DUK/Mortgage REITs/SOLD 50 of the TP JWF at 25.06/Exchange Traded Bond Table

Duke Energy (own) increased its quarterly dividend by 2%. The new rate will be 25 cents per share. I am reinvesting the dividend to buy additional shares.  While DUK are part of my core electric utility strategy, I did recently pare my position to take a profit and to reduce my average cost per share using FIFO accounting. Pared 50 DUK at 18.42 (March 2011 Post). My long term average cost per share is now $15.03.  

The Supreme Court rejected efforts by local governments to regulate emissions from utilities, basically holding that the EPA had jurisdiction. Bloomberg This is an important victory for utilities that are heavy uses of coal who have been sued by several states for alleged violations of state emission laws. American Electric Power v. Connecticut, supremecourt.gov/opinions/ 10-174.pdf

Randall Forsyth wrote a worthwhile column on the advantages and disadvantages of Mortgage REITs, who borrow money short term to buy mortgage securities. The current low short term rate environment is beneficial to these companies. I own 200 shares in an ETF that owns Mortgage REITs as well as some bank stocks. iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM  (66.86% Mortgage REITs as of 3/31/2011: Fact Sheet/pdf)  It is very heavy into Annaly Capital (NLY) at around 22.6% of net assets.

I also have a small position in American Capital Agency (AGNC) in the ROTH IRA, and hope to exit that position at some point with a gain of one dollar or more after collecting a few quarterly dividend payments.  If the current quarterly dividend rate was maintained for an entire year, which is always open to question for this type of company, the dividend yield for AGNC would be around 19.4% at a total cost of $28.85, the close from yesterday.  So a one dollar gain on the shares would result in an excellent total return. Bought AGNC at 29.29 AGNC went ex dividend for its quarterly distribution of $1.4 per share on 6/21/11, which was my second dividend since purchasing a position.

After the close last night, AGNC announced a stock offering, selling 43.2 million shares for approximately 1.2 billion in proceeds. American Capital Agency  If my math is correct, that is $27.78 per share. So I would expect the stock to decline today.  The timing may have had something to do with the FED's statement released yesterday.

After digesting the Fed's statement released yesterday, which downgraded their assessment of the economy, the stock market headed south. FRB: Press Release--FOMC statement--June 22, 2011 The lower forecast is contained in a the following table: federalreserve.gov/.pdf The WSJ does a good job of comparing this last FED statement with the one released last April. The FED intends to continue its JIHAD against savers and responsible Americans for an extended period of time. The continuation of abnormally low rates is beneficial to those firms who borrow short term to buy higher yielding assets.

1. Sold 50 JWF at $25.06 on Wednesday (see Disclaimer): JWF is a trust preferred stock that has a 5.625% coupon on a $25 par value.  JWF is a typical trust preferred. Interest payments are made quarterly and JWF just went ex interest. In effect, JWF is a junior bond from Wells Fargo (WSF) which matures in 2034.  I bought those shares at a total cost of $9.55 on 3/6/2009:

50 Shares of JWF at Average Cost per share of $9.55

It is possible that WSF may redeem this security since it will have to phase out the use of TPs as Tier 1 equity capital.

Generally, a trust preferred security represents an undivided beneficial interest in junior bonds owned by a Delaware Trust. The bonds will be from one issuer. Both the TP and the underlying bond will mature at the same time and have the same basic terms.  The TP is sold  to the public to raise funds to buy the junior bond.  The trust is formed by the entity that sells the bond, usually a bank. If the TP met certain criteria (see Item # 8 Added 50 of ABWPRA), the bank could use it as Tier 1 equity capital and deduct the interest payments made in connection with the bond.  Financial reform ended this absurd practice of treating a bond as equity for banks with over 15 billion in assets as of 12/31/2009. Trust Preferred Securities & Financial Reform Trust Preferred Securities: Links in One Post Regular Preferred and Trust Preferred

I decided to harvest my 160%+ long term capital gain in JWF rather than to risk losing any part of it.  The long term capital gain will exceed 10 years of interest payments on those 50 shares. I previously harvested profits on another 50 share lot bought around the same time.

2. Exchange Traded Bond and Preferred Stock Table:  Since I last posted this table, I have suffered a number of redemptions, either by the issuer or the owner of the call warrant for trust certificates.  I have included a variety of securities in this table, including TPs, trust certificates, synthetic floaters, baby bonds, "principal protected" unsecured senior notes, and equity preferred stocks. I include equity preferred stocks since their bond characteristics are more dominate.

Among the equity preferred stocks are a few cumulative REIT preferred, where I have reduced by exposure to virtually nothing.  I still own the non-cumulative equity preferred floater issued by Met Life that was bought during the Near Depression.  I have also sold most of my European hybrids, keeping a few bought during the Dark Period. All of these securities are traded on the stock exchange and are consequently easier for small investors to buy and sell. The synthetic floaters will only be bought in retirement accounts due to tax issues.  More about these securities can be found in the following Gateway Posts, and the links provided therein.

Exchange Traded Bonds
TRUST Certificates: Links in One Post
REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Synthetic Floaters
ING HYBRIDS: Links in one Post
Aegon Hybrids: Gateway Post
Trust Preferred Securities: Links in One Post
Floaters: Links in One Post

This portion of my portfolio did increase in value yesterday. More lengthly discussions about exchange traded "principal protected" notes can be found in a variety of posts:  Principal Protected Notes (April 2010 Post); Bought 100 MDC at 9.84 (April 2010 Post); MKN Closes with a 25.56% Gain (March 2011); Bought 100 MKN at 9.85;  MOU Ends Second Annual Coupon Period With a 27.93% Gain; Bought 100 MOU at $10.12 (April 2010); Item # 2 Principal Protected Notes (May 2010); Stocks & Politics: MTY (May 2011).  

Junk Bond Ladder Table/Prospect Capital (PSEC)/IMF Report on Euro-Area/ ADDED 2 Harland Clarke 9.5% Senior Bonds Maturing on 5/15/2015

The IMF released yesterday its Concluding Statement of the IMF Mission on Euro-Area Policies.  The IMF states that a broadly sound recovery continues in the Euro-Area, "but the sovereign crisis in the periphery threatens to overwhelm this favorable outlook". The IMF emphasized that policies "to stop contagion from sovereign debt adjustment or re-profiling are at a premium". 

1. Prospect Capital (PSEC) (own): Many of the Business Development Corporations are serial issuers of new stock, and PSEC is one of the worst. Prospect Capital Corporation announced after the close on Monday that it intended to offer 10 million shares and has granted the underwriters an option for an additional 1.5 million shares. The shares were later priced at $10.15. Whenever this happens, the share price sinks.  As of 3/31/2011, PSEC reported that its net asset value per share was $10.33. (Form 10_Q Q/E 3/2011 at page 3). The net asset value per share was at $14.58 as of 12/31/2008, www.sec.gov, and $15.18 as of 3/31/2007,   www.sec.gov.     

