Google Search Box

Added: The problem was fixed 6/21/13.

Yesterday, the google search box quit working again. I notified Blogger of the problem. If the problem is not corrected by this weekend, I will remove the google search box again until it is fixed since it will erroneously return no results when there are multiple results.  The only way to search this blog now is to use the search box in the upper left hand corner, which only returns entire blog results when searching for a specific item.

Many of my regional bank stocks are bucking the downtrend today. I noticed rises in HBAN, KEY, CBU, HCBK, FNB, BRKL, BHB, ANCX, PBCT, PCBK, TRMK, UBSI, UMPQ, VLY and WASH. While cause and effect is always tricky, many investors may view the rise in yield curve to be a positive for these banks, particularly as short term rates remain anchored near zero. 

IRS Refunds/Bond Fund Risks/Sold 100 LF at $10.01/Bought 58 NPI at $13.4 & 42 at $13.17/Bought 100 of the Municipal Bond CEF BKK at $15.93-Then Sold BKK at $16.82//Added 50 TICC at $9.85/Added 50 PSEC at $10.15/ROTH IRA: SOLD 50 GJT at $18.9/Bought 100 FAX at $6.35

Big Picture Synopsis:

Stocks:

Stable Vix Pattern (a bullish pattern)

Vix Asset Allocation Model Explained Simply 

Use of the VIX as a Timing Model

Short Term: Praying for a 10+% Correction
Intermediate and Long Term: Bullish

Bonds:

Short Term: Slightly Bearish
Intermediate Term: Slightly Bearish (Bearish for Treasuries)
Long Term Extremely Bearish

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I have a question for my readers that confounds large segments of the SeekingAlpa readership. Is an investor better off selling GE at $57 in 2000 (close to a 50 P/E and valued at the 2000 price at 31.32 times the consensus 2014 E.P.S of $1.82), and then buy the shares back at $25 in 2002 with the proceeds from that prior sale or is it better to keep the shares because GE is a good company and pays a dividend? I wish that I could put more emphasis on the 31.32 times the 2014 estimated E.P.S. using the 2000 high price!!!

Many disagreed with my argument that KO had to be sold at $42 in 1998 when the P/E was well over 40 (close to 50) and then buying the shares back at $20 in 2002. If I owned 200 shares and sold at $42, I could then use that $9,000 to buy 450 shares at $20. You would think that was a no brainer. But you would be wrong. I was trying use those comments to highlight the interplay of situational risks and/or inflation on investment decisions made during prolonged bear markets or at the blow-off phase of a long term secular bull market. I will take this subject up again in next week's blog since it is an important one.

Of course, I do not even view the choice between those two alternatives as debatable. Who wants to take the side of holding the obviously ridiculously over priced stock in order to receive the dividend, anyone?

But what is the underlying theme in this choice between two alternatives? It is simply about increasing your pile in an intelligent manner. Most people are not rich and have to be concerned about doing whatever they can to make a more limited pile grow to the point of meeting their goals particularly their retirement planning goals.

Every dollar for most investors (at least 90% in my opinion) becomes a precious and limited asset, and needs to be used in an intelligent fashion to achieve as optimum a result as possible. An optimum result would not be achieved by holding GE at anywhere near $57 in 2000, let along buying shares during that period. Instead, without question, a sensible individual would use that parabolic and insane price rise to sell, not to buy, and then use the proceeds when rationality returned to buy that stock or some other after the inevitable 50+% decline back to something close to sanity. Someone who bought GE in 1999 and then sold the shares in 2002 at $25 has just gone in the wrong direction in growing a limited pile into a larger one.

I would emphasize another point for those who insist on holding stocks that are without question insanely overvalued. The share price correction will happen soon as shown by the 49.1% S & P 500 decline in 2000-2002 or the really fast 44.1% decline in 1974. The most brutal, of course, was the -86.2% drop after the 1929 crash.

