Bought 50 NBB at $20.73-ROTH IRA/Added 50 RVT at $12.37/VLY NOK TINY RSH/CHINA and Europe/

Nokia unveiled three new phones for customers in emerging markets. WSJ The press release announcing these new models can be found at Nokia. I own NOK shares as a LT. Bought 50 NOK at $2.88-LT Category The common stock  (NOK ADS) appears to be stable around $2.8, having fallen from a five year high of $39.72 (10/2007), NOK Stock Chart. A NOK 2019 bond appears to have stabilized at above 80, at least for the time being, after trading above par earlier this year. 

The BDC Harris & Harris (own as a LT) periodically issues press releases relating to developments at its portfolio companies. In a recent announcement, the company noted that Nanosys had entered into a collaboration agreement with MMM to commercialize Nanosys'  Quantum Dot Enhancement Film. The OG is always interested in these new technologies even though he lacks the knowledge to understand them. Apparently, this technology creates a high quality backlight designed for liquid crystal display devices. 

In another announcement, Harris & Harris noted that OpGen had entered into a collaboration agreement with Life Technologies intended to improve surveillance and detection of microbial outbreaks. Another press release focuses on a collaboration agreement between Ensemble Therapeutics and Genentech.

As of 3/31/12, TINY estimated a net unrealized loss in its Ensemble and Nanosys positions. SEC Form 10-Q at p. 7. 

Bought 80 TINY at $3.3-LT Category

Lottery Ticket Basket Strategy

Harris & Harris Group (TINY) declined five cents in trading yesterday to close at $3.55.

China's central bank cut its benchmark rate by 25 basis points yesterday. That cut reduces the one year yuan lending rate to 6.31%. Hopefully, that is the first among many stimulus bullets to be fired by China.

A head of China's sovereign wealth fund, with approximately $410 billion in assets, stated that he sees too much risk in Europe's markets and has cut back the fund's exposure to European stocks and bonds. WSJ

Fitch has threatened the U.S. with a downgrade of its debt unless a credible debt plan is adopted in 2013. Reuters I no longer view U.S. government debt as AAA anyway, more like a BBB+.

Fitch lowered Spain's credit rating three notches to BBB, not too far from junk, and kept a negative outlook. Fitch believes that Spain's banks may needs as much as €100 billion. Whatever the number turns out to be, I doubt that Spain has the ability to deal with its banking problems, and the EU will need to provide massive assistance.

Valley National (own) was downgraded by Raymond James to market perform. As explained in a CNBC article, this action was part of a sector downgrade based primarily on net interest margin contraction and slowing loan growth. Net interest margin contraction due to abnormally low rates is a known and easily understood risk for banks now. Until recently, the banks have benefited by customers rolling over certificates of deposit at lower rates. When loan rates start to move back up, which is not likely to happen anytime soon, the net interest margin will expand as bank customers are locked into the abnormally low current rates on their CDs.

Radioshack announced that it had entered into a joint venture with Cybermart to operate small retail format stores in China, Taiwan, and Hong Kong.  SEC Form 8-K It is my understanding that Cybermart is an affiliate of the Taiwanese company Hon Hai Precision that does business as Foxconn. The common shares (RSH) declined 4.58% or 21 cents in trading yesterday to close at $4.38.

Morningstar published an article about using Multiasset ETFs to achieve a diversified income stream. Among the ETFs mentioned in that article, I have very small positions in CVY an HGI. Another article at Morningstar focuses on the new SPDR SSgA Income Allocation ETF (INKM).  I have a subscription to Morningstar which entitles me to receive their analyst reports, but a number of articles at that site are available to non-subscribers. SPDR SSgA Income Allocation ETF (INKM) rose 3 cents in trading yesterday to close at $29.42 on just 800 shares in volume.

Freddie Mac reported yesterday that the average interest rate on a 30 year mortgage declined to 3.67% for the week ending 6/7/12. Primary Mortgage Market Survey (PMMS) - Freddie Mac

Susquehanna Capital I 9.375% Cap Secs. Series I (SUS.PA) (own) was ex interest for its quarterly distribution yesterday.

I am not going to invest much money in anything until I become more comfortable with the big picture issues.

1. Bought 50 NBB at $20.73 Last Wednesday-ROTH IRA (see Disclaimer): NBB is a closed end bond fund that invests in taxable municipal bonds. Of course, I would never buy a tax free municipal bond in a retirement account and have only owned such funds in a taxable account. The taxable municipal bonds will have a higher yield than the tax free ones. In the ROTH IRA, the taxable municipal bond becomes in effect a tax free one. 

NBB invests in Build America Bonds: NBB - Nuveen Build America Bond Fund As noted at the sponsor's website, this fund has a contingent term provision. If there are no new issuances of BABs or similar U.S. treasury subsidized taxable municipal bond within 24 months ending on or before 12/31/2014, the fund will terminate on 6/30/20. I seriously doubt that there will be any such issuances. So, without a change, NBB will likely be a term bond fund that liquidates in about 8 years. If that in fact happens, the managers of this fund may have to be nimble trading long bonds as that deadline approaches. 

This is the credit quality breakdown as of 4/30/12: 

NBB page at the Closed-End Fund Association  

SEC Form  N-Q listing holdings as of 12/31/11

SEC Filed Shareholder Report for period ending 9/30/11

On the day before my purchase, the NBB closing price was $20.83 and the fund had a net asset value of $22.17, creating at that time a -6.04% discount to NAV. 

I have traded this bond CEF for small profits:

2011 ROTH IRA 100 NBB +$108.97

2011 Taxable 100 Shares +$49.61

2010 Regular IRA +$25.58

Total: $184.16

The goal with this bond CEF is simply to collect several monthly dividend payments and then to sell the position for any profit whatsoever. I have held some shares for over a year. So far at least, I have not had to sell the shares for a loss. 

Sold 100 NBB at $20.13-ROTH IRA November 2011; Added 50 NBB at $19.55 in the ROTH IRA September 2001; Sold 100 NBB at $20.07 November 2011; Bought Back 50 NBB @18.4 in IRA December 2010; Sold 50 NBB @ 19.24 in the Regular IRA December 2010; Bought 50 NBB @ 19 November 2010; Bought 50 NBB at 19.67 June 2010. 

NBB is a leveraged fund. NBB Fund Data Page As such, the fund currently benefits by being able to borrow funds at abnormally low short rates to buy long term bonds, at a time when the prices of long term bonds were rising. In that kind of optimal environment, the fund can make a spread on the difference in yields and also have many of the bonds purchased with borrowed funds rise in value creating capital gain opportunities. Needless to day, the reverse can also happen. A leveraged bond fund is not an appropriate investment in a rising interest rate environment.  

NBB has been paying a monthly dividend of $.1085 per share which was reduced from $.117 last April. NBB Distributions The next ex dividend date is June 13th. Nuveen Closed-End Funds Declare Monthly Distributions Assuming a continuation of that rate, which is of course in no way assured, the dividend yield would be approximately 6.28% at a total cost of $20.73.