I own 250 shares of PSEC.  I will always maintain only small positions in BDCs due to their many disadvantages.  The primary advantage is their dividend yields that are generated by the same factors that cause me to underweight this class of securities.  These factors include the following: (1) the loans made by BDCs carry high interest rates since the borrowers are unproven businesses or businesses who would have difficulty arranging financing from banks due to their creditworthiness; (2) the BDCs have to pay out 90% of their net income to shareholders which depletes their capital for growth.  When you combine those two factors, a high loan loss rate with capital depletion through dividends, the third major negative comes into play, the need to raise more capital, even if that means selling stock at below net asset value.  That decision may not be in the best interests of existing shareholders, but may be in the interests of management based on their compensation arrangements.  I have discussed these issues in many prior posts. (See, e.g., Item # 5 Bought 50 PSEC at 9.5 (July 2010 Post); Item # 5 PSEC (February 2010 Post); Item # 3  Bough 50 of the BDC ARCC at 16.17 and at $16.3) Assuming the economy continues to improve, and with the wind at their back, hopefully the managers of this BDC will start to earn their generous compensation.

The base management fee for PSEC is 2% of gross assets, including amounts borrowed. (Form 10-Q at p. 43).   There is also an incentive fee.

PSEC sold 10 million shares of common stock at $11.4 in April 2011.  In February 2011, it issued $172.5 million in principal amount senior convertible note maturing in 2016. (see page 54 of 10-Q).

Prospect Capital closed yesterday at $10.14, down 5.06% or $.54 per share. 

2. Added 2 Harland Clarke 9.5% Senior Bonds Maturing on 5/15/2015 at 91.375 Limit on Tuesday (Junk Bond Ladder Strategy) (see Disclaimer):  I now own 3 of these bonds. The first one was bought near par value so I am averaging down with this last 2 bond buy. Bought 1 Harland Clarke Senior Bond Maturing 2015 (February 2011 Post).  The bond started to slide in value after a disappointing earnings report for the first quarter that I discussed at Item # 2  Harland Clarke

This is a link to the FINRA information on this bond:  FINRA

This is a link to the bond's prospectus: www.sec.gov

Harland Clarke is an indirect wholly owned subsidiary of M and F Worldwide Corp (MFW).  

I would sum up the disadvantages to this bond as follows:

A. The firm is excessively leveraged with long term debt at $2.192 billion as of 3/31/2011. Form 10-Q for the 2011 1st quarter

B. The maturity schedules of the debt are relatively short, which raises the issue of whether or not a refinancing will be successful. 

C. There is a ton of senior secured debt owed by the company, and that facility matures in 2014 before the unsecured 2015 senior note. As of 3/31/2011, Harland had drawn $1.729 billion on that facility. The company is seeking to extend the term of that loan: www.sec.gov In the event of a bankruptcy prior to maturity of the 2015 note, I would not expect to recover much of my investment given the sheer size and priority of the senior secured debt.  

D. Harland's business is declining in terms of revenues and profits. Although Harland is expanding into other businesses, it is still primarily a printer of checks.  Fewer people are using checks, preferring to pay bills online or to have bills automatically debited from a bank account which is something that I do. I still use some checks every month, however, and my bank uses Harland as their printer.   

For all of those reasons, the 2015 bond is deservedly rated junk. 

The positives are the high current yield, the potential for a capital gain given the purchase at a discount to par value, and Harland is still operating in the black even with the excessive leverage. The company reported earnings of $23.4 million in the first quarter on 403.9 million in revenues.

My confirmation states that the current yield at my cost is 10.351% and the YTM is 12.21%.  

3. Junk Bond Ladder Table:  This is a snapshot of my junk bond ladder graph.  My yield now is up to close to 10% with an average maturity in years of 7.28. Some of the higher yield is due to a recent decline in junk bond prices.   I am keeping for now my total dollar exposure to around $50,000, give or take a couple. That number is based on my own financial position and tolerance for risk.

The general idea is to break-even on the bonds. Item # 5 More on Rationale for Junk Bond Ladder Strategy I have already realized some gains. Item # 5 Realized Gains Junk Bond Ladder Strategy Hopefully, most of the companies will survive to pay me par value at maturity which would also result in a gain since I am purchasing these bonds at discounts to par value.  This means that I expect to suffer some losses through defaults.  Since I do not know which companies will in fact default, I am using a basket strategy where I spread out my risk to a large number of issuers, and limit my exposure to any one firm to a maximum of $5000. Even if I hit that maximum, I will preferably pare the position if and when the opportunity arises to sell one or two bonds at a profit.  I am avoiding some issuers altogether based on my view of the likelihood of a default being too close to certain.    

There are Positives According to the RB/Market is Not Pricing In a Greek Default/Sold 100 FCBC at 14.44/Regional Bank Basket Table

Many of the negatives are known. Greece is of course bankrupt. A default is inevitable, unless most  Greeks have a brain transplant, and it is only a question of when. Over the weekend, I read a number of articles that indicate that many Greeks are blaming just about everyone, other than themselves, for their current predicament. The prevalence of mass delusion is startling at times.

The Europeans would like to kick the can down the road, hoping for a less painful "restructuring" in 2013, that might then have less serious repercussions on European financial institutions and less of a contagion impact on other EU sovereign debtors, particularly Spain and Italy. However, it now appears that further aid will not be forthcoming unless the Greek parliament takes some concrete steps to approve an austerity package. Reuters NYT (see Statement by Commissioner Rehn on Greece) It is my understanding that the Greek Parliament has been given two weeks from Monday to approve further austerity measures. The market is acting as if a deal will be struck to avert a default. I see no reason to have that level of confidence, nor would I be sanguine about the potential repercussions of any such default. And, given the rise of the market off the March 2009 low, I see no reason to be brave at the moment either. LB is In a Slow Mo Trading Mode While Preserving Recently Raised Cash Stash (6/7/2011 Post); Introduction to Jobs (6/6/2011 Post).

A loss of confidence in sovereign debt issued by other EU nations, beyond Portugal, Ireland and Greece, could easily have adverse effects on what appears to be a fragile economy recovery in developed countries. Until there is at least a temporary resolution of the Greece problem, I am going to remain mostly on the sidelines, doing no more than small purchases of income generating securities. Assuming the EU sovereign debt problems can successfully be kicked into 2013, there are some positives, when one focuses on the big picture, the focus of our RB,  rather than the here and now:

1. As previously mentioned, about one-third of American households have no mortgage debt. census.gov/pdf. Another large segment have been able to refinance their mortgages at historically low rates, thereby lowering their monthly payments and increasing their ability to pay down other debt or to spend some or all of the savings.  The household debt to service ratio (DSR) for the first quarter was 16.39. This ratio has gradually been declining since hitting a high of 18.85 in the 2007 third quarter. The DSR ratio is an estimate of the ratio of debt payments to disposable income. Household Debt Service and Financial Obligations Ratios This ratio has not been so low since 1994. Part of the decline is no doubt due to mortgage defaults and bankruptcies. The 30 year average is 17.2%. 

2. Energy and other commodity prices have started to come back down. The ETN for the DJ-UBS Commodity index (DJP) has fallen below its 50 day moving average and is sitting at its 200 moving average. 