See Doug Short Charts of the 4 Bears:
The Four Totally Bad Bears

Frequently, and this is unfortunate, what I view as a really simply point still flies way over the head of someone. I was discussing how inflation and situational risks can combine to result in a bad outcome for an investor in a good stock. An example would be an investor who bought KO stock in 1966 and then had to sell in 1982. The nominal stock price declined over an 18 year period identified in my comment, but that was just one point that I was clearly making, the inability of most investors to make it to the promised land after eighteen years of a stock going nowhere. The other point, clearly made, was that inflation would tremendously erode the value of the proceeds received from the inopportune sell of KO stock. It would take $3.11 in 1982 to buy $1 worth of goods and services in 1964. Inflation Calculator: Bureau of Labor Statistics

Seeking Alpha

There are readers who understand my points, so I am not talking about everybody. Some of those writing comments appear to me to be investors eager to learn and capable of handing their own money. There are unfortunately many others who need a conservator appointed for them.

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Risks in Bond Funds:

There are obvious risks to bonds now that go beyond the usual credit and interest rate issues. The interest rate risk issue was highlighted with emphasis when the ten year treasury rose from a 1.66% to a 2.17% yield between 5/2/13 to 6/7/13. The decline in price was sufficient to offset several years of interest payments at the abnormally low yield of 1.66%, projected by the market to produce at significant negative real rate of return based on the inflation forecast embodied in the 10 year TIP price on 5/2.

I have highlighted throughout this blog another important risk. The investment chosen by the investor will simply not produce the income needed to fund retirement making it likely even probable that the individual will outlive their retirement savings. What exactly would a 1.66% ten year treasury generate in income before inflation and taxes? On a hefty one million dollars, the income would be about $16,000. About 90+% of retirees do not have that million and $16,000 does not go very far nowadays. In some jurisdictions, it might be enough to pay property taxes on a middle class home with enough left off to fill up a car a few times. Forget about the premiums for medicare and health insurance, home insurance, car insurance, necessary repairs to the home, food, gas, etc.

An article in the NYT discussed the risk to retirees and those nearing retirement caused by the abnormally low interest rates now, aptly titled "Why Many Retirees Could Outlive a $1 Million Nest Egg" - NYTimes.com It is a horrendous situation caused by the Federal  Reserves Jihad Against the Saving Class that has first substantially reduced their incomes to practically nothing for risk free savings but has now placed those folks in the precarious position of having to sell bonds to pay expenses as those bonds lose value due to nothing other than interest rate normalization. Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization A return to normal rates, based on the market's forecast for inflation rather than rates based on FED intervention and manipulation, will cause devastation to those who own bond funds and have to sell shares to pay expenses, at least until the rate normalization period comes to an end. Getting from point A to B will be a difficult path for those now owning those funds.

Frequently, I hear arguments from bond fund sponsors that investors need not fret about interest rates going up. The bond managers can hold the bonds to maturity and then invest the proceeds into higher yielding instruments.

There are several major flaws in that argument. First, current bond fund net asset values include a very large number of bonds selling at premiums. Today, those bonds could be sold for a profit and many are being sold. Those profits are already started to diminish and those lower valuations are reflected in net asset value. Now, if the bond manager sells or waits to sell, the proceeds will be lower and the net asset value would be permanently negatively impacted and continue to be negatively impacted as the premium price melts to par at maturity. That is not even the major problem.

The major problem, applicable to bond mutual funds and bond ETFs, flows from the risks associated with investor redemptions. When prices start to decline in a non-temporary fashion, the funds will transition from net inflows to net outflows, causing the fund managers to sell something that locks in a lower price while the funds fly out the door and consequently can not be reinvested in a higher yielding bond. That process perpetually locks in lower net asset values per share due to selling bonds at ever lower prices, possibly at a loss rather than at a diminishing gain. At some point, the herd will change direction and start to pull money out of those funds.

Closed end funds do not have that type of redemption risk. With incompetent managers, the decline in bond prices may be met nonetheless with a lot of inopportune selling that has the same negative impact on net asset value per share as selling by mutual funds to meet redemptions when prices are declining.

