PSEC/Forest City Bond Redemption/Added 70 GDV at $16.19

I would remind everyone that the Bush tax cuts expire at the end of this year. If Obama is reelected and the GOP retains control over the House of Representatives, a failure to extend those cuts is more than a mere possibility. I really do not see any common ground that could form the basis for a compromise.

The GOP will not agree to extend the tax cuts unless their wealthy donors are included, while Obama is not going to agree to another extension that includes people viewed as rich by the Democrats. If the Bush tax cuts expire, the highest marginal tax rate will apply to dividends, and the long term capital gain rate will rise from 15% to 20% with a 18% rate applied for assets held for more than five years and acquired after 12/31/2000. The highest marginal rate will increase to 39.6% from 35%. For wealthy taxpayers who are at the highest marginal tax rate, the dividend tax rate would go from 15% for qualified dividends to 39.5%. WSJ

I will certainly experience a raise in my tax bill due to the loss of the 15% maximum tax rate currently applicable to dividends and long term capital gains. I am heavily dependent on those sources of income. Dividends would instantly become less attractive to me. Equity preferred stocks, which currently pay qualified dividends, would certainly become less appealing given the loss of their favorable tax rate. Long term capital gains would still be relatively attractive from a taxation perspective, compared to other types of income other than municipal bonds.

********

The ETF Database has compiled a list of the 100 lowest cost ETFs. A number of the Vanguard ETFs are among the lowest cost ETFs. Vanguard brokerage customers do not pay commissions when buying and selling Vanguard ETFs. The two lowest cost Vanguard ETFs are the Vanguard - S&P 500 ETF at .05% and the Vanguard - Total Stock Market ETF at .06%. 

SL Green Realty announced that it will redeem 4 million out of the 11.7M of its series "C" cumulative preferred stock at its $25 par value plus $.3707 per share in accrued dividends. The redemption date will be 9/23/12. During the Near Depression, I was able to buy this security near $10. REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages; Bought SLGPRC at $10.5 March 2009; Buys of GPOR and SLGPRC at $11.89 February 2009; Sold 50 SLGPRC at $24.76 August 2010; Sold Remaining SLGPRC at 25.01 September 2010

The BDC Prospect Capital (own) announced its monthly dividends for October and November.

The BDC Ares Capital (own) sold 25.875M shares, raising net proceeds of $427.4 million.  

Bloomberg published a list of the countries with the highest cost gasoline. The most expensive was Norway, a major oil producer, with an average cost of premium gasoline at $10.12 per gallon. The U.S. was at #51.

One worrisome indicator about the economy's health is the steep decline in the velocity of money:

Velocity of M2 Money Stock (M2V) - FRED - St. Louis Fed Simply put, the velocity of money shows how fast money is moving through the economy. The FED can not control the velocity of money. It can only create and pump money into the economy. This chart shows that money is being hoarded rather than put to uses that generate economic activity such as spending and lending. Stocks, Bonds & Politics: Velocity of Money and Money Creation  (December 2011 Post).

Baltic Dry Index is not encouraging either. That index is down almost 60% year to date and is well below the levels prevailing during February 2009.

The manufacturing and inventory numbers coming out of China are also troubling. Reuters  NYT

Marc Faber believes that a worldwide recession is 100% certain. CNBC

Gross believes that there is a 80% chance of QE3. CNBC

New single family home sales increased 3.6% in July over the revised June number. census.gov.pdf The number of new homes for sale was reported at 140,000, the lowest number on record which goes back to 1963.

**************

Paul Ryan has recently tried to distance himself from Ayn Rand. National Review Online An audio of a speech given by Ryan in the annual celebration of Ayn Rand held by the "Atlas Society". An article published by TheStreet outlines why Ryan remains an Ayn Rand devotee, except on the issue of abortion. 

The latest poll by the WSJ/NBC shows that the Ryan selection has had no impact on the presidential race. Bloomberg The poll also showed the public's disdain for Congress, as 82% disapproved of its job performance.  

One of the false statements made by Romney is that Obama "robbed" 700+ billion from Medicare to help pay for Obamacare. Of course, Ryan's budget plan has the same cuts in spending. As made plain in a NYT article, Romney's promise to restore those 700B+ in spending cuts would actually increase beneficiary premiums  by $342 per year over the next decade and $577 in 2022. The reason is basic. The cuts do not encompass beneficiary benefits, as suggested by Romney. Instead, what Romney and the GOP wants to restore are additional payments to health insurers, hospitals and other health care providers. By increasing Medicare's costs, which are shared by the government and beneficiaries, Romney would be increasing the beneficiaries premiums.

This is not something new for the GOP. The Ryan budget plan, approved by the GOP house with almost no GOP dissent, would require seniors receiving vouchers to purchase private health insurance to pay about $6,000 more than those receiving traditional Medicare on 2022, according to the Congressional Budget Office. GOP's Plan To Bankrupt the Middle Class 

I keep reproducing this snapshot to drive home the foregoing point, which is even made more hideous by the same budget plan granting tax relief to the GOP's wealthy donors:

www.kff.org/medicare.pdf I would emphasize that this GOP plan would without question bankrupt the middle class after retirement. Their only alternative would be to forego health insurance. This plan was supported by 235 GOP votes in the House, and not a single Democrat voted for it. TIME.com; NYT The voucher plan would apply to those who were then 55 or under when they became eligible for Medicare in 2022.

Gawker published yesterday allegedly confidential documents from over 20 hedge funds and other investment vehicles that accounted for over $10M of Romney's 2011 investments.

**********

The CBO estimates that the U.S. government's budget deficit for the F/Y ending this September will be $1.1 trillion. This would mark the fourth year in a row of budget deficits exceeding 1 trillion dollars. CBO | An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 When Reagan first took office, the entire debt of the U.S. government, accumulated since inception, was less than 1 trillion dollars. United States public debt

Without question, we are in one big mess. It will not end well. Ultimately, the sad ending will be the fault of the voters and those who never bothered to vote, aided and abetted by both political tribes in roughly equal amounts.

*************

1. Forest City (Bond Redeemed Roth IRA Account): I lost earlier this week my Forest City 2015 senior bond to an issuer redemption:

Forest City Bond 2015 Senior Bond Redemption

I did not accomplish anything with this position other than to earn a few months in interest.  Bought 1 Forest City Enterprises 7.65% Senior Bond Maturing 6/1/2015 at 100 This bond was purchased in a Vanguard brokerage account where my commission was $2.

I still own the common as a Lottery Ticket: FCE-A: 14.81 -0.05 (-0.37%); Bought 30 FCE/A at $11.58 (re-entry as a LT)

2. Added 70 GDV at $16.19 last Wednesday (see Disclaimer): This brings me up to 300 shares of the Gabelli Dividend & Income Trust I am not reinvesting the monthly dividend which is currently 8 cents per share. This purchase was made with recently received cash flow. The last purchase of 30 shares was also made with cash flow, except that add used cash flow to fund small purchases in several CEFs during a market downturn:  Added to CEFs BTZ SWZ GDV and ERH The 30 share buy of GDV was at $14.54. I have sold the entire positions in BTZ and ERH.

I will frequently use that scatter approach during periods of market turbulence. Another example of a scatter buy occurred in November 2008: LATE DAY TRADES: GCI, CBL, FR, SLG, NYT, NWSA In that bunch, SLG, News Corp and CBL proved to be the most rewarding, though I exited all of the positions at a profit. (e.g. Stocks, Sold SLG at 47.5 (a double); Sold: 170 CBL @ 18.04 (includes 40 bought at $3.7 that day);  Sold 120 NWSA at 14.83 (includes 30 bought at $6.65).

I decided to devote the entire cash flow to just one purchase this time, primarily to bring me up to an even round lot of 300 shares.

On the day prior to my purchase, the discount to net asset value was -10.96, based on a net asset value per share of $18.24 and a closing market price of $16.24.

The fund does use leverage as shown in the fund's page at Morningstar.