There is an ETF that invests in BABs which I have owned in the past: PowerShares Build America Bond Portfolio (BAB)

Last Wednesday, the fund closed with a net asset value per share of -5.25. The closing price that day was $20.74 and the net asset value per share was $21.89.

I will probably by another 50 shares when and if the price falls below $20, provided the discount to net asset value per share exceeds 5%.

Nuveen Build America Bond Fund (NBB) declined 15 cents in trading yesterday to close at $20.59. Adjusted for the $.109 May dividend, NBB has risen 1.78% since 5/1/12, while the S & P 500 has declined 6.46% over the same period. This indicates to me that NBB can be negatively correlated with stocks during market declines.

As of 6/7/12, the net asset value per share was reported at $22.01, creating a discount to net asset value of -6.45% based on yesterday's closing price of $20.59.

2. Added 50 RVT at $12.37 Yesterday (see Disclaimer): This add brings me up to 373.421 shares of this closed end stock fund. On 6/4/12, RVT went ex dividend for its quarterly distribution of 16 cents per share. Royce Value Trust Declares Second Quarter Common Stock Distribution of $0.19 Per Share I am reinvesting the dividend and will receive shares purchased with that dividend on 6/25 based on the price as of 6/13.

My last add was back in August 2009. Added to RVT at $9.69

I was more aggressive in averaging down in Royce Micro-Cap Trust shares during 2010:

RVT will invest primarily in small cap stocks using a value approach.

Sponsor's webpage: Royce Value Trust (RVT)

Small cap stocks, always a favorite here at HQ, performed terribly during the Near Depression period. That period hurt RVT's five and ten year average total return. As noted earlier, the Royce CEFs did suspend their dividends during the 2019-2010 time period, and resumed paying a managed distribution in the 2011 first quarter. I would prefer having no dividend than one supported only by a return of capital.

Over the past 20 and 25 years, however, the average annualized return is over 10%.

The fund does use some leverage.

RVT Page at Morningstar
RVT Page at the CEFA

SEC Form N-Q listing holdings as of 3/31/12

SEC Filed Shareholder Report for the period ending 12/31/11

Steve Forbes interviews Royce at Forbes.com Video Network.

Royce Value Trust (RVT) closed at $12.29, below my purchase price, as the market rally yesterday faded into the close.

As of 6/7/12, the net asset value per share was reported at $14.03. Based on yesterday's closing price, the discount to net asset value was -12.4. 

UMPQ/Added 50 ERC at $14.75-ROTH IRA/Bought 1 J.C. Penny 5.65% Senior Bond Maturing 6/1/2020 at 87.898

Umpqua Holdings (UMPQ) announced a 29% increase in its quarterly dividend to 9 cents per share. The common shares are owned as a LT selection. Bought 30 UMPQ as LT at $11.53. Prior to 2008 and the onset of the Near Depression, the annual dividend rate was 74 cents per share. So, like a lot of banks, UMPQ is simply making up some of the lost ground with this kind of dividend hike. This bank is headquartered in Portland, Oregon and has 184 branches in Oregon, Washington, northern Nevada, and California. Umpqua

The AllianceBernstein Income Fund (ACG) was ex dividend for its monthly distribution yesterday.

I could not discover any good reason for the robust stock market rally yesterday. Apparently, according to news reports, there were unnamed sources that allegedly said there were talks among German and EU officials about helping Spain's banks. Reuters The head of the ECB asserted that markets were underestimating Europe's resolve. And the Fed Beige Book showed the U.S. economy was improving at a moderate pace. FRB: Beige Book - June 6, 2012  The best headline on the reason appeared in Barrons, which referred to the cause as "wishful thinking". 

1. BOUGHT 1 J.C. Penny 5.65% Senior Bond Maturing 6/1/2020 at 87.898 Last Tuesday (Junk Bond Ladder Basket Strategy)(see Disclaimer): This bond is a senior unsecured note issued by JC Penney that pays interest semi-annually on 6/1 and 12/1. 

The company has experienced a decline in sales due at least in part to a change in its pricing strategy. JCP attempted to clarify its pricing strategy message last Tuesday, which sent the stock down over 5% intra-day. 

As a result of a poor first quarter report, S & P cut its ratings on JCP debt to BB-,   TEXT-S&P The company reported a loss and eliminated its dividend. J. C. Penney Company, Inc. Reports 2012 First Quarter Results On the day of that report, the shares had their worst one day loss in history, falling $6.57 to $26.75. Given the issues surrounding the company now, I limited myself to just a one bond buy. 

According to FINRA, this bond is currently rated at Ba1 by Moody's and BB- by S & P.  

Prospectus 

2011 Form 10-K The long term debt is listed at page F-18 of that report. The weighted average interest rate was 7.1% and the weighted average maturity was 23 years. As noted at page F-19, the 2020 senior note was offered in May 2010.

My confirmation states that the current yield at my cost is 6.369% and the YTM is 7.561%. My goal on this bond is very modest. Hopefully, JCP's operations will improve sufficiently for the bond to rise 5%+ in price. To achieve a 5% gain on the bond after brokerage commissions, the bond would need to rise to 93+. Assuming I could sell the bond in one year for 93+, the annualized return would be over 11%.  

The common stock (JCP) did rise in yesterday's rally, closing at $24.88, up 61 cents for the day. The current consensus estimate is for a E.P.S. of $1.35 this year and $2.39 for the F/Y ending in January 2014. JCP Analyst Estimates

I looked at a few bonds maturing in 2020 that were rated  by Moody's one notch above this JCP bond.

Black Hills 5.875% Last Close 112.387 YTM 4.12%
Hillenbrand 5.5% Last Close 109.706 YTM 4.08%
Waste Management 4.75% Last Close 111.869 YTM 3.11%

This is a sample of similar rated bonds (Ba1 by Moody's) maturing in 2020:

LifePoint Hospitals 6.625% Last Close 104.5 YTM 5.76%
MeadWestvaco  9.75% Last Close 127.359 YTM 5.51%
CB Richard Ellis 6.625% Last Close 105 YTM 5.53%
R R Donnelley 7.625% Last Close 91.5 YTM 9.144%

The RRD bonds continue to trade at much higher yields than similarly rated bonds, suggesting that investors do not accept the current ratings.

2. Added 50 of the Bond CEF ERC at $14.75 Last Tuesday-ROTH IRA (see Disclaimer): I now own 200 ERC shares in the ROTH IRA and another 350 in a taxable account. I have never reinvested the dividend.   

ERC is currently paying a $.10 per share monthly dividend. At that rate, the dividend yield would be approximately 8.14% at a total cost of $14.75 per share.  When held in the ROTH IRA, that is in effect a tax free yield.  

On the day prior to my purchase, the fund closed with a net asset value per share of $15.78 and at a discount of -5.96 to NAV based on the closing price of $14.84.  