The more substantial risk for bond CEFs, assuming competent management, is that the discount to net asset value will increase substantially during periods of market turmoil, at a far greater rate than the percentage decline in net asset value per share. That phenomenon may cause individuals, who are the primary owners of those funds, to see at the worst possible times, either due to panic or to margin calls. Eventually, the expansion of the discount at a faster rate then the decline in net asset value will stop as more sophisticated investors see an opportunity to acquire a $1 worth of bonds for $.85 or $.8 or even in one of my buys in October 2009 at $.58 on the dollar. As the discount increases, the yield increases too.

There are in my opinion a large number of richly compensated and incompetent bond and stock fund managers. I consequently would prefer low cost ETF investing but will invest in CEFs based on their discounts to net asset value presenting opportunities for trades or longer term investments.

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Jim Rogers on Bonds:

Rogers is in the camp that bonds are in a bubble and will start to rise in yield no matter how many bonds the FED buys.  MarketWatch I seriously doubt that will be the case until the government starts to report a series of higher and higher CPI numbers. There will be a lot of drama in bond land, causing movements up and down, as the market undergoes the long process toward rate normalization.

Rogers was responding to an article written by Jon Hilsenrath, the WSJ reporter who covers the FED, that Bernanke wants to soothe market fears next week. I thought that this article once again made the clear distinction between QE and ZIRP. The FED will taper and then end QE long before raising the federal funds rate, which is what I have been saying for a long time now.

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IRS and 2013 Refunds

Normally I do not fool with asking for tax refunds and just apply whatever is overpaid to the next year's tax obligation. I do not want to confuse the I.R.S. by asking for part of the overpayment to be applied to the next year's tax obligation with the remainder refunded to me. However, this process can reach the point where I have already covered 100%+ of the payments due for the subsequent year with the accumulated overpayments and then I will ask for a refund of just a bit of that excess over 100%.

I filed my return before April 15, 2013 this year and requested a refund. Unlike a large number of citizens, I do not need that refund to meet expenses such as a car payment. I have just read horror stories about people losing their cars to repossession because the IRS has simply failed to timely send a refund back to the taxpayer in anything remotely close to a timely manner.

There is a IRS site called "Where is My Refund". Where's My Refund - It's Quick, Easy and Secure. Yes it was quick and easy. I just entered by SSN, my filing status and the amount of the refund. The site was short on an answer however. This is the reply given to me:

Well, thanks for that information. I already knew that the IRS had my tax return. I wanted to know where the f*** was my refund?

I know that I did not make any math mistakes that might cause a delay since I use TurboTax and allow their software program to perform the computations. The only other legitimate reason for a 2 month delay would be a failure to sign the d*** thing, which it is not inconceivable for the Old Geezer but the LB prepares that return and will readily tell anyone that it has never made a mistake.

1. Added 50 TICC in Taxable Account at $9.85-Average Down (see Disclaimer): This BDC went ex dividend for its quarterly dividend after my purchase. I am averaging down from an earlier purchase made in the taxable account. This is another stock that I have discussed recently so I will just be briefly discussing some more recent news. I did buy this one below net asset value per share, based on the March earnings report, after failing to follow that simple objective previously, which goes to show that the OG sometimes does practice what he preaches except when there is a brain malfunction, an unfortunate event occurring more frequently now, or a temporary dominance in trading decisions by the NIT WIT RB.

Snapshot of Trade:

Security Description:  TICC Capital is a Business Development Corporation (BDC) that provides capital primarily to small and medium size private technology companies.

TICC Capital Profile Page at Reuters.

Key Developments Page at Reuters

Prior Trades: Bought 100 of the BDC TICC at $9.8-ROTH IRA, and brain malfunction event at Item # 5 Added 100 TICC at $10.30.

I now own 150 in a taxable account and 100 in the ROTH IRA which I may sell if there is a pop above $10.5 within the next twelve months.