GDV page at the Closed-End Fund Association

SEC Form N-Q for the period ending 3/31/12

Last SEC Filed Shareholder Report for the Gabelli Dividend & Income Trust (12/31/11)

Assuming no more or less than a 8 cent per share monthly dividend, the yield would be close to 5.92%. The next ex dividend date is 9/12/12.

I would be satisfied to exit the position with a 4% annualized average return on the shares, assuming my net annualized dividend rate would be close to 6%, giving me a 10% annualized total return.

I would characterize this fund's as using a value approach to its investments.

GDV: 16.08 -0.14 (-0.86%)

3. Prospect Capital (own common and bond): The BDC Prospect Capital reported second quarter net investment income of $64.2M or 51 cents per share, up from 31 cents in the 2011 second quarter. Net asset value per share was reported at $10.83, up $.47 from the year ago quarter. The current annualized yield of PSEC's portfolio was 13.6%. As of 6/30/12, the debt to equity ratio stood at less than 44% and less than 36% after subtraction of cash and cash equivalents. The BDC currently has no borrowings under its bank credit facilities.

Common Shares:PSEC: 11.47 -0.15 (-1.33%)
Exchange Traded Senior Bond: PRY: 24.88 +0.10 (+0.40%) 

Romney's Tax Returns/Added 100 EXG at $8.91/Sold 40 ZBRPC at $26.62/MDT, Cascades

The upcoming presidential election will be close. If Romney released his tax returns for several years, he would at a minimum increase his chances of losing. Republicans support Romney's non-disclosure knowing that it would likely cost them the election, not due to any concerns about the relevance or importance of this information. Why not release five or ten years of tax returns? Romney has released only his 2010 return after receiving serious pressure from other republican candidates during the primaries and has promised to release his 2011 return by October 15, 2012. Reuters He is not going to release returns prior to 2010, end of story. Even that one year provided fodder for his critics. 

What is by far the most dominant economic theme of the Modern Day GOP? Simply put, rich people and large corporations ("Job Creators") need more tax breaks in order to create jobs for the common folk. GOP's Trickle Down Economics and the Middle Class Those Job Creators generously give to republicans running for office and to "conservative" PACs who have never been able to make a truthful statement in a campaign advertisement. Those donations, running well into the hundreds of millions, have absolutely nothing to do with the GOP's tax policies of course.  

As shown in the Ryan budget proposals, the GOP will favor the rich with tax breaks while slashing programs for the middle class and the poor. They are generally oblivious to how such program cuts will hurt the demand for products that corporations and the wealthy need to sell in order to generate more profits. That would require some degree of foresight and deep thinking beyond immediate self-interest however.  

The most recent GOP budget plan, passed in the House with no Democrat votes, is described in this NYT article. (see also analysis at Chairman Ryan Gets 62 Percent of His Huge Budget Cuts from Programs for Lower-Income Americans) 

Needless to say, Romney is rich and earns a lot of money every year now with no job other than running for political office. His tax rate has probably been below that of a factory worker for a very long time. An article in Vanity Fair noted that his tax rate was below 15% for the total amount of income earned in 2010-11, notwithstanding $42.5 million in income. Mitt Romney Made $42 Million, Paid Less Than 14 Percent in taxes - ABC News

How does he manage to accomplish that result? How do the wealthy manage to pay less than 15%in taxes when the marginal tax rate is currently 35%? Why do we need to cut the marginal rate for them, which the GOP will do once they have the power to do so? For someone like Romney, the 15% maximum rate on dividends and long term capital gains would be important. I suspect that he has made use of the carried interest loophole that transforms   ordinary income compensation earned by a hedge fund manager into long term capital gains taxed at 15%. (see discussion of this tax loophole for the wealthy at WSJ.com which mentions Romney's use of this loophole)

As noted in the Vanity Fair article, the 2010 return released by Romney shows the use of offshore tax havens and foreign bank accounts. 

These are issues relevant to the current campaign. Romney's returns will at a minimum show how the wealthy avoid, possibly in a legal manner, paying taxes anything close to the highest marginal rate. 

As shown by the recent release of formerly secret Swiss bank accounts, a very large number of rich citizens were avoiding their tax obligations illegally by not declaring income. Remember what happened when the government gained access to formerly secret bank accounts at just one Swiss bank, UBS? There were 52,000 Americans hiding, just at that one bank, at least $14.8 billion from the tax man. IRS unlocks UBS vault hiding Americans evading taxes - USATODAY.com And, guess what? Those law abiding "Job Creators" checked the box on the IRS form that they had no foreign bank accounts. Those people did not even want to pay a 15% tax rate on dividends and long term capital gains.  

More importantly, Romney's returns may show something else other than legal tax avoidance. Romney has a retirement account that may be valued up to $102 million generated during his years at Bain between 1984 to 1999. How is that even possible when the maximum annual contribution during those years was $2,000 for an IRA and $30,000 for a Keogh. 

An article in the WSJ, written by Mark Maremont and published last March, contains one possible explanation. When Bain acquired a company, the firm would create two classes of shares called "A" and "L". The "A" shares were riskier and the Bain executives would place those shares in their retirement account. But how would they be valued? Was an unreasonably low valuation  placed on them, in order to fit within the maximum limit per share, which could not survive an independent and unbiased examination? That would be a relevant issue in this campaign, and Romney would never want to answer questions about such a matter for obvious reasons. Actual disclosure could easily raise questions that Romney pushed the envelope and then some. If a legitimate issue was raised on this kind of point, he would lose the election without question.

The foregoing discussion is connected to the GOP's trickle down economic theory. Can the GOP answer two simple questions? Did the Bush tax cuts, which primarily benefited the wealthy, create jobs and improve the balance sheets of the average middle class family? Or did they merely widen the growing wealth gap in the U.S. between the top 10%, and particularly the top 1%, and everyone else?

It can not be questioned that Bush had the worse job creation record than any modern American President going back to WWII. Bush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ That would at least call into question the GOP thesis, but they lack the ability to question any of their core beliefs with reliable evidence. It is impossible for them and always will be.

I took the Labor Department's data and modified it by Presidential term. I did not credit Bush with the job losses during his first year which seems reasonable to me.  Bush was inaugurated during a recession and the economy would be shedding jobs irrespective of the newly elected President's policies.

After debiting the job data for Bush's first year, I credited him with the jobs data occurring for one year after he left office for the same reason. The GOP of course want to credit Obama with the hideous losses that were occurring when he first became President.

I found that there was a net job loss in the U.S. of 184,000 over the eight Bush years using the Labor Department's data with the foregoing described adjustment. (introduction sections: Stocks, Bonds & Politics and Bush Tax Cuts and Jobs) Does any of the foregoing cause GOP tribe members to question "trickle down" economic theory, and the short answer is no. And, they never will.

Without that adjustment, there would be Bush would be credited with 3 million jobs over 8 years. Most of those jobs would be connected with the housing bubble rather than anything relating to tax cuts for the wealthy.

It really riles a GOP tribe member to point out that 10.5 million jobs were created during the 4 years of the much despised administration of Jimmy Carter or 23.1 million under the loathed Bill Clinton. I have done that a few times and they dismiss the data. It can not possibly be true they say. If asked, they will even assert that Carter was so bad that there had to be job losses during his four year administration, just a form of reality creation common among those tribe members to justify a preexisting belief system.

A GOP tribe member's hatred for Clinton and Obama, or any Democrat President, really has nothing to do with facts anyway. It really does not matter how many jobs were created, or how well the stock market did, or whether the nation avoided an unnecessary war. The disdain and hatred are guttural, not based on anything resembling a thoughtful analysis of reliable evidence. Obama is not really an American anyway, probably a secret Muslim,  and most definitely  a "socialist" who wants to take away our guns, or some other tag which justifies their disdain.

Another way to get them riled up is to ask how the stock market fared under Bush Junior, when the GOP controlled Congress for 6 out of the 8 years and then to compare that performance with the 8 years of Clinton and almost 4 years under Obama?

Bush 8 Years = Negative 40% on the S & P 500/S & P Starting Value on 1/20/2001 at 1,342.55 and Ending Value on 1/20/2009 at 805.22. So how did those tax cuts work their magic exactly?

