, and noticed a press release that ADX had committed to a 6% annual distribution rate. Adams Express Company Commits to Annual Distribution of 6% I am reinvesting the dividend. The current discount is close to 15%. If and when the spirit moves me, I will add to my ADX position.

1. Cash Flow into Main Account: My most basic strategy is to generate cash flow from dividends and interest and then to invest those funds into more income generating securities. In my main taxable account, that cash flow will be a continuous stream, though the flow will increase on the 1st business day of the month, the middle of a month (usually the 15th if that is a business day) and the last day business day. The following are snapshots of the cash flow into that one taxable account for the last business day in September and the 1st one in October:

Cash Flow Snapshot #1

Cash Flow Snapshot # 2

Cash Flow Snapshot # 3

Cash Flow Snapshot # 4

Cash Flow Snapshot # 5 

Cash Flow Snapshot # 6

While I do not care to see these securities fall in price, it is important for them to continue generating income, regardless of their price, during severe market downturns.  This is primarily psychological. I am willing to invest that income no matter how dire the circumstances appear to be. However, if that income is taken away, I may have more than a few days of having that dear in the headlights look during market meltdowns.

Added: Another dividend, paid on the 1st business day of October, appeared in this account today. The dividend was paid in Canadian currency by HSE:CA (Husky) in the amount of  30 Cads minus 4.5 Cads in withholding taxes.

2. Bought 200 of the bond CEF IMF at $17.446 on Monday (see Disclaimer): I treat this bond CEF as functionally equivalent to WIW. Both funds own primarily U.S. treasury issued inflation protected bonds. I recently bought back WIW, and snapshots of my realized gains can be found in that post. Item # 1 Bought 200 WIW at $12.63

IMF and WIW will not generate much income. The current monthly distribution for IMF is 5 cents per share. At a total cost of $17.45, that works out only to a 3.44% annualized yield. That is better yield than I could receive by buying a treasury inflation protected bond in the bond market. The ten year TIP was just auctioned by the treasury with a coupon yield of .078%. www.treasurydirect.gov.pdf

My previous round trips in IMF were at lower levels.  Bought 300 CEF IMF at 16.5 May 2010 Sold: 300 IMF @ 17.23 October 2010  Bought 200 of the Bond CEF IMF at 16.64 February 2011 Sold at Few Days later- Sold 200 IMF at $17.15 February 2011 I am not a long term holder of this kind of investment. I am just parking some cash yielding nothing in this investment, hopefully for a short period.

This is a link to the sponsor's website: Closed-End Funds Details As of 6/30/11, the holdings are weighted in "AAA" at 93.92%. IMF Portfolio

The fund closed the third quarter with a net asset value per share of $19.34. This information is available at the sponsor's website, the CEFA and the WSJ.

This is a link to the last SEC filed shareholder report: www.sec.gov

This is a link to the Morningstar page. IMF is unrated by Mornginstar.

On Monday, IMF closed with a NAV per share of $19.53, up from $19.34 on Friday, and the discount to NAV expanded to -10.55 based on a closing price that day of $17.47.  On Tuesday, the fund closed with a net asset value of $19.57 per share and at discount to net asset value of -11.19 based on the closing price of $17.41.

As the fear trade was taken off late yesterday,  IMF declined slightly to close at $17.41, down six cents. The TIP ETF rose 8 cents to $115.33, bucking the downdraft in the non-inflation protected treasury ETFs TLT and IEF. 

