Warnings on Canadian Trusts Converting to Corporations/ Sold FR and OPXT LTs/Bill Gross on Bonds/Bought 50 COP at 51.35/Bought 50 PYS at 20.01

WARNING ON CANADIAN ENERGY TRUSTS CONVERTING TO REGULAR CORPORATIONS:

Added Saturday Afternoon 2:05 P.m.: This is part of the warning that I am giving U.S. investors about Canadian energy trusts converting to regular corporations. I am referencing the conversion of 100 shares of Advantage Energy Income Fund Trust Units on a 1 for 1 basis for shares in Advantage Oil and Gas which occurred last year in my account at Fidelity on 7/14/2009.

I received my 4th corrected 1099 this month from Fidelity, which removed the non-existent $479, referenced in the post below, as a phantom dividend. This was the value of the Advantage Oil shares received in the exchange at the date of the exchange. Instead, and this may be closer to being accurate, Fidelity is now treating the conversion of my 100 shares of Advantage Energy Income Fund Trust Units as a SELL yielding proceeds of $479 on 7/14/2009 (the date of the conversion) with an unknown cost basis. This sell did not happen, so it is some kind of tax event, and is classified now as a long term capital loss even though I had never had any position for longer than 12 months. I was just a U.S. citizen doing nothing except noting a 1 for 1 exchange of the trust units for shares in a regular corporation, and I did not hold any shares for over a year. And, then when I sold the shares received on a one for basis for the original trust unit shares, called Advantage Oil and Gas, they are treating it as a second sale, this time of a short term nature, with my original cost basis of the old Advantage Energy Income Units, which makes no sense. There is no way that I will hold ERF and PVX when they convert to regular corporations. I may even sell them before I know whether or not this will happen for them, just to be sure to avoid another headache. This is just ridiculous.

I had to figure the above out on my own. Fidelity did not note on its corrected 1099 received today a change in the "Gross Proceeds Less Commissions" as being a corrected item. The IRS computer would kick my return out if I did not have the proceeds number matched up and I had already downloaded the information into turbotax. The gross sales number went up by $479 from the last corrected amount. This is the number representing the value of the stock on the date of the exchange which is now being treating as a sale with the gross proceeds realized to be the $479 value of the 100 Advantage Oil and Gas regular corporation shares received that day for the 100 shares of the Advantage trust units.

So every U.S. investor needs to decide, knowing about the foregoing in advance, whether or not to own a canadian energy trust when it converts into a regular corporation. For me the answer without equivocation is under no circumstances will I own one undergoing a conversion again.

I would doubt that many Fidelity customers would pick up on the change to the gross proceeds number. LB is quite a nerd's nerd. I know how I will account for this mess now.

The conversion from a trust to a regular corporation has to do with the tax change in Canada whereby these trusts will be taxed as regular corporations in 2011. Yields on royalty trusts sustainable? income trusts

************Original Post

On Friday, I received my third corrected 1099 from Fidelity sent in March. There was a new $479 dividend included in this latest version, allegedly paid by a Canadian company called Advantage Oil and Gas, which was never paid by the company. Instead, Advantage was a canadian energy trust that converted to a regular corporation on or about 7/14/2009. I received one share of the new corporation for each share of the trust held, and there was no change in the price of the security as a result of this exchange: AAV: Historical Prices for Advantage Oil & Gas Ltd On 7/14/2009, the value of the shares was $479. So the entire value of the shares in the new corporation was classified as a dividend to me. I wrote an email to Fidelity yesterday about the matter and the response was simply that it is the way the transaction was reported to them.

If this is a correct way to classify the conversion, then it is clearly disadvantageous to a U.S. taxpayer. In a few days after the conversion, I sold the shares after the conversion for a loss, and Fidelity reported the proceeds of the sale. I certainly will not wait for some similar result in my current holdings of Provident (PVX) and Enerplus (ERF) and will consequently sell them before anything similar is done by them. At a minimum, the tax issue is far too complicated for me to deal with it and that by itself would justify the disposal of other trusts before a conversion is made, speaking just for myself. And, reporting the manner consistent with Fidelity's 1099, which I will do, will create a phantom tax liability that can not be reasonably justified.

WARNING ON FILLS OF ODD LOT ORDERS:

I have not mentioned in this post a fill of 50 shares of STDPRB by Fidelity via Knight Trading at $18.85 on Friday. I am contesting the fill. I was rounding my lot up to 200 shares when this security was trading at 18.45 Bid and 18.49 Ask. It was actively traded. I therefore placed a bid to buy 50 shares via Fidelity at the market and it was filled by Knight at 36 cents higher than the ask price (CORRECTED FROM ORIGINAL POST THAT SAID 26 CENTS HIGHER), and far higher than the issue traded at anytime during the remaining part of the trading session. This has happened to me in this past. I will note Fidelity's response when I receive it.

1. Bill Gross on Bonds: I certainly agree with some comments by Bill Gross last week that the three decade bull market in bonds has run its course. BusinessWeek Bond funds have seen inflows of 409 billion over the past 14 months as many individual investors seek a yield alternative to money market funds and treasury bills yielding near zero. I suspect that this will end badly for them. The only question is when will the bear market start looking back with twenty-twenty vision.

Greenspan referred to the recent rise in treasury bond rates as the canary in the coal mine. Gross is concerned that profligate spending and borrowing by governments will lead to inflation and a rise in rates. Bloomberg.com For those who have not been around a long time, the bond market does go into a long term secular decline periodically. I would date the current long term bull cycle to the early 1980s when the Federal Reserve successfully stifled hyper inflation in the U.S.. The current SEC yield on BND, the Vanguard ETF for the total bond market, is 3.3% as of 3/25/2010: Vanguard - Vanguard Total Bond Market ETF Overview

2. Sold 40 FR at $8.2 (see Disclaimer): During the worse days of the bear market, I continued to invest small amounts in common stocks. During most of the period from September 2008 to March 2009, the strategy was to limit stock investments to cash flow generated by interest and dividends or to buy a new position with the proceeds realized from one sold. There were several days during the height of the bear market where I did scatter buys, where I took the cash flow received into my account and bought a small number of shares in a variety of companies on the same day. This restriction of stock buying activity never did apply to the purchases of bonds and bond like investments such as preferred stocks.