ERC page at the Closed-End Fund Association

Sponsor's Webpage: Wells Fargo Advantage Multi-Sector Income Fund 

Sponsor's  FactSheet MultiSectorIncome.pdf

SEC Form N-Q listing the holdings as of 1/31/12 

SEC Filed Shareholder Report for the period ending 10/31/11: WELLS FARGO ADVANTAGE MULTI-SECTOR INCOME FUND

In the fact sheet, the sponsor states that the expense ratio, including interest expense, was 1.14%. 

The fund does use leverage which will juice the yield during periods of abnormally low short term rates.  However, during periods of rising rates, leverage will add to an investor's losses. 

This fund will own junk bonds, but was weighted (54.7%) in AAA rated securities as of 10/31/11:  

Looking at the holdings as of 1/31/12 in the last filed SEC Form N-Q, it appears to me that the fund may have reduced its exposure to investment quality bonds, but I did not tally a number since the ratings were not disclosed in that report.

My last ERC transactions was to sell 100 share at $15.49 (July 2011) and then to buy 50 shares at $14.75 in the Roth IRA (September 2011). I realized a long term capital gain of $244.9 on the 100 shares sold, see snapshot at Item # 1 Sold 100 of 550 ERC at 15.49. 

If I can sell any bond CEF for a net profit on the shares after trading the shares, while collecting the dividend, I am satisfied, particularly when that type of security is held in a retirement account where I focus more on tax free income generation and preservation of capital.

Wells Fargo Advantage Multi-Sector Income Fund (ERC) closed at $14.84 yesterday. The fund reported a net asset value per share of $15.89, which created a discount to net asset value of -6.61 based on yesterday's closing price.  

ADDED 50 TRST at $5.1/Reddy Ice Emerges from Bankruptcy/Risk Rating Raised on Edison Mission Bond to 10- from 9-

The ISM services index rose to 53.7 in May, slightly ahead of the 53.5 estimate.  The new orders component rose to 55.5 from 54.6 in April. Employment, however, contracted to 50.8 from 54.2 in April.

France Telecom (FTE-own) was ex dividend yesterday. I believe that the dividend will be approximately $1.0492 per share.

BNC Bancorp (own as LT) announced that it will acquire FIRST TRUST BANK (NCFT) in a transaction valued at approximately 35 million, consisting 70% in BNC stock and the remainder in cash. First Trust has 3 branches in the Charlotte, N.C. area. While First Trust reported net income of $620,000 for the 2012 first quarter, it reported that NPAs were at 8.1% of total assets. When impaired assets are added to that number, NPAs were a staggering 10.7% of total assets. First Trust Bank Press News Release

BNC Bancorp also announced the private placement of $72.5 million in mandatorily convertible stock. The conversion price is $7 and the conversion would occur upon shareholder approval. BNC's largest shareholder, the private equity fund Aquiline Capital Fund, will participate in that offer. Ken Thompson, the former CEO of Wachovia which was based in Charlotte, is part of Aquiline. It was under Thompson's tutelage that Wachovia acquired GoldenWest for $26 billion, a dismal acquisition that directly led to a fire-sale to Wells Fargo. Prior to this latest deal, Aquiline owned about 9.8% of the outstanding BNC shares. BNCN Major Holders I was not surprised to see BNCN decline 5% yesterday to close at $7.03 in response to these developments.

Bought 40 BNCN at $7.09 as LT

Paul Krugman argues that the past two years of Obama's administration represent Republican "economic policy", NYT He is referring to the GOP orthodoxy that cutting taxes and slashing government spending will lead the economy into a perpetual growth and job creation machine. The time period does exclude the first two years which would encompass most of the stimulus spending passed early in Obama's term. Without question, the President has implemented GOP tax cut orthodoxy. The Democrats did agree to extend the Bush tax cuts through the end of this year in exchange for the GOP agreeing to reduce payroll taxes. Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance | The White House I am still waiting for the Bush tax cuts to create that perpetual job creation machine. Bush Tax Cuts and Jobs It would be comical, however, to maintain that the federal government has slashed spending. In Krugman's universe, a failure to continue large scale stimulus programs is probably tantamount to a slash in spending.

A similar view is expressed by the liberal economist, Joseph Stiglitz, who argues that a reduction in federal spending proposed by Romney would increase the likelihood of another U.S. recession.  Bloomberg

The TBs have long since forgotten, assuming that they ever knew, that a good chunk ($275B) of the American Recovery and Reinvestment Act of 2009 was devoted to tax cuts and credits. My criticism of that stimulus program was that virtually all of the funds needed to be devoted to infrastructure spending lasting at least a decade, which spending needed to be incurred anyway. If that had been done, there would then be something concrete to show for the budget hole created by that stimulus, and the stimulus would last for a long time. One problem with the Democrats stimulus program is that the money was spent over a fairly short  period of time when the demand problem was long term. {Stocks, Bonds & Politics- 4/27/11 Post)

1. Risk Rating Raised to 10- for Edison Mission Energy Unsecured Senior Bonds (own 1 senior bond: Junk Bond Ladder Strategy): Due to a number of adverse events, I raised the risk rating for EME bonds to 9- last March. Sold 2 Edison Mission 7.75% Senior Bonds Maturing in 2016 at 73.25 Those events include the closure of the Fisk and Crawford coal fired generating stations, continued poor pricing in the merchant power market, EME's excessive debt and particularly the maturity schedule of that debt, and an inability to generate earnings. The Fisk and Crawford stations will be shut down in September 2012.

I also noted an article that a recent energy auction yielded disappointing results. Edison Mission has also hired Kirkland & Ellis to assist it in assessing a possible restructuring or reorganization, which suggest a possible bankruptcy filing.  

In my Personal Risk Ratings For Junk Bonds, a 1 rating would be the lowest risk for a potential default and a 10+ would be the highest risk.

Back in April 2012, Fitch lowered its rating on the EME senior unsecured bonds to C. TEXT-Fitch A bankruptcy filing is a distinct possibility in 12 to 24 months in Fitch's opinion. I see no reason to disagree. 

Since raising the risk rating to 9-, the prices of EME's junk bonds have significantly deteriorated. The current prices send a clear signal, at least to me, about EME's prospects. I sold two 2016 EME senior unsecured bonds at 73.25 about three months ago. That bond closed at 48 on Friday. FINRA 

EME has another senior bond maturing 6/15/2013, FINRA. Last June, this bond was trading near par value, and it closed last Friday at 55.61. This kind of decline speaks volumes about how EME is viewed by professional bond investors. That price and maturity suggests to me that institutional investors view a default as a high probability event and are now attempting to place a value on EME's unsecured bonds during and after bankruptcy. While those investors may turn out to be wrong, there can not be any serious dispute that the pricing of all EME unsecured bonds reflect that collective judgment in my opinion. 

