Bought 100 of the Bond CEF NBD at $21.29-Roth IRA/PG/ GOP's Trickle Down Economics and the Middle Class

The Federal Reserve concluded its meeting yesterday with an announcement that it will extend Operation Twist through December using $267 billion in securities. FRB: Press Release--Federal Reserve issues FOMC statement --June 20, 2012 Operation Twist involves the selling of shorter term securities and then using the proceeds to buy longer dated ones. The purpose is to bring down long term interest rates. The Fed intends to keep its bloated balance sheet at close to $2.9 trillion.

I view the foregoing as a symbolic action, rather than one having any meaningful impact. Possibly, this operation will keep long term rates near their already rock bottom levels.

The Fed also reiterated its estimate that exceptionally low federal fund levels will last "at least through late 2014". For retirees dependent on income from their savings, that estimate is worthy of note.

It is unfortunate that politicians from both tribes mislead the American public. Lying does work in politics since a large number of Americans make no effort to challenge assertions by exercising good judgment after conducting a diligent search for reliable information. Virtually all political commercials are so vapid as to be totally devoid of meaningful information, the so called positive commercial about the candidate, or contain misleading and false assertions relating to the other candidate. 

Earlier this week, the NYT ran a story analyzing the accuracy of assertions made by Romney and Obama and found many of them to be "half truths and exaggerations". On a scale of 1 to 10, with 10 being a pathological liar and 1 being an honest truth teller, I would rate Romney at a 10 and Obama at a 5 or 7, depending on whether his assertions are made as a political candidate (7) or as the President (5). Some of the organizations that do fact checking are FactCheck.org | A Project of the Annenberg Public Policy Center and PolitiFact | Sorting out the truth in politics. The Washington Post also a Fact Checker.

Reality creation is a really serious problem in politics, since it undermines the formation and implementation of viable solutions to actual problems. Possessing a rigid ideology that prevents learning from experience compounds the problem. Being afflicted with a rigid ideology and a strong tendency toward reality creation, both of which are critical and essential to election success as GOP politicians, are not prescriptions for the creation and implementation of viable policies. 

The NRA is one of those organizations that find it nearly impossible to be accurate with their facts. PolitiFact | National Rifle Association's file Among today's self-styled "conservatives", truth telling is obviously not one of their conservative values. 

Yesterday, I referenced a study by the Census Bureau that estimated the median household net worth at $15,000 in 2010, exclusive of home equity. Updated Regional Bank Basket Table I downloaded that information into Excel and then took a snapshot of the pertinent part:

                                  

Wealth and Asset Ownership - People and Households - U.S. Census Bureau

Virtually every member of the GOP in the House voted to replace traditional Medicare with a voucher system to purchase private insurance. GOP's Plan To Bankrupt the Middle Class That plan would be applicable to those Americans who were then 55. That plan would double medical insurance premiums compared to traditional medicare, as the government shifts the rise in medical costs unto those unfortunate individuals. I observed that the plan would bankrupt most members of the middle class long before their demise. Can there be any dispute of that assertion? Those same GOP members also voted to slash taxes more for the wealthy and for corporations, based on their theory that such tax cuts would benefit the middle class as the benefits trickle down. Really, they are serious. The Bush tax cuts were in force between 2005-2010. The GOP's Movement Toward An AYN RAND Vision for America 

{Democrat attack ads will frequently distort the GOP Medicare program as an end to traditional medicare, for the obvious purpose of trying to scare those seniors who now receive medicare benefits. While that charge is true for those under 55 in 2011, it is not accurate for those over that age limit. FactCheck.org : Democrats’ ‘End Medicare’ Whopper, Again. That article references a study by the CBO, which is of course a projection, that the GOP plan would cost $6,400 more per year in 2022 when the GOP plan would start for those who were under 55. I suspect that it would end up being much higher than that estimate and that number would accelerate in the subsequent years. Even if I am wrong about the estimate being too low, particularly in subsequent years, the difference in cost would bankrupt most members of the middle class in their golden years.The Kaiser foundation came to a similar conclusion to the CBO about the differences in cost: kff.org/medicare/.pdf, see also Ryan's radical plans for Medicare - CBS News and www.cbo.gov Ryan_Letter.pdf. The GOP has nothing to fear really by supporting this kind of change since the True Believers have no idea what is in store for them}

I am still waiting for the Job Creators to start hiring in exchange for the 2003 Bush tax cuts received by them. Assigning to Bush Junior the job losses in the fist year of Obama's term, and taking away the job losses in Bush's first year which was also a recession, which I view as fair, there was a net job loss in the U.S. of 184,000 during the Bush administration, using the Department of Labor numbers. Stocks, Bonds & Politics Blog 4/24/12; Bush Tax Cuts and Jobs; Bush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ

True Believer Train of "Thought" Process: Government Bad; Regulations Bad; Tax Cuts for Rich Good.  End of Discussion. 

General Electric (own) is ex dividend today for its quarterly distribution. I am reinvesting the dividend and currently own over 500 shares. I am in profit territory based on yesterday's closing price of $20.13. I plan to stop reinvesting the dividend when the share price starts to close above $25 for at least a month.  

Spain had to pay about 200 basis points more than the last auction for bills maturing in 12 and 18 months. The 12 month bill was auctioned at 5.07%. 

1. Proctor and Gamble Warns Again: I suspect that investors will be receiving more warnings from U.S. multinational companies, to varying decrees, similar to the one given by Proctor & Gamble yesterday. I currently do not have a position in PG shares. I do own 50 shares of the Synthetic Floater GJR in the ROTH IRA, which has as its underlying security a senior PG bond maturing in 2034

{GJR currently has an unattractive yield since interest is calculated at a .7% spread to the 3 month treasury bill rate (near zero now) on a $25 par value, with no guaranteed coupon and a maximum coupon of 7.5%. Prospectus I am close to playing with the house's money on those 50 shares, currently owned, after trading some lots including one purchase at $11. And, I am not concerned about the credit risk} 

P&G released yesterday its preliminary financial outlook for the 2013 fiscal year. For the current quarter, PG estimates that E.P.S. will be $.75 to .$79, excluding some items, compared to the current consensus forecast of $.84. For the F/Y starting 7/1, PG expects organic sales growth between 2% to 4%, with core E.P.S. rising in the mid-single digits compared to F/Y 2012. The company blamed slowing growth in China and developed markets, as well as the strength in the USD. This is the second warning from PG since April. 