3. Corporations have been able to refinance their debt, lowering their interest costs and extending the maturities. Corporations are flush with cash, as American corporations are sitting on 2 trillion dollars in cash, and generated 1.68 trillion dollars in profits in the 2010 4th quarter. And the GOP wants to cut their taxes. TIME The lower cost of debt will help to generate increased profitability in the years to come.  

4. Notwithstanding inflation problems, and attempts to cool growth, emerging markets are continuing to grow at rapid clips.  The larger emerging markets have huge and growing pools of middle class consumers, who are not over leveraged, that are capable of picking up slackening demand from over leveraged consumers in developed countries, due to their sheer numbers.  I am referring to what some are already calling the next super cycle of growth (see 152 page report at www.standardchartered.com/The_Super-cycle_Report.pdf Consumer spending in China may overtake the U.S. by 2017-2018 (p. 3).  Thirty million middle class consumers are created each year in just China, Brazil and India. TIME In short, the U.S. consumer is becoming less important by the year to a sustainable worldwide recovery.

5. Some of the current weakness in manufacturing is due to the tsunami and earthquake in Japan, and the worldwide supply chain disruptions caused the those events. Toyota recently said that it expects to return to full North American production by September 15.

UZV, the exchange traded senior bond from United States Cellular, was redeemed yesterday at its $25 par value.  I owned shares in both a taxable account and the Roth IRA. U.S. Cellular Announces Redemption of 7.5 Percent Senior Notes I did sell some of my position prior to the redemption announcement. Sold 100 UZV @ 25.67

The P.M. London gold fix on 6/20/11 was $1,544. MTY Down to the Wire

1. Sold 100+ FCBC at 14.44 (Regional Bank Stocks' basket strategy)(see Disclaimer):  First Community Bancshares' stock was a recent edition to the regional bank basket strategy. I am in a retrenchment and consolidation mode for this particular basket.  I bought those shares at $13.89 and had reinvested one dividend at $13.75 per share.

This brings my realized capital gains to $6,649.45 for this basket: Item # 3 Realized Gains Regional Banks

The unrealized appreciation in the basket continues to fluctuate in the $1000 to $2000 range, and is currently nearer the top end of that range. This is down from a range of $3000 to $4000 when the market topped out in April/May 2011.

2. Regional Bank Basket Table:  This is a snapshot of this basket as of the close on 6/20/2011.  The yield is at the closing price rather than at my cost. I am not keeping track of reinvested dividends in this table.  The cost per share does not include commissions. The realized gain number referenced above does include commission costs.  Where there has been more than one purchase, I use the average weighted cost and the last purchase date as the "trade date".  I have two problem banks in this basket, PBIB, which is probably a lost cause, and HCBK.  I am reinvesting the HCBK dividend to buy additional shares, and intend to give it more time to recover.  If I average down, it will be an odd lot purchased at below $8.  The unrealized gain in this basket has gone down a few thousand since hitting a high earlier in the year.

The general intent is to pursue this strategy for five to ten years, with my total exposure ranging between $40,000 to $50,000.  I am near the bottom of that range now after selling a number of positions.  Over time, I would expect the dividends to make up a substantial part of my total return, although capital gains will at times be a more significant contributor.  

Tenneco Packaging and Pactiv Bond-Increasing Personal Risk Ratings/BOUGHT 50 BMLPRH at 16.27/

The market had an unconvincing rally last Friday. Apple closed at below its 200 day moving average, falling $4.9 to close at $320.26. This decline by The Market Leader caused a major brouhaha among staff members, as the OG lobbied for another purchase of a double short ETF.

LB asserted that it had already planned for a downdraft in the stock averages by substantially raising cash and adding double shorts only in a manner permitted by its Vix Asset Allocation Model. (e.g.  More on VIX AND ASSET ALLOCATION-November 2008 Post). All of this has been explained over and over again to the OG, who apparently has trouble following the LB's reasoning.  LB has to have the patience of JOB in dealing with the OG.  No one appreciates the burdens that the LB has to bear in this operation, and the OG's dead weight is becoming heavier by the year, in more ways than just one. 

As previously noted in great detail, many times, the Vix Asset Allocation Model does not permit the purchase of double short stock ETFs in an Unstable Vix Pattern, except when the VIX is below 20. The VIX is now hovering over 20.  The OG thought that the decline in the Nasdaq, the overall weak-kneed rally, and the movement in Apple stock below both its simple and exponential 200 day moving averages (Seeking Alpha), were together worth at least another $1000 add to the double short hedge, notwithstanding the Nerd's Model.  LB refused to relent and nothing was done.  LB as the acting Head Trader adhered strictly to its Model, regardless of the concerns expressed by the Old Geezer, who by the way needs to an extra dose of his chill pills.  LB has everything under control, chaos does not exist.  

"Let LB do the thinking OG, maybe the OG needs to play Frank Sinatra's Greatest Hits about 100 times in a row to help settle his nerves and think about something else, like Amour or playing checkers, taking the garbage out which is a task that the OG can excel at, or anything other than making suggestions to the LB, or engaging in useless babble about investments", LB added in his voice showing the deepest concern for the OG, which it could muster at the moment.  There are many positives that the RB will discuss in tomorrow's post, who just said "go all in".

S & P reaffirmed its BB- rating of Belo's senior debt but changed the outlook to positive from from stable, citing reductions in the firm's leverage and "strong liquidity". WSJ Bought 1 Belo Senior 7.75% Senior Bond Maturing 1/1/2027 at 92.5

In an interview with Fortune magazine, Bob Rodriguez sees another financial crisis on the horizon, equal to or greater than the Near Depression, that will be attributable to the U.S. government's balance sheet, unless the U.S. starts making deep spending cuts of 350 to 500 billion a year.  His fund FPA Capital has close to 30% in cash.

The OG was watching a college baseball game over the weekend. Vanderbilt has made its first appearance in the College World Series, and the OG is a fan.  During a commercial break, flipping through channels to see if anything else was interesting, the OG accidently landed on the local PBS channel, and saw what appeared to be a 11 year old girl, Jackie Evancho, singing Nessun Dorma, Jackie Evancho sings "Nessun Dorma": Dream with Me in Concert | Great Performances | PBS, and the OG could not believe what he was hearing.  Amazing! Apparently, she was a contestant in one of those TV talent contests that have never been watched here at HQ.  I later found a clip of her singing "Time to Say Goodbye" with Sarah Brightman on that show: YouTube (see also Jackie Evancho performs "O Mio Babbino Caro" | Great Performances | PBS Video)

1. Tenneco Packaging and Pactiv (own 3 senior bonds)(Junk Bond Ladder Strategy): Tenneco Packaging was the predecessor name for Pactiv, that was acquired in 2010 by the Reynolds Group.  The Reynolds Group is a private company controlled by New Zealand's Graeme Hart that has grown through acquisitions financed by debt.  Reuters The acquisition of Pactiv by Reynolds Group caused all of the Pactiv bonds to lose their investment grade rating and have been deservedly rated in junk territory after this acquisition.  Bought 1 Tenneco Packaging Bond Maturing in 2027 Bought 1 Tenneco Packaging Senior Bond at 92.8 Maturing in 2025  Bought 1 Pactiv 6.4% Senior Bond Maturing on 1/15/2018 at 91.5

I mentioned in a prior post that Reynolds Group needed to apply its cash flow to reduce debt for several years and to abandon further leveraging its balance sheet through yet another large acquisition financed by incurring more debt. Serial acquirers, who load up their balance sheet with ever increasing amount of debt, will increase the risk of a default occurring, particularly during an economic downturn or the occurrence of other events such as customers finding an alternate supplier or a competitor gaining market share with a new product.  