Obviously, EME could not refinance its debt at the current yields of its bonds and hope to stay in business. It is possible that EME could receive an equity infusion sufficient to pay off some or all of this 2013 bond, but I would not count on its parent company coming to the rescue. The parent company, Edison International, does not guarantee EME's debt. The principal amount of the 2013 bond is $500 million. EME did have 1.307 billion in cash as of 3/31/12 (EME 2012 Q1), and some of that could possibly be used to pay off the 2013 note. There is also a credit facility in the amount of $500 million, page 35. 

However, as noted in the last quarterly report, EME needs cash for capital investments. Capital expenditures were estimated in the last filed SEC Form 10-Q at $374 million for $2012; $232 million in 2013; and $358 million in 2014 (page 36). 

EME estimates that it will cost up to $628 million to retrofit its large coal fired units (Powerton, Joliet 7 and 8 units, Will County) with new environmental controls. The company sounds less certain that it would make the necessary retrofits for Juliet 6, so that one may be the next shutdown: 

10-Q for Q/E 3/31/12 at pp. 25-26

At the moment, EME seems willing to make the environmental retrofits on the following coal units: Joliet 7 and 8; Will County Units 3 and 4; the Powerton Units 5 and 6 and possibly Waukegan Units 7 and 8. EME estimates that it would cost $160 million to retrofit the Waukegan units.

Another troubled coal facility is the Homer operating station discussed at page 26.

In short, the company is losing assets due to the Obama administration's new emission rules for coal plants. To make matters worse, EME will have to spend a great deal of money on new retrofits at a time when energy prices are low.

Other utilities are also shutting down older plants rather than making the costly retrofits required by the EPA's new emission rules. An investor can argue whether these standards are wise or foolish, but their adverse impact on existing operators can not be disputed. With coal plants being shut down, and no large nuclear stations likely to produce power for a decade or more, it would not be surprising to see an energy shortage develop in the U.S. relatively soon after the U.S. enters its next boom cycle.  {Item # 3 Edison Mission Bonds, an article at Reuters generally, and the recent NYT on AEP's decision to shut down Big Sandy rather than spend $1 billion on EPA required retrofits}

As noted in the 2011 Annual Report, EME has interests in several natural gas and wind generating stations. Edison Mission Energy 2011 10K at pages 11-12.

The 2016 bond closed at 51 yesterday, with some trades below 50.   

The 2017 bond closed at 51 on Friday with $1.196096 billion outstanding.   The 2017 bond closed at 50.75 yesterday.

The 2027 bond closed at 50.625 on Friday with $700 million outstanding. It was close to unchanged yesterday.

The 2019 bonds trading close to 51, though FINRA does not show trades on that one. 

The debt is summarized at page 80 of the Edison Mission Energy 2011 10K. Some of the debt is non-recourse. 

Please note the flatlining of the price near 50, irrespective of the maturity date of the bond or the coupon.

What causes that kind of flatlining?

The similarity in pricing, irrespective of maturity, supports my opinion that professional bond investors are pricing a potential recovery after default as the primary factor influencing price. In a default situation, all of these bonds would be at the same level of priority, and there owners would oct likely receive the same consideration for them in bankruptcy. That is why, in my opinion, a 2013, 2016, 2017 and 2027 bond would have a similar almost identical prices now. The coupon and maturity date are no longer driving the price action. 

Due to my perception of the increasing risk, I have already disposed of all EME bonds except for 1 maturing in 2016. 

It is certainly conceivable that EME may be able to pay off the 2013 note and then hope that market conditions improve thereafter. And it would not be a bad idea for EME to buy as many 2013 bonds as possible now at close to a 50% discount to their par value.

Bond investors may be too pessimistic about EME's survival. But without a substantial improvement in market power prices, it would be hard for me to envision survival to 2016 or 2017. Low natural gas prices are placing downward pressure on the price energy produced by of coal plants. For their to be an improvement in realized prices for EME's coal generation, natural gas prices will probably have to rise by a significant amount, and I would not expect that to happen this year or next. And, the economy will need to improve so that there is more demand for energy.

If I was going to gamble now on EME bonds, it would be solely with the 2013 maturity, but I would make that bet with my eyes wide open on the potential for a bankruptcy filing before its maturity.

One potential wild card would be Obama's defeat this November, followed soon thereafter by the repeal of the new EPA rules impacting coal generation. The GOP's disdain for the EPA is readily apparent. Since investors must deal with reality, rather than living in a pretend world infested with reality creations, such an event could easily be a game changer for EME.

See Subsequent Post: Edison Mission Statement SEC Form 10-Q on Bankruptcy Option (8/7/12 Post)

See Subsequent Post:  Item # 3 EPA Emissions Rules for Coal Plants Struck Down in 2-1 Decision (8/27/12 Post)

See Subsequent Post in Introduction: Edison Mission (11/21/12 Post)(EME filed notice on 11/15/12 that it had failed to make interest payments due on 11/15/12-‎EME 8-K SEC Filing

2. Added 50 Shares of TRST at $5.1 (Regional Bank Basket Strategy)(see Disclaimer): This purchase brings me up to 420 shares bought in the open market. I have been reinvesting the dividends. The OG has bought TRST in two taxable accounts, with the intention of selling the shares at some point in the account which now holds 207+ shares while keeping all of the shares held in another taxable account. My target price range for selling shares is between $5.75 to $6.00.

TrustCo is currently paying a quarterly dividend of $.065625 per share or $.2625 annually per share. The shares were ex dividend a few days ago. At that penny rate, the yield is approximately 5.15% at a total cost of $5.1 per share.

Form 10-Q for Q/E 3/31/2012 and my discussion of that report at Item # 1 TRST.

Given the abnormally low interest rate environment, likely to continue for an "extended period" of time, a dividend yield of 5.15% looks attractive compared to alternative places to stash cash such as money market funds, treasury bills or a savings account. The trick will be to avoid losing money on the stock position while receiving that dividend yield and to hopefully realize net trading gains on the position. The optimal result would be an annualized total return of 10% which could be achieved with a 5% annualized increase in the stock price when the shares are sold.

Trustco Bank closed at $5.13 yesterday.

3. Reddy Ice (1 Second Lien Bond Exchanged into 43 Common Shares)  Based on my review of Reddy Ice's reorganization plan in bankruptcy, I anticipated receiving 43 shares of newly issued common stock. Item # 2  Reddy Ice (4/16/12 Post) I received those shares yesterday:

The company announced on 5/31/12 that it had emerged from bankruptcy: Reddy Ice The company reduced its outstanding debt by 32% or $145 in the bankruptcy proceeding.

The common stock in existence prior to the filing for bankruptcy will be canceled, and those shareholders will no longer have an ownership interest in the company when it emerged from bankruptcy.

I will record the likely loss from this position when and if I sell those 43 shares of common stock. I do not know now whether the company intends to have a stock IPO or when that may occur. 