I have PG shares on my monitor list for a potential add at below $57. PG I may lower that entry price based on yesterday's announcement. I have already sold shares bought at $47.49 and $52.85 in 2009. Those shares were flipped after a brief holding period:

2009 PG 130 Shares +907.12

My last transaction in PG shares was to sell 50 shares in 2010:

2010 50 Shares +$160.05

SOLD 50 PG at $63.33 

Those short holdings periods reflect a lack of confidence. I still own shares in Unilever bought at $18 (March 2009). The last discussion of UL is in Item # 4 UL (5/1/12 Post)

This latest P & G warning is discussed in articles at Bloomberg, the WSJ.com, and Reuters.

Procter & Gamble fell $1.82 in trading yesterday to close at $60.39. 

2. Bought 100 of the Bond CEF NBD at $21.29-Roth IRA (see Disclaimer): NBD is the symbol for the closed end fund Nuveen Build America Bond Opportunity Fund (NBD). I recently bought back a similar fund, NBB, in the Roth IRA solely for its income generation.  Bought 50 NBB at $20.73-ROTH IRA (6/8/2012 Post) Both funds are sponsored by Nuveen, pay monthly dividends, use leverage, and own taxable municipal bonds issued under the Build America Bond program which has now expired.  For these bond funds, I would be content to harvest the monthly dividend for a year or so and then to sell the position at any profit. 

Sponsor's webpage: NBB - Nuveen Build America Bond Fund

NBD has a slightly lower yield than NBB, but a higher overall credit quality. NBD was selling yesterday at a greater discount to its net asset value than NBB. 

NBD's closing net asset value was $22.96 on 6/19/12. Based on a closing price that day of $21.36, the discount to net asset value per share was -6.97%. The discount widened in trading yesterday to -7.85%, as the net asset value increased to $23.06 with the share price falling 11 cents. 

NBD is currently paying a monthly dividend of $.1065. Assuming a continuation of that rate, which in way is assured, the dividend yield at a total cost of $21.29 would be approximately 6%. In the ROTH IRA, of course, that taxable dividend would become a tax free one.  

The fund reduced its monthly dividend from $.126 in March 2012. I would prefer a reduction in the dividend to a dividend supported by a return of capital. 

My retirement accounts are managed for income generation with a tilt toward capital preservation. So if the OG becomes nervous, the cash allocation will be raised, and the the retirement accounts have over $20,000 and $5,000 in a money market now earning nothing. The larger amount is in the ROTH IRA, where capital preservation is given even greater weight than the regular IRA. I do not anticipate ever needing the funds in the retirement accounts. In the event that I do, the money better be there, rather than in money heaven. 

This is a snapshot of the credit quality breakdown of NBD's holdings as of 5/31/12:

                               

NBB Holdings Detail 

This a comparison of the credit quality for both funds as of 5/31/12:

AAA: 9.6% NBD/8.7% NBB

AA: 65.8% NBD/47.6% NBB

A: 17.8% NBD/37.4% NBB

BBB: 4.1% NBD/5% NBB

NBD has a higher concentration than NBB in AAA and AA rated securities. NBB picks up some yield by having over twice the weight of NBD in "A" rated bonds. 

This is a snapshot of NBD's maturity breakdown as of 5/31/12, and the long maturity dates could prove to be problematic in light of the potential 2020 liquidation date for the fund:

Like NBB, NBC will liquidate in 2020, provided there are no new BABs issued. Most likely, there will be none:

Contingent Term Summary

While the 2020 term date for the fund gives it a feature of an individual bond, the payment of principal at a certain date, a liquidation date for a long bond fund could pose a risk if interest rates are rising later this decade in a troublesome manner, and this fund did not transition to shorter term instruments before that happens. One way for an investor to deal with that potential problem would be simply to sell the shares if and when that scenario starts to unfold. I doubt that I will own either NBB or NBD for more than two years. I would anticipate that the Fed's Jihad Against the Saving Class will last at least that much longer. 

NBD page at the Closed-End Fund Association

NBD page at Morningstar (unrated)

Nuveen Build America Bond Opportunity Fund (NBD) fell 11 cents in trading yesterday to close at $21.25. The net asset value, as noted above, rose 10 cents or about .44%. The ETF SPDR Nuveen Barclays Capital Build America Bonds rose 13 cents or .22% to close at $60.31. Another BABs ETF, BAB, also rose in yesterday's trading, rising 7 cents or .24%, to close at $29.73. The foregoing describes one of the frustrations that CEF owners frequently have to endure. 

Updated Regional Bank Basket Table/Partial Redemption SCEDN/REM ETF/FCBC/Household Net Worth Decline 2005-2010

The Census Bureau released yesterday estimates of U.S. household net worth in 2010. Newsroom: Income & Wealth: New Census Bureau Estimates from 2005 to 2010 Show Changes in Household Net Worth U.S. household net worth declined by 35% between 2005 and 2010. The median value of stock portfolios fell 33%, and home equity declined 28%.

Householders between 35 and 44 had the largest decline of any age group, with their net worth declining 59 percent. Excluding equity in a home, the average net worth in 2010 was $15,000 with the total including equity in the home at $66,740. The data can be downloaded at Wealth and Asset Ownership - People and Households - U.S. Census Bureau

I received an email from Fidelity confirming that the 2023 U.S. West Communications senior bond will be redeemed by the issuer:

I also own 1 of these bonds in the ROTH IRA. As noted in Monday's post, I anticipate that this bond will be redeemed at 100.34 plus accrued interest. Qwest Proposes to Redeem 2023 Senior Bond I believe that the bond will be redeemed on 7/20/12.