On one day in November 2008, I bought shares in First Industrial, New York Times, News Corporation, SL Green, CB & L Properties and Gannett. LATE DAY TRADES: GCI, CBL, FR, SLG, NYT, NWSA Of those buys the main laggard has been First Industrial which was bought at $6.19. I sold those shares on Friday at $8.2. I still own FR's cumulative preferred stock in an IRA, bought at $8.4 to yield over 21% per annum at my cost. I see no reason to sell those shares.

I made the most money on S L Green which more than doubled, and surprisingly a good percentage gain in the NYT and Gannett. I still own shares in CBL Properties bought at $3.7 and NWSA: purchased at $6.65. Both of those stocks are trading at over $18. And I still own shares in SLGPRC in both retirement accounts, an SL Green cumulative preferred stock, bought at $10.5 and $11.89, less than half of its current value. The 50 shares bought at $10.5 in March 2009 will give me 18% per year in dividend payments based on that cost. I see no reason to sell those shares. Bought SLGPRC Those shares are selling at near their $25 par value now. The income stream in the retirement accounts is more important to me than capturing the profit by selling those shares.

I also bought blue chips in the same way during that period. I view the strategy as a success and will do it again when the next bear cycle returns. The main point that I will make about the strategy was that I was able to do it without causing any psychological stress. I would have been on pin and needles if I had deployed large sums of money into stocks in October or November 2008, based on what happened subsequently. It was not until March 2009 that I felt comfortable enough to make a series of significant stock market purchases summarized in the posts from March and April 2009.

3. Bought 50 of the TC PYS at $20.01 (see Disclaimer): I mentioned to a reader in an email exchange last Friday that I would not be fooling with these long bond purchases if I was receiving 4% in a money market account, or any other viable alternative. I had tried to buy PYS at around $18 a few weeks ago. The order was not filled, and subsequently PYS began to rise in early December 2009. PYS: Historical Prices Based on that rise, I gave up on it until Friday. Uncle Ben's Jihad against savers is just wearing me down. What can I say? I am almost a liberal now in what I am willing to buy for yield, and that can be the only explanation for buying even 50 shares of PYS at $20.01 last Friday.

This TC has a senior bond from R.R. Donnelley and Sons ( RRD) as its underlying security. The bond matures on 4/15/2029. The QuantumOnline.com site shows that the bond is rated investment grade. I confirmed that information by checking the underlying bond information at FINRA. The BBB from S & P is investment grade.

This is a link to the Reuters description of RRD and to its key developments page. The consensus E.P.S. estimate for 2010 is $1.53 and $2.03 in 2011. RRD: Analyst Estimates

Interest is paid semi-annually in April and October. The coupon of the TC is just 6.3%, less than the underlying coupon of 6.625%. This is the link to the prospectus: www.sec.gov/

At a total cost of $20.01, the current yield of the TC is around 7.87%. The underlying bond at the last trade last Friday of 91.2 has a current yield of 7.264%. I always check this information. The underlying bond is actively traded, and I can check historical trades at the FINRA site. The YTM of the TC will also be higher than the underlying bond due in part to its larger discount to par value. At a cost of $21.01, the YTM for the TC is 8.78%. Morningstar Bond Calculator: Yield to Maturity, Returns, Taxable and Municipal Bonds The YTM captures the additional yield associated with the profit on the shares, assuming par value is paid on the maturity date.

I am already familiar with RRD. I am somewhat concerned about the debt load shown on the balance sheet: RRD: Balance Sheet for R.R. Donnelley & Sons Company The long term debt number as of 12/31/09 was 2.982 billion. However, I am relieved by the net cash flow number for operations being 1.4258 billion in 2009: (page 42: Form 10-K)

In February, RRD announced an all cash acquisition of Bowne (BNE) for 481 million. Press Release Filed with SEC.

RRD reduced its debt by 804.4 million in 2009: Press Release

I do not expect much for this buy and would be pleased to hold it for a year or two, collect a few interest payment and then sell it for a $1 profit. Any more profit than that buck would be viewed as gravy.

Since the crux of my strategy is to generate a cash flow to purchase securities, I view a number of these recent bond buys to fulfill that objective more than the current alternatives, and any capital appreciation would be considered an added benefit.

4. Sold 100 OPXT at $2.47 (see Disclaimer): This transaction constituted the second round trip for this LT. The shares were bought at 1.89. I will never understand Opnext's products. I sold the shares after reading this Barrons synopsis of Morgan Keegan's views on the stock.

5. Bought 50 ConocoPhillips at $51.35 (COP)(Dividend Growth Strategy)(See Disclaimer): My prior round trip on COP shares was a buy at $38.60 in March 2009 and a sell last October at $46.45. This is another one where it would have been more advisable to keep this dividend grower purchased at a favorable price for a long term hold.

I decide to repurchase the shares after Conoco announced its intention to raise its dividend by 10%. The dividend was raised from 50 cents to 55 cents. At a total cost of $51.35, the yield at that rate would be about 4.28%. COP has raised the dividend every year since the formation of COP eight years ago. Both the starting yield and the history of dividend increases are important criteria for selecting stocks under a dividend growth strategy.

ConocoPhillips also announced its intent to sell 1/2 of its stake in Lukoil and other assets. NYT That stake is worth about 4.7 billion at current prices. WSJ Those proceeds will go to share repurchases.