The Modern Day GOP has done a magnificent job convincing middle class voters that the GOP's tax policies are somehow designed for their benefit, even though nothing could be further from the truth.

The middle class has a tax problem that originates partly from federal taxes but more importantly from taxes and fees levied by state and local governments. And that could be seen on a case-by-case basis by simply adding up all of the taxes paid to those governments and then comparing them with the total federal income paid exclusive of the social security tax. Those families are being squeezed by state income taxes, sales taxes, property taxes and assorted other fees and taxes levied by state and local government plus rising costs for health and other insurance, energy and food.

According to the 2011 tax table, a couple with a net income of $40,000 after all deductions and exemptions, would owe $5,296 in federal income tax or 13.24%, close to the same rate as Mitt Romney paid on $42 million. ‎www.irs.gov.pdf That kind of tax amount ($5,000 for 30 years) would not be sufficient to cover the future Medicare benefits provided to a husband and wife. The CBO currently estimates that the government will be paying $7,900 per person in Medicare benefits in 2022.

{If the couple had significant long term capital gains and qualified dividend, the actual tax obligation using a schedule D worksheet would be lower than that computed using the tax table provided there is income above the 15% tax level. In 2011, the 25% marginal rate applies to taxable income of $34,500-$83,600 for singles; and $69,000-$139,500 for married filing jointly}

Whatever that middle class family is paying in federal income tax, it is not likely to appreciably change irrespective of who wins this November. For most of those families, their state and local taxes will far exceed their federal tax obligation number. If voting strictly their economic self interest, they should be voting for people Scott Walker, the GOP governor from Wisconsin, for local and state offices and Obama for President. The Democrats will be doing more for them on a national level. Possibly, they need to join with Obama and ask Romney to pay more than 14% on $45 million in income. Wasn't the U.S. tax system supposed to be progressive and how did it retrogress to one where the super rich have lower tax rates than the middle class?

1. Cascades (own 1 senior 2017 bond: Junk Bond Ladder Strategy): This bond is currently rated Ba3 by Moody's and B+ by S & P. Cascades is a Canadian company whose common shares are listed on the Toronto exchange. Cascades Inc. (CAS- TOR)

Cascades produces and markets packaging and tissue products composed of recycled fibres.

Cascades reported second quarter earnings of 8 cents per share on revenues of 944 million CADs. At the end of the quarter, debt was at 1.585 billion CADs including 134 million in non-recourse debt. The press release announcing second quarter earnings is filed with the SEC as part of Form 6-K: Quarterly Report for Second Quarter Results

Bought 1 Cascades 7.75% Senior Bond Maturing on 12/15/2017 at 96.5 (September 2011).

According to FINRA, there is $500M outstanding of this 2017 bond. There is also $250M outstanding of a 7.875% coupon bond maturing in 2020. The maturities of the long term debt are shown in note 6 at page 49, Quarterly Report for Second Quarter Results. The debt includes 423 million CADs in a revolving credit facility.

2. Sold 40 ZBPRC at $26.62 Last Monday (see Disclaimer): ZBPRC has a run its course in my opinion. It is a high cost equity preferred stock that is likely to be redeemed at its $25 par value as soon as Zions can do so. ZBPRC pays 9.5% on a $25 par value. This security may be redeemed on or after 9/15/2013 at par value plus accrued dividends. Prospectus Supplement It is highly likely that Zion will redeem it at the first opportunity. I receive more dollars by selling now at $26.62 than waiting another year for a par value redemption. My gain was long term:

2012 ZBPRC 40 Shares +$40.47

Prior trades yielded good percentage returns. A chicken buy of 30 shares, bought at $18.4, netted a long term gain of $226.13 on a $560 investment plus dividends. Another small lot trade netted a total of $208.63 plus dividends.

2011 Taxable Account +208.63 ST/$226.63 LT

Earlier this year, Zions redeemed another high cost equity preferred, ZBPRE. Zions Bancorporation Announces the Redemption of 11% Series E Preferred Shares The redemption of that preferred stock occurred on 6/15/12, the first day permitted by the prospectus. Final Prospectus Supplement

ZB-PC: 26.74 +0.09 (+0.34%)

3. ADDED 100 of the Buy-Write Stock CEF EXG at $8.9091-Regular IRA (see Disclaimer): I will buy, hold and trade a few high yielding stock CEFs in retirement accounts. EXG is the only one currently owned where I am reinvesting the dividend to buy additional shares. I also own 100 shares in the ROTH IRA where I am taking the dividends in cash.

The prior 100 share purchase was over a year ago at $10.61 in Regular IRA. Since that time, I have received and reinvested $112.52 in dividends, so I have a net total loss on those shares of close to $100.

SEC Filed Shareholder Report for the period ending 4/30/12: SEC Form N-CSR

EXG Page at the Closed-End Fund Association

The fund is currently rated 4 stars by Morningstar. As shown at the Morningstar page, the dividend is supported by a return of capital.  The only way for the fund to earn the dividend is by harvesting more capital gains.  The return of capital issue is not material from a tax perspective when the security is held in a retirement account.

Eaton Vance recently declared a quarterly dividend for this fund of $.244 per share. The fund was ex dividend yesterday. This fund is owned only in retirement accounts.

On 8/20/12, the net asset value per share was $10.25. Based on a closing price of $8.91 that day, the discount to net asset value per share was -13.07%. Adjusted for the $.244 dividend, which went ex dividend on 8/22, the discount was -13.35 on 8/22 based on a net asset value of $10.04.

This is a world stock fund. Consequently, its allocation to European companies has restrained its recent performance. It has significant holdings in European financial institutions, including Santander, that have been shellacked by the market, but have share price recovery potential.

EXG: 8.67 +0.03 (+0.39%)

4. Medtronic (own): For its first fiscal quarter, Medtronic reported net income of $864M or 83 cents per diluted share on 4 billion in revenues. SEC Filed Press Release Adjusted net income was 85 cents in line with estimates. Revenues increased 5% on a constant currency basis. Free cash flow was $1.2B. The company reiterated its fiscal 2013 guidance of $3.62-$3.7 which implies E.P.S. growth of 5 to 7%.

MDT: 40.69 -0.45 (-1.11%) 

SOLD 100 ONB at $13 & Bought 100 NBN at $8.7/Earnings: MWA, Reynolds Group

The fan on my new APPLE IMAC started to run continuously, making a loud sound. The OG could not concentrate while sitting at the computer. I downloaded software that told me that the temperature inside the computer was over 100 decrees. I took the computer to the Apple Store, no small task for the OG who grew weary lugging the contraption through the mall. After waiting for about 30 minutes past my appointment time at the "genius bar", I was told that the problem was not with Apple, possibly I needed to take it back home and unplug the printer which could be causing the computer to overheat. I lugged the computer back home, and disconnected everything from it. The computer started to overheat, and would do so irrespective of the electrical outlet or cord used by me. I called Apple support, and had to pay almost $50 for online support. Free online support has expired even though the computer was still under warranty. After running the computer in safe mode, it was determined by the technician that no third party software was causing the problem, and the problem had to be Apple computer. I was told to take it back to the Apple store. I elected instead to junk the computer, rather than continue this run around. I certainly was not going to continue running a computer which could catch on fire. A large number of people were complaining about the same problem in online message boards, and there was even YouTube videos capturing the noise. Apple had to know of the problem. I believe Apple products are way overrated by consumers.