First Community Bancshares (own) was upgraded by Keefe Bruyette & Woods to outperform and the price target to $16. Keefe raised its E.P.S. forecast for 2012 and 2013 to $1.25 and $1.4, respectively. The upgrade was apparently based on FCBC's FDIC assisted acquisition of Waccamaw Bank which was headquartered in Whiteville, North Carolina. This acquisition is discussed in a SEC Filed Press Release. I counted 16 Waccamaw branches, with 12 in NC and 4 in SC:

I own just 50 shares. Item # 3 Bought 50 FCBC at $12.5 First Community (FCBC) rose 40 cents or 3.12% to close at $13.24 yesterday. Regional Bank Basket Strategy

iShares FTSE NAREIT Mortgage PLUS Capped Index Fund (REM) was ex dividend for its $.44075 per share distribution. REM is one of highest yielding stock ETFs, possibly the highest yielding one. I own two hundred shares, with 100 of those in the ROTH IRA. This fund owns mortgage REITs. Annaly Capital was weighted at 22.35% and American Capital Agency at 17.68%, as of 6/18/12. iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM): Holdings I own this ETF as an alternative to buying individual mortgage REITs, though I do own 50 shares of Annaly and 100 shares of MFA Financial in the Roth IRA. Adjusted for the dividend, REM rose 8 cents yesterday to close at $14.

I did not have any purchases yesterday. I am baffled that the market apparently believes the Fed can pull another rabbit out of its hat.  The VIX has fallen below 20 again, closing yesterday at 18.39. It hit 17.54 in the early afternoon and rose into the close however. There were 24 consecutive closes above 20 and three of those were over 25. ^VIX Historical Prices The whipsaw action in the VIX between 20 to 30, with temporary spurts over 30 and below 20, is a defining characteristic of an Unstable Vix Pattern, Phase 1: Mark Hulbert and the Use of the VIX as a Timing Model The VIX has been in an Unstable Vix Pattern since the Trigger Event in August 2007. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern; Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2; VIX and S & P Compared 1990 to 1997

1. Partial Redemption of SCEDN: I lost 9 out of 50 shares last Monday to a partial redemption of SCEDN. SCEDN is an equity preferred floating rate stock issued by Southern California Edison. I bought 50 shares back in 2009. Item # 4 BOUGHT 50 SCEDN AT $84 Par value for this security is $100. SCEDN pays qualified dividend at a 1.45% spread over the highest of the 3 month LIBOR, the ten year U.S. treasury or the 30 year treasury. Prospectus Supplement Dividends are paid quarterly. I still own 41 shares.

I realized a long term capital gain on the 9 shares:

2012 SCEDN 9 Shares Partial Redemption by Issuer +$142.56

I see no reason to sell this security.  I may develop a reason when and if Congress raises the long term capital gain rate and/or eliminates the 15% cap on qualified dividends:

SCEDN 41 Shares Unrealized Gain as of 6/19/12=$628.94

Advantages and Disadvantages of Equity Preferred Floating Rate Securities Snapshots of trades in this category are at the end of that post. This last transaction brings me to $8,611.51 in realized gains. Although these securities are technically part of equity capital and pay qualified dividends, I lump them into my bond allocation since their bond characteristics are more dominant. Common stock is also equity but represents an ownership interest in the business. An owner of an equity preferred stock has no such ownership interest, except in the relatively rare instance where the security can be converted into common stock. In most equity preferred stocks, the owner has only the right to a dividend with a priority in the capital structure lower than any bond.

Southern California Edison Co Series A PFD closed at $99.5 yesterday.

2. Updated Regional Bank Basket Table (Regional Bank Basket Strategy): After some recent sells, this basket now consists of 28 stocks. I am not tracking reinvested dividends in this table.

I have noticed that this basket will frequently rise or fall more than the major market averages, both up and down. Yesterday, the portfolio increased $757.54 or 1.88%. The DJIA rose .75%.

The dividend yield is calculated by Yahoo Finance at yesterday's closing price. The yield shown for FFBC is way off.  As previously noted, this bank recently raised its core quarterly dividend to 15 cents per share and is also paying a variable dividend representing the difference between its net income per share and that core rate. The most combined dividend was $.29 cents per share. First Financial Bancorp While the variable rate will change, and may not last, the dividend yield at a 29 cents per share quarterly rate would be 7.3% at a total cost of $15.88, yesterday's closing price, compared to the 3.8% shown in this table. I am reinvesting the FFBC dividend. Bought 50 FFBC @ 16.85; ADDED 50 FFBC at $14.87.

Regional Bank Basket Strategy Table as of 6/19/12 (excluding reinvested dividends)

Bought 1 Telecom Italia Capital 6.375% Senior Bond Maturing 11/15/33 at 80/Sold 100 PSEC at $11.36/Sold 52+ GABC at $19.62

Spain's ten year bond is now yielding over 7%. After the Greek election on Sunday, this bond fell in price yesterday and rose in yield. ES 10Y Govt Bond Benchmark Bill Gross argues that Spain's debt is not "safe".  Spain's central bank reported yesterday that bank deposits declined 2.5% in April, compared to March, and bad loans as a percentage of total loans rose to 8.72%, the highest level in 18 years.

The latest commentary from Bill Gross can be found at Investment Outlook.

1. Sold 100 PSEC at $11.36 Last Friday-Regular IRA (See Disclaimer): PSEC is the symbol for the high yielding stock of the BDC Prospect Capital Corp..

When held in a retirement account, my objective for any BDC is harvest one or more dividends and to sell at any profit. 

2012 Regular IRA 100 PSEC +$39.6

I held 50 of those 100 shares for slightly over a year, collecting 12 months dividends paid by this high yielding security.