Conoco's aggressive acquisition era of the past decade is giving way to more focus on being more profitable rather than bigger for the sake of being bigger. The 36 billion spent to acquire Burlington Resources in 2006 was one that would have been better left undone. Item # 4 Bought 50 XOM at 67.81 Wall Street sold the shares in response to the news, but the strategy makes sense to me, provided the company executes it properly. (see generally discussion in Investopedia article)

The current estimates, which may change as a result of the divestitures, call for an E.P.S. of $5.92 in 2010 and $7.59 in 2011: COP: Analyst Estimates for ConocoPhillips An estimate for an integrated oil company is not the same as estimating Coca Cola's earnings. A wide variety of factors can cause wide swings in income. I am not sure that I would pay attention to any person's estimate of refining margins in calender 2011.

Price to sales is .56 and price to book is 1.23.

Sold all of CEF OLA at 8.79/Bought 100 MHC at 9.8/Seven Year Note Auction

1. First American Core Logic Negative Home Equity Report: This service has a free report, available after registration, that goes into some detail about negative equity estimates by state. The Negative Equity Report Q4 2008 This firm estimates that it will take five to 10 years on average, depending on the location, for those homes to appreciate into positive equity territory.

The USATODAY front page yesterday has a story about negative home equity which is estimated to include approximately 11.3 homes nationwide. To highlight the problem, the story focuses on a few homeowners. One couple bought a house in Florida for $230,000 and the previous owner had made $100,000 in three years. Think about that for a second. The new owner actually expected a continuation of that parabolic rise. This was obviously unsustainable before there was a reversion to the mean. Another person, nearing retirement, spent $100,000 to renovate a basement to add a small theater and other amenities, borrowing the money, and will now how to go into foreclosure because the house can not be financed after falling in value.

2. Catholic Church and Its Decades Long Cover-Up of Sexual Abuse Cases: For decades, the officials in the Catholic Church swept sexual abuse by Priests under the rug to avoid adverse publicity. For years now, maybe for a couple of decades, there has been a stream of adverse publicity of the cover ups and what the church was willing to do to protect its reputation. The latest story reported on the cover of the NYT involves a priest who molested as many as 200 deaf boys. The NYT has an interactive with the documents relating to this story. Another story in the paper yesterday details some scandals that are now sweeping across Europe. NYT (see also NYT editorial on this subject). The Vatican claims that it knew nothing about the abuse of those 200 deaf boys until 20 years later. CNN.com The NYT has a story in today's paper that the current Pope, while he was a Cardinal, was told of a pedophile priest in Germany being returned to pastoral work within days after the Ratzinger sent him for therapy to overcome his pedophilia. The priest was later convicted of molestation.

3. Sold All Shares (421.751) in OLA at $8.79 (See Disclaimer): I mentioned in an earlier post that a significant percentage of dividend payments made by OLA in both 2008 and 2009 have been classified as returns of capital. This placed OLA, along with Eaton Vance's ETW, on my short list for possible disposal. I view return of capital "dividends" to be an illusion. The fund is literally creating a tax event for investors in non-retirement accounts by returning a portion of their capital investment in the shares back to them in the wrapping of a dividend. OLA was within 6% of its net asset value when I sold all of my shares yesterday. It had also underperformed many of my other CEFs in the market up cycle since March of 2009. Unlike ETW, where the returns of capital have resulted in an artificial gain as a result of the cost basis adjustment required by the IRS for returns of capital, OLA's return of capital had resulted in an artificially low loss (i.e. less of a loss for tax reporting purposes than with an unadjusted basis). Tax losses have some value in that I can use the loss to offset some of the gains already taken this year, which are close to 10 grand. OLA closed on 3/25 at a 6.24% discount to its net asset value. That would not be sufficient in and of itself to sell my shares. However, combined with the return of capital issue, the poor overall performance, and the benefit of taking the tax loss, there were more than sufficient reasons to sell my entire stake.

I have decided to give ETW another year. If my 1099 for 2010 shows another large return of capital distribution, I will look for my first opportunity to sell all my shares.

4. Bought 100 MHC at $9.8 (see Disclaimer): I have previously bought and discussed two similar type of securities to MHC. For those who read this blog daily, I am referring to MKZ and MKN. Both of those securities are senior notes from Citigroup Funding (guaranteed by Citigroup), maturing in 2014 at their $10 par value, paying the greater of 3% or a percentage increase in the commodity index from the start date of each annual period. The percentage increase, tied to the commodity index, is paid if it is greater than 3% and there is no close in the index about the maximum permissible level provided in the respective prospectuses. It looks like MKN will make it to the closing date of its first annual period (3/30/2010) without the commodity index exceeding its permissible maximum. Bought 100 MKN at 9.85 MKZ vs. MKN Bought 100 MKZ at 9.91 in the Roth IRA Bought 100 MKZ at 9.96

MHC is a similar security except the guarantee is 2% and the floating percentage is tied to the S & P 500. It is important to understand all of the terms of this kind of security. Before I invested in the first one, I read the entire prospectus and studied it until I understood it.

First, you need to know the starting date number for the first year Pricing Supplement The starting number for the S & P is 1050.78 which is computed as of 9/24/2009. So this one is in the money with the S & P over 100 points higher now. The percentage increase since the starting number would be greater than the guarantee of 2%.

Second, you have to understand the reversion. The most unfavorable aspect of this security is that the interest will revert back to 2% for an annual period if the S & P 500 closes at any time in excess of the maximum permissible level. The second unfavorable aspect of MHC is that the maximum is low, just 21%. So, multiply 1.21 x the starting value of 1050.78 and you arrive at the maximum number which is 1,271.44. If the S & P closed one day during the annual period above 1271.44, then there is a reversion back to 2% no matter where the S & P 500 ends at the closing date, which will be 9/24/2010 for the first annual period. This is the pertinent language in the prospectus:

"the percentage change in the closing value of the underlying index from the first index business day of the related coupon period through the last index business day of the coupon period (which we refer to as the index percentage change), if (i) the closing value of the underlying index on every index business day during the coupon period is less than or equal to 121% of the closing value of the underlying index on the first index business day of the coupon period (which we refer to as the starting value) and (ii) the index percentage change is greater than 2%"

Twenty-one percent is too small of a maximum number for the S & P 500. Still, the guarantee is 2%, and I bought the security below its par value of $10. So, assuming Citigroup survives, I know my downside and I may receive a sum greater than 2%, though less than 21%, for one or more years until the note matures on 10/8/2014.