Reynolds is a serial acquirer. The latest target is its announced acquisition of Graham Packaging Co (GRM) for $4.5 billion which includes assumed debt. SEC Filed Press Release GRM was itself a highly leveraged company, with $2.794 billion in long term debt as of 3/31/2011.  Form 10-Q GRM was taken public in 2010 at $10 per share. Final Prospectus Supplement  Reynolds is acquiring GRM for $25.5 per share plus assuming the debt. The private equity firm, Blackstone Group LP owns about 61.3% of GRM. 

As one would expect, the existing Tenneco Packaging/Pactiv bonds fell in price in response to this development.  It would not be surprising to see the rating agencies take some action in response to Reynolds' increase in leverage.  The current ratings are Caa1 by Moody's and B- by S & P.

In response to this latest action by Reynolds, I am raising my personal risk rating for the Tenneco Packaging bonds due in 2025 and 2027 to 8+ from 7, and my rating for the 2018 Pactiv bond to 7 from 5.  Personal Risk Ratings For Junk Bonds A higher rating indicates an increased risk of a default.

2. Bought 50 BMLPRH at 16.27 Last Friday (see Disclaimer): BMLPRH is a non-cumulative equity preferred stock originally issued by Merrill Lynch, which was of course acquired by Bank of America.  After that acquisition, all of the exchange traded floating rate preferred stocks issued by Merrill became BAC obligations and there symbols also changed, all with the first three letters "BML", as in Bank of America Merrill Lynch.  All of the "BML" floaters pay quarterly qualified dividends at the greater of a minimu or some percentage above the three month LIBOR rate on a $25 par value:

BMLPRG   Prospectus Supplement Greater of 3% or .75% above 3 month LIBOR

BMLPRH   Final Prospectus Supplement Greater of 3% or .65% above 3 month LIBOR

BMLPRJ    Final Prospectus Supplement Greater of 4% or .75% above 3 month LIBOR

BMLPRL   Term Sheet   Greater of 4% or .5% above 3 month LIBOR

Prior to the add of BMLPRH last Friday, I owned 100 shares of BMLPRJ, but I have bought and sold this volatile grouping of securities since 2009:

2011 Net Gain BML Floaters To Date +$221.77

2010 Net Gain BML Floaters +$413.64

2009 Net BML Floater +$166.28

All of the dividends paid by this grouping of equity preferred stocks have been classified as qualified dividends by my broker.    

I have discussed in several posts the considerations that would lead me to buy one compared to the others. Item # 1     Bought 50 BMLPRG at 16.04 (January 2011 Post); Item # 6 BMLPRH vs. BMLPRJ  (9/25/2009 Post); Item # 3  Bought: 50 BMLPRH at 16.2 (September 2010).  

The selection involves weighting several criteria:

1. The current yield at my purchase price

2.  At what point will a rise in LIBOR trigger the float provision

3.  What will be my yield at my constant cost number under various three month LIBOR scenarios

While BMLPRJ has a 4% minimum, the price for that security last Friday was around $19.1.  Bank of America Corp. Dep. Shs (Rep. 1/1200th interest of a share of Fltg Rate Non-Cum Pfd Series 4) , BML.PJ  At a total cost of $19.1, with the 4% rate, the current yield would be around 5.23%, which is not bad for a qualified dividend when interest rates are so low.   

BMLPRH has a 3% minimum. At a total cost of $16.27, that translates into a current yield of 4.6%.  The BMLPRH coupon would increase over the minimum when the 3 month LIBOR rate crossed 2.35%. At a 3% LIBOR rate, the coupon would be 3.65% or 5.6% at the $16.27 total cost number , higher than 5.23% current yield of BMLPRJ which would not have increased its coupon yet with the 3 month LIBOR at 3%.   

The advantage in dollar terms would be greater in favor of BMLPRH when spending an equal amount, say $1000, to purchase shares of BMLPRH at $16.27 compared to BMLPRJ at $19.1.

BMLPRH $1000 invested at $16.27=61.46 shares

BMLPRJ $1000 invested at $19.10= 52.35 shares  

At the current minimum payments, these two investments would currently produce-

BMLPRH Annual Per Share $.75 x. 61.46 shares: $46.09

BMLPRJ Annual Per Share $1 x. 52.35 shares= $52.35

When I look at it this way, the current advantage of BMLPRJ is reduced but there is still a current advantage.  

Now, assume a 4% 3 month LIBOR:

BMLPRH Coupon 4.65%= $1.16 rounded x. 61.46 shares= $71.29

BMLPRJ Coupon 4.75%= $1.19 rounded x. 52.35 shares= $62.3 

When the cross over point occurs, the equal amount spent on BMLPRH will always produce a higher dollar amount based on the greater number of shares, even though BMLPRJ has a slightly higher LIBOR float.  That small difference of .1% is not high enough to overcome the income produced by the greater number BMLPRH shares. 

Since I do not know what the future will bring, I will often hold one of the higher current yielding ones and one which would produce a greater yield at higher LIBOR rates.   

Given the volatility of this grouping of securities, I will trade in and out of them, booking profits as I collect dividends.  

The volatility is often linked to perceptions about the credit worthiness of Bank of America.  Since these securities are non-cumulative, a fear about an elimination of the dividend, rational or not, will drive these securities lower in price. A flight to safety would not include this kind of security. I would expect it to decline in the event of a default by Greece for example. The dividends have to be paid as long as BAC continues to pay a common share dividend, currently at 1 cent per quarter. Once that dividend is eliminated, then the equity preferred shareholders could have their non-cumulative dividend eliminated too. Advantages and Disadvantages of Equity Preferred Floating Rate Securities

However, it would be a major step for BAC to eliminate that 1 cent per quarter dividend.  It would signal to the market extreme stress at the bank and would raise questions about the bank's viability.  So, I would not expect that too happen.  If it did, then the equity preferred shares could be trading in the low single digits.   

I am content to trade them, avoiding an exposure of over $4,000 to this grouping at any time, and generally move toward playing with the house's money. That point is reached when the total profits plus dividends exceed my total cost for positions held. The profits on the BML series so far amounts to +$801.69. When I come closer to the magic number, I will take the time to tally up the dividends.  I suspect that at least 70% of that number will have to come from capital gains rather than dividends which have been relatively low due the non-activation of the float provision, as a result of the FED's Long JIHAD Against Savers and All Responsible Americans, just take out that whip Uncle Ben and hit us some more.  