I consider this investment to be a success due to harvesting a 11%+ dividend yield without suffering a loss on the shares.  

I am also de-risking in the retirement accounts. I recently sold 100 shares of PSEC in the ROTH and bought in their place 50 shares of a Prospect Capital senior exchange traded bond. Bought 50 PRY at $23.58 (6/5/12 Post); Sold 100 PSEC at $10.83-Roth IRA (6/1/12 Post) S & P currently has a BBB rating on Prospect's senior unsecured debt with a negative outlook. 

In that kind of de-risking, I am willing to accept less income for a higher priority security, swapping common stock shares sold at a profit for shares of a senior bond. Dividend on common stock can be reduced or eliminated, whereas a senior bond's interest payments can not be reduced, deferred or eliminated short of bankruptcy.

Prospect Capital closed at $11.36 yesterday. I still own 219+ in a taxable account, where I am reinvesting the dividend.

2. Sold 52+ GABC at $19.62 Last Friday (Regional Bank Basket Strategy)(see Disclaimer): This transaction was primarily motivated by profit taking. GABC is also one of my lowest yielding regional bank stocks. Based on the current quarterly dividend of 14 cents per share, the dividend yield at a total cost of $19.62 would be approximately 2.85%. Sixteen of the stocks in the regional bank basket have dividend yields over 4% at their respective current prices, and none were lower than 3% other than GABC.

Most of the gain realized on this small GABC position was a long term capital gain.  

2012 GABC 52+ Shares +$111.71 ($109.06 LT)

These shares were bought at $17.05. Bought 50 GABC at 17.05 I would certainly consider buying the shares back at that price. For the 2012 first quarter, this bank reported earnings of 44 cents per share, up from 37 cents in the year ago quarter. Item # 2 GABC As of 3/31/12, the efficiency ratio was good at 57.79%, and the non-performing loans were less than 2% of total loans.

German American Bancorp fell 46 cents to close at $19.07 yesterday.

3. Bought 1 Telecom Italia Capital 6.375% Senior Bond Maturing 2033 at 80 Yesterday (see Disclaimer): I would view this bond to be at best a borderline investment grade.  According to FINRA, this bond is currently rated at Baa2 by Moody's and BBB by S & P.

This is a partial replacement for the 200 shares of GFW, an exchange traded senior bond, that is being called by the issuer. Redemption of GFW GFW matures in 2033 and is currently rated Baa2 by Moody's.

Telecom Italia Profile Page at Reuters

TI is the largest provider of telecommunication services in Italy, and has significant operations in Latin America (Brazil, Argentina and Paraquay). I would be concerned about the Argentina operations given the government's move toward a Hugo Chavez approach to private business interests.

This bond was first sold in a private offering. A Prospectus was later filed with the SEC,  Amendment No. 1 to Form F-4. Telecom Italia Capital is a wholly owned subsidiary of Telecom Italia, which guarantees the notes as provided for in the prospectus. Interest is payable semi-annually on May 15th and November 15th of each year.

The bond has a make whole provision in the event TI redeems it before maturity, which is inapplicable to a Tax Redemption.  In the following snapshot, the 2033 note is referred to as the Series C Note:

Prices Optional Redemption

I have previously flipped another Telecom Italia Capital bond. Bought 1 Telecom Italia Capital 5.25% Senior Bond Maturing 11.15.2013 at 96.429 (12/22/11 Post)- Sold 1 Telecom Italia Capital 5.25% Senior Bond at 101.328 Maturing 11/15/2013 (2/22/12 Post)

The common stock of Telecom Italia is traded in the U.S. under the symbol TI.

A transcript of the 2012 first quarter earnings call is available at Seeking Alpha.

SEC Filed Press Release Announcing 2012 First Quarter Results: Telecom Italia - 6k For the 1st quarter, TE reported net income of €720M on revenues of €7.392B.

2011 Annual Report Filed with the SEC: Form 20-F

The current yield on this bond is 7.97% at a 80 total cost. Using the Morningstar Bond Calculator, I came up with a YTM of 8.48%. I have not yet looked at my confirmation.

To pick up more than a 8% YTM on a Telecom Italia Capital (TIC) bond, I had to go out at least twenty years in maturity. Some of the other available TIC bonds with current (6/18/12) YTM's over 8% are:

2034 6% Coupon
2036 7.2% Coupon
2038 7.721% Coupon

The 2033 maturity gave me almost the YTM of the 2038 bond with close to a five year shorter maturity. 

Redemption of GFW/Redemption of PJR/Added 50 GOV at $21.22/Qwest Proposes to Redeem 2023 Senior Bond

The Swiss Central Bank stated that Credit Suisse needs "to significantly expand its loss-absorbing capital during the current year", adding that the bank consider suspending its dividend or selling more common shares. {snb.ch.pdf at page 5; NYT}

Tax evasion in Greece is notoriously rampant. It is after all easier to spend borrowed money. A few months ago, Greece came up with the idea of collecting property taxes as part of the electricity bill. If there was no payment, then power would be cut off until the bill was paid. So what happened? An estimated 500,000 Greek households refused to pay their bills, power was not cut off, and the state run power company is about to default on a $657.2 million loan payment to the banks. CNBC

Based on the elections results yesterday, the Greeks have apparently decided not to renege on the bailout agreement this month.

The New York Fed's June manufacturing index for NY fell 15 points to 2.3. The new orders component declined 6 points to 2.2. Empire State Manufacturing Survey (overview)

After Nokia's latest earnings warning and another round of job cuts, Moody's downgraded Nokia's debt into junk territory. WSJ The debt was cut by Moody's to Ba1 from Baa3. Both S & P and Fitch downgraded the debt to junk back in April. I do not own any Nokia bonds, but I am monitoring the price of  NOK's 5.375% senior bond maturing in 2019. FINRA I have so far refrained from buying that bond for a number of reasons: (1) I have not seen any ask quotes that allow for a one bond purchase and I do not want to assume the risk of buying two; (2) Nokia's cash burn rate is troubling; and (3) I have not seen any evidence that its turnaround strategy is working.