Greece/ISM/VIX-Formation of Phase 2, Unstable Vix Pattern/MACD-Flashes Sell/Sold 100 AEB at $18.42-Last Remaining European Hybrid/ADDED 200 OF THE BOND CEF ACG at $7.98

Michael Lewis was interviewed yesterday on CNBC. Here are links to two videos:   CNBC.com and CNBC.com

I do believe Greece is hopeless and undeserving of any bailout.  It was a huge mistake to admit that country into the EU. Those opinions were reinforced when I read the material about Greece in Michael Lewis' new book "Boomerang".  An excerpt from the book about Greece appeared in Vanity Fair.  When a rational person reads that article, it is impossible to have any confidence in a rescue package for Greece.  It is important to remember that the Greece saga started when the new Socialist government came into power and notified the EU that the prior government had committed fraud by massively underreporting its debt as a percentage of GDP. (see 30 page report at eurostat.ec .PDF)

Lewis provides some examples of the Greek entitlement state. Greece's national railroad has annual revenues of €100 million and €300 million in annual wage costs plus another €300 million in operating expenses. The average railroad worker makes €65,000 per year.

The average government job pays about 3 times the average private job.  The NYT reported in early 2010 that civil servant salaries and pensions take up 51% of the Greek government budget. Greece-Entitlement Society Run Amok (February 2010 Post); Greece-Citizens in Aggressive Denial (May 2010 Post). The state is treated like a Piñata to be rob by the people, as noted by Lewis in his CNBC video yesterday.  Tax collectors in Greece were fired for collecting taxes, now there are Germans in Greece trying to collect taxes owed to the Greek state. CNBC.com

And, given the extensive corruption, waste and even theft, many public employees make even more then their paychecks. Lewis points out Greeks view it as necessary to bribe government employees in order to receive a service. The WSJ published a story last year summarizing a Brookings study, which found that bribery, corruption and cronyism cost the Greek state €20 billion a year.   

Those government workers in arduous jobs can retire with generous pensions at 55 for men and 50 for woman. And what is arduous to the Greeks, just about every occupation imaginable, more than 600 according to Lewis. 

The Greek school system, ones of the lowest ranked in Europe, employs four times as many teachers as the highest ranked system in Finland. And, the teaching is so bad that Greeks hire tudors for their children. 

This entitlement state is supported by borrowed money. In short, that money has been stolen. Is there any rational basis for believing the Greeks will come to their senses after Europe bails them out or is good money being thrown after bad?  Without brain transplants for most of the population, the answer seems clear to me.

Greece reported over the weekend that its new budget falls short of hitting the deficits targets set forth by the EU and the IMF for their respective bailout packages. Can there be any rational doubt that those numbers would prove to optimistic and Greece will fail to meet even those numbers?  The EU basically told Greece yesterday that it needed to do more before it would receive the next €8 billion in aid.  Reuters NYT WSJ 

The U.S. government reported Friday that personal income fell .1% in August.  Real disposable income decreased .3%, an increase from -.2% registered in July. The savings rate was 4.5%, down from 4.7% in July. News Release: Personal Income and Outlays, August 2011

Consumer prices in the 17 nation Eurozone rose 3% in August. This kind of data can be found at Eurostat, the statistical office for the European Union: eurostat.ec. PDF In another release, Eurostat says that the EU 17 unemployment rate is at 10%. eurostat.ec.PDF The Greek unemployment rate was at 16.7% and Spain was even higher at 21.2%.

The German Federal Statistical Office said that August retail sales in Germany fell a seasonally adjusted 2.9% compared to July. 

Ingersoll Rand reduced its estimate for third quarter and 2001 results due to lower than expected growth.

According to Reuters, George Soros believes that the financial markets are taking the world into a depression and he offers some advice for the European leaders.

A new recession is unavoidable according to ECRI's Lakshman Achuthan. He said that things are going to get a lot worse. The best case is a mild recession. And, he said that it could get worse with a shock like the Lehman failure. The U.S. is in a recession now or will be later this year. According to him, it is a done deal.  Daily Ticker  CNBC VIDEO  I do not have his certainty but believe that his conclusions are more likely than not.  Caution is the appropriate word here at HQ now.

The September ISM index was reported at 51.6.

Bloomberg reported yesterday that credit default prices on Goldman Sachs and Morgan Stanley debt increased to levels last seen in the weeks following the Lehman failure.

The MACD technical indicator for the S & P 500 has flashed a sell signal. CNBC.com The prior last sell signal was made by this indicator in December 2007.  It gave a buy signal in September 2009.