Floaters: Links in One Post

Greece/Aegon Repays Dutch Government-Mandatory Payment Event/Apple/Sold 100 of the Canadian Bond ETF XRB:CA at 23.08 CAD

I noticed that Richard Lehmann recommended PFK, the senior exchange traded note issued by Prudential, in his most recent Forbes' column, when this bond was trading at $27. Par value is $25 with a maturity in 2018. This bond pays monthly interest based on a 2.4% spread to CPI. Pricing Supplement No. 122 dated March 31, 2006

I own PFK in both the ROTH IRA and a taxable account, with most of the purchases made in June and August of 2009. As explained in a recent post,  Is this Bond Safe?, my problem is whether I should at least pare my PFK position.  I would not buy more at its current price, which hit $28.55 last Wednesday. Prudential Financial Inc. Prudential Financial Inflation linked Retail Medium Term Nts, PFK  My shares were bought at a much lower level: Bought 100 PFK at 18.47 (June 2009 Post); Bought 90 PFK in IRA $18.94 (June 2009); Added 50 PFK at $17.83 (August 2009); Added 50 PFK in Roth at 20.88-Averaged UP (January 2010).

The CPI computation for PFK is similar to OSM and ISM, similar type bonds issued by SLM that are also traded on the stock exchange.  The difference is the spread to CPI.  The computations use the CPI Index for All Consumers without a seasonal adjustment. research.stlouisfed.org /CPIAUCNS The calculation will be based on a twelve month change in CPI, with a three month lag. (see computation for OSM at Item # 1 OSM). Due to the increase in CPI, the penny rate for PFK will be over 12 cents per share for the monthly payments in July, August and September.

Based on news reports yesterday (e.g. Reuters WSJ.com), the EU and the IMF are apparently willing to release their respective next bailout installments to Greece, notwithstanding considerable evidence that the money is being thrown into an ever widening and deeper sinkhole. It is not clear to me whether or not this will actually happen if Greece does nothing to pass an austerity package and legislation to privatize some government owned monopolies. I do not believe the market is pricing a Greek government default into current stock prices, though I am starting to see that possibility reflected in the price movement of some securities, including the common stock and preferred stock prices of Spanish banks.

STDPRB, an equity preferred floating rate stock issued by Santander Finance, fell yesterday 4.22% to close at $18.4. I have sold my position in that security down to just 50 shares this year based on concerns about Spain. The last transaction was in May 2011: Sold 50 STDPRD at 20.34 I am not adverse to buying back some of the shares sold, but I need a lower price to compensate me for what I perceive now to be an additional risk.  I am looking also for signs of stress in the common stock prices of BBVA and STD.

It is becoming increasingly clear to me that Greece will default, unless the EU and IMF decide to keep that country afloat for years by turning it into a European version of the U.S. money pits Fannie Mae and Freddie Mac. I suspect that Greece will not be able to actually comply with the conditions being requested by the EU and the IMF, so it is still unclear to me why the Germans and the Dutch will be throwing more money into that sinkhole. It is not like the Greeks are grateful, nor are they willing to live within their means, still evading their own tax obligations while asking responsible taxpayers from other countries to support them in their lifestyles. Greece-Entitlement Society Run Amok (February 2010 Post). A recent story on the rampant tax evasion can be found at The Globe and Mail.

News reports this morning indicate that Germany has retreated from its position of requiring private lenders to participate in the latest rescue plan. Bloomberg This reversal caused a rebound in European stocks this morning.


The Philadelphia FED released its manufacturing survey yesterday, showing a decline in the broadest measure of business conditions to a -7.7 in June. phil.frb.org.pdf Any number below zero indicates contraction.

Apparently, the alleged willingness of the EU and the IMF to funnel more money into Greece, coupled with some alleged better data on the jobs front, caused the market to rise yesterday morning.  The purported good news on jobs, assuming I correctly understand the reasoning of some financial reporters, is that the initial unemployment claims data was revised up 3,000 to 430,000 for the previous week, while the estimate for the week ending 6/11 was at 414,000 or 6,000 less than expected by the consensus estimate. Any number over 400,000 is considered to be consistent with a weak jobs market.

In this video interview with Shiller, he believes that there is "substantial probability" of a recession within the next year, and the U.S. is at a "tipping" point now. I am always interested in the Professor's opinions. I read his book Irrational Exuberance soon after its publication in 2000, and it had a significant impact on my investment approach.

Bob Johnson, Director of Economic Analysis at Morningstar, is confident that the U.S. consumer will lead a recovery in the second half, and he is positive that no recession is near. Johnson did not see the soft patch coming either.

The ^VIX rose 6.24% yesterday to close at 22.65.  This type of movement is inconsistent with the formation of a Stable Vix Pattern, and is consistent with a continuation of the Unstable Vix Pattern in effect since August 2007. Vix Asset Allocation Model Explained Simply The movement in the VIX did not confirm the up move in the market yesterday morning and into the close.  Volatility can be an indicator for risk, real or perceived. An increase in the S & P 500 average's volatility above 20 will generally be associated with declining stock prices, as the market compensates for real or perceived increases in risk with lower stock prices.  Multiple Confirmations of VIX Model-Canary in a Coal Mine

Apple (AAPL) moved slightly below its 200 day moving average yesterday. Barrons.com AAPL Stock Chart For a brief period yesterday, the price was well below the 200 day moving average, falling to an intraday low of $318.33 before rallying late in the day to close at $325.16. Apple's stock has been The Market Leader since stocks hit their bottom back in March 2009. I would simply view this price action to be another warning sign.  It would be a positive sign to see Apple move up sharply today.

1. AEGON (own two hybrids and common as LT): I have sold all of my Aegon (AEG) hybrids other than AEH, bought at at $4.63  and 200 shares of the floater AEB bought at $4 to $8, both during the Near Depression period.  Aegon Hybrids: Gateway Post  Buy of 50 AEB at 4.8 (February 2009) Added to AEB at 5.5 (October 2008). It was a wild ride. Both the ING and Aegon hybrids were weak yesterday, probably in response to the deteriorating sovereign debt crisis in Europe. Most of the ING hybrids declined over 3% (e.g. IND, INZ, ISG, and ISF over 4%)

I thought that I had another 100 shares of AEB, but I apparently sold that 100 in a bout of profit taking.  The OG was sent by LB to find the missing 100 shares and reported back that they were gone, sold at $19.72 several months ago. This is a current snapshot of my remaining 200 shares:

100 AEB Taxable Account Average Cost Per Share $6.92/Pays qualified dividends at the greater of 4% or .875% above 3 month LIBOR on a $25 par value

100 Roth IRA Average Total Cost per share=$6.05

At some point, when and if I become worried about AEGON, I may sell the AEH since I do not want to lose the gain, and I do not have to pay taxes on gains realized in the IRA. AEH is currently selling near its $25 par value:    AEGON N.V. 6.375% Perpetual Capital Secs., AEH 

Since I have already taken profits in AEB, and that security serves a function in my bond portfolio, I am likely to keep the remaining 200 shares. AEB is just one strange security for a U.S. investor. In reality, it is a junior bond that pays qualified dividends. The dividends are cumulative. And, by paying the greater of a minimum or a spread over 3 month LIBOR, the security can serve a dual role in both inflation and deflation scenarios. Advantages and Disadvantages of Equity Preferred Floating Rate Securities  Floaters: Links in One Post Inflation or Deflation: Bond Alternatives (December 2008 Post) One of my first posts was on AEB: LIBOR AND THE AEGON FLOATING ATE PREFERRED STOCK (October 2008). 