After purchasing those shares, I suffered a typical adverse event, the issuance of common shares. As noted in the prospectus for this issuance of 3M shares, the price was $10.46 per share before the announcement. Prospectus Overall, TICC issued 3.45M shares in March 2013 at $10.2 and another 6.325M in February at $10.36 (Page 48 10-Q) At least those issuances were above NAV.

Last Earnings Report: For the March 2013 quarter, TICC reported core NII of $.24 and there were two loans on non-accural status. The ratio of net investment income to average net assets was reported at 9.4%, down from 10.32% as of 3/31/12.‎ SEC Filed News Release

Net Asset Value Per Share as of 3/31/13: $10.02, up from $9.9 on 12/31/12

A list of investments can be found starting at page 9 of the last filed 10-Q. Most individual investors, including me, are in no position to evaluate those private companies and all of us are relying on the expertise of TICC's highly compensated managers to make sound investment choices.

Rationale: (1) It is all about the income with limited capital appreciation potential My goal each year in a taxable account is to increase my aggregate value by 6%+ after inflation and adjusted for taxes. That is one hard bogey to hit consistently and is made easy only in long term bull markets for major asset classes. The really tough part comes during long term secular bear markets for one or worse both major asset classes (1966 to 1982) When I start out with a dividend yield close to, or in excess of 10%, that individual selection has done its part in achieving that result with minimum appreciation in the share price

TICC is currently paying a $.29 per share quarterly dividend. TICC Capital Corp. | Investor Relations At that rate, the yield is approximately 11.78%. Please note that this BDC cut its dividend repeatedly after the 2008 first quarter. The 2008 first quarter payment was $.36 per share, seven cents more than now, and was cut thereafter to $.3, and then to $.2 before bottoming at $.15 in the March 2009 quarter. The dividend was then raised to $.2 in the 2010 second quarter and several subsequent raises took the quarterly dividend to its current level of $.29. That history is a significant negative.

Risks: The risks of BDCs are discussed throughout this blog. The company goes into great detail about risks in its Annual Report at PAGES 23-43, SINGLE SPACED PAGES: 2012 Annual Report

Whenever I read that kind of statement, it reminds me of those television commercials about a drug when the announcer goes into a long list of potential adverse side effects. Sometimes, I ask that announcer "are you saying that this drug is worst than whatever problem it is allegedly designed to help".

Closing Price Last Friday: TICC: 9.56 +0.08 (+0.84%)

2. Added 50 PSEC at $10.15 (see Disclaimer): I have discussed Prospect Capital throughout this blog and do want want to rehash my analysis of the risks and advantages. My most recent discussion is in a post where I bought 100 shares in the ROTH IRA: Item # 3 Pared Trade: Sold 50 PRY @ $25.51 & Bought 100 PSEC @ $10.2-Roth IRA Instead, I will just briefly discuss a few news items since that purchase.

Snapshot of Trade:

Prospect Capital Profile Page at Reuters

Prospect Capital Key Developments Page at Reuters

Prospect Capital Corporation-Company Website

I will generally try to buy a BDC stock on a downdraft caused primarily by non-fundamental reasons. A typical cause for such a downdraft is a large share issuance, frequently below net asset value, that causes a significant decline in the share price. The last published NAV was $10.71 as of 3/31/13, down from $10.83 on 6/30/13.

My last purchase in the ROTH IRA, linked above, was just after once such occurrence. PSEC is in my opinion a serial issuer of shares and a number of those issuances have been below net asset value. I just have a negative view of that approach and would note that the manager's are compensated in part on the size of the portfolio.

Another non-fundamental reason for a sharp decline is a temporary market correction or some other kind of turmoil and volatility in the market. In both cases, most or all BDC stocks will react more negatively than the S & P 500. I noted recently in a SA comment that PSEC declined almost twice as much as the S & P 500 in the May to August 2011 stock market correction, with a notable plunge of almost 35%.  The closing price was $12.11 on 4/29/11 and $7.71 on 8/10/11. PSEC Historical Prices So, if you are going to play in this volatile space, an investor has to get use to these swings and understand the many risks associated with that high dividend. The PSEC dividend yield was calculated by Marketwatch at 12.7% using the closing price on 6/14/12: PSEC Stock Quote  Needless to say, that kind of yield does not come without a bevy of risks. And those risks have to be understood before buying your first share.