Volatility and Asset Allocation/Bought 50 PRY at $23.58/BOUGHT 100 FPCPRA at $25.35

This is a link to a WSJ article discussing asset allocation based on volatility. According this paper, a mutual fund follows this approach, the Invesco Balanced-Risk Allocation Class A. This is link to the top 25 holdings of ABRZX. I have argued that volatility needs to play an important role, particularly in the stock allocation, for about five years now. The Vix Asset Allocation Model bases stock allocation decisions, at least in part, on the movement of the VIX. Mark Hulbert and the Use of the VIX as a Timing Model; Trading and Asset Allocation in Stable and Unstable VIX Patterns. The most important signal given by that model is the Trigger Event, which requires a mandatory reduction in the stock allocation. That event occurred in August 2007 which marked the formation of an Unstable VIX Pattern which is still in effect. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern

It is more difficult to set volatility parameters for other assets such as gold. If I was going to base a decision now on whether to buy gold based on its volatility, which I would not do, I would buy when the volatility of gold price increases, which is counter-intuitive. Gold prices last spiked when the CBOE/COMEX Gold Volatility Index spiked from under 20 (July 2011) to 37.13 (9/23/11). Gold prices went down as volatility decreased and finally hitting a bottom at 16.89 on 4/27/12. Last Friday, gold had a big up day and volatility rose from 23.26 to 25.24. In other words, gold prices may be asset class benefiting from increased volatility. That would conform to my previous observations that gold tends to rise during an elevated spike in the VIX associated with an ongoing and signifiant stock market decline. {GVZ, the gold "VIX", measures "the market's expectation of 30-day volatility of gold prices by applying the VIX methodology to options on" GLD, CBOE}

An article in the WSJ found that there was inconsistent correlations between gold prices and two other assets, the S & P 500 and the 10 year treasury. It is not unusual for correlations of certain asset class to be volatile, a topic that I explored briefly in a 2009 post: Instability & Volatility in Asset Correlations For example, a ten year treasury may rise in value with stocks for a time, and then be negatively correlated in other periods. An investor really needs to drive down to the causes for positive and negative correlations, and then determine which cause is present in the real world.

It should not come as any surprise that Bank of America hid the anticipated losses from acquiring Merrill Lynch from its shareholders before its shareholders voted on that acquisition. NYT

Bernstein started Facebook (FB) with a sell rating and a $25 price target. (see also discussion at  Bloomberg) It would be unsual for me to buy a large capitalization company at more than 20 times forward earnings. The current consensus estimate for FB's calendar 2013 E.P.S. is $.65. If I slap a 20 P/E on that estimate, the price would have to be about $13.

Reuters' poll found that 4 out of 5 Facebook users have never bought a product or a service as a result of advertising or comments on Facebook.

Finance Ministers and central bank governors from the G-7 will hold an emergency conference call today to discuss Europe. Something major needs to be done soon to restore confidence in the European banks. There is some hope that Germany will come around and do whatever is necessary to keep the EU from collapsing.  MarketWatch

I have several stocks fall into my buy range, where I sold a partial share position at higher prices. For many of my stock positions, I will trade small lots, selling an odd lot on a pop and then buy back those shares at lower prices, hopefully realizing a gain while at the same time lowering my average cost per share using FIFO accounting. This is a normal trading strategy during an Unstable Vix Pattern.

1. Bought 50 PRY at $23.58 Last Friday-Roth IRA (see Disclaimer): PRY is a new exchange traded senior unsecured bond issued by Prospect Capital (PSEC). The bond has a 6.95% coupon on a $25 maturity. It is scheduled to mature on 11/15/2022. Interest payments will be made quarterly on the 15th day of February, May, August and November. Prospect has the option to redeem this bond at par value, plus accrued interest, after May 15, 2015. This is a senior unsecured note.

Prospectus 

This note started to trade last Thursday and the price has been volatile since the start of trading, with a downside bias. Possibly, some investors have become unnerved by a significant percentage decline since the IPO and have sold without regard to price. The price action for PRY after its IPO is notably different than the price for HTGZ and ARN, two recent exchange traded bond offerings from the BDCs Hercules Capital and Ares Capital. While I was able to pick up 200 shares of HTGZ at a small discount to its par value, that 7% senior bond is now trading at or slightly over its $25 par value. Ares Capital Corp. 7% Sr. Notes 2022 (ARN) has not traded below its par value after its recent IPO. Yesterday, Prospect Capital Corp. 6.95% Senior Notes Due 2022 (PRY) traded in a $22.18 to $23.85 range. This is not what I would call rational for this type of security. The shares closed at $23.25, down 4.25% for the day.

As noted in the prospectus, the company  had $461.5 million in senior unsecured debt and PRY will rank equally with that debt. (page S-6) Importantly, the prospectus does not contain financial or operating covenants. 

The aggregate value of PSEC's portfolio was $1.691+ billion as of 3/31/12, page 53. 

PSEC's debt in existence as of 3/31/12, prior to the issuance of PRY, is discussed in note 4, starting at page 41 of Form 10-Q for the Q/E3/31/12. 

PSEC is a business development corporation, which like a REIT, must pay out most of its net income (at least 90%) to the common shareholders in order to maintain its tax status. That tax status allows the company to avoid taxation at the corporate level for the amounts so distributed, thereby avoiding double taxation. Distributing that much money to the common shareholder deprives the corporation of a cash cushion that bond owners would like to have. On the other hand, the income payable to the common shareholders makes it easier to sell common stock, which PSEC has accomplished with regularity and some consternation to me as a common shareholder. The most recent equity offerings are listed in note 7 at page 44. 

I placed a limit order to buy 50 in the ROTH IRA last Friday at $23.81. If I had place a round lot order, it would have probably been filled at that price. Instead, the security underwent a downdraft soon after I placed the order and was filled at $23.58:

That is not uncommon for odd lot limit orders. The downside is that I might receive a fill, at the limit price, for less than 50 shares, which is a known trading hazard for thinly traded securities. On at least one occasion, I had a fill for just 1 share with a 50 share odd lot limit order. I placed the PRY limit order about 40 cents below where it was trading at the time of my order entry. When done in that manner, I would not be thrilled with a partial fill of an odd lot, but I would not be bothered by it either.  In this particular case, it worked in my favor by filling the entire odd lot at below my limit price. 

At a total cost of $23.58, the yield is approximately 7.37%. Using the Morningstar Bond Calculator, the YTM would be 7.8% at a total cost of $23.58. 

Prospect Capital Corp. 6.95% Senior Notes Due 2022 (PRY) closed at $23.25 in trading yesterday. 

I sold 100 shares of the common in the Roth earlier last week. I mention then that I might substitute the PSEC senior bond, trading less income for a higher priority security. Sold 100 PSEC at $10.83-Roth IRA

2. Bought 100 FPCPRA at $25.35 Last Friday (see Disclaimer): I have bought and sold this Trust Preferred Security. In addition to the 100 shares purchased last Friday in a taxable account, I currently own 50 shares in the ROTH IRA. Bought 50 FPCPRA at 25.59 (July 2011)

FPCPRA is a typical trust preferred security. It originates from FPC Capital II, a Delaware Trust, who used the proceeds from the sell of TPs to buy junior bonds issued by Florida Progress, an electric utility operating in Florida that was later acquired by Progress Energy (PGN).