LB likes to pat itself on the back for the way it managed risk in the purchase and sale of Aegon hybrids. If LB does not congratulate itself, it will not receive any recognition. After all,  HK is well into playing with the house's money on this grouping of securities (AEB, AEH, AEF, AEV). And both AEB and AEH will actually pay for their cost soon enough, without regard to profits from trading the other AEG hybrids, just from their own dividends. 

I am bringing this up now primarily to discuss recent news that is relevant to the hybrid owners. 

Aegon announced on Wednesday that it has repurchased the Junior Securities issued in connection with its receipt of state aid from the Dutch Government, originating in 2008: AEGON Completes Repayment to the Dutch State As previously discussed in nauseating detail, the repurchase of Junior Securities triggers the Mandatory Payment provisions in the hybrid prospectuses and would require AEG to make four quarterly payments on the hybrids after the occurrence of that repurchase. The payment is also triggered by the payment of a distribution on that junior security. Pay Back Dutch Government=Buying Junior Security=Mandatory Payment Event/Bond Investing Process  (August 2009 Post); More on ING and AEGON Mandatory Payment Events/Alternative Payment Mechanism (August 2009);  Summary of Arguments To Stop EC from Causing Deferral of Payments on the Aegon (August 2009 Post) Aegon and the European Commission: Resolution of State Aid Issue (August 2010).   

2. SOLD  100 of the Canadian Bond ETF XRB:CA at 23.08 CAD on Wednesday (Canadian Dollar (CAD) Strategy) (see Disclaimer):  This bond ETF is traded on the Toronto exchange and owns inflation protected bonds issued by Canada and its provinces. iShares DEX Real Return Bond Index Fund, XRB Fund Quote - (TOR) The yield is, as you would expect, low:  XRB Distributions. Last year, the fund distributed about 42 Canadian cents.  I intend to re-deploy those funds into another Canadian bond ETF that I own. 

I bought the shares last October at 22.09 CAD and received one semi-annual distribution paid last December.  The profit is calculated, converting the CADs back into USDs,  according to my broker:

  

NFIB Reports Job Creation Decline Among Small Businesses/CPI/NY FED Manufacturing Survey/Bought 1 Vulcan Materials 7.5% Senior Bond Maturing 6/15/2021 at 99.874 in Regular IRA/Added 40 STLPRA at 10.14 in Regular IRA

Fortunately, the cicada invasion is just about over here at HQ.  It was not so much the shrill sound of the mating call that was causing consternation.  It was the LB's insistence that the OG leave HQ and go outside to gather up those critters in buckets for later consumption.

As previously noted, LB is always pursuing ways to cut down expenses here at HQ, and to eliminate the noise and nuisance problems created by having other staff members around. Having the OG running around outside corralling cicadas all day would accomplish both worthwhile objectives.

And, it would be in the OG's best interest to get some exercise and sun anyway, besides a little sweat never hurt anyone, as LB noted after hearing the OG mention that the temperature outside was in the 90s. LB was just thinking about the OG's best interests, recognizing that a steady diet of cicadas would help the OG lose weight and lower his cholesterol, compared to a steady diet of cheeseburgers and fries, or other assorted meat and potato dishes. 

LB explained to the OG that the cicadas were rich in protein and were vegetarians. When properly prepared, they had a nut like flavor and could be used in a number of tempting dishes such as El Chirper Tacos, Cica-Delicious Pizza, and Soft-Shelled Cicadas, LB noted referring to a cookbook previously provided to staff, prepared by researchers at the University of Maryland who no doubt also had the OG's best interests in mind, just like the LB:   cicadarecipes.PDF 

The LB does not want to brag on how it considers all of the angles, but noted that revenue could also be generated for Headknocker, by selling tickets to those who would find amusement in watching the OG chase those bugs all day. LB thought that $2 a day for one person or $5 per family, would be a fair price. The customers could come and go as they pleased, bring their lawn chairs and grills, and HK could provide all of the protein needed for nourishment free of charge. 

The LB further recommended that the OG no longer be dunked head first into a vat of phosphatidylserine, that particular therapy has had untoward consequences on the OG's brain circuity, to such a worrisome extent that the OG believes that his opinions are better than those promulgated by LB, which have of course the force of fiats. The OG has even started to argue with the LB about investments and doing his own research.

Headknocker responded that the OG was starting to make sense, for a change, based on recent developments, and possibly there may be a pearl of wisdom hidden in his babble somewhere, if you looked hard and long enough.  

The ^VIX rose 17.14% yesterday to close at 21.39.  That kind of movement is inconsistent with the formation of a Stable VIX Pattern, and is consistent with the continuation of the Unstable VIX Pattern in effect since August 2007. Item # 1 Current Status of the Vix Asset Allocation Model (6/13/11 Post).

The National Association of Independent Businesses reported on Tuesday that more small businesses were  planning to shrink their payrolls over the next three months than add new jobs over the next three months.  NFIB  Small businesses employ about 1/2 of the private payrolls. A graph of this survey made by the NFIB, which shows a persistent weakness in job creation, can be found at the NYT. The numbers in this survey remain dramatically lower than at anytime during earlier recessions since 1986, when this data series started to be collected by the NFIB. There are several news articles about this survey, including ones at the NYT and Reuters.

The government reported a .2% increase in CPI for May.  The core inflation rate accelerated to .3%.  Over the past year, inflation rose 3.6% before seasonal adjustment, while the core inflation rate increased 1.5% for the year ending in May 2011.  Consumer Price Index Summary The government also reported that real average hourly earnings (adjusted for inflation) fell 1.6% over the past year, seasonally adjusted. Real Earnings (see Table A-1. Current and real (constant 1982-1984 dollars) earnings for all employees on private nonfarm payrolls, seasonally adjusted)

Cash inflation, which excludes the hypothetical owner equivalent's rent, is up 4.2% over the past year.  cpi 

The NY FED released its manufacturing survey yesterday, and the results showed a sharp slowdown.  The index fell  20 points to -7.8%. Any number below zero indicates contraction. Empire State Manufacturing Survey  


I view it as important to examine my portfolio on a day like yesterday, when the S & P 500 average fell 1.74%.  I want to answer two questions. Did my portfolio go down more or less than the market averages? And, what assets rose in value, showing negative correlation with the major market averages.  In one account, I own mostly double short stock ETFs, and yesterday was a plus day for that account.  The main taxable account declined by -.58% compared to the -1.74% decline of the S & P, or about 1/3rd of the S & P 500 decline.

Most of the dampening of the volatility was due to a sizable increase in the cash allocation. The decline was also cushioned by the receipt of dividends and interest yesterday, see Item # 3 below.   Several asset classes increased in value, including the Canadian bond ETFs (CBO:CA; CLF:CA; XRB:CA; and ZCM:CA); several individual bonds (both junk and investment grade); all of the stock double shorts (up 3% to 4%);  several of the "principal protected" senior notes  (e.g. MOU, MBC, MKZ); a very limited number of stocks and preferred stocks, and a few of my CEFs like GGN and PSY.  Several asset classes showed positive correlation with the down movement in stock prices but did not fall as much such as the recent purchase of CEW which fell .82%.   The bond heavy Regular IRA was up $25.53, while there was a de minimis decline in the bond heavy ROTH IRA, basically a scratch day for the IRAs.   