I always look down before I look up and gaze wishfully at the blue sky and the snow covered mountaintops. I might just step into a hole, break my leg, and in up in a hospital room staring at beige walls and cheap furniture.

Prospect Capital raised last week it NII guidance for the June quarter to $.31 to $.35 per share. Prospect Capital Announces $112 Million First-Lien Senior Secured Investment and Increases Current Quarter Net Investment Income Estimate to 31 to 35 Cents per Share, Providing a Current Stock Price Net Investment Income Yield of 12.2% to 13.8%  On the day of that news release the stock did rise on a down day for the market on above average volume indicating that institutional investors, on balance, viewed the information as favorable.

The previous guidance given in the earnings call for the March quarter was $.26 to $.31: (Comment by John Barry: Earnings Call Transcript - Seeking Alpha)

Another positive new development is embodied in this press release: Prospect Capital Reports Sale of Wolf Energy Assets and Receipt of Net Profits Interest Cash Distribution for a Combined Gross $66 Million, Boosting Prospect's Net Asset Value by Over $0.06 per Share and Reducing Prospect's Non-Accrual Rate to 0.2%

Prospect Capital pays monthly dividends and has been raising that dividend slightly every monthProspect Capital Declares Its 58th, 59th, 60th, and 61st Consecutive Cash Distributions to Shareholders As I pointed out, the dividend was reduced when PSEC went from paying quarterly dividends to monthly distributions. Just as an aside, one SA reader questioned my statement on that matter using four monthly interest payments to compare with one quarterly payment. Brilliant, another one of the geniuses caught one of my idiotic and stupid mistakes. I simply had no choice but too inform that reader as kindly as possible that quarter contains three months, not four.

Writing comments for me at SA is actually a good exercise since it gives me a great deal of information about the competence of individual investors who are making decisions in securities that I own.

A negative take on the last March earnings report can be found in this Seeking Alpha article.

Closing Price Last Friday: PSEC: $10.41 +0.12 (+1.17%)

3. Bought 100 of the Municipal Bond CEF BKK at $15.93-Sold 100 BKK at $16.92 (see Disclaimer): My target price for BKK was hit in just a few days. This is probably first time that I have discussed the purchase and the sell of a security in the same post. I knew last Friday that this CEF had to selling at a premium to net asset value per share which will likely cause me to sell the CEF.

For long time readers, it is known that I am negative about bonds and have adopted an active trading strategy for bond CEFs. I will try to buy them at greater than historical average discounts over the past 1 and 3 years and then sell them when that discount narrows to below that average at a time when the net asset value had increased and certainly when the market price had risen to a premium over the net asset value. All of the BKK share price increase was due to the market price moving from a 4% discount to NAV to a 2.2% premium.  This CEF also went ex dividend for its monthly distribution during my brief period of ownership.

Snapshot of Purchase:

Snapshot of Sell:

Snapshot of Profit: 

2013 BKK 100 Shares $73.07

I would have preferred to receive about a year of dividends before this CEF went to a premium valuation. I will now buy another one.

Security Description: The Blackrock Municipal 2020 Term Trust (BKK) is a leveraged closed end fund that owns tax free municipal bonds and is scheduled to liquidate on or about 12/31/2020. The fund owns a number of municipal bonds that mature in 2019-2021, but it also has some longer and shorter maturities.

The sponsor claims that the levered fund duration is 6.56 years (information under "portfolio" tab)

Sponsor's Website: BKK : Fund Profile

Credit Quality as of 3/31/13:

Last Filed Form N-Q Holdings as of 1/31/13: sec.gov As of that date, the fund's investments had a value $501+M purchased at a cost of $471+M or a net unrealized appreciation of $30+M. As of 10/31/12, the fund had a small loss carryforward of $1.864+M.