I just read an article by Nicholas Marshi published at Seeking Alpha that discusses the disadvantages of senior debt issued by Business Development Corporations. I have discussed briefly one of those disadvantages which involves the lack of covenants in the prospectus. While he is correct that a BDC's unsecured senior debt is structurally subordinate to its secured credit facilities, and any borrowings of a subsidiary, that would be the case for every issuer, including even secured notes sold to investors that rely on the same collateral as the secured bank credit facility (e.g. Sears 2018 senior secured note which is in effect a second lien bond)

The senior secured debt for a BDC will be a bank credit facility. Marshii notes that Hercules Technology (HTGC) does not appear to be using its bank credit facilities as a source of permanent financing which is one reason why he mentions HTGC's senior unsecured debt somewhat favorably compared to others. Of course Hercules may change its approach to using its bank credit facility. (see page 48 Form 10-Q for 2012 second quarter)

I am keeping my exposure to BDC debt light. It has to be remembered that BDC's are making high risk loans to private companies who would ordinarily be unable to secure bank financing sufficient for their needs. The default rates for those borrowers will be higher than most banks would accept in non-recessionary conditions and will then significantly increase to even higher levels during a recession. That makes bank lenders to BDC's nervous, as shown by some of their actions during the Near Depression.

A BDC may only incur indebtedness in such amounts that its asset coverage is at least 200% of the debt when issued. The bank which lends to the BDC can become nervous, making demands on the borrower that create liquidity issues when the BDC's coverage ratio starts to substantially decline during a recession due to high default rates and one or more covenants in the bank credit facility are violated by the BDC.

More importantly for me, the yield on this debt is borderline for the risks, even with the relatively short maturities and the abnormally low yield for alternative investments. I currently own 200 HTGZ which Marshi discusses and just 50 of PRY.  Sold 50 NPBCO at $26.17 and Bought 100 HTGZ at $24.6-ROTH IRA (May 2012); Bought 100 HTGZ at $24.63 (May 2012); Bought 50 PRY at $23.58. I am not likely to add much, if anything, to that overall dollar exposure to BDC unsecured senior debt.

Exide Technologies announced that it will become the "majority supplier" of private label batteries for Pep Boys. I own two senior secured bonds: Bought 2 Exide 8.625% Senior Secured Bonds Maturing 2/1/2018 at 81.375

Goldman Sach's U.S. equity strategist David Kostin told investors yesterday to sell stocks based on the upcoming fiscal cliff which may not be resolved by year end. He is sticking by his year end estimate for 1250 on the S & P 500 which is now trading over 1400. CNBC

Why are the republicans so upset with Todd Akin's comments? Yesterday, their delegates approved a platform statement that abortion should not be allowed under any circumstances, including a pregnancy due to rape. That platform states that an "unborn child has a fundamental individual right to life which can not be infringed", which is the essence of what Akin was trying to say without the usual republican obfuscation on the subject.

Emerson Electric is the largest contributor to Akin's campaign. Emerson's CEO, David Farr, has personally donated the maximum to Akin.

Unlike prior platforms, the GOP platform committee refused to add a statement supporting the home mortgage interest deduction. Bloomberg It is generally recognized that this entitlement would have to be slashed for the GOP to lower tax rates for their wealthy donors and large corporations.

1. Sold 100 ONB at $13 Last Friday (Regional Bank Basket Strategy)(see Disclaimer): I had a $13 one year price target for this stock, purchased at $11.85 last May. So without any further adieu, the position was sold pursuant to a GTC All or None (AON) limit order at $13:

2012 ONB 100 Shares +$99.07

Quote: Old National Bancorp So far at least, I would have been better off staying with ONB: ONB: 13.40 +0.02 (+0.15%) 

Fidelity and TD Ameritrade will allow AON orders on 100 share lots.

2. BOUGHT 100 NBN at $8.7 Last Friday (Regional Bank Basket Strategy)(see Disclaimer): I pick up more than a 1% in dividend yield with NBN at $8.7 compared to ONB at $13.

Northeast Bank is a small community bank headquartered in Lewiston, Maine. The bank currently has 10 branches, 3 loan production offices, and 4 investment centers. Locations | Northeast Bank

The company offered 6.25M shares, plus an over-allotment option, in May 2012. Prospectus NBN sold 6,875,917 shares at $8 for aggregate proceeds of $55M and net proceeds of $52.8M.  This was a huge increase in the outstanding shares. The announcement in May 2012 caused a significant price drop from $10.75 on  5/14/12 to $8 on 5/16. NBN Historical Prices After selling these shares, the bank had about 10.38M shares outstanding as of 6/30/12.

Information about institutional ownership may be stale, but I did note four filings in May indicating significant hedge fund positions in NBN's stock. Except for Eagle Rock Capital's holdings, those positions may have originated from the public offering: (1) Bay Pond Partners owned 444,880 common shares or 5.12% as of 5/16/12 Schedule 13-G; (2) Castine Capital Managment owned more. Schedule 13-G; (3) Arlon Capital Partners owned 859,439 or 9.9% as of 5/21/12. SEC Schedule 13-G; (4) Eagle Rock Capital owned 671,939 or 7.74% as of 5/16/12, Schedule 13-D 

Before the Near Depression the shares were trading over $16 and returned to that level briefly in late 2010 and early January 2011. NBN Interactive Chart

The bank is currently paying a 9 cent per share quarterly dividend, which went ex dividend on 8/9/12.

For the bank's fiscal 4th quarter which ended on 6/30/12, NBN reported net income of $1M or 14 cents per share and $.41 for the fiscal year. SEC Filed Press Release  ‎

As of 6/30/12, tangible book value per share was $10.63, so the stock is now selling at a sizable discount to tangible book.

As of 6/30/12, the net interest margin was 4.63%; the efficiency ratio was way too high at 81.1%; the Tier 1 capital ratio was 19.9%; the total risk-based capital ratio was 33.4% (both influenced by the sizable share offering); return on average assets during the quarter was .68%; NPLs to total loans were 1.5%; and the coverage ratio was very low at 14.4%.  

  

Most of the new capital is apparently used to purchase loans, both a potentially rewarding and risky strategy for such a small bank:

Quote: Northeast Bancorp

3. Mueller Water Products (own 1 senior subordinated 2017 bond: Junk Bond Ladder Strategy) For its 3rd fiscal quarter, Mueller Water Products reported adjusted net income of 5 cents per share on a 6.3% increase in revenues to $275.9M. Adjusted EBITDA increased to $41.4M from $40.7M in the 2011 third fiscal quarter. Free cash flow was $5M in the last quarter. Mueller reduced its debt by $69.7M to $622.8M during the 2012 third quarter.

This 2017 subordinated bond is currently trading over 100. If I could sell my one bond online for any price over 100, I would do it. I have not noticed a single bid willing to accept just one bond however. For most of the junk bonds that I buy, liquidity on the sell side could be achieved most days with 5 bonds and less frequently with 2 to 4. It is hard to sell 1 bond unless there is a lot of volume, with a deep order book, in that bond. I have been successful in buying and selling one bond lots ($1000 par value per bond), but it takes time and is sometimes very difficult for some issues like this Mueller bond. Other one bond lots with liquidity issues would include my positions in Cascade, Gray Television, ArvinMeritor (2015) and Penn Virginia Resources. There is also no activity in some two bond lots, including Boise Cascade (OfficeMax) and First American (now CoreLogic).

Bought Back 1 Mueller Water 7.375% Senior Subordinated Bond Maturing on 6/1/2017 at 94.5

Common stock: MWA 

4. Reynolds Group (own 4 senior unsecured bonds: Junk Bond Ladder Strategy): This company has grown by using debt to acquire companies. The end result is an extremely leveraged balance sheet. I own four bonds, originally issued by Pactiv/Tenneco Packaging, that were rated investment grade before Pactiv was acquired by Reynolds and are now deservedly rated well into junk territory. 

For the three months ending 6/30/12, Reynolds reported a loss of 55 million on revenues of $3.591 billion. Why the loss? The company had operating income of $304 million, before the interest expense on the excessive debt of $480M. The loss before tax was computed at $128M and a income tax benefit reduced the loss to $55M. (page 11, reynoldsgroup.pdf) Adjusted EBITDA, which adds back depreciation and amortization to operating income and does not subtract interest expense, was shown at $641 Million. For a heavily indebted company where interest expense is so important, I would not place much reliance on that number, though it would be alarming if the adjusted EBITDA number fell below the interest expense number.  