1. Formation of a Phase 2 Unstable VIX Pattern: In a previous post, I referenced a probable formation of the Unstable Vix Pattern, Phase 2. Probable Formation Phase 2-Unstable Vix Pattern (8/9/11 Post) The recent action in the VIX confirms the formation of that pattern. The ^VIX rose 5.84% yesterday to close at 45.57.  The more volatile index for the Russell 2000, ^RVX, closed at 57.57.  This is what I would expect RVX to do. Small Caps and RVX model (January 1, 2009 Post) The Nasdaq 100 volatility index, ^VXN, closed at 46.56.

The Phase 2 pattern is extremely dangerous for investors. With increases in volatility, opportunities develop for traders and long term investors who are able to hold indefinitely, as prices decline to compensate for perceptions that risks have increased for equities. Vix Asset Allocation Model Explained Simply If today is another down day, I will probably sell my last remaining double short stock ETF being used as a hedge. Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming (7/28/11 Post); VIX and Trading Rules in An Unstable Vix Pattern Within the Context of a Long Term Secular Bear Market (8/5/11 Post); When VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks (May 15, 2009 Post).

I have already reduced my stock allocation to the lowest level possible under my allocation scheme. Since the CBOE started compiling the VIX data, there has been only one other Phase 2 formation in the Unstable Vix Pattern, and that was in September 2008. Prior to the VIX data, which starts in 1990, there was a volatility index on the S & P 100 which showed a Phase 2 pattern formation in 1987.  Parallels to VXO 1987-1988 (May 2009 Post).  The VIX 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  Multiple Confirmations of VIX Model-Canary in a Coal Mine (May 2009 Post).

For me I use this signal as a confirmation of my portfolio positioning, that is, an allocation consistent with a cyclical bear market within the context of a long term secular bear market.  It is further a cautionary signal, a warning of at least a potential significant decline in stocks.  The Roller Coaster Ride of the Long Term Secular Bear Market; Item # 7  Historical VIX Patterns The market is particularly vulnerable now to an external shock and a waterfall decline.

The most important trading signals given by the Vix Asset Model are the Trigger Event (August 2007, October 1997, April 1987) and the Green Light signal. The last Green Light signal was given in March 2004 (More on VIX AND ASSET ALLOCATION) and was terminated with the August 2007 Trigger Event. During Unstable Vix Pattern periods, a hyper active trading strategy is employed with constant shifts in asset allocation. The prior Green Light signal was given in March 1991 and lasted until the October 1997 Trigger Event which also marks the start of the current long term bear market in my opinion. Dating the Start of the Current Long Term Secular Bear Market (May 2010)

The prior Unstable Vix Pattern period lasted from October 1997 to March 2004. There will be a lot of up and down movement during those periods, but nothing productive is likely to originate from a buy and hold strategy. The S & P 500 closed at 983.12 on October 7, 1997. ^GSPC Historical Prices | S&P 500  The close on March 9, 2004, with the Unstable VIX Pattern having been formed with continuous movement below 20 over 3 months, was at 1140.58. The Trigger Event occurred in late October and early November 1997:  VIX Historical Prices The Trigger Event for the most recent Unstable VIX Pattern occurred in August 2007, VIX Historical, which was confirmed by the VIX movement in mid-November 2007 and again in January 2008.

Possibly the first references to using the VIX as a timing indicator for stock allocation, other than posts contained throughout this blog since inception in October 2008, were made by Mark Hulbert in his MarketWatch column yesterday and in an earlier column. MarketWatch He refers to a simple model of going into cash whenever the VIX exceeds 20, and then back into stocks when it falls below 20.

Since Hulbert apparently has some interest in using the VIX as an asset allocation tool, I sent him an email with links to my posts on the subject last night.