The leverage is currently being provided by very low cost auction rate preferred shares. Interest rate costs ranged from a low of .23% to a high of .38% during the last fiscal year, see Annual Report at page 60 (bad for the owners of those securities who got stuck after auctions failed starting in February 2008, but good for the owners of BKK)

Last SEC Filed Shareholder Report (period ending 10/31/12): SEC Filing

Data as of Friday May 31, 2013:
Closing Net Asset Value Per Share= $16.59
Closing Market Price= $16.13
Discount= -2.77%

Data as of Tuesday June 4, 2013
Closing Net Asset Value Per Share: $16.57
Closing Market Price: $16.03
Discount= -3.26

Data as of the Day of Purchase: Wednesday June 5, 2013
Closing Net Asset Value Per Share: $16.58
Closing Market Price: BKK: $15.90 -0.13 (-0.81%)
Discount: -4.1%

Data on Date of Sale Friday June 14, 2013
Closing Net Asset Value Per Share: $16.39
Closing Market Price: $16.75
Premium: +2.20%

On the day of my purchase, net asset value per share rose $.01 with the shares declining 13 cents.

BKK Page at CEFConnect

The pricing history shows an erratic pattern of trading both below and above net asset value per share over the past five years. Most of the time over that period, this CEF is trading at a premium to net asset value. The only substantial discount occurred during the Dark Period in 2008 which was typical for all leveraged bond CEFs. CEFConnect (pricing history tab-select 5 year time frame) The average over five years through 6/4/13 was a price 1.31% above net asset value per share.

The portfolio is weighted in investment grade municipal bonds, but there is a significant weighting in "BBB"  rated bonds.

The fund pays monthly dividends at the current rate of $.0623 per share. At that rate, the yield would be about 4.69%. The tax equivalent yield, based on a marginal tax rate of 35%, would be approximately 7.17%.

Prior Trade: Bought  200 BKK @ 14.71 November 2010- Sold 200 BKK @ 14.98 May 2011

Rationale for Purchase and Sell:

Like other bond CEFs, the BKK price suffered a swift declined in May. The BKK share price went quickly from $17.01 on 5/10 to my purchase price of $15.93 on 6/5, a 6.5% decline unadjusted for one monthly dividend of $.0623 per share or 5.98% on an adjusted basis. BKK Interactive Chart Adjusted net asset value declined .0094%, using the data at CEFConnect.

I reached my limited objective in less than 9 days. I will be looking for another trade in the municipal bond CEF space next week.

Risks: First, the recent carnage in the bond CEF space highlights one of their disadvantages. During times of turmoil, volatility, stress and/or downdrafts in asset values, the market price of CEFs can go down much faster than their net asset values. Second, the existence of leverage, even at a very low cost, will accelerate that decline simply due to the assets purchased with borrowed money adding to the decline that would otherwise exist for that fund without any leverage.

All bond funds face interest rate risks and risks associated with interest rate normalization which is currently a significant risk for them.

Closing Price Last Friday: BKK: $16.78 +0.45 (+2.76%)

4. Sold 50 GJT at $18.9  (See Disclaimer): The Synthetic Fixed-Income Securities Inc. STRATS Trust for Allstate Corp. Securities, Series 2006-3 (GJT) is a Synthetic Floater in the Trust Certificate legal form of ownership, one category of Exchange Traded Bonds, that pays monthly interest payments at a .8% float over the three month treasury bill on a $25 par value, up to a maximum of 8%. The underlying security owned by the trust is a fixed coupon senior Allstate bond maturing in 2036. www.sec.gov


Snapshot of Recent History:

I have now liquidated all of my synthetic floaters that pay a float of a short term rate and have no minimum coupon. This liquidation is based on my view that ZIRP will continue well into 2015 and that the FED will likely thereafter raise the federal funds rate at a snail's pace, unlike the June 2004-July 2006 rise from 1% to 5.25%.  That forecast which may end up being wrong means that I can no longer justify these securities as holdings since it may be another three years before there is any increase in the current coupon rate which is for all practical purpose the spread rate since the short term treasury bill is about as close to zero as it can get.