The balance sheet data can be found deep into the report at page F-3. As of 6/30/12, Reynolds Group Holdings had cash of $1.222 billion and $17.558 billion of non-current borrowings, up from $16.625B as of 12/31/11. If the goal is never to pay income taxes, and to depend on the kindness of lenders for refinancing needs, then the business can be operated in this fashion. 

Note 14, which starts at page F-25, discusses the debt. In the chart at that page F-25,  the notes issued originally by Pactiv, which I own, are listed: Pactiv Maturing 1/1/2018; Pactiv 2025; Pactiv 2027. I plan to sell one of the longer dated maturities, possibly within the next year. 

Management Presentation 2012-Q2-Results .pdf

I raised my risk ratings on the Pactiv bonds back in June 2011. Tenneco Packaging and Pactiv Bond-Increasing Personal Risk Ratings The rating on the longer term Pactiv bonds was raised then to 8+. I seen no reason to lower that risk rating based on the earnings reports since June 2011. Arguably, the risk rating may need to be raised to 9, but I will wait until I see at least one more quarterly report.  

Sold 400 ACG at $8.44/ADDED 200 of the Canadian ETF CLF:CA at 19.87 CADs/UBCP/ADDED 2 Sears Holding Senior Secured 6.625% Bonds Maturing 10/15/2018 at $89.75

USATODAY has published a number of stories about the excessively generous salaries and benefits paid to many federal government employees. When private employers were laying off employees during the Near Depression period, USATODAY published a story pointing out that federal government employees making more than a $100,000 per year jumped from 14% to 19% of the government's workforce during the first 18 months of the recession. Think about that one for a few seconds.

In just the transportation department, there was just one person making more than $170,000 at the start of the Great Recession and then another 1,690 persons were added to that rarefied level 18 months later. The average federal employee was paid $71,206, compared to $40,231 in the private sector according to this report.

Back in the day, when the OG was a much younger OG, government employees were paid less than those working in the private sector, and part of the appeal was the generous post-retirement benefits. Now, the government pays more and provides better post-retirement benefits than the private sector.

Ridiculous is the only appropriate characterization. On this issue, I agree with the republicans. 

Last week, USATODAY published a story pointing out that 21,000 federal employees have pensions that currently pay them more than a $100,000 per year.

**********
FactCheck.org calls an ad approved by Obama as "badly misleading" that accuses Romney of personally approving a tax "avoidance" scheme and for suggesting that Romney may have paid zero to 10% in taxes. The ad is referring to the "Son of Boss" tax avoidance scheme used by Marriott and other corporations.

After reading some material on the "Son of BOSS" tax scheme, I would have to disagree with FactCheck on just the "Son of Boss" issue. Romney sat on Marriott's Board of Directors and Chairman of its audit committee which approved the fictitious losses exceeding $70M as part of the Son of Boss tax scheme. An account of this history can be found in articles published by Bloomberg and CNN.  This is a link to the decision by the Court of Claims affirming a summary judgment for the government against Marriott. Marriott International Resorts, L.P. v. United States It would have been better for Obama to spell it out better, by simply stating that Romney approved of Marriott's use of an abusive tax shelter but did not himself develop this scam which originated from "tax professionals". KPMG to Pay $456 Million for Criminal Violations ABC News

Does Romney deny that he approved using the Son of Boss tax fraud scheme when he was a member of Marriott's Board and/or Chairman of its audit committee?  If so, he can plainly make that statement, yes or no, rather than dancing around it.

The thrust of the commercial, however, is to suggest, without any proof, that Romney may have used abusive tax shelters himself to skirt his personal tax obligations. In that respect, I would agree with FactCheck's criticism. There is an insinuation in the commercial that Romney will not release his tax returns prior to 2010 because he may have used the same or similar tax schemes. That insinuation  leaves the viewer asking "is that why Romney want release his returns". I would agree that there is no proof supporting that implication.

A more important issue, which I will soon discuss, is how the wealthy are able to pay a tax rate similar to a factory worker, even by using entirely legal means, and whether the end run around a progressive tax structure is in the nation's best interest. We do know that Romney's tax rate on over $45 million in income for 2010-11 is less than 15%, close to the tax rate for a married couple with a net income of $40,000.  That is a relevant issue for Americans to decide this November.

***************

The GOP House Republican Todd Akin, who is running for the U.S. Senate seat in Missouri, told an interviewer that "legitimate rape" rarely results in pregnancy. In his view, it would be rare that a rape would result in pregnancy since a woman's body knows how to deal with it. This is a common view among abortion opponents, whose sole source of support is an article written by a general practitioner John Wilkes and published by an anti-abortion Christian group in 1999.

 If there was a pregnancy after a rape, then he would not be in favor of "attacking the child" with an abortion.  CNN.com

Akin is basically stating a position by abortion opponents that women will falsely claim rape in order to take advantage of the rape exception. Ryan opposes that exception. Akin just did not state the matter in accordance with standard GOP obfuscation and decorum. Now, the GOP is worried that he will lose to the Democrat incumbent which is the real reason why he is now being pressured to quit.

Akin believes that the "heart of liberalism really is a hatred for God and a belief that government should replace God". Liberals in his view want to separate us from God, who is the source of our "individual liberties" and consequently those evil liberals want to "tear the heart out of our country". Todd Akin - Wikipedia

Does Mr. Akin sound like a True Believer, someone who will always be incapable of forming opinions based on a careful assimilation of reliable information and then exercising good judgment with an open mind?

Akin is in no sense a conservative but one of legions of pretend conservatives currently infesting the GOP. Perhaps he would be in favor of burning those nasty liberals at the stake, a tried and true method of freeing evil spirits from the non-believers.

After a night of drinking and partying, a group of GOP lawmakers and their staff jumped into Israel's Sea of Galilee to be closer to God.  NBC Politics One GOP Congressman, Kevin Yoder from Kansas, felt it was necessary to shed all of his clothes. Other GOP lawmakers felt that it was only necessary to partially disrobe before embarking on this communion. It was reported that, unlike Jesus, the GOP lawmakers did not walk on water.

The GOP is currently attempting to repeat its 2004 successful Swift Boat styled attack ads. Those ads were funded by the usual list of large GOP donors and were rated as untrue by independent fact checkers. FactCheck.org  The new campaign is being funded by a newly formed group called the "Special Operations OPSEC Education Fund" that disclaims any party affiliation and professes only to have  a desire to educate the public. The organization refuses to list its donors. According to the head of this new organization, it is irrelevant that this new organization shares offices with two GOP consulting firms in Alexandria, Virginia, and its spokesman worked for the Bush Administration. The group is non-partisan and independent because they say so, just like that Swift Boat organization funded by T. Boone Pickens, Jr, Harold Simmons, Aubrey McClendon, Sam Fox, Robert Lindner, and of course Bob J. Perry; the usual cast of characters whose interest is solely to bring the voters facts. The new swiftboating group charges Obama with leaking sensitive information about the Bin Laden raid, but refuses to provide any information supporting that claim. CNN; Guardian (UK); Swift Vets and POWs for Truth - Wikipedia,

To the "loud and enthusiastic" cheers of an appreciative Iowa crowd, Hank Williams Jr. called Obama a "Muslim President who hates farming, hates the military, hates the U.S. and we hate him". NBC News; Metromix Des Moines That was relatively mild for this TB compared to his earlier remark comparing the President to Hitler.  

***************

Over the weekend, I heard several voters express a favorable view of Paul Ryan because he at least had a plan, which is just another reality creation. His "plan" is to cut taxes for the wealthy and corporations by $4.1 trillion dollars and to cut spending by $1.7 trillion. An Unserious Man Is that a plan?

Those cuts come mostly from Medicaid, Medicare, food stamps and other programs for the poor and middle class. He will not provide further specifics in his budget. He claims that eliminating deductions will offset that $4.1 trillion in revenue cuts, but refuses to specify which deductions would be eliminated by the GOP. It is impossible to come anywhere close to that number unless there is a wholesale slashing of middle class entitlements such as the home interest deduction, earned income and child tax credits, and the exclusion from income of employer provided health care. I previously discussed this issue in Romney's Tax Plan and more information can be found at FactCheck.org

PolitiFact gave a "Pants on Fire" rating to an attack ad sponsored by the National Republican Congressional Committee that claimed Democrats supported a plan to gut Medicare in order to pay for a "big government healthcare takeover". There are many self-styled "conservative" organizations who do not believe that telling the truth is a conservative value.