Duke Energy is in the process of acquiring PGN. If that merger is completed, then the underlying bond in FPCPRA will become a Duke Energy obligation.

As noted earlier, I fully anticipate that FPCPRA will be called at its $25 par value plus accrued interest. I have not seen any notice of a call yet. The market expects a call in my opinion, given the small premium to par value. The coupon is 7.1% on a $25 par value.  The TP and the underlying junior bond mature on 5/152039. While a bond maturing in almost 27 years would have a considerable amount of interest rate risk, I am not concerned about it for this bond given the likelihood of a call which could happen at anytime.

If it is called, I will lose $42 on the security which includes the purchase commission.

According to QuantumOnline, FPCPRA is rated investment grade at Baa2 and BBB-. Since the interest payments may not be deferred unless PGN eliminates the common dividend and any equity preferred dividends, I feel more secure with this security than a BBB- rating would suggest. I would feel even better if Duke completes the merger, though that would probably increase the likelihood of a call.

The merge is not a done deal as the parties await action by the Federal Energy Regulatory Commission. The FERC is concerned about competition issues in the Carolinas' wholesale power market (e.g. power sales to rural cooperatives for resale to their customers). The combined entity would dominate that market in both North Carolina and to a lesser extent South Carolina, due to the presence in SC of Scana and Santee Cooper.

There is a typical stopper clause that would prohibit PGN from deferring the interest payment while continuing to make distributions on a junior security, which is what one would expect to see:

Prospectus

This kind of purchase is a placeholder in a taxable account. While I do not expect to make much, if anything, on the security, I hope to avoid losing anything either, while collecting one or more interest payments. The goal is therefore very modest, sell the security for a few a bucks in profit after collecting at least 1 interest payment. Collecting four interest payments and harvesting a $1 profit would be satisfactory. This kind of purchase can be financed without dipping much into the substantial cash allocation, given the interest and dividend cash flow into the taxable accounts:

Buy of 100 FPCPRA at $25.35 + Some 6/1/12 Cash Flow One  Account

On the day of my purchase (6/1/12), FPC Capital I 7.10% Cum. QUIPS Series A (FPC.PA) closed at $25.48, down 2 cents for the day. The S & P 500 declined 2.46% last Friday.

The yield at a total cost of $25.35 is approximately 7%.

Duke Energy has a 6.05% mortgage note, rated at A1 by Moody's, that matures in 2038 that closed last Friday at over 130, with a YTM slightly over 4%  (FINRA and Prospectus-  Duke Energy Carolinas, LLC). A 6.1% Duke senior bond maturing in 2037 closed last Friday at over 127, giving it a 4.3% YTM at a A3 Moody's rating (FINRA and Prospectus) Progress Energy has a 6% senior note maturing in 2039 that last closed over 127, giving it a YTM of 4.59% at a Baa2 Moody's rating (FINRA and Prospectus) I suspect that Progress is waiting for the Duke acquisition to be completed and then Duke would have the option of redeeming this junior bond. Refinancing the junior bond with a senior bond would save some money.

FPCPRA is discussed in note 23, starting at page 224, of the 2011 Progress Energy Annual Report ($300 million in principal amount outstanding)

FPC Capital I 7.10% Cum. QUIPS Series A closed up 1 cent at $25.49 yesterday. 

JOBS/Exide BHLB/Sold 300 WIW at $13.01-Roth IRA/

The jobs report released last Friday is consistent with other data pointing to another slowdown in the U.S. economy. I would not be surprised to see a negative GDP number before the end of 2012.

The Labor Department reported that the U.S. economy added only 69,000 jobs in May. Importantly, the job numbers for March and April were revised down. The April increase was revised to 77,000 from 115,000. Employment Situation Summary The U-6 number increased to 14.8% from 14.5%. Table A-15. Alternative measures of labor underutilization The average work week declined by .1 hour. The manufacturing workweek declined by .3 hour. The long term unemployed, those without work for over 6 months, grew to 5.4 million from 5.1 million.

With yields on the ten year treasury already at record lows, another round of quantitative easing would not provide any solutions to what ails the U.S. economy. The U.S. slowdown confirms to me that the Fed has no power to alter what is already underway. The jobs data does make it more likely that the FED will actually continue its Jihad Against the Savings Class until 2015.

Keeping short term rates near zero does have deleterious effects on demand by depriving the Saving Class of income. The Real Cost of The Federal Reserve's Jihad against the Saver Class What Are the Reasons for a Continuation of the Fed's Jihad Against the Saver Class

I mentioned in a post from last December that the robust stock market rally was based on "hopium". Robust Market Rally Based on Hopium Another discussion in that same post involves the "velocity of money" which has continued to trend way down, Velocity of M2 Money Stock (M2V). There has been, for many time periods, a positive correlation between the velocity of money and the stock market. Creating more money is not going to help the economy when money fails to circulate and is being hoarded in non-productive assets like treasury bills and notes yielding next to nothing.

Most developed countries are in no position financially to engage in more debt financed stimulus programs. For those that may have that capability given investor's appetite for their debt (U.S. and German), there is no political will to do so. With less spending by governments, and a contraction in private demand, a worldwide economic slowdown is underway and is likely to accelerate. That result could be alleviated by aggressive stimulus programs by emerging market nations, particularly China, Brazil and India, and/or by radical actions by the EU to restore confidence.

Europe is most likely headed for a severe recession and may take the rest of the world down with it, unless there is a shock and awe policy action soon. The May manufacturing PMI index for 17 nation EU fell to 45.1 from April's 45.9, marking the 10 consecutive month of readings below 50, the demarcation line between expansion and contraction. This last reading is a three year low. markit Last Friday, Eurostat revised the unemployment number up to 11% for the EU 17 which is the highest unemployment rate since the creation of the EU. That rate equates to about 17.405 million unemployed people. (eurostat.PDF) Spain had a 24.3% unemployment rate.

The German two year note dipped into negative yield territory last week. Germany's ten year bond closed at 1.18%, DE 10Y Govt Bond Benchmark, 10YR_GER Bond

If the closet, hard line communist Alexis Tsipras wins the upcoming election in Greece, and otherwise acquires the authority to form a new government, I would expect Greece to the reject all austerity measures.

Tsipras has vowed to clamp down on rich tax cheats in a nation of tax evaders. Money will fly out of Greece, if and when he gains power.

Tsipras has repeatedly stated that he wants to nationalize Greece's banks and other industries, and even renege on all of the Greek government debt. It is no accident that the hammer and sickle appear at his rallies. {see generally articles in Bloomberg, Reuters and Businessweek;}. He reminds me of Lenin.