2. Sold 100 AEB at $18.42 Last Friday (see Disclaimer):  I no longer want any exposure to European hybrids. This is in part based on the fear of losing my significant percentage  profit in these AEB shares.  I simply do not view the risk of losing some of that profit to be worth the income paid by this security. The profit was equal to over 11 years of income at the 4% minimum payment. This is a snapshot of my realized gain for the shares sold last Friday:

2011 Taxable Account LT Realized Gain 100 AEB =+$1,142.51

I also liquidated earlier in September my 100 shares held in the ROTH IRA:  Sold 100 AEB at $18.2635 ROTH IRA-Average Total Cost $6.05 (see snapshot in that post).

AEB closed at $17.64 in trading yesterday.

Aegon Hybrids: Gateway Post

3. Bought 200 of the Bond CEF ACG at $7.98 last Friday (see Disclaimer):  This was another fear based purchase. I now own 400 shares of this bond CEF.  The prior purchase was in early August 2011: Bought 200 ACG at 7.85

ACG released last week its monthly portfolio update. In that release, the fund shows leverage of 44.36%, an average maturity of 10.09 years, and an effective duration of 6.1 years. ACG reported a 73.71% weighting in AAA rated securities with a high concentration in U.S. treasuries.

Generally, when a bond fund reports credit quality, it will use the highest rating of the main rating agencies. So, even though S & P downgraded U.S. debt a notch below AAA, Moody's still has the debt rated AAA as does Fitch.

The AllianceBernstein Income Fund recently declared its regular 4 cent per share monthly distribution. The ex date is October 5, 2011.

When I made my last purchase in August, I noted that Morningstar rated the fund 3 stars. It is currently rated 4 stars.

I have bought and sold this fund in the past: Bought 200 ACG at $8.12 in Roth In May 2010 Added 400 ACG at 7.85 in May 2010 Sold 200 ACG at 8.35 in August 2010 SOLD 200 ACG 8.45 in August 2010 Bought 300 of the Bond CEF ACG at 7.63 in April 2011 Sold 300 of the Bond CEF ACG at 7.82 in May 2011.

I regard this position as a trade only. I am not a long term investor in ACG shares.

Fund website link: AllianceBernstein Income Fund, Inc. (formerly ACM Income Fund, Inc.)

Last SEC filed shareholder report: AllianceBernstein Income Fund, Inc.

As of last Friday, the fund reported a net asset value per share of $8.92

ACG closed at $8 in trading yesterday.  The net asset value per share increased three cents on Monday. Based on yesterday's closing price, and the NAV per share of $8.95, the discount to NAV at that time was -10.61.   

Update on Travelport/Bought More CADs/Copper Price Plunge/China PMI/Bought 1 United Refining 10.5% Senior Secured Bond Maturing 2/18/2018 at 97.25/Sold 204+ NPF at $14.02 and 100 NPP at $14.45

One reader wanted to know why I call this blog "Stocks and Politics", when I mostly discuss bonds. I have renamed the blog in response to that query.  I am sitting at the very bottom of my stock allocation range at the current time after paring the allocation earlier in the year, with the final pares made in late July.  While I may change my mind, my current thinking is to wait for the S & P to decline to around 950 before purchasing stocks in any meaningful way. If another recession is coming, and that is a risk, then the vast majority of stocks will decline when that becomes evident.

Fidelity calculates personal rates of returns for the accounts that I have with them.  The cumulative  personal rate of return is shown in the top column, and the bottom column is the cumulative return for the S & P 500. The calculation includes YTD, 1 Year, 3 Years and 5 Years through August 31, 2011. The September data is not yet available. I have had withdrawals from this account, primarily to fund the IRAs with the maximum contribution amount.

In that account I am currently sitting on a cash balance, earning nothing, of close to 15%.  The cash balance is much higher in taxable accounts where preservation of capital is a primary objective. The three year period shown in the above chart would be 9/1/2008 to 9/1/2011, so that would start shortly before the Lehman failure. I suspect that the inclusion of the September numbers will increase my advantage over the S & P due to going down less during that month, but will send my return for the 2011 YTD into the red.   I am not satisfied with the foregoing.  I am probably a better bear market manager of my money than a bull market, bet the farm manager.