**********************

It was not surprising to read that United Bancorp cut its quarterly dividend to 7 cents from 14 cents. I have mentioned that possibility in several posts since the payout ratio was close to 100%.  I recently pared 50 shares and will continue to hold 100 shares plus the reinvested dividends. Sold 50 UBCP at $10.05 On the day of this announcement (8/16), the stock fell 12.73% to close at $8.23 on 55,592 shares. The average daily volume was just over 4000. The market cap at the closing price last Thursday was reduced to just over $35M. UBCP is a very small bank with twenty branches located in Ohio. The operating banks are known as "The Citizens Bank" and "The Community Bank", Martins Ferry | The Citizens Bank | The Community Bank; 2011 Annaul Report. I am not going to complain about the CEO James Everson failing to take a pay cut since he has a significant ownership stake in bank and will suffer along with the other shareholders. UBCP Major Holders His annual salary is shown at $284,000 at UBCP Profile.  I may buy back those 50 shares at below $6.5.

First Trust/Aberdeen Global Opportunity Income Fund (own) declared its regular monthly distribution of 13 cents per share.

The solar market has been in the dumps for a long time. Proof is shown in the Guggenheim Solar ETF Fund Chart. After undergoing an ignominious 1 for 10 reverse stock split last February, the adjusted price high, shortly after launch in February 2008 was $278 and the ETF is now trading below $18. Have the solar stocks hit bottom yet? No one really knows. The author of this article Solar Stocks Have Caught Fire. Will It Last?, published by Motley Fool, argues that it will last. I read the article since I have a LT position in PWER. Bought 50 PWER at $4.66-LT Category That is my sole ownership stake in this sector.

1.  Added 2 Sears Senior Secured 6.625% Bonds Maturing 10/15/2018 at $89.75 Last Thursday-Main Taxable Account (Junk Bond Ladder Strategy)(see Disclaimer): A few days ago, I discussed this bond and have nothing to much to add. Item # 1 Sears Senior Secured 2018 Note

I would note that the upcoming rights offering for the Sears Hometown Stores is now expected to generate $446.4M of gross proceeds for Sears Holdings. When Sears originally announced this proposal, it was stated then that Sears would expect to receive $400 to $500 Million. Sears Holdings Provides Update On Status Of Separation Of Its Sears Hometown And Outlet Businesses - Apr 30, 2012

FINRA Investor Information on this bond

Prospectus: Final Prospectus

Last Friday, S & P revised the outlook to stable from negative. TEXT-S&P S & P has a recovery rating of 1 on the 2018 Senior Secured bond. The denotes an estimated 90% to 100% recovery in the event of a default.

I now own 3 of these bonds in the main taxable account and one in the ROTH IRA. That is my limit.

Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 at 83.25 (September 2011)

Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 2018 at 90.50-Roth IRA (May 2012)

I have at times considered selling the 1 bond purchased at $83.25, but have never noticed a buyer willing to accept just one. I have seen buyers willing to accept two or three. With 3 bonds in that account, I have acquired more liquidity in case I desire to sell all of the bonds. I had no liquidity with one bond.

Now that my 3 bond position is more liquid, one reason for adding two more, I may elect to sell those three bonds when and if the price rises into the 92-95 range. I would be leaning strongly toward selling at above 95.

For the two bonds bought on 8/16/12, my confirmation states that the current yield is 7.348% and the YTM is shown at 8.725%. The bond is currently rated a B2 by Moody's and B by S & P.

Sears reported its earnings on the day of this last bond purchase.

For its second fiscal quarter, Sears Holdings reported an adjusted  loss of 86 cents per share, down from ($1.18) in the year ago quarter, on $9.467B in revenues. Domestic inventories declined by $512M to $7.9B "driven by both improved productivity and store closures". Total debt decreased to $3.3B as of 7/28/12 from $3.5B on 1/28/12. The Sears Hometown and Outlet Store transaction, a rights offering, is "on track to raise $446.5M of gross proceeds" in the third quarter. The "margin rate increased 100 basis points and selling and administrative expenses declined".  

As of 7/28/12, the company had cash balances of $406 for its domestic operations at the end of the quarter. During the first half of 2012, Sears used $231M to reduce debt, another $164M for post-retirement benefits and $161M for capital expenditures and other working capital needs. Those cash uses were partially offset by a cash inflow from the sales of properties. Sears had $1.6B available under its domestic credit facility. 

Previously, Sears estimated that its minimum pension contribution for fiscal 2013 would be between $380M to $430M, down from a prior estimate of $740M, due to a recent change in the law.   

Comparable store sales for U.S. Sears stores declined by 2.9%. K Mart same store sales declined by 4.7%.

I viewed it as material that Sears first lien borrowings were $941 million as of 7/28/12. That is the amount borrowed under Sears secured credit facility. The 2018 senior secured is in effect a second lien bond that would attach to inventory and credit card receivables in excess of the first lien: Form 10-Q at pages 7-8.

Description of 2018 Senior Secured Notes at page 7

Common shares:  Sears Holdings (SHLD)

2. Added 200 CLF:CA at 19.87 CADs last Thursday (Canadian Dollar Strategy)(see Disclaimer): As previously noted, I have a stash of Canadian Dollars bought when the USD was stronger against the CAD than now. I use that stash to buy securities on the Toronto Stock Exchange.

I am purchasing dividend paying securities. I receive those dividends in Canadian dollars after the 15% withholding tax. With those dividends, and capital gains received occasionally after selling a position, I increase my Canadian dollar stash, thereby enabling me to buy more securities that pay dividends in Canadian dollars. The purpose of this strategy is multifold as explained in Canadian Dollar (CAD) Strategy.

Part of the reason is diversify holdings beyond assets priced in the USD. I have more faith in the Canadian and Australian governments to behave responsibility than my own.

I would not anticipate that the U.S. government will be able to solve its looming budget crisis due mostly to an uniformed electorate who have grown use to receiving benefits without paying for them   and a dysfunctional political system. The two political tribes are becoming increasing rancorous and dysfunctional, where politicians from both political tribes play fast and loose with the facts, actively engage in deception, and are more interested in achieving and maintaining power over any other consideration. In short a fair and responsible approach to solving this problem appears to be out of the question.

I am very negative on the USD and U.S. government bonds long term. At the moment, U.S. government bonds are the beneficiary of the turmoil in Europe and a U.S. Federal Reserve's policy to create money in order to buy that debt. While much handwringing is focused now on Europe, the EU is actually making progress toward fiscal sanity, while the U.S. government still has the peddle to the metal. Please spar me the idiotic and delusional reality creation common among GOP tribe members that the BUSH tax cuts for the wealthy paid for themselves rather than being a primary cause of the current budget deficits along with the recent Near Depression. McConnell: 'No evidence whatsoever that the Bush tax cuts actually diminished revenue' It is impossible for anyone to reach a reasonable compromise with the Modern Day GOP that would involve raising revenue and cutting spending. And those spending cuts would have to be limited to social programs benefiting the poor and the middle class to secure GOP support.

When perceptions change about the safety of the USD, which will happen as the government continues to run up annual deficits of over a trillion dollars per year, USD priced assets may not look anywhere near as attractive to the thundering herd in the not too distant future.

Many are concerned about the upcoming fiscal cliff. I am not one of those persons. The automatic spending cuts and the elimination of the Bush tax cuts, both implemented as result of inaction and paralysis, may end up being the only way Congress can address the problem using both revenues and spending cuts. Jumping off that fiscal cliff may temporarily be unnerving but ultimately will prove to be just what the doctor ordered for the long term fiscal well being of the U.S. government.