The consequences of such actions, the full extent of which can not be foreseen with any precision, could easily cause widespread contagion on nations already in a weakened and vulnerable state including Spain, Italy, Portugal, and Ireland, and possibly even to France through its vulnerable private banks.

The fact that the U.S. 5 and 10 year notes are hitting record lows daily is a clear manifestation that all is not right with the world. The ten year closed at a 1.457% yield. The two year treasury note closed last Friday with a .25% yield.

The VIX rose 10.81% last Friday to close at 26.66, reflecting a typical inverse relationship to the S & P 500 which declined 32.29 points or 2.46%.

Gold had a robust upward move last Friday. I mentioned in an earlier post that a spike in the VIX toward 30 has been correlated with an upward move in gold prices. Stocks, Bonds & Politics: May 17, 2012 Post I suspect that some investors return to gold when there is a major spike in stock volatility, willing to readopt gold temporarily as an alternate currency and a safe haven. I am, however, not confident enough in that past correlation to play it now with a GLD purchase.

Instead, if gold returns accelerates to anywhere close to $2,000, I will use that opportunity to lighten up again on bullion, which is what I did earlier this year and in September 2011. Recent Gold and Silver Sales Those transactions were on 9/6/11 and 9/12/11, when gold was trading near $1,900 and silver was trading in the $40-$42 per ounce range. Past Historical London Fix

S & P gave a tentative rating of "B" to Boyd Gaming's proposed $300 senior note offering. TEXT-S&P The report is noteworthy for the positive comments made about Boyd's proposed acquisition of Peninsula Gaming. I own just one senior bond and the common shares as a Lottery Ticket. Bought 1 Boyd Gaming 9.125% Senior Bond Maturing on 12/1/2018 at 89 I have sold the senior subordinated Boyd bond. Sold 1 Boyd Gaming 7.125% Senior Sub Bond Maturing 2/1/16 at 93.25-Bought 1 Boyd Gaming 9.125% Senior Bond Maturing on 12/1/2018 at 89

Boyd Gaming was able to increase the offering to $350 in 9% senior notes maturing in 2020.

1. Berkshire Hills Bancorp (own: Regional Bank Basket Strategy): Berkshire Hills Bancorp is acquiring Beacon Federal Bancorp (BFED) in a transaction valued at approximately $132 million. Beacon is headquartered in East Syracuse, NY and has seven full service banking offices.

I was surprised to see that two of those branches are in Tennessee, located in Middle Tennessee (Smyrna and McMinnville: Locations) I would be curious to see whether this bank expands into Middle Tennessee or elects to sell those branches. I viewed the Smyrna branch at Google Maps. Nissan USA Manufacturing is located nearby. Nissan has a large plant employing about 6,000 people in Smyrna, capable of producing 550,000 vehicles per year. Nissan Corporate Nissan North America moved in 2006 its headquarters from California to Franklin, Tennessee, a few miles from HQ.  As noted in a New York Times article published in 2005 announcing the move, it costs 44% less to do business in Tennessee compared to California.

Berkshire has an investor presentation on this acquisition, which has a map of its existing branch locations and red squares showing how the 5 northeastern Beacon branches fit into Berkshire's existing territory. Investor Presentation at page 5. In that presentation, Berkshire claims that it is paying a 111% of tangible book value whereas other regional transactions have been valued at 162% (page 8)

Fifty percent of the BFED shares will be exchanged for $20.5 in cash, with the other 50% exchanged for .92 Berkshire (BHLB) shares. Berkshire estimates that this transaction will produce $.22 per share in core earnings accretion during 2013. Prior to that announcement, made after the close last Thursday, Beacon Federal Bancorp shares closed at $13.3, so the owners of those shares will receive a nice premium.

For the 2012 first quarter, Beacon earned 21 cents per share, down from 25 cents in the 2011 first quarter, Form 10-Q. The net interest margin decreased to 2.82% from 3.16% (page 43).

As of 3/31/12, Beacon's total capital ratio was 15.29%; the Tier 1 capital to adjusted total assets ratio (leverage ratio) was 10.57% (well capitalized 5%); NPAs stood at 4.01% (down from 4.44% as of 12/31/11); net-charge offs for the first quarter were 3.03% of average loans; the coverage ratio was 36.17% (prefer over a 100%); and NPLs to total loans stood at 5.07% (regarded as poor). {see also  SEC Filed Press Release} I would regard this report to be unsatisfactory, except for the capital ratios.

This proposed acquisition will cause me to place a hold on the purchase of more BHLB shares. Bought 50 BHLB AT $21.66 (March 2012 post).

Berkshire Hills Bancorp declined 4.9% or $1.07 last Friday to close at $20.75.

2. Exide (own 2 senior secured bonds: Junk Bond Ladder Strategy): Exide has been in a legal tussle with Frisco, Texas about Exide's battery recycling plant. That dispute involves Frisco's refusal to grant a zoning permit for the installation of environmental controls designed to comply with new lead emissions standards. Frisco's obvious purpose underlying its actions was to shut down the plant. That dispute was discussed at page 32 of the recently filed Form 10-Q and during the question and answer session of the most recent earnings call. 

Last Thursday, Exide Technologies announced a tentative agreement with Frisco. As part of that settlement, the Frisco Community Development Corporation and the Frisco Economic Development Corporation will buy Exide's 180 acres of undeveloped land, surrounding the plant and used as a buffer zone, for $45 million. Exide will close down the plant and remove all vertical structures other than an administrative office building and wastewater treatment plant. 

3. Sold 300 of WIW at $13.01 Last Thursday-Roth IRA (see Disclaimer): I have repeatedly bought and sold this CEF. My last purchase was made in early April 2012 at $12.75-ROTH IRA. While this fund is selling at a significant discount to its net asset value, I am concerned about the current value of U.S. treasury inflation protected securities. An investor buying 5 or 10 year TIPs in the market now will receive a negative yield. I am not an investor who views a negative current yield as a buying opportunity. Obviously, a large number of investors disagree with that opinion and are falling over one another to buy U.S. TIP paper at negative rates.

Last Thursday (5/31/12), WIW's discount to net asset value per share did expand some to 12%, based on a closing price of $12.98 and a net asset value per share of $14.75.  The 10 year TIP closed that day at a -.57 yield and the 5 year TIP was at a -1.09% yield.

Data on government bond yields can be found at Bloomberg.

2012 Roth IRA 300 WIW +$63.97

With this last transaction, I have realized gains of $582.54 trading WIW, excluding dividends. (see snapshots and links at Item # 1  Bought 300 WIW at $12.75-ROTH IRA)

Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (WIW) rose 6 cents in the debacle last Friday to close at $13.04.  The current yield on the 10 year TIP went deeper into negative territory.

iShares Barclays TIPS Bond Fund (TIP) rose 50 cents to close at $121.1. iShares Trust Barclays 20+ Year Treasury Bond Fund (TLT) rose $3.02 to close at $130.13 on 6/1/12. 