One of the main considerations supporting this small purchase was the fact that my idle cash has been earning nothing in a money market account, and 2% is better than nothing.

I chose MHC for several reasons: (1) it is still within its maximum limit of 21% from the starting value, (2) it still has a cushion to run up without exceeding that limit and (3) the time remaining to the closing date for the first coupon has been cut almost in half from the start date. I would prefer to have the current S & P 500 number with only a month to run but I may not be able to buy it at less than par value if I wait for that possible outcome. If the S & P 500 exceeds the maximum before the closing date, I would not be surprised to see this security to fall some in value. It would also fall with some adverse development in Citigroup's credit risk profile.

I did check FINRA for a couple of Citigroup bonds maturing at about the same time as MHC for comparison purposes:

C.HTX MATURES on 1/15/2015 6.01% Coupon/ Yield at Last Price of 105.67=5.77%

C.GOS Matures on 10/15/2014 5.5% Coupon/ Yield at Last Price of 103.16=5.33%

So maybe I am giving up around 3.5% in a guaranteed yield per year by going with MHC. But, with just one year of 15% to 20% based on the S & P percentage gain, I would be ahead with MHC for the entire term compared to the fixed coupon bonds of comparable maturity.

5. Seven Year Treasury Note Auction: The auction for the 7 year note did not go well yesterday according to those in the know. Maybe if Uncle Sam would pay something to those willing to feed the beast, the auctions would draw more interest. The high yield for the 7 year was 3.374%. I think that it is just great that the government is able to borrow a ton of money (32 Billion) at that rate for seven years. It would just be my opinion, but I am in far better shape financially, with no debt, than the U.S. government with budget deficits growing at trillion plus dollars annually. And, no one is beating down the front door to loan me money for seven years at 3.374%. The coupon for this note is 3.25% and the OID makes up the remainder since the note was sold at a small discount to par value. www.treasurydirect.gov. pdf The longer dated treasuries sold off in response to the auction: WSJ

The head of PIMCO's Treasury and Derivatives trading is worried about the U.S. government's fiscal situation. WSJ The dollar continues to gain strength again both the Euro and the Japanese Yen: FXY: Summary for CurrencyShares Japanese Yen FXE: Summary for Currencyshares Euro Trust Prior to late yesterday, when the deal for Greece was announced, the Euro is starting to look like it has lost the floor that it was standing on a few weeks ago.

6. HealthCare Protesters: The media has been filled with stories of late about how the GOP egged on disruptive protests against the health care legislation. This recent report from CNN refers to GOP House members encouraging protesters in the halls of Congress who were carrying signs saying "If Brown won't stop it, a Browning Will", referring to the former State Senator, male model and driver of a truck, Scott Brown, that Massachusetts sent to the U.S. Senate to serve Ted Kennedy's remaining term.

There was a protest in the House Chamber which became unruly and disruptive. It would be standard practice for the non-partisan police to remove such people. When the protesters resisted and struggled to stay in place, GOP House Members cheered them on. msnbc.com BREAKING: An Ugly Scene msnbc.com: Did the GOP stir up trouble? Tea Party Protests: 'Ni**er,' 'Fa**ot' Shouted at Democrats A number of violent acts and threats have been made against those who voted for the bill.

At least the leader of the TBs is making headway signing a deal with the Discovery Channel for a reality show at 1 million per episode, produced by Mark Burnett of Survivor fame: chicagotribune.com Sarah Palin's TLC Reality Show She has certainly done well for herself after quitting her job as Governor, with the book, speaking engagements and now a TV reality show. Peggy Noonan summarized in her WSJ column an interesting portrait of Sarah during her debate preparation that caused the McCain staffers to hold a conference call about her. Would John Edwards have been better or worse as a VP? It does make the LB wonder about the process of selecting national political leaders.

7. Dividends and Interest: On Monday 3/29/2010, I noted that the following securities will go ex dividend or ex interest with their quarterly distributions: Glimcher Realty (GRT), Glimcher Realty Preferred F (GRTPRF), Kraft (KFT), Lexington Realty Preferred D (LEXPRD), Odyssey Re Preferred stocks A and B (ORHPRA & ORHPRB), Prospect Capital (PSEC), SL Green Preferred C (SLGPRC), Washington Trust (WASH), Wilshire Bancorp (WIBC) and Yamana Gold (AUY).

PJS, a TC with a senior First American bond, will go ex interest for its semi-annual payment.

The Telephone and Date Systems (TDA) bond which was bought this week will go ex interest next Monday for its quarterly payment. Bought 100 TDA at 25.22

GJN, a synthetic floater, will go ex interest for its monthly interest payment. As previously discussed, all synthetic floaters are held in retirement accounts due to tax issues.

Bought 100 TDA at 25.22/5 Year Treasury Auction/Bought 50 GJD at 17.8-Roth IRA

1. Cyclical Bull Market in the Context of Long Term Secular Bear Market: Todd Harrison wrote a column for MarketWatch giving ten reasons why the rally since March 2009 is a cyclical bull move within the confines of a long term secular bear market. I have expressed similar views in the past. more on 1982 or 1974 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? 1976 or 1982 However, I am starting to see some signs that support the opposing view. I am agnostic on the ultimate resolution, ready and willing to swing either way.