My primary problem in September was my junk bonds. Randall Forsyth opines in his Barrons.com column that the deterioration in high yield bonds are signaling a much worse economy ahead than what actually may happen. Based on the recent decline in my junk bonds, I do know for a fact that it would be a lot cheaper to purchase them today than when I actually did.

Goldman Sachs sees a 40% chance of a great stagnation for developed markets. (see ZeroHedge which copies the report) I would go higher than 40%, maybe somewhere in the 60% to 70% range.  The more debatable issue is how long will the stagnation last.

UBS increased its 2012 prediction for gold to $2,075 per ounce.  If that comes to pass, I will sell one or two ounces. I sold 1.875 ounces when gold hit $1900. That sale involved a 4 piece U.S. mint gold proof set. Recent Gold and Silver Sales

The copper charts are not looking so good. Spot Copper Historical Charts  A technical analyst, Katie Stockton, says that copper has had a technical breakdown. MNBC Video  She would look for stabilization in copper's price before calling a bottom in the S & P 500. Randall Forsyth wrote a column arguing that investors need to pay attention to Dr. Copper's warning. A more upbeat article about copper's prospects can be found in this  Barrons' article.

The December future's contract for copper closed last Friday at 3.10. It closed at 4.50 on July 29, 2011, or a 31% decline in just two months. 

Where does one find a risk free return now?  By risk free, I am referring to a 100% assurance that my capital will be returned in full, with the payment of sufficient interest to offset inflation and taxes.  

Given the events over the past three years, I can not say that a longer term, sovereign debt issue provides me with a 100% assurance of a return of capital.

HSBC's PMI for China sank below 50 for September, indicating contraction in China's manufacturing.

According to Reuters, credit default swaps on Morgan Stanley debt rose 71% over the past month, ending last Thursday, to 452 basis points.  Investors are reportedly concerned about MS exposure to European banks. Part of the increased concerns about MS were fueled by the blog at ZeroHedge. The MS common shares declined 10.47% to $13.51 last Friday. I own the equity preferred floater, MSPRA, that fell 4.23% last Friday to close at $15.85  MS.PA. That security went ex dividend on 9/28/11, shortly after my last purchase. Bought 50 MSPRA at $16.6

The  Europe 600 Index index closed down 17.1% for the third quarter.

I did buy some more Canadian dollars last Friday, as the USD continued to gain strength on a flight to safety.  Canadian Dollar (CAD) Strategy  I view that as a knee jerk type of response, no one asks whether the USD is really that safe when they are scared.

This is what a currency confirmation looks like at Fidelity:

I could have effectuated this exchange Saturday morning and received slightly more CADs. The fee is 1% of the principal value of the exchange up $100,000:

I will use  CADs to purchase income generating securities on the Toronto exchange. Dividends will be paid to me in CADs, thereby increasing my CAD stash over time. I will not buy CADs using USDs unless I can buy at least 1.03 CADs for 1 USD, and then I will add only in small amounts.

The Washington Post reported that Rick Perry's hunting camp is called "niggerhead", the name appearing on a flat rock near the entrance, still visible after being painted over.

1. Bought 1 United Refining 10.5% Senior Secured Bond Maturing 2/18/2018 at 97.25 Last Wednesday (Junk Bond Ladder Strategy)(See Disclaimer):  I discussed this bond in an earlier post and mentioned  then that I might buy it when and if it started selling below its par value. United Refining (July 2011). I owned a United Refining bond that was redeemed from the proceeds realized from the sale of this 2018 bond. United Refining 2012 Bond Redeemed at Par Value The 2018 was originally sold in a private placement and that bond was later exchanged for one registered with the SEC. Prospectus

This is a link to the FINRA Information on this bond. According to FINRA, it is currently rated B3 by Moody's and B by S & P. Interest is payable semi-annually in August and February. 