1. Bought 1 Vulcan Material 7.5% Senior Bond Maturing on 6/15/2021 at 99.874 in Regular IRA on Tuesday (Junk Bond Ladder Strategy)(see Disclaimer): Senior unsecured debt issues from Vulcan Materials (VMC) was recently demoted by the rating agencies to junk. This 2021 bond was recently issued by VMC and my purchase was near par value. 

This is a link to the prospectus:  SEC Filed Prospectus As noted in that prospectus, Vulcan is the largest aggregate company in the U.S. with "319 aggregate facilities, located in attractive population-growth markets". (page S-1). The company is also a major producer of asphalt mix and ready-mixed concrete. 

The Near Depression has taken a toll on VMC's earnings and sales, as reflected in the chart at page S-9. The company reported net earnings of $470 million in 2006 and $451 million in 2007. (page S-23) A map of its aggregate facilities can be found at page S-27. 

The last filed Form 10-Q was for the Q/E 3/2011. Form 10-Q  Long term debt was shown at $2.427596 billion. Note 11 contains a discussion of that debt. The weighted average interest rate on the long term debt was 7.07%, see page 31, which includes information on the rating downgrades). 

The maturity schedules of the debt can be found by perusing the information provided by FINRA. 

This is the link to the FINRA information on the 2021 bond:   FINRA - Investor Information The first coupon date will be 12/15/2011. The bond pays interest semi-annually. 

The consensus estimate is for a loss of 75 cents per share this year and a loss of 15 cents in 2012.  That may prove optimistic if the U.S. is entering a non-temporary slowdown which is what the OG suspects is in fact the case. 

Due primarily to bond calls, I am sitting on an usually high amount of cash in my retirement accounts earning nothing. If there is a significant decline in the value of this bond, meaning a greater than 10% decline in value, I would consider including it in a ROTH IRA Conversion. I prefer to own bonds in the IRAs for reasons discussed in prior posts.  

2. Added 40 STLPRA at 10.14 on Tuesday (see disclaimer):  STLPRA is a Trust Preferred security, in effect a junior bond issue from Sterling Bank (STL) that is currently callable at its $10 par value.   This brings me up to 350 shares of STLPRA in the retirement accounts, with 200 shares owned in the ROTH IRA and 150 in the regular IRA.  

I recently sold 100 shares owned in a taxable account.  Sold 100 STLPRA at 10.47 I prefer to own this type of security in the retirement accounts for the usual reasons.  I am not taxed on the interest payments made into the IRAs, whereas I pay the highest marginal tax rate on interest income paid into a taxable account.  When held in the ROTH IRA, and assuming no change in current law, I view a taxable bond to be equivalent to a tax free bond, since I will not pay on tax when the interest is received, nor when the interest is distributed to me.  The OG is currently over 59 1/2 years old.  And, if there is ever a deferral of the interest, that will not have an adverse tax consequence for me when the security is held in a retirement account.   

This TP has a 8.375% coupon on a $10 par value and matures on 3/31/2032. Interest is paid quarterly. Prospectus It is a typical bank TP. While Sterling can call it now, this bank could still use the TP as Tier 1 equity capital since it had less than 15 billion in assets on the relevant date, which was 12/31/2009. Trust Preferred Securities & Financial Reform 

Sterling repaid TARP in April 2011, see page 38 Form 10 Q for the Q/E 3/2011.  That is relevant to the owner of a TP. The junior bond owned by the Delaware Trust created by the bank is senior to the government's cumulative equity preferred stock.  In order to defer payment on the bond, the bank would first have to defer paying dividends to the U.S. government. With that repayment, the stopper provision in the TP prospectus, prohibiting a deferral of interest payments, would be activated only by continued payment of common stock dividends. STL is paying common stock dividends.

Anyone investing in a TP must understand the stopper provision, which can be found at page 35 of the prospectus.  Without activation of the stopper clause, deferral of interest payment could lawfully be made for up to five years, with the deferred payments accruing interest at the coupon rate.

Sterling Bancorp Trust I  (STL.PA) closed at $10.19 yesterday and went ex interest for its quarterly distribution on 6/13/11.

Trust Preferred Securities: Links in One Post
Regular Preferred and Trust Preferred

3. Snapshot of Interest Payments into One Account on 6/15/11: This is a snapshot of the interest payments received into one account on 6/15/11. The snapshot does not include the interest payments made by the TC PJR, UZV (about to be called) and OSM which were grouped with the dividend payments though properly classified as interest: 

The three GMAC notes pay interest monthly and the amounts shown are for just 1 bond.  The Prudential senior bond is a holdover from the short term investment grade bonds bought in 2007 as part of my shift out of stocks.  Interest is paid monthly on two senior Prudential bonds.  

OSM is a CPI floater, and I am down to owning just 100 shares after hitting a high of 300.  I may have ended up with my higher cost shares on this one:

100 OSM Average Cost Per Share $15.93

Interest is paid monthly based on an obtuse calculation which I explain in several posts. Item # 1  OSM  (December 2010 Post). Prospectus: www.sec.gov  The penny rate is set to rise in the coming months, and will increase to $.118 cents per share for the September monthly distribution. 

PJR also paid me interest on the 15th, and I recently took some profits in my position.  I am now down to 150 shares, split between a taxable account and the ROTH IRA with the ROTH now having 100 shares. This TC contains a senior Unum bond, FINRA. The TC has a 7.4% coupon, while the underlying bond has a lower coupon at 6.75%, thereby making the TC more vulnerable to a call by the call warrant owner for reasons explained in prior post.  This is a snapshot of the shares currently held in the taxable account: 

PJR Average Total Cost Per Share= $16.88/7.4% Coupon on a $25 Par Value/Maturity 2028 

Stocks & Politics: Bought 50 PJR at $16.72  ADDED TO PJR at $20.70  Sold 50 PJR at 25.79 (May 2011 Post)

Prospectus: www.sec.gov

I sold one security on Wednesday which I will mention in the next post. 

Inflation In Emerging Markets/Bought 50 ELD at 53.6 and 100 CEW at $23.23

Bill Gross maintains that the U.S. is in worse shape than Greece, when you add future liabilities to the existing debt and then compare the GDP to debt ratio.  Gross wonders who will be buying treasuries after the end of QE 2: CNBC Video The reference to the U.S. being in worse shape than Greece is made in the last minute of that interview. In his recent newsletter, he argues that the FED is engaging in "financial repression" by keeping rates artificially low: PIMCO  Among his suggestions for investors is to buy non-dollar denominated emerging market bonds, plus more floaters and fewer fixed rate coupon bonds.

Another interesting interview with Gross can be found at Morningstar, where he discusses better alternatives to owning U.S government debt. One of those alternatives is Canadian government debt.  I owned 400 shares of an ETF traded on the Toronto exchange that uses a ladder strategy to buy government debt issued by Canada and its provinces. Claymore 1-5 Year Laddered Government Bond ETF, CLF Fund Quote - (TOR) Dividends are paid monthly in CADs after the 15% withholding tax applied by the Canadian government. I own those shares as part of my Canadian Dollar (CAD) Strategy.  