2. 5 Year Note Auction: The Treasury auctioned the 5 year note yesterday and the results added to the selling pressure after being announced mid-day. Personally, I would prefer eating broccoli and spinach every day for the rest of my life than to loan the beast money for five years at 2.605%. Treasury Auction Results for the 5 Year. pdf And, it goes without saying that I really hate spinach and broccoli. I would whether eat grass. Nonetheless, the yield of 2.605% was higher than the market expected which caused an abrupt end to a mid morning rally. The WSJ described the auction as weak. I am just grateful that anyone is willing to feed the beast at that rate. The government's borrowing cost has nowhere to go but up in my view. This is the link to the Federal Reserve's date on the weekly yield of the 5 year note since 1962: www.federalreserve.gov

Bonds had a bad day yesterday. TLT, the ETF for the 20 year treasury, fell $1.66 or 1.83%. The TIP ETF fell .81%. I compare the performance of the TIP ETF with the ETF for the 7-10 Treasury, IEF, which declined 1% yesterday. BND, the total bond market ETF from Vanguard, fell .5% to $79.22. I explained in this old post why I sold my position in BND at $78 in 2008 and have not bought it back: For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal Possible

This is an analysis from the TheStreet TV about the TLT and the double short for the 20 year treasury, TBT.

3. Bought 100 of TDA at $25.22 Yesterday (see Disclaimer): TDA is a senior bond from Telephone and Data Systems with a $25 par value and a maturity in 2041. This bond has a 7.6% coupon and interest is paid quarterly. The next ex interest date is on 3/29/2010 with a pay date on 4/01. The bond is rated investment grade according to QuantumOnline.com. I did confirm that information by checking the bond information at FINRA.

This is a link to the prospectus: SEC Filing for TDA CORPORATION The note is callable now at par plus accrued interest. This bond is viewed as the replacement for XFL, which contained a senior Verizon bond, that was called and redeemed yesterday. I would have preferred to keep XFL which had a 9.5% yield at my cost, but I was not given a choice in the matter. One of the undesirable features of TDA is the maturity in 2041 when the OG may not be around to collect par value.

Telephone and Data Systems is a telephone company, traded under the symbol TDS. It is the parent company of the publicly traded U.S. Cellular. I also own 100 shares of an exchange traded bond issued by U.S. Cellular, and I am at my limit for exposure to TDS and its subsidiary. I am already familiar with TDS but I did review briefly its last quarterly report filed with the SEC before making this bond purchase: www.sec.gov 10-k.htm In addition to owning 82% of U.S. Cellular, TDS owns 100% of TDS Telecommunications which provides wireline services. As of 12/31/2009, TDS had about 1.1 million wireline customers and 6.1 million wireless customers. U.S. Cellular is the 6th largest wireless phone company in the U.S. This is the link to the Reuters description of TDS and to its key developments page.

I view this holding as at most an intermediate term holding.

4. Prospect Capital (PSEC) (owned): PSEC declared a 41 cent dividend for the 1st quarter, up slightly from the prior quarter. The ex dividend date is 3/29. I still own 150 shares in my taxable account. As previously mentioned, a portion of the dividends paid in 2009 were classified as returns of capital. It is my view that the part of a dividend so classified is an illusory dividend. Sold 50 of the 200 PSEC

5. Bought 50 of the Trust Certificate GJD at $17.8 in the Roth IRA (see Disclaimer): As a result of the redemption of the first mortgage bond from Entergy Louisiana, I was left with a hole to fill in both the taxable and IRA accounts. I really do not view GJD, which contains a junk rated senior bond from Sprint as its underlying security, to be in any way equivalent to that first mortgage bond. As I have said on many occasions over the past few months, the lengthy Jihad by the Federal Reserve against savers has created a bubble in the bond market, raising prices and reducing yields to the point that any option for reinvesting capital is a choice now among undesirable options.

I discussed GJD in prior posts. Bought 50 GJD at 17.49 Current Yield and Yield to Maturity: Comparison of Sprint TCs The coupon of the TC is 6.5%, maturing in 2028 at a $25 par value. My current yield would be over 9% per annum with a yield to maturity of around 10.28% at a $17.8 total cost. Morningstar Bond Calculator: Interest is paid semi-annually in May and November. www.sec.gov The last trade on the underlying bond for 3/24/2010, was reported at 80.250. FINRA The underlying bond has a coupon of 6.875% for a current yield at that closing price of 8.57%. The current yield on the TC GJD at a total cost of $17.8 would be about 9.13%. The YTM is higher for the TC too due to its larger percentage discount to its par value.

Although I manage the retirement accounts far more conservatively than the taxable accounts which are much larger, I do not view the options available now in individual bonds to warrant additional purchases in the IRA accounts at current prices. This purchase yesterday of GJD takes the cash in the Roth to less than $200. As cash builds back up there may need to be another focus in security selection other than bonds or bond like investments.

There was some recent news that has had a positive impact on Sprint's common stock: Forbes.com

JOE EMR MDT/Call Warrants and Trust Certificates/BOUGHT CEF LDF & Sold LTs LGF and LNDC/Atlantic Power

1. REVISED CLOSED END FUNDS TABLE-MORE ABOUT EOI AND ETW: I have added a few names to the CEF table since I last copied it, so I have the new information in the preceding table. The two new CEFs increase my exposure to Asia and Latin America. I have not entered the cost information for these CEF positions, because there is just too much of it to bother with figuring out an average weighted cost number or to enter all of the purchases. My brokerage firm keeps track of it, including the gains and losses on reinvested dividends.

ETW and EOI went ex dividend earlier in the week. ETW pays quarterly and EOI monthly. Both are selling as of the close yesterday at small premiums to their net asset values. Eaton Vance Investment Managers - Closed-End Funds Consequently both of those CEFs are certainly not candidates for additional buys, and I have also stopped reinvesting dividends for both of them. The general strategy for CEFs is to sell or trim them when there is a significant narrowing of the discount, or a movement into a premium price. This has now happened for both of these CEFs.

ETW is already in the doghouse with unacceptably large return of capital distributions, and could be sold at any time now. I view a dividend supported in significant part by a return of capital unfavorably.