CLF is a very low cost ETF that invests in Canadian government securities. The expense ratio is .17%.
CLF Overview - iShares ETFs The sponsor is iShares Canada. This fund uses a 1 to 5 year bond ladder strategy.

I now own 700 shares. Dividends are paid monthly in Canadian dollars:

700 SHARES CLF:CA

On the day of my last purchase, I took a snapshot of the holdings.

Holdings as of 8/15/12

Quote: iShares 1-5 Year Laddered Government Bond Index Fund, CLF - (TOR) closed at 19.91 CADs yesterday.

3. Sold 400 ACG at 8.442 (see Disclaimer): I am not a fan of U.S. government debt. ACG uses leverage to buy low yielding U.S. government debt. Consequently, I have bought and sold it several times, harvesting relatively small gains after clipping dividends. This last sale resulted in a $85.62 profit on the shares:

2012 ACG 400 Shares +$85.62

Item # 1 Bought 400 of the Bond CEF ACG at $8.19 (5/31/12).

See also: Sold 500 ACG at $8.122 (December 2011); Bought 200 ACG at 7.85 August 2011; ADDED 200 OF THE BOND CEF ACG at $7.98 October 2011; ADDED 200 OF THE BOND CEF ACG at $7.98 October 2011; Sold 200 ACG at 8.35 August 2010; SOLD 200 ACG 8.45 August 2010; Added 400 ACG at 7.85 May 2010; Bought 200 ACG at $8.12 in Roth May 2010.

I am now back to owning no shares.

ACG: 8.44 -0.01 (-0.12%) 

VIX Asset Allocation Model Update/LEAP/EARNINGS: CSCO, AMAT, First Data/Bought 200 RMT at $8.81 in Roth IRA/Sold 50 FPCPRA at $26-Roth

S & P raised the credit rating on the Leap Wireless subsidiary Cricket Communications last week TEXT-S&P Cricket's senior unsecured debt was raised to B- from CCC+. The recovery rating was raised to a 3 from a 5, which indicates a 50% to 70% recovery in the event of a default. I own one Cricket bond. Bought 1 Cricket Communications 7.75% Senior Note Maturing on 10/15/2020 at 96.5 (June 2011)

******************

The current alternative to traditional Medicare is called the Medicare Advantage program which is heavily subsidized by the federal government and is offered by private insurance companies. As you would expect, the Republicans under Bush Junior promoted this alternative as a way to save the federal government money. Medicare Advantage - Wikipedia It has not worked out that way however.

The cost per patient is 14% more than traditional Medicare. A publication by the Kaiser Family Foundation, an unbiased authority on health issues, shows this information at figure 3 ‎kff.org/medicare.pdf Similar numbers come from the non-partisan Medicare Payment Advisory Committee. Free Perks With Medicare Advantage Plans Aren't Really Free. (link to government's website on Medicare Advantage Plans | Medicare.gov)

The members of the all girl band "Pussy Riot" were given a two year prison sentence for "hooliganism". Their crime was singing a "profane" song requesting the Virgin Mary to rid Russia of its 21st Century Czar Vladimir Putin. The NYT has Youtube links to their arrest and to the video.

******************

Closing Price for the ^VIX: 13.45 -0.84 (-5.88%) last Friday. This is the lowest close in five years.

Doug Kass stated recently that it would "rarely" be a buying opportunity when the VIX was at 14.  That is simply incorrect as I mentioned in the last post. The investor has to place the number in context. Since the formation of the Unstable VIX Pattern in August 2007, a decline in the VIX below 20, and particularly below 15, would be a signal to sell or pare long positions and to establish hedges. A fall below 20 would be short lived, usually a few weeks, and then stocks would start to decline again and the VIX would shoot back up into the 20s or higher. That is the defining characteristic of the Unstable Vix Pattern-Phase 1. Vix Asset Allocation Model Explained Simply

Historically speaking, there will eventually be a continuous movement below 20 that will form the Stable Vix Pattern, a pattern consistent with the onset of a powerful stock market rally lasting several years. Once that pattern forms, almost all movement in the VIX is below 20, possibly with temporary and very infrequent moves slightly above 20, until there is a major disruption in that cycle, which I call a Trigger Event, where the VIX shoots up into the high 20s, staying at that level for several days, as something in the world has spooked stock investors in a major way. You could look at the VIX chart from 2007 and tell when something important and adverse was happening in the world. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern

When there is a transition to the Stable Vix Pattern from the Unstable VIX Pattern, the VIX will continue to fall below 20 toward 15 and then below 15.  Historically, when that movement continues for 3 months, the Stable Vix Pattern signal is given and then the model is predicting a much stronger up move with minimum volatility. Then, the movement to 14 is not a sell signal but a long term buy signal. Kass is just wrong in making such a categorical statement.

VIX and S & P Compared 1990 to 1997
Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2

A Stable Vix Pattern was formed in early Spring 1991. The S & P was at 373.5 on 3/14/1991. The Trigger Event occurred in October 1997. VIX Historical Prices (10-11/1997) The move back to below 20 in February 2008 provided the opportunity to sell. VIX Historical Prices (2/1998) The S & P was near 1050 in February 1998. ^GSPC Historical Prices

The Unstable VIX Pattern would last about 6 1/2 years after the first Trigger Event. When the Stable VIX Pattern emerges again, starting in March 2004, the S & P 500 is basically unchanged from that February 1998 level, though it had moved considerably lower during the Unstable Vix Pattern period.

This is a snapshot of the Vix movement as it formed the stable pattern in 1991. I would urge the reader to go to March 1991 historical prices and just keep clicking forward. It just keeps moving below 20 with an occasional print above 20. By December 1992, the movement is down around 11-13.

Vix  Forming a Stable Vix Pattern
Starting  March  12, 1991  

^VIX Historical Prices

The same kind of movement started in March 2004: ^VIX Historical Prices Once again, there was a clear formation of a Stable Vix Pattern with a number of closes below 15 starting in mid-June 2004.

By August 2004 there was continuous movement below 15. In the context of the Stable VIX Pattern, this would be the most bullish signal so far in this cycle. ^VIX Historical Prices The S & P was hovering near 1000 when the VIX started moving below 15, ^GSPC Historical Prices. As previously noted, the Trigger Event occurred in August 2007, with the opportunity to lighten up in October 2007 when the VIX fell back below 20. The S & P 500 was trading at over 1500 in October 2007.  ^GSPC Historical Prices

The model is agnostic on the duration of the up cycle. Historically, there would be several years after the formation of the Stable Vix Pattern before the next Trigger Event. It is possible for something to disrupt the Stable Vix Pattern sooner. Basically, the model is just saying that conditions are ripe for a multi-year up move in the market with low volatility. Investors are less fearful and worried about whatever was causing them to be so jumpy and are now comfortable again with stock risks.

While the VIX has been moving below 20 (with one minor exception) since June 25, 2012, the market is still in an Unstable VIX Pattern. The movement below 15 may be signaling now a selling or a buying opportunity. If the movement below 20 continues to around September 25, 2012, then the movement below 15 would in retrospect be a long term buy signal, at least until the next Trigger Event.  If the VIX pops back into the mid to high 20s before 9/25/12, or starts to have continuous movement above 20, then the Unstable VIX Pattern continues, and the movement below 15 was a short term selling opportunity.

1. Cisco (own): I started to trade CSCO shares after the price crashed, which is also true for Applied Materials, discussed below, and Microsoft. While Cisco shares are tempting from a valuation perspective, investors are having difficulty seeing earnings growth, as shown by the consensus earnings forecast. CSCO Analyst Estimates For the F/Y ending July 2012, the consensus E.P.S. forecast before the latest earnings report was $1.83 and $1.91 for the next fiscal year. That 4.37% forecasted E.P.S. will not excite most value investors, and the growth crowd have already abandoned ship.

For its 4th fiscal quarter, Cisco reported GAAP E.P.S. of 36 cents and 47 cents non-GAAP on a 4% increased in revenues to $11.69 billion. SEC Filed Press Release

The consensus forecast was for 45 or 46 cents, depending on the service compiling the estimate, on $11.6B in revenues.