GDP Growth Slowing Worldwide & Record Low Prices For the 10 Year U.S. Note/Reynolds Group Holdings/Sold 100 PSEC at $10.83-Roth IRA

The S & P 500 declined 6.3% in May.

The VIX closed at 24.06 yesterday, marking the 13th consecutive close above 20. The VIX closed at 16.6 on May 1st.

India's GDP growth slowed to 5.3% in the first quarter, down from 6.1% in the previous quarter and below the 6.1% consensus forecast.

The U.S. government revised first quarter real GDP growth to a 1.9% annual rate, down from the prior estimate of a 2.2% increase. Consumer spending was revised down to 2.7% from 2.9%. The personal consumer price index was revised up to 2.5% from 2.4%. Real GDP increased 3% in the 2011 4th quarter. News Release: Gross Domestic Product

The ten year U.S. Treasury fell to another record low yield yesterday, hitting 1.53% intra-day. The five year treasury note fell to .66%.

Joy Global lowered its earnings and revenues estimate for FY 12.

MKM Partners downgraded Nokia to sell and lowered its price target to $2. Based on its channel checks in Europe and the U.S., MKM believes that Lumia has fallen out of favor after being hot for four or five weeks. The MKM report is summarized in Barrons.com. I recently bought NOK at $2.88-LT Category. I have considered buying a Nokia unsecured senior bond, but have been unable to pull the trigger.

Intel (own) fell 1.11% yesterday after Morgan Stanley initiated coverage with an underperform rating. Barrons published last Saturday a positive article on Intel's prospects.

Over the past few weeks, I have seen bonds being offered in bulk that were issued by companies with issues, including Nokia, Chesapeake and J.C. Penny. Those bonds did not appear until recently when I screened for bonds yielding more than 7% and selling for under their par value.

ADP reported yesterday that employment in private businesses rose 133,000 from April to May on a seasonally adjusted basis. The April number was revised down to 113,000 from the prior estimate of 119,000. Large firms added just 9,000 jobs in May according to ADP, continuing a trend of anemic hiring. While large companies have record amounts of cash, they apparently need more tax breaks before starting to hire.

A number of recent articles explore how far Germany will go to save the Euro and the EU. (e.g.Reuters). The recent weakness in the Euro is probably a net positive for Germany given its strong manufacturing base. And, it is understandable why responsible European governments are reluctant to bail out the irresponsible ones. However, if the crisis spins out of control, and that is certainly a real possibility, then Germany will suffer.

A number of reports suggests that depositors are fleeing Spain's troubled banks. Fear will continue to feed on itself unless something really big is done soon. That was the message given the European governments yesterday by the President of the European Central Bank. NYT

CNN placed an another nail in the Obama birther conspiracy theories. True Believers are not interested in anything resembling reliable information, particularly when the evidence refutes an accusation against the Beanpole.

1. Reynolds Group Holdings (own 4 senior bonds: Junk Bond Ladder Strategy): For the 2012 first quarter, Reynolds Group Holdings reported net income of $63 million on revenues of $3.312 billion. reynoldsgroupholdings.pdf This was an improvement from the $54 million loss suffered in the 2011 first quarter. Net cash flow from operating activities was $86 million, down from $169 million in the 2011 first quarter, due largely to increase interest expenses related to the Graham Packaging acquisition. (page 22)

The first quarter included some extraordinary items including a $66 million gain from the sell of the Louisville laminating operations of Pactiv Foodservice segment, asset impairment charges and expenses relating to acquisitions.    

The company notes that it has "substantial" debt (page 22), and no one will quarrel with that statement. Reynolds Group has been formed by a series of debt financed acquisitions.  

As of 3/31/12, the company had $1.253 billion in cash and $17.709 billion in long term debt (page F-3). A listing of the debt obligations can be found at page F-20. Since I own senior unsecured debt, I am most concerned by the sheer magnitude of the senior secured debt which includes $4.444 billion drawn on a secured credit facility and approximately $3.941 billion in several senior secured notes. 

I own senior unsecured debt originally issued by Pactiv (2018), or its predecessor Tenneco Packaging (2025 and 2027). All of that debt is listed by Reynolds as Pactiv debt at page F-20. After adding one 2018 Pactiv bond, I noted that I was uncomfortable owning four bonds from such a heavily indebted company and would sell either the 2025 or 2027 bond. Added 1 Pactiv 6.4% Senior Note Maturing in 2018 at 77 (October 2011). I will probably do that before the end of this year. 

I would hope that Reynolds makes no further debt financed acquisitions until it makes substantial progress in reducing its existing leverage.  

Before Pactiv was acquired by Reynolds, Pactiv bonds were rated investment grade. Now, those bonds are deservedly rated well into junk, not due to Pactiv's operations, but to the Reynold's Group excessive debt levels.

In my Personal Risk Ratings For Junk Bonds, I currently rate the 2025 and 2027 bonds at 8+ and the 2018 bond at 7. Tenneco Packaging and Pactiv Bond-Increasing Personal Risk Ratings I do not see any reason to change those ratings based on the first quarter report. Those bonds remain very high risk given Reynold's debt load.

All of those bonds have the same priority. However, I am assigning more risk to the longer dated bonds due to what I perceive as an increase in default risk associated with the longer maturity. I have discussed that kind of risk in relation to stocks: Bayesian Analysis: Duality of Long Term Risks There is added risk related to unanticipated events occurring over a longer time span. That risk is enhanced for a higher leveraged company like Reynolds which may become even more leveraged due to another acquisition.  

Moody's currently has a Caa1 rating on the unsecured debt which is not comforting.

FINRA - 2018 Pactiv (currently own 2)

FINRA -2025 Tenneco Packaging (Name later changed to Pactiv)

FINRA -2027 Tenneco Packaging

2. Sold 100 PSEC at $10.83 Last Wednesday-Roth IRA (see Disclaimer): I will look for an opportunity to buy these shares back in a taxable account, where I currently own 218+. I am reinvesting the monthly dividends to buy additional shares in that account. I still own 100 shares of PSEC in a regular IRA.

I am de-risking some in my Roth IRA and have raised my cash level to about 25% of net assets, including the $4,000 raised in transaction yesterday that I will mention next week. That is an excessive cash allocation for that account. I am hoping for better buying opportunities in the coming weeks.

I bought the shares sold last Wednesday at $10.1:

2012 Roth IRA 100 Shares PSEC +$60.47

With BDCs, I am simply trying to make a buck or more on the shares while harvesting their dividends. Since PSEC had a dividend yield exceeding 11% at my cost, my total return for this position would be approximately 17.7% annualized. For BDCs held in a retirement account, I will harvest that type of gain, particularly when the OG is as worried as he is now.

I may deploy those proceeds into a PSEC senior bond. While the common shares have a much higher yield than the senior bond, I may buy the higher priority security in the retirement account and accept less yield, usually after trading the common for a profit.

Prospect Capital closed at $10.77 yesterday.