A return of capital is a dividend illusion. For ETW, the classification of significant portion of the dividends paid in both 2008 and 2009 as returns of capital creates in my view an artificial gain, in that the cost basis adjustment for my position just adds to my capital gains tax liability when I decide to sell the remaining shares. That is the main consideration for keeping ETW now, its sell would create an artificially large gain.

I am currently reinvesting dividends only for ADX, SWZ, and JQC. For some positions, I have never reinvested the dividends, using them as cash flow generators. I have stopped reinvesting others due in part to the narrowing of the discount to net asset value.

I have also just figured out, literally at 6:30 A.M. this morning, that my brokerage company has been adjusting my tax basis to reflect returns of capital. I am very grateful for that service which will at least save me some grunt work in the future. Unfortunately, this also means that I have overpaid my taxes by a few hundred dollars in prior years since I started to use this particular brokerage firm. In effect, I have made the adjustment twice for the tax years 2006-2008 thereby increasing my tax liability. LB is in the penalty box-big time- this morning for failing to catch that the adjustment had already been made by the broker.

2. Sold LTs LNDC and LQF and Bought 75 of the CEF LDF (see Disclaimer): This is what happens when the Old Geezer is at the helm of the trading desk. Possibly, Headknocker needs to bring the RB back as the HT. LB did not say that. The LB does its best to explain the reasons given by the OG for his trades, even though those reasons given by that addled, rattled and aged brain often defy the structure or logic comprehensible to the LB.

These three trades were called an exchange by the Old Geezer. He was buying what amounts to a lottery ticket CEF and funding some of the cost with the proceeds realized from two LT sales. What can the LB say about that, except that it makes no sense. How did the OG select 75 shares and not a 100 or 200, the LB inquired, and will not repeat the answer since it is too embarrassing for the LB. In fact, LB wants to emphasize again that the OG is an embarrassment to the LB, somehow, someway, the LB wished the Lord would dissociate it from that Old Goat, send him back to the Old Folks home to play checkers and engage in that philosophizing babble.

LNDC was bought at at $6.2. I did check the earnings estimates. The consensus is 31 cents in the F/Y ending May 2010 and 39 cents for F/Y 2011. I sold the shares at $7.37 or close to 19 times the F/Y 2011 estimate and 23.77 times this year's estimate. 

For Lions Gate, the OG just got tired of it. Icahn is offering $6 for the entire company and I sold my 50 shares at $5.92.

The quasi-LT bought in their place was a CEF called the Latin American Discovery Fund. It is discussed some in this article. When the words Latin America and investment are mentioned together, it does cause the OG to cringe, a few goose bumps form, a chill runs through the lean body causing the OG's hand to tremble, the addled brain is filled with anxiety, and most important of all, a glaring motion picture appears of Hugo Chavez giving one of his four hour sermons. The OG has a long history, sort of like that Richard guy on "Lost", and remembers the many occasions where gringos were singed buying bonds or stocks in that area of the world. Nonetheless, after reviewing my CEF portfolio, I was underweighted L.A. and decided to increase my exposure a tad with a 75 share purchase of this Morgan Stanley CEF at $17. Given the volatility and risk, OG is placing this 75 shares in the 2010 Speculative Strategy.

The MS web page with NAV information is the same as APF. Daily Prices - United States : Individual Investor - Morgan Stanley Investment Management The close on the 22nd was $16.88 with a $18.19 net asset value. That is the only information available to me at the time of the trade yesterday. The discount to NAV at the close on March 22 was therefore 7.2%. The WSJ does have this one listed in the "World Equity" section of its closed end fund data section. This shows that the NAV as of the 23rd increased to $18.41 from the prior closing net asset value of 18.19. The market close yesterday was $17.06. So the discount as of yesterday's close rose slightly to 7.33%.

The net expense ratio is 1.34% : Fund Details The fund details at the CEF association web site can be found at CEFA. This one will be very volatile. It was up almost 100% the past year.

Shareholder reports can be found at the MS web page referenced above or at the SEC. Here is the link to the last filed report with the SEC: www.sec.gov There is a large concentration of stocks in Brazil with a 70.8% weight as of 12/31/2009. The next highest is the 19.4% weighting in Mexico.

3. VOLATILITY INDEXES: The volatility indexes for the DJIA, the Nasdaq 100 and the S & P 500 are moving comfortably below 20 now. The Nasdaq volatility index, ^VXN , is showing what I would characterize as a favorable confirmation of the moves made by the more stable DJIA and S & P 500 indexes. The VIX closed yesterday at 16.52. The most stable index in the Vix Asset Allocation model is the DJIA volatility index, ^VXD. It crossed the 15 threshold yesterday, falling .51 to 14.68, possibly in the process of forming a Phase 2 Stable Vix Pattern. Vix Asset Allocation Model Explained Simply With as Few Words as Possible

I have not discussed the DJIA volatility index much. The most extensive discussion can be found in a 2008 post: Further Discussion of Volatility and Asset Allocation

The laggard is the the volatility index for the Russell 2000 that closed yesterday at 21.34. ^RVX The RVX was also the first to flash a Trigger Event prior to the onset of the bear market that is now dated as starting in October 2007. The VIX Trigger Event was in August 2007.

Needless to say, I did not hear back from the WSJ journalist who wrote a misinformed article about the VIX. WSJ ARTICLE on the VIX as a Predictive Indicator of the Market's Future Direction Historical VIX Patterns Generally, I would view most financial journalists as lacking an understanding about the issues that are the subject of their columns.

It is also interesting that I never hear back from journalists after pointing something out that would be of interest to their readers. I wrote an email to Bary at Barron's in October 2008 explaining that many Barron's readers would have an interest in Trust Certificates, which were then yielding in many cases 3 to 5% more than the underlying bonds and the bonds were starting to sell at historically large spreads to treasuries. I was right but I never heard back, nor was anything ever said in Barron's about that opportunity. I was trying to trying to share something that I know for a mass audience but I am at least grateful that nothing was published about this opportunity back then. This was as I say typical for financial journalists.