Chart 1954 to Date: Effective Federal Funds Rate (FEDFUNDS) - FRED - St. Louis Fed
Data for Federal Funds Rate

Chart: 3-Month Treasury Constant Maturity Rate

Chart: 3-Month London Interbank Offered Rate (LIBOR)

Closing Price Last Friday: GJT: $19.00 +0.10 (+0.53%)

5. Bought 58 shares NPI at $13.4 and 42 at $13.17 (See Disclaimer): The first order was a partial fill on a 100 share limit order at $13.4 where I did not place a AON restriction. With that restriction, the market market is under no obligation to display the order to the market.  Consequently, the order may not fill when there is a temporary downdraft below the limit order. To deal with the possibility of a partial fill I will set my limit price sufficiently below the then current bid price to compensate me for the brokerage commission.

Odd lot orders are not displayed to the market either. 17 CFR 242 : REGULATIONS In case you are interested, "CFR" stands for "Code of Federal Regulations", a multi-volume set much larger and somewhat less boring than the Internal Revenue Code. That may be the only CFR regulation that most investors need to read.

After noticing the partial fill, I checked the high and low price for the day. The high/low was $13.65/$13.42. Odd lots will not even show up when the orders sets a new intra-day low or is the only shares traded on a particular day which I have observed on a few occasions where I had  an odd lot fill when no round lots were traded during the day.

The CEF then went ex dividend for its $.072 per share monthly dividend. Nuveen Closed-End Funds Declare Monthly Distributions After a further decline in price, I went ahead and rounded the lot up to 100 shares by buying 42 at $13.17.

The dividend rate was lowered in November 2012 from $.0765%.

CEFConnect shows the annualized performance numbers under the "performance" tab which assumes reinvestment of all dividends. As of 6/14/13, the 5 year annualized return is 7.48% at net asset value and slightly higher at market value.

Snapshot of Trades:

2013 Bought 58 NPI at $13.42

2013 Bought 42 NPI at $13.17

Description of Security: The Nuveen Premium Income Municipal Fund is a leveraged closed end municipal bond fund.

The fund is weighted in "A" or better rated bonds.

Credit Quality as of 5/31/2013 

Sponsor's webpage: NPI - Nuveen Premium Income Municipal Fund

NPI Page at Morningstar (rated 3 stars)

NPI Page at CEFConnect

Data as of Monday 6/10/2013 (Day Before Purchase)
Closing Net Asset Value Per Share= $14.91
Closing Market Price= $13.65
Discount; - 8.45%

Data as of Tuesday 6/11/13 Date of 58 Share Purchase:
Closing Net Asset Value Per Share= $14.81
Closing Market Price= $13.52
Discount to NAV= -8.71

Ex Dividend Wednesday 6/12/13 for 7.2 cents per share

Data as of Thursday 6/13/13 Date of 42 Share Purchase
Closing Net Asset Value Per Share= $14.66
Closing Market Price: $13.4
Discount to NAVat Closing Price: -8.59%
Distribution Rate at Closing Price= 6.51%
Tax Equivalent Yield at Closing Price (Federal at 35%)=  10.01%
Discount to NAV at $13.17 Price:  10.16%

Average Discounts as of 6/13/13
1 Year=2.27%
3 Year=2.23%
5 Year=-3.84%

During 2008, there was a brief spike to over a 25% discount and longer trading the the 10% to 15% range. (Pricing History Tab at CEFConnect: 5 Year History).

The Nuveen site contains information under the distribution tab that shows the earnings to distribution ratio.

Prior Trades: None

Rationale: The municipal bond CEFs tanked over the past month, many rising to 10% discount to net asset value and providing close to 10% tax equivalent yields (35% marginal federal tax rate), far higher than most leveraged taxable bonds CEFs adjusted for taxes. An example would be the bond CEF BTZ, which I own, that tanked in price too but the yield before taxes at last Friday's close was 7.2%.  BlackRock Credit Allocation Income Trust Stock Price Today (BTZ)

RISKS: See the risk section in BKK above.