The 2018 is a senior secured bond. The collateral for the note is a mortgage lien, subject to certain exceptions explained in the prospectus, on United's refining in Warren, Pennsylvania and the pledge of the capital stock of a pipeline subsidiary. United has other assets that are not covered by the lien (see pp. 7, 44-48 of the Prospectus) This note is discussed by the company at page 9 of its most recently filed Form 10-Q. This is a link to an SEC filed press release discussing the results for the Q/E 5/31/11.

All of the Company's "wholly-owned subsidiaries fully and unconditionally guarantee on an unsecured basis . . . the Company's Senior Secured Notes". Form 10-Q at page 10.

I discussed this private company when I purchased the 2012 bond, later redeemed by United.  Bought 1 United Refining Senior Bond at 95.5 

Company website: URC - United Refining Company

My confirmation states that the current yield at my cost is 10.708% and the YTM is 10.926%.

I am assigning a 6 risk rating to this bond. Personal Risk Ratings For Junk Bonds

This is basically the replacement for the two Edison Mission bonds sold last week at a loss.

With a recession looming, I would anticipate junk bond prices to remain under selling pressure and to further weaken in price until investors have more confidence in an economic recovery.  The spreads between junk and investment grade bonds have risen sharply over the past several weeks. The spread over treasuries rose to 8% last week. Part of that is due to the rally in treasuries but junk bonds have also cratered in price.

As a result, I will only buy 1 junk bond in the bond market per month until I am far more comfortable than now about a durable economic recovery. I have not yet bought that 1 bond for October. 

2. SOLD 100 of NPP at $14.45 Last Wednesday AND 204+ NPF at $14.02 last Thursday  (see Disclaimer): I ended up with so many leveraged municipal bond funds that I had to count them using the fingers of both hands.  I decided to narrow my list some and to bunch it up. 

NPP closed at $14.33 on the day of my sale, and at a -4.85 discount to its then existing net asset value per share of $15.06. 

My purchase was made last November @ 14.05. I realized a small profit on the shares plus several TF monthly dividends.  I had too many municipal bond CEFs. I will probably use the proceeds to add to another leveraged municipal bond CEF.

Similarly, I sold 204 shares of NPF, another leveraged municipal bond CEF that was bought last November at @ 13.55  I had bought the shares in two 100 lots in different accounts. In one account, I reinvested the dividends.

3. Travelport (own 3 bonds): As previously discussed, Travelport Holdings Limited, the parent of Travelport Limited (Travelport) borrowed a lot of money to pay to its hedge fund shareholders.  I own bonds issued by Travelport who did not receive any of those funds. The parent is unable to pay back the PIK notes that are coming due in March 2012 without a restructuring.

While all of this is complicated, and I only spent a few minutes trying to understand it, the proposed restructuring would involve Travelport paying $85 million dollars to the owners of those PIK notes and granting a second term lien loan. Item # 1 Travelport

A large law firm, claiming to represent owners of the 2016 senior unsecured Travelport bond (own 1), wrote a letter claiming that those transfers would constitute a fraudulent transfer and a potential default under the indenture. This is a link to a copy of that letter filed with the SEC: 9/22/11 Letter from Dewey & LeBoeuf to Travelport  This is a link to another letter sent by the same lawyer: 9/27/11 Letter from Dewey & LeBoeuf to Travelport

I have no comment on those legal claims, other than to note that Travelport is helping to bailout the parent's shareholders and receiving nothing in return. What do you expect from private equity folks, who some refer to as worse than leeches? Instead, I would just note that Travelport recently paid back $655 million of its secured credit facility from the proceeds realized from the sale of  Gullivers Travel Associates:  SEC Filing

Travelport announced on Friday that it had obtained consent from the owners of the PIK notes for the restructuring. Travelport Limited and Its Parent Holding Company Successfully Obtain Consents to Complete Debt Restructuring - Sep 30, 2011 According to that release, the PIK loan maturity was extended from March 27, 2012 until December 1, 2016. I have not attempted to verify that statement from Travelport.  

This is a link to the FINRA information on the senior bond maturing in 2014. I will just monitor how the market reacts to this news today and for the remainder of this week.