4. St. Joe (owed)(JOE): I was going to make a decision on whether to keep my shares of JOE, bought at $15.69 on 3/18/2009, after the expiration of the one year holding period for long term capital gains. I have decided to keep it for now after reading this article about a possible technical breakout on the upside brewing: Technical Setups

5. Emerson (owned)(Dividend Growth Strategy): Emerson (EMR) reported yesterday that its trailing 3 month order rate turned positive in February: march8k This was the first positive turn since October 2008: Reuters

6. Call Warrants and Trust Certificates: Until last Monday, the call warrant provision in the prospectuses of Trust Certificates was out of sight, out of mind. I knew that there was a call warrant which, if exercised, would result in the redemption of the TC at par value plus accrued interest. In other words, the same result for the TC holder as if the underlying bond was called by its issuer. On Monday, I opened up my bond portfolio at YF, and saw the symbol "CL" was next to XFL, a TC with a senior bond issued by Verizon. I then looked back up the list and saw that no "CL" was next to the other TC, PJL, which I also owned containing the same VZ bond. I thought that was strange. Verizon had not called the underlying bond. I quickly discovered that the owner of the call warrant for XFL had exercised the call warrant. Alert on Verizon TC XFL

I checked my account this morning and found that XFL had indeed been called and I have received the $25 par value plus accrued interest tallied at $59.84 per 100 shares.

This actually made sense to me after thinking about it for a few seconds. The underlying bond was selling at close to a 20% premium to its par value. The call warrant could be exercised and the bonds sold for a quick profit at no risk to the warrant owner. Since this was the first occasion to my knowledge where this has happened, I wanted to summarize the implications for those of us who regularly invest in this niche market.

First, the mere existence of the call warrant will place a lid on a "premium" price of the TC in certain contexts. If the TC and the underlying bond have roughly the same coupon, and the underlying bond is selling at a significant premium to par value, a rational market for the TC would still have the TC priced at a much lower premium to its par value, around par value plus accrued interest. So when the investor is considering the possibility of paying a premium for a TC, the percentage premium of the underlying bond and the existence of the call warrant need to be assessed, which will restrain me from buying at much of a premium in those type of cases. I always check the Finra data on the underlying bond before placing an order for a TC: LINKS TO FINRA INFORMATION ON UNDERLYING BONDS IN TRUST CERTIFICATES

Second, even in a long term bull market for bonds, where the underlying bonds accelerate to substantial premiums on their par value, the price of the TCs may stall at a much smaller premium. I would consider the potential profit restraint on the shares when making an investment.

So far, I have only bought a few TCs at a premium. The latest purchase was an add of 100 shares of DKF at 25.87. This TC has a 8% coupon whereas the underlying bond is lower at 7%. The underlying bond is currently selling at about a 9% premium to its par value. FINRA The TC DKF does have a call warrant, referenced under the section of the prospectus labelled "swap agreement". www.sec.gov This one is about to go ex interest for its semi-annual payment.

Within the past week, I have had two exchange trade bonds called, EHL and XFL, and the redemption will cause a long term capital gain to be realized on both positions. It does leave me in a predicament, however, because the available alternatives in bond land are non-existent now for me at least. Maybe I will find something, otherwise those funds will be used to buy common stocks. I also had a smaller position in EHL in the Roth which I have also sold.

7. Fears OverBlown about HealthCare bill?: The U.S.: This article from US News summarizes the five most overblown fears of the new healthcare law. I suspect that Robert Schlesinger, writing for U S News and World Report, will be correct in his assessment that the GOP has hurt itself long term, though I expect it will have short term gains as a result of their united opposition to this legislation.

8. MEDTRONIC (Owned): There was a favorable article about MDT in the Heard column in the WSJ.

9. Newsweek Cover Story on the Afghan National Police: I really did not want to know how much the U.S. has spent training the Afghan police force since 2002. I could not avoid the number after fetching my Newsweek from the mailbox since it was taunting me, spitting the number directly into my face. SIX BILLION DOLLARS. And, the story documents that the U.S. has just about wasted every dime of it.

10. Atlantic Power (owned): This Canadian independent energy producer has fallen sharply the past two days. The analyst at BMO Capital markets downgraded it to underperform from neutral. I found a copy of the report, which isn't much, mostly just an opinion that the shares were fully valued. The report is at page 6 of this document found at scribd. I own 200 shares bought entirely for the income in Canadian dollars generated by the good monthly dividend.

11. Portugal: The European markets are falling this morning apparently due to the Fitch downgrade of Portugal's debt rating to AA- from AA. NYT You have got to be kidding.

Kimberly Clark Update (KMB)/Added 100 of the CEF APF/Bought 50 SUTR at 2.81 as Speculative LT/Added 50 GIW at 6.55

Whenever I add a name or shares to an existing position in this basket containing regional banks, I will post a revised table of the stocks. When I have several adds, I am using the average weighted cost in the price paid column, and I am using the date of the last shares acquired in the trade date column. The yield shown is at the current price, not the price paid by me. And, I am not including shares bought in the retirement accounts, including the 100 shares of NYB.

Cramer was predicting a downdraft in the market once Congress passed the health care legislation. I thought that he was hyperventilating and had become too immersed in the kind of thinking frequently found in WSJ reader comments. It is not surprising that his latest rant found a receptive audience at NewsBusters.org, a site viewed as providing some of the best entertainment on the net for those who are truly fair and balanced.

1. Added 50 GIW at 6.55 (Regional Bank Stocks Strategy) (See Disclaimer). Wilber is a small bank doing business in the Catskill region in NY. I previously discussed it in Item # 10, /Bought 100 GIW at 7.03. I currently have noting to add to that discussion, except the stock is cheaper now than when I first purchased it, so the dividend yield has gone up and the P/E down some since my purchase at $7.03. I have not seen any news to account for the weakness when the other regional bank positions are rising in value. It is one of the few positions in the regional bank strategy where I have an unrealized loss.