Cash flow from operations was $3.1B. Cash and cash equivalents stood at $48.7B. Cisco repurchased 108M shares during the 4th fiscal quarter at an average price of $16.62 per share.

Cisco raised its quarterly dividend by 75% to 14 cents per share from 8 cents. I am reinvesting the dividend.

Cisco's E.P.S. projection for the current quarter is 45 to 47 cents, in line with the 46 cent consensus estimate.

I currently own 100+ shares bought in two 50 share lots: Bought  50 CSCO @ 19.55 November 2010;  Bought Back 50 CSCO at $19.95 February 2012 At least those prices are better than the $77 price tag hit in 2000. CSCO Interactive Chart The OG, even when he was a younger OG, would never be caught up in the Madness of Crowds.

Prior to those purchases, I was content trading the shares for small profits.  Bought 50 CSCO at $22.45 June 2010-Sold Cisco August 2010: Bought CSCO at 20.39 September 2010-SOLD 50 CSCO @ 24.42 November 2010;  Added 50 CSCO at 18.75 February 2011-Sold 50 CSCO at $20.4 February 2012 (satellite taxable account). At least I did not lose anything with those trades. I am not much of a technology investor.

2010 CSCO 100 Shares +$247.64

This earnings report is discussed in article found at Bloomberg, MarketWatch and Reuters.

Stock Quote: Cisco Systems 

2. AMAT (own): I am even less adventuresome with AMAT than CSCO. I currently own 80+ shares and I am reinvesting the dividend for some reason that is not entirely clear. My last purchase was not a vote of confidence.  Added 30 AMAT at $10.99 I am slightly under water.

Previous to acquiring my current position, I flipped 200 shares for a total profit of $84.24 back in 2010, which were my first ever transactions in this stock.

I am content holding this small position and may add up to 50 more shares provided I can buy them at less than $10. After the earnings report, Susquehanna Financial downgraded AMAT to "negative" from neutral, expecting the price to fall into the high single digits. Barrons

Applied Materials reported earnings of 24 cents per share on a 16% decline in earnings. The comparable number for the year ago quarter was 35 cents. For the current quarter, AMAT expects adjusted earnings to be between break-even and 6 cents. The consensus forecast was for 12 cents per share

3. First Data (own 1 senior subordinated 2015 bond: Junk Bond Ladder Strategy): For the second quarter, First Data reported a net loss of $157.4 million, down from $175.8M in the 2011 second quarter.

As of 6/30/12, the company had $483.5M in cash and long term debt of $22.514+B, mostly due to a private equity leveraged buyout that turned this viable company into an over leveraged one whose future is dependent on refinancing its huge debt load. The company had not made progress paying down the debt incurred in connection with that leveraged buyout. A recent offering was $1.3B in a 6.75% senior secured note maturing in 2020.

10-Q for Q/E 6/30/12

In the event of a bankruptcy, I would not expect the senior subordinated bond to be worth anything. I have therefore assigned it a risk rating of 10  in my Personal Risk Ratings For Junk Bonds.

4. Bought 200 RMT at $8.808 Roth IRA (see Disclaimer): I sold a TP held in the ROTH IRA, summarized in Item # 5 below. In its place, I bought 200 shares of the closed end stock fund Royce Micro-Cap Trust (RMT) which invests in micro-cap stocks, as do I.

I currently own 651+ shares of RMT in a taxable account.

RMT is currently paying a quarterly distribution of 13 cents per share. During the Near Depression, all of the Royce closed end funds quit paying dividends, a decision that I supported since a return of capital has no advantage to me and that approach can be destructive of shareholder value over time.

At a total cost of $8.81 and assuming a continuation of that rate, the dividend yield would be about 5.9%. I could receive more depending on the total realized gains for the year.  I am not giving up much income compared to FPCPRA. I do not view FPCPRA as having any meaninfgul upside potential over $26, whereas RMT does, provided of course the market enters one of those longer term secular bull markets.

I will hold some dividend paying stock CEFs in the ROTH IRA, usually for several years. I can wait for an opportune time to sell the shares.

On 8/15/12, the net asset value was $10.15. Based on a closing price that day of $8.82, the discount to net asset value per share was -13.1.

Morningstar page for Royce Micro-Cap Trust 

Closed-End Fund Association page on RMT

‎SEC Form N-Q for the period ending 3/31/2012 (list of holdings)

‎2011 Annual Report

{a return of capital can have two potential advantages in a taxable account.There is no tax on that part of the dividend received as a return of capital, but that amount reduces my cost basis. In that sense, the amount is just tax deferred until I sell the security. When the tax rate on dividends is higher than the tax rate on long term capital gains, which is not the case now, I could in effect turn higher taxed dividends into the lower taxed long term capital gain by selling the security after a one year holding period. This could become relevant particularly when dividends are taxed at my highest marginal rate, which has been the case for most of my life, and the long term capital gain rate is significantly lower than that highest marginal rate. It is possible that the tax rates for dividends and long term capital gains will diverge again next year or soon thereafter depending on the outcome of the upcoming election and those in the future. The second example of a benefit would be to hold the security until I die. If Uncle Sam allows my heirs to step up the tax cost basis to fair market value at the time of the OG's demise, then the return of capital issue could go from a tax deferral issue to a legal tax avoidance, depending of course on the price of the security.}

Some investors will look at a fund in their account and conclude that it is a dud based on the profit reflected in the shares. The correct approach is to look at the unrealized profit or loss from the shares, including those bought with dividends, plus the total amount of dividends. The sponsor's website, and other financial websites, will compute for you the average annualized returns.

The closing price on 12/15/1993 was $6.87 per share. YF calculates the adjusted price, which subtracts subsequent dividends, at $2.04. RMT Historical Prices

The annualized return of RMT since inception on 12/14/1993 through 6/30/12 is 9.15%. The five year return is a negative -4% for the obvious reason. Royce Micro-Cap Trust (RMT)

Stock Quote: Royce Micro-Cap Trust (RMT)

Last Friday, RMT closed with a net asset value per share of $10.37. Based on a closing price of $8.94 on 8/17/12, the discount to net asset value was -13.84 at that time.

5. Sold 50 FPCPRA at $26 Last Wednesday-Roth IRA (see disclaimer):  When SUSQ redeems my 80 shares of SUSPRA in September, I will no longer own any TPs. FPC Capital I 7.10% Cum. QUIPS Series A (FPC.PA) was ex interest for its quarterly distribution on 8/10/12. I will receive that distribution. And, I exited this position at a profit after collecting several interest payments, which was my modest goal.

Stock Quote: FPC Capital I 7.10% Cum. QUIPS Series A

I took a snapshot of cash flow into the Roth IRA on 8/15/12, which includes the last interest payment from 50 shares of FPCPRA.

Cash Flow Roth IRA 8/15/12

Please note the $.85 monthly interest payment from 50 shares of the Synthetic Floater GJR, which has no minimum coupon, and the $31.15 quarterly interest payment from 150 shares of the synthetic floater GYB which has a 3.25% minimum coupon on a $25 par value.

The two synthetic floaters that I own in this account, which pay monthly, are GJT and GJR, both 50 share positions, and neither will pay much until there is a significant rise in the three month treasury bill rate. This may not happen until 2015. GJR pays .7% over the 3 month T bill rate, up to a maximum of 7.5%, and the underlying security is a senior Proctor & Gamble bond maturing in 2035. GJT has a senior 2036 Allstate bond as its underlying security and pays .8% above the 3 month treasury bill rate, up to a maximum of 8% on a $25 par value. The three month treasury bill might as well be zero now. When looking at this kind of security that just pays a float over a treasury bill rate, I will assume a zero percent 3 T Bill rate for at least two years from now. Those securities will look better when the 3 month treasury bill returns to a more normal level which I would define as being between 4%-5% using historical data going back to 1980. Last Friday, the the three month treasury bill yield was at .08%.  Chart  Historical interest rate data can be downloaded into excel from the Federal Reserve's website: FRB: H.15 Release--Selected Interest Rates--Historical Data