As noted in this WSJ, some analysts assign a zero value to Nokia's phone business and attempt to value the company solely on its cash position and intellectual property.

So far, I have limited myself to the purchase of 50 shares of Nokia's common shares, bought as a Lottery Ticket. Bought 50 NOK at $2.88-LT Category That purchase is somewhat analogous to playing a hand of blackjack for $100, which LB will do whenever the Old Geezer starts to doze off at the table.

In this post, I will discuss two bonds that are about to be redeemed by the issuer and another that was called last week by the owner of the call warrant. Given the longevity of the Fed's Jihad Against the Saving Class, it is not surprising that I am losing a large number of bonds to calls.

1. Anticipated Redemption of 2023 U.S. West Communications Bond by Qwest: Qwest, a subsidiary of CenturyLink (CTL), filed a preliminary prospectus last week to sell senior bonds. Prel. Prospectus Supplement The proceeds will be used to redeem all of the outstanding Qwest 7.5% senior bonds maturing in 2023:

Use of Proceeds

The redemption price would be 100.34% of the principal amount plus accrued interest to the redemption date. As noted in the preceding snapshot, $484 million in principal amount is outstanding and the company plans to redeem the  entire amount.

I believe that Qwest is referring to the U.S. West Communications 7.5% senior bond maturing in 2023. I own two of those bonds. The amount outstanding is $484 million, FINRA, which matches the number in the preceding snapshot. Bought 1 U.S. West Communications 7.5% Senior Bond Maturing 6/15/2023 at 100; Bought 1 U S West Communications 7.5% Senior 2023 Bond at 100.13 -ROTH IRA. So I will just about break-even on the bond and will receive several months of interests at the 7.5% coupon rate. Interest is payable on June 15th and December 15th.

I received last Friday the semi-annual interest payments on those two bonds, held in two separate accounts. The one held in the ROTH IRA was purchased with a $2 brokerage commission, while the other had a $8 commission built into the price.

2. Averaged Down by Adding 50 of the REIT GOV at $21.22 Last Thursday (see Disclaimer): I recently bought 50 shares of this REIT, and have nothing to add to that discussion: Bought 50 GOV at $22.9-ROTH IRA

Government Properties Income Trust (GOV) closed at $21.58 last Friday, rising 33 cents in trading for that day.

The current quarterly dividend is 42 cents per share. At that rate, the dividend yield would be about 7.92% at a total cost of $21.22.

3. Proposed Redemption of GFW: I currently own 200 shares of the exchange traded senior bond GFW. That bond was issued by AAG Holding, an indirect subsidiary of American Financial Group (AFG). GFW has a 7.5% coupon and matures in November 2033. According to AFG's Form 10-Q at page 25, there was 112 million outstanding of that bond, as of 3/31/12.

I noticed early last Friday that AFG had a filed a Final Prospectus Supplement to sell $200 million in a 6.375% senior bond maturing in 2042. AFG stated in that prospectus that it will use the proceeds to redeem 112 million of the 7.5% senior bond. I believe that this new bond will be listed on the stock exchange. I have no interest in buying it given its coupon and long maturity.

Late last Friday, I received an email notice that GFW would be redeemed in full. The notice from Vanguard had July 13th as the redemption date.

This is typical for what is happening now. Corporations are able to extend the maturity of  their debt at lower rates. In this case, AFG replaces a 7.5% bond maturing in 2033 with one maturing in 2042 with a 1.125% lower coupon.

I have bought and sold this bond: Bought 50 GFW at 22.76; Bought 50 GFW at 22.63; Sold 50 GFW at 25.13; Bought 50 GFW @25.04; Bought 50 GFW at $24.82; Added 50 GFW at 24.9; Sold 50 of 200 GFW at $25.48; Added 50 GFW at $25.02.

The sole purpose for the recent adds, bought near bought par value, was for the income generation. Overall I will net a small profit on my remaining 200 shares, entirely from a 50 share purchase made in the ROTH IRA back in February 2010, where my total cost basis was at $22.79.  The remaining 150 will be redeemed a close to break-even:

100 GFW ROTH IRA

100 GFW Regular IRA

GFW just went ex interest for its quarterly distribution. Par value is $25.

4. Redemption of PJR: I received last Friday the redemption proceeds and the final interest payment for the TC PJR, which was redeemed at par by the owner of the call warrants.

I netted a $406 long term capital gain on this 50 share position:

2012 Taxable PJR 50 Shares +$406 LT

This brings my total realized gains from trading trust certificates to almost $24,500. (see snapshots at Trust Certificates: New Gateway Post.

This sector of the exchange traded bond market is just about played out. It has been usually successful for me. I have realized almost no losses from these securities. When I first started to buy them in 2008, I was typically able to secure a 3% to 5% yield advantage compared to the yields of the  underlying securities. TCs were clearly being mispriced by the market back in 2008 into the first half or so of 2009. This allowed me to eventually capture unusually a number of large percentage gains with small positions, while harvesting interest payments. Those days are long gone, but it was like shooting fish in a barrel for a year or so.   

Added 50 of the ETF SDIV at $20.43-Roth IRA/Sold 52 FNLC at $15.55/Regional Bank Basket Table

I noticed yesterday that the stock symbol for Santander had changed from STD to SAN. I own the floating rate equity preferred issued by Santander Finance, whose symbol changed to SANPRB from STDPRB. 