2. Kimberly Clark (own-dividend strategy): KMB held its conference with investors yesterday. Kimberly Clark was a recent addition to the dividend growth strategy after it announced a 10% increase in its dividend. /Bought 100 KMB at 60.58 The stock thereafter went ex dividend. The starting yield at my cost was about 4.3%, comfortably in excess of my preferred starting yield of 3.5+% for the dividend growth strategy.

Soon after purchasing the stock, Goldman Sachs placed KMB on its conviction sell list, based on concerns about KMB lowering its forecast for 2010 at an upcoming investor confidence, which was held yesterday. This is what I said in an earlier post about that GS analyst: "I would not pay any attention to an analyst who bases a recommendation on a spike in a commodity price due to the Chilean earthquake and a Finnish dock strike, and view that kind of approach to investing as ludicrous." KMB The company maintained its guidance for 2010 yesterday. The guidance remains $4.8 to $5 dollars per share on an adjusted basis. Through 2015, Kimberly-Clark expects sales to grow on average to range between 3 to 5%, dividend increases in line with earnings growth, and earnings growth in the mid to high single digits.

3. The True Believers Gather in the Halls of Congress: Like an anthropologist, I have studied the True Believers in their natural habitat here in the SUV Capital of the World and elsewhere for almost four decades. I do not want to brag, but I may be the world's foremost authority on this particular tribe. Over the weekend, we learned from the Texas school board, the intelligentsia of the TB tribe, that Thomas Jefferson really had nothing to do with the Declaration of the Independence. No it was Rush Limbaugh with an assist from John Wayne.

LB tries to document the sayings of the TBs whenever it has the time to digress from the few billion tasks assigned to it by Headknocker each day. The reasoning and thought process of the TB tribe members are a constant source of interest to the LB. Yesterday, while watching the evening news, LB noticed a congregation of TBs captured on film in the halls of Congress making their views known to the Democrats who have not yet felt much love from the American people for their work on "health reform". One GOP congressman referred to a Democrat colleague as a "baby killer". Other TBs use the "N-word" fifteen times as John Lewis walked by them. Others hurled anti-gay slurs at Barney Frank. CBS News

While the efforts to mislead the American people about this legislation will soon begin in earnest as the mid-term elections approach, several news organizations have prepared summaries of what is actually in this legislation: CBS USATODAY Every GOP member voted against the bill and that party will do whatever it can to repeal it. NYT If the Democrats succeed in the next two years in convincing independents that this bill is in the best interest of the nation, the GOP will eventually pay a price for their united opposition and their well known desire to repeal it once they have the votes and the Presidency. Ultimately, it would not be difficult to foresee the campaign commercials in 2012 from the Democrats and in 2010 for the GOP. Three Democrat congressmen in Tennessee voted in favor of the bill, two are in the heavily Democratic districts that include Nashville and Memphis respectively. NYT

4. Added 100 of the CEF APF in the Roth at $15 (see disclaimer): I bought this CEF in the main taxable account last Friday. I have nothing to add to the prior discussion: Bought 100 CEF APF at 15.08 I would note that the discount widened some yesterday. The market price close of $14.99 (APF) was 8 cents lower than the Friday close while the net asset value increased by 3 cents to $17.43. Daily Prices - United States : Individual Investor - Morgan Stanley The discount as of yesterday's close was 13.99%.

NAV information can be found at the sponsor's web site or at the Closed-End Fund section in the WSJ Market Data Center. APF is not listed in the WSJ. The weekly Friday numbers can be found in Barrons Free Tables. Lastly, the CEF association maintains a database about this funds: CEFA This is a link to its page on APF. This site does have daily numbers but posts them later than the WSJ.

I did notice that one of my CEFs held in the Roth, JSN, has shrunk to a less than 2% discount to its NAV. This one has a cost basis of near $9, on the original shares, and those shares were bought at a significant discount to NAV around March 2009. Normally, this would be a candidate for a sell due to the narrowing of the discount on top of substantial rise due to the market. However, the dividend is high so I will hold on to it, unless it starts to sell at more than a 5% premium to NAV. JSN - Nuveen Equity Premium Opportunity Fund I would not buy a stock CEF trading this close to its NAV.

5. Bought 50 SUTR at $2.81 (Speculative Lottery Ticket Category) (SEE DISCLAIMER) It is extremely important to keep the RB occupied on matters that can not conceivably cause any harm to the Headknocker's capital base. Thus, the LT category was created to keep the RB from causing any real damage, and occasionally it has somehow in its lame brain way actually advanced the HK's capital. But we will never give it too much rope as the saying goes.

Sutor Technology Group is a Chinese steel company. Recently, I have not had much luck with these small Chinese companies. I have not lost anything yet, but the only one with a significant gain, quickly harvested, was VIMC. /Sold 100 VIMC at $3.53/ Lottery Ticket Purchase 100 of VIMC AT 1.97: EXTREMELY SPECULATIVE. Two other small buys, Action Semiconductor and Advanced Battery, are at break even. LOTTERY TICKET PURCHASES: LINKS IN ONE POST

I am not going to discuss Sutor too any significant degree. It came up in a screen searching for potential LT buys. The price to sales ratio is .3 and the price to book is .69: SUTR: Key Statistics for Sutor Technology The one analyst following the company has a .39 cent estimate for the F/Y ending in 6/2010 and .6 for the 2011 F/Y. SUTR: Analyst Estimates for Sutor Technology Group YF shows the market cap at 107 million and that analyst has estimated almost 630 million in sales for F/Y 2011. This Chinese company files reports with the SEC and this is the link to its last 10-Q which I did review: www.sec.gov _10q. The firm earned 11 cents in the Q/E 12/31/2009 versus 9 cents in the year ago quarter. The company recently sold some stock to institutional investors: www.sec.gov/ _8k. The price was $2.7 with a warrant to purchase .25 shares at 3.76 within five years. That is why I went from 100 shares to just 50 shares. LB is not going to allow the RB to spend more than $150 on this one.