The inflation rate in India rose to 9.06% in May, higher than the consensus estimate of 8.7%.  The Reserve Bank of India is scheduled to announce its next decision on interest rates on Thursday.  In May, the Reserve Bank increased its lending rate to banks to 7.25% from 6.75%, and is expected by many analysts to increase that rate by .25% on Thursday.  

Inflation in China increased to 5.5% in May, a 34 month high, and that country increased bank reserve requirements again in response. This latest increase was .5%.  The reserve ratio has been raised 6 times in 2011 and now stands at 21.5% for the largest banks.  The general idea is to withdraw credit availability by requiring the banks to hold more cash in reserve.  Retail sales rose 16.9% in May 2011, with industrial production up 13.3%, compared to May 2010.  

The market reacted positively to the news that growth in China had not slowed significantly yet in response to the efforts by the government to slow the inflation rate. I am not sure, by any means, that was the correct response.  The fact that inflation is increasing at alarming rates in emerging market nations will simply bring more measures to cool growth. As some have noted, including Roubini, those measures may eventually increase the possibility of a hard landing.  MSN Money

Since there is so much discord here at HQ about increasing the stock allocation, LB decided to increase the bond exposure on Tuesday, and to spread out the bond diversification by including more emerging market sovereign debt and currency exposure.

1. Bought 100 of the ETF CEW at $23.23 (see disclaimer):  I do recall buying this ETF.  Bought 50 Currency ETF for Emerging Markets-CEW at $20.25 I later sold those shares at $22:13 due to a lack of a dividend payment that year (December 2009):

I discuss in another post some of the reasons for buying this ETF and ETFs containing emerging market bonds: Stocks & Politics: Emerging Market Currencies and Bonds as Non-Correlated Asset Classes (May 2009 Post)

Generally, this particular asset class can cool down and dampen volatility in a portfolio which is one of my goals.  While there have been periods where emerging market currencies and bonds are positively correlated with U.S. bonds and stocks, usually at a low level, any asset correlation can change over time for various reasons, sometimes dramatically.   Instability & Volatility in Asset Correlations (May 2009 Post).  An investment advisor who believes in stability of correlations is in dire need of re-education.

This is a link to the sponsor's web page: Emerging Market Currency ETF | WisdomTree Dreyfus Emerging Currency Fund (CEW). The fund will equal weight a basket of currencies, rebalanced quarterly, which now include the Brazilian Real, Mexican Peso, Chilean Peso, South African Rand, Polish Zloty, Israeli Shekel, Turkish New Lira, Chinese Yuan, South Korean Won, Taiwanese Dollar and the Indian Rupee.  I have at times bought ETFs with exposure just to the Indian Rupee or the Brazilian Real.

The expense ratio is .55%.

The Funds FactSheet describes its goal and how it attempts to achieve it. I would not hazard a guess on how well the fund captures currency movements and money market rates in those foreign currencies through forward currency contracts.

The fund did pay out an annual distribution in 2010 of $.83916, consisting of .62769 in long term capital gains and .21147 in short term capital gains:  Distributions There was no "ordinary income" dividend paid in 2010. So, I do not know what the rate will be for this year until late December.

It is possible that emerging market bonds and currencies may further diversify a portfolio in the future with a negative correlation to U.S. stocks and bonds.  This may occur, by way of example, when and if investors lose confidence in the U.S. government's ability to manage its fiscal problems accompanied by overall slow to negligible GDP growth in the U.S.  If that occurs at a time of much better growth in emerging market countries, accompanied by relatively low GDP to government and private debt ratios compared to developed countries, then there could be a decoupling in correlation, where emerging market stocks, bonds and currencies have a negative correlation to U.S.D. priced securities, both in terms of the currency and the values of the securities in constant currency terms.  In other words, an asset class that goes up in value when another declines.

2. Bought 50 of the ETF ELD at 53.6 (see disclaimer): I have bought and sold several times ETFs and CEFs containing emerging market bonds. Prior to this purchase, I owned only 100 shares of the ETF, EMLC, devoted to this asset category:

This ETF does pay monthly dividends, always viewed as important, and I bought these shares back in September 2010. Bought 100 of the ETF EMLC at 26.18 (see Van Eck Global - Emerging Markets Local Currency Bond ETF (EMLC) and  Seeking Alpha article about its 2010 debut).  The local currency bond ETFs have explicit exposure to the potential currency risks and benefits. PIMCO | Investment Basics - Emerging Market Bonds (External and Local Markets)

I decided to buy ELD, rather than to add to EMLC, due to the different weightings of these two ETFs.  EMLC has the following weightings:

South Africa: 10.06%
Brazil: 9.99%
Mexico: 9.9%
Poland: 9.9%
Turkey: 9.4%
Malaysia: 9.15%
Thailand: 7.5%
Indonesia: 7.13%

The remainder is scattered in other countries like Peru, Chile, Egypt and Columbia.  The fund has 183 securities.  I just took that information from the sponsor's Fact Sheet for the 2011 1st quarter.

ELD gives me a slightly different tilt which may work out, or not,:

Brazil: 11.35%
Mexico: 11.17%
Malaysia: 11.09%
Indonesia: 10.34%
South Africa: 7.65%
Poland: 7.52%
South Korea: 7.47%
Turkey: 7.47%
Thailand 7.32%

WisdomTree - WisdomTree Emerging Markets Local Debt Fund (ELD)(as of 6/3/11) I receive more weight in Mexico and Brazil with ELD, two places mentioned by Bill Gross as alternatives to U.S. debt in the interviews cited above.  This fund has an expense ratio of .55% and has 92 holdings (68.52% sovereign bonds).

As noted in this article at Fidelity, there has been significant improvement in the credit quality of emerging market sovereign debt over the past several years.  This article from T. Rowe Price provides seven arguments for investing in emerging local currency bonds.

Before buying ELD, I also looked at the iShares JPMorgan USD Emerging Markets Bond Fund (EMB).  I preferred the country allocation of ELD.  The Ishares product has the largest allocation to the Russian Federation, which makes me nervous, and a significant allocation to Venezuela and Kazakhstan, making the OG even more anxious.  The expense ratio is .6% and distributions are made monthly.  As of 6/3/11, ELD had no exposure to Venezuela or Kazakhstan, and a 3.73% weighting in Russia.

I have traded some CEFs in the past that own emerging market bonds, such as ESD:

ESD 2009 Trade +191.97

Several of these CEFs can be found listed under the "World Income" section at the  Closed-End Funds by Category - Markets Data Center - WSJ.com.  A listing can also be found at the CEFA - Closed-End Fund Association.

Others include two offerings from Morgan Stanley (EDD and MSD) and two from Western Asset (ESD) and (EMD).  All of those CEFs sell at a discount to NAV.   I elected to avoid ESD due to its exposure to Russia and Venezuela.   ESD Portfolio Details  The CEF EMD has the same issues for me:  EMD Porfolio Details  A lot of their emerging market bonds are denominated in U.S.Ds. (see ESD Annual Report filed with the  SEC)

I bought a couple of bonds on Tuesday that I will discuss in the next post.