The Trust Certificate, Merrill Lynch Depositor Inc. 6.0518% Index Plus Trust Series 2003-1 (IPB), is ex interest today for its semi-annual distribution. This TC is unusual in that the underlying securities consist of 15 corporate bonds and U.S. treasury strips. Prospectus I have owned 150 shares for over two years in the ROTH IRA. Bought 100 of the TC IPB at $16.99 August 2009; Sold 50 IPB at $20.28 February 2010; Bought 50 of the TC IPB at $21.3; Bought: 50 of the TC IPB at 23.11 in IRA. In retrospect, it was a mistake to sell 50 at $20.28. I have no interest in this security at its current price.

Consumer Price Inflation fell .3% in May on a seasonally adjusted basis. Consumer Price Index Summary Over the past 12 months, CPI has increased 1.7% before seasonal adjustment. Core CPI rose .2%. Gasoline prices fell 6.8% in May which led to a decline in the energy index.

Moody's cut the bond rating of R.R. Donnelley to Ba2 from Ba1 and kept the outlook at negative. I own 2 RRD bonds. Bought Back R.R. Donnelley 8.875% Senior Bond Maturing in 2021 at $96.95; Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89

1. Averaged Down By Adding 50 SDIV at $20.43 Last Wednesday-ROTH IRA (see Disclaimer): SDIV is the symbol for the recently launched Global X SuperDividend ETF. I bought 50 shares at $22.33 last February. This ETF pays variable monthly dividends.  Distributions So far, I received $27.13 in dividends from the 50 shares purchased in February. By splitting the order into small lots, I was able to lower my average cost per share, compared to buying 100 shares at the $22.33 price.  

This fund has an eclectic selection of high yielding stocks. The management fee is .58%.

Global X SuperDividend ETF (SDIV) closed at $20.61 yesterday, up 23 cents for the day.

2. Sold 52+ FNLC at $15.55 Yesterday (Regional Bank Basket Strategy)(see Disclaimer): I have not been favorably impressed with this small bank's earnings reports, as noted in several prior posts. {Item # 4 FNLC-April 2012 Post; Item # 2 FNLC January 2012 Post; Item # 6 FNLC October 2011 Post}

I did like its quarterly dividend of $.195 per share.

I decided to harvest the unrealized gain of $123.88, given the lackluster earnings reports. I bought those shares at $12.79 (9/2011), so the total return was good. The dividend yield at a total cost of $12.79 is approximately 6%.

2012 FNLC 52 Shares +$123.88

The fractional shares (.72) will be liquidated by the broker at 15.55 on the settlement date.

First Bancorp closed at $15.9 in trading yesterday.

3. Regional Bank Basket Table (Regional Bank Basket Strategy): I last posted this table in May: Regional Bank Table as of 5/8/12. I have added slightly to this basket strategy since that time. The following table does not reflect shares purchased with reinvested dividends. Over the expected life of this strategy, I would anticipate that dividends will provide close to half of the total return. To date, as shown in snapshots REGIONAL BANK BASKET STRATEGY GATEWAY POST, I have net realized gains of $9,156.51, originating from stocks purchased under this strategy since its inception in 2009. The largest realized loss was in PBIB shares.

I am currently reinvesting the dividends paid by BDGE, FBSS, FMER, FNFG, HCBK, TRST and UBCP.

The dividend yields shown in this table would be at yesterday's market price rather than at my cost.

My largest unrealized loss is in FNFG shares, almost entirely due to a boneheaded decision made by the Board and management after my purchases. First Niagara: Just Another Incompetent Bank Board of Directors; First Niagara Dividend Slash.

Bought 100 PBCT at $11.47

I have an unusually large cash allocation at the moment. I am not pleased with the near zero return on that stash. It was certainly easier to hold a large cash allocation in 2007 when money market rates were over 5% (e.g Vanguard Prime Money Market was 5.12% in June 2007 and .04% now).

My displeasure is aggravated and enhanced by a realization that no return is likely on money market mutual funds for at least another two years. Given that large cash allocation earning nothing, I feel obligated to take some measured risks to generate income. The purchase of PBCT last Tuesday is just one way among many to generate some income without taking an inordinate amount of risk. For me, the risk of holding PBCT is substantially reduced since I have zero situational risk. I can hold the stock through its up and down moves, for as long as necessary, but I would hope  to harvest a decent total return in a 1 to 3 year time period.

Sterling Bancorp Trust I 8.375% Cum. Trust Pfd. Secs (STL.PA) and AAG Holding Company Inc. 7.50% Sr. Deb. due 11/5/33 (GFW) were ex interest for their respective quarterly distribution yesterday. I own 200 shares of both. STLPRA is unusual for a TP in that it has a $10 par value. GFW is a baby bond with a $25 par value.

Ares Capital (own) was ex dividend yesterday for its quarterly distribution of 37 cents per share. Adjusted for the ex dividend, the shares rose 6 cents to close at $15.22.

The Nuveen Build America Bond Fund (NBB) was ex dividend yesterday for its monthly distribution.

Moody's downgraded Spain's debt by three notches to Baa3 from A3.

I am busy on another matter so this post will only discuss one purchase from Tuesday.

1. Bought 100 PBCT at $11.47 Last Tuesday (Regional Bank Basket Strategy)(see Disclaimer): Considering what happened to bank stocks during the Near Depression and its immediate aftermath, People's United Financial performed admirably during that period. The bank raised its dividend, as other banks slashed their distributions. While earnings fell in 2008-2010, the bank remained comfortably profitable. The bank earned $150.7 million, or 52 cents per share, in 2007. Net income fell to $137.8 million in 2008 and $101.2 million in 2009, 2010 Annual Report at page 21. 

People's currently operates 361 branches in New England. About People's United A recent Investor Presentation contains a number of easily understood charts and graphs. 

PBCT is well capitalized. As of 3/31/12, the holding company had excellent capital ratios:

For the Q/E 3/31/12, PBCT reported an E.P.S. of 17 cents per share, up from 15 cents in the year ago quarter. The company reported for this last quarter an efficiency ratio of 63..2%; an operating net interest margin of 4.01%; and a return on average tangible assets of .93 (prefer over 1). Form 10-Q at page 47 Originated non-performing loans stood at 1.67% of originated total loans. 

The current quarterly dividend is 16 cents per share. The dividend yield at that rate would be approximately 5.58% at a total cost of $11.47 per share. In today's world, that looks good to me. 

The stock has a four star rating by Morningstar. Their fair value estimate is $14, and I do not have a quarrel with that number in about a year or maybe two. I would be more than satisfied to sell the stock at $14 after harvesting several dividends. 

The current consensus estimate is for a 2012 E.P.S. of 77 cents and 90 cents in 2013. PBCT Analyst Estimates Provided PBCT can hit or exceed that 90 cent number in 2013, with no adverse warnings about 2014, a $14 per share price tag would be doable in late 2013 or early 2014. I would give this bank a slight premium valuation to its peers based on its dividend yield, good capital ratios, and a successful navigation of the Near Depression period. All of those positives indicate to me a conservatively run financial institution.  

A two year chart reveals a surge to over $14 back in January 2011, and a couple of moves up to $13.5 in 2012. Starting last April, when the stock traded near $13.50, the price slid to its current daily range of $11.40 to $11.5. Back in March 2009, the stock was trading much higher, mostly in the $16 to $18 range. The shares held up remarkably well during the Near Depression, PBCT Interactive Chart 

I have owned this stock in the past, but this is its first addition to the regional bank basket strategy. I decided to pull the trigger after its recent 15% or so slide in price. 

In today's world, a 8% total annualized return would probably prove to be exceptional over the next few years, probably over the next decade. A stock like PBCT can give me about 5.58% from the dividend, provided it is maintained at its current level. Another 2.5% annually could be achieved with relatively small stock increases. A sell at $14 after the brokerage commission would generate about 22%. If that return on the shares could be captured at anytime between 2013-2015, I would categorize this investment as successful. 

Between 1/1/98 through 12/31/11, the annualized return for the S & P 500 with dividends reinvested, and adjusted for inflation which was very modest during that period, was 1.21%. Annualized Returns of the S&P 500

People's United Financial closed at $11.5 yesterday, up 2 cents per share. 

Exchange Traded Bond & Preferred Stock Table/Fed Discouraging Survey of Family Finances/TINY & SZYM/Added to PRPFX

I discussed yesterday the paring of the bond CEF GDO, partly due its exposure to European bonds. A research paper released by the San Francisco Federal Reserve shows how U.S. corporate bonds have reacted to shocks emanating from Europe between 2009-2011. FRBSF Economic Letter: Are U.S. Corporate Bonds Exposed to Europe? (2012-17, 6/4/2012) Those shocks are "readily transmitted" to the U.S. corporate bond market, but the "rate of transmission is less than one to one." Higher quality U.S. bonds are impacted less than junk rated bonds. Bonds issued by the U.S. financial sector are impacted to a much greater extent than similarly rated bonds from the non-financial sector. 

According to a recently released Federal Reserve report, the median American family had a 2010 net worth no greater than what they had in the 1990s. I have argued repeatedly that the two political tribes have done almost nothing to benefit the middle class, notwithstanding their frequently specious claims to the contrary. Sometimes, one of the tribes makes a proposal that would severely hurt the middle class, which was the case with the GOP's plan to turn Medicare into a voucher system for the purchase of private insurance while cutting taxes even more for the extremely wealthy. GOP's Plan To Bankrupt the Middle Class

It is not surprising that the middle class has lost more wealth than any other income segment, in large part due to a higher concentration of wealth in their family homes. Only 52% of families were able to save anything at all in 2010. Over the 2007-2010 period, the Fed's survey found that the median value of real family income declined 7.7%. Between 2007-2010, inflation adjusted net worth declined 38.8% at the median (pp. 16-17). This report is summarized in articles found at the NYT, Bloomberg and MarketWatch. It can be found in its entirety at federalreserve.gov.pdf.

SL Green Realty (SLG) announced that it will redeem all of its outstanding 7.875% Series D (SLGPRD) preferred stock at its $25 par value plus accrued interest through the redemption date of July 14th. I have owned both SLGPRC and SLGPRD, but no longer have a position. REIT Cumulative Preferred Stocks/Advantages & disadvantages My last transaction in this security was to sell 50 shares of SLGPRD at $25.44 (4/16/12 Post).

The trust certificate, PJR, which is about to redeemed by the owner of the call warrant, went ex interest yesterday for its semi-annual distribution of $.925 per TC. Par value is $25. I own 50 shares bought in 2009 and will realize a $400+ long term capital gain on the shares in a couple of days.

A NYT column written by Bruce Bartlett, a former member of the Reagan and Daddy Bush administrations, highlights a problem with a large segment of GOP tribe members, a total inability to accept reliable factual information which calls into question their beliefs. I can understand the frustration when Daniel Moynihan said that everyone is entitled to their own opinions but not their own facts.

Jeb Bush reportedly stated that his father and Ronald Reagan would have a "hard time" fitting into the modern day GOP. NYT

An article in the WSJ argued that the "leap" in Spain's bond yields suggests that Spain's government may need a bailout. That may turn out to be the case, or it could be just the latest hyperventilation about government bonds yields. It was not too long ago (2000 to be exact), when the U.S. had a 6.5% yield on its 10 year government debt and no serious person maintained then that the U.S. was being shut out of the bond market by having to pay that rate, which was a contention recently made by Spain's treasury minister. CNBC {Historical treasury bill, note and bond yields can be found at FRB: H.15 Release--Selected Interest Rates--Historical Data.}

There is a problem, however, in that 67% of Spain's bonds are owned domestically, NYT, and some of those large owners are themselves in need of a bailout. So, in that sense, Spain is being propped up by some of its undercapitalized financial institutions and that can not be good.

Just based on my personal observations over the past several decades, most people learn nothing from history, and are more likely to draw wrong conclusions even from recent history that they live through, rather than conclusions based on reliable factual information guided by good and unbiased judgment.

In my lifetime, just by way of example, improvident and foolish real estate loans have been the primary cause of several banking crises, requiring massive government bailouts of financial institutions. Regional Bank Basket Strategy Yet, the cycle is repeated over and over again, which at a minimum tends to prove my point about the failure to learn from history. There is something very fundamental to humans that causes identical or virtually identical mistakes to be repeated over and over again by very large numbers of them.

For home prices, one harbinger of problems to come is well understood. The rise in median home prices can not significantly exceed the growth in median family income for very long. Something has to give. Home prices increased at a 20% clip, which was the case for many regions between 2002 to 2007, as median family incomes stagnated in the low single digits. The something, which had to give, was the price. Incomes were not going to match the price increases.

1. Added $250 to PRPFX (see disclaimer): Most of my position in the Permanent Portfolio, (PFPFX), a mutual fund, was established in 2006. The unrealized gain on those originally purchased shares is currently close to $1,500. The total unrealized gain is close to $2,500, which includes unrealized profits on all shares purchased with dividends:

PRPFX Unrealized Gain +$2,423.12 as of 6/11/12

The fund has relatively static asset allocations. The allocation will include 20% in gold bullion and 5% in silver bullion. The fund has consequently benefited by the long term bull market in those precious metals and has been hurt by their more recent declines. Other allocations include approximately 10% to Swiss government bonds; 35% to U.S. bonds, mostly in treasuries with a limited amount of investment grade corporates; 15% in REITs and natural resource stocks; and 15% in "aggressive growth". I put the "aggressive growth" phrase in parenthesis since that part of the portfolio consists mostly of large cap value stocks. (see generally Item # 2 Unusual Allocation Funds)

This fund has a five star rating by Morningstar.

SEC Filed shareholder report for the period ending 1/3/12 (see pages 6-12 for holdings)

I view this fund as sort of a disaster type portfolio. During 2008, the fund lost only 8.36%: Fund returns

The worst three year return was +3.5% (1997-1999), and 2008 was its worst year. The ten year annualized return is currently calculated by MSN Money at 10.2%. I will accept a lower than average return in a big up year, like 2009, for a much better downside year like 2008. It is not the kind of fund that I would use to ride the waves of a long term secular bull market in stocks. But, it has done better than most stock funds in the long term stock bear market.

PRPFX closed yesterday with a $46.66 net asset value per share, up 29 cents or .63% for the day.

2. TINY and Solazyme (SZYM): TINY is the symbol for the BDC Harris & Harris Group, a recent purchase in my Lottery Ticket Basket Strategy. I have discussed Solazyme stock only because those shares are relevant to TINY's price. Item # 4 Bought 80 TINY at $3.3-LT Category-May 23, 2012 Post

When discussing the TINY purchase a couple of weeks ago, I noted that it owned 2,304,189  shares of Solazyme as of 3/31/12. The price of Solazyme shares closed at $9.71 the day before that post. I commented that SZYM was an "interesting company, though not yet profitable." Since that post in late May, UBS started coverage of Solazyme with a buy rating and a $16 price target. The stock has risen over the past two weeks over 20% to close at $12.06 yesterday after hitting a high at $12.59 intraday. The market cap of TINY at a $3.5 price is approximately $107 million. TINY closed at $3.52, up 14 cents per share in trading yesterday.

Solazyme is discussed in this recent article published by Seeking Alpha.

3. Exchange Traded Bond and Preferred Stock Table: The total size of this portfolio segment has declined by close to $50,000 since its high point, due to redemptions and to profit taking. With some exceptions, the value of the securities have mostly remained stable to slightly up since I last posted this table in Item # 3 Exchange Traded Bond and Equity Preferred Stock Table as of 1/10/12 (see also Exchange Traded Bond and Preferred Stock Table as of 10/19/11 and EXCHANGE TRADED BOND TABLE as of 4/18/11) I do not expect much, if any, price appreciation from these securities that currently sell near or above their par values. For trust certificates with call warrants attached to them, the mere existence of that call right will cap appreciation above par value. Call Warrants and Trust Certificates; More on the Call Warrant in TCs.

I have not listed the TC PJR as owned, since I anticipate that it will be redeemed by the owner of the call warrant on June 15th.  I still own 50 shares of SCEDN, but will lose 10 of those shares soon due to a partial call by the issuer.

With few exceptions, the trust certificates, which were lost to redemptions, were called by the owners of the call warrant rather than by the issuer.

I include equity preferred stocks in this table, because I view their bond attributes to be more dominant than their equity characteristics. An equity preferred stock does not have an ownership stake in the business, a primary reason for owning equity, but has some of the undesirable characteristics of common stock such as a low priority in the capital structure and a perpetual duration.

This table includes the following types of exchange traded bond: trust certificates, trust preferred securities, synthetic floaters and principal protected notes. I no longer own any European hybrid securities. Aegon Hybrids: Gateway Post; ING HYBRIDS: Links in one Post

Exchange Traded Bonds: New Gateway Post
Trust Preferred Securities: Links in One Post
Trust Certificates: New Gateway Post
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
REIT Cumulative Preferred Stocks/Advantages & disadvantages
Synthetic Floaters
Principal Protected Notes

The synthetic floater GJN rose almost 13% yesterday to close at $24.4. Synthetic Fixed-Income Securities Inc. Fltg. Rate STRATS Ser. 2005-2 for JPMorgan Chase Capital XVII Secs I have sold out of my position. Sold 150 of the Synthetic Floater GJN at $23.02-ROTH IRA (April 2012 Post). I did place a limit order to buy 100 shares last week below $21 which was not filled. There were some orders filled in light trading slightly above my limit price. GJN Historical Prices I did not see anything yet to account for GJN's price action yesterday which occurred on heavy volume for this security. There was also a surge in volume on June 6th.

Exchange Traded Bonds and Preferred Stocks as of 6/12/12