Closing Price Last Friday: NPI: $13.65 +0.25 (+1.87%)

6. Bought 100 FAX at $6.35 (see Disclaimer):

Snapshot of Trade:

Security Description: The Aberdeen Asia-Pacific Income Fund is a leveraged closed end bond that focuses on bonds issued by companies and governments in the Asia Pacific region with more than a 40% exposure to Australian corporate and government bonds.

Sponsor's Website: Asia-Pacific Income Fund

Last Filed SEC Form N-Q Holdings as of 1/31/13: Aberdeen Asia-Pacific Income Fund, Inc. (Australian government bonds then at 36.9% weighting)

I took a snapshot of the credit quality as of 1/31/13 from that N-Q filing:

Last SEC Filed Shareholder Report: Aberdeen Asia Pacific Income Fund, Inc.

FAX Page at CEFConnect

Data Day of Purchase (6/12/13):
Closing Net Asset Value Per Share: $7.08
Closing Market Price= $6.28
Discount: -11.3%

Average Discounts/Premiums:
1 Year= +.7%
3 Year= -2.17%
5 Year= 4.57%

Unadjusted for any monthly dividend, the share price closed at $7.72 on 5/2/13 and at $6.28 on 6/12/13, a decline of 18.65%. The net asset value declined from $7.66 to $7.08 or 7.57%, obviously a significant amount but nonetheless far less than the decline in the market price. That kind of action, where the market price decline far exceeds the net asset value drop, is typical for CEFs during periods of declining asset prices, turmoil and/or stress. It can present an opportunity but there is a risk that the trend will continue unabated which will increase the investor's losses (i.e. the so called "falling knife')

The current monthly distribution rate is $.035 per share. CEFConnect At that rate, the yield would be about 6.6%. The relatively low yield compared to other alternatives is another reason for the small purchase. I am primarily playing a hoped for bounce in the AUD against the USD but I lack confidence in that happening anytime soon.

The average annualized performance for the past five years is +9.01% based on price and 8.17% on NAV. CEFConnect

Prior Trades: There have been some prior trades. I noted in October 2008 buying 200 shares when the discount  was close to 42%: Some Nibbles Got Filled: JZE, PJS, INZ and FAX All of the buys that day were off the charts good. JZE, bought at $12.5 was later redeemed by the call warrant at $25; PJS bought at $7.2 was later sold at ; and the ING hybrid INZ was bought at $7.4.

I just took a snapshot of that October 2008 purchase and my total trading profit for that year, rather than digging it all out when I only just purchased 100 shares:

2008 Bought 200 FAX at $3.39 

2008 FAX Trades +$241.81

Just glad to have one in profit territory that year. Some of those shares were bought in 2007.

I decided to buy only 100 shares for now because I could not find the duration number anywhere, and found that disturbing.

Rationale: This fund is going to be impacted by the currency exchange involving primarily the Australian Dollar and some other foreign currencies. The AUD has lost significant value against the USD after trading over 1.05 USDs for 1 AUD in April, closing last Friday at around .95 USDs for 1 AUD. AUD/USD Currency Conversion Chart

Another security adversely impacted by this decline is the WisdomTree Australia & New Zealand Debt Fund Fun (AUNZ), which closed at $21.03 and recently hit a 52 week low at $20.41. I sold that security back in January noting at the time "that I am somewhat concerned about a potential correction in the Australian Dollar that could wipe out the meagre interest payments made by this fund".  Sold 100 of the Bond ETF AUNZ at $22.89 That turned out to be a legitimate concern as the shares slide 8.13% from my sale's price to last Friday's closing price, wiping out well over 2 years worth of interest payments.

So at least some of the currency and interest rate risks have already happened before my purchase. I would not speculate on the AUD/USD currency exchange rate but would not be surprised to see AUD weakness continue for as long as commodity prices remain under pressure. I also believe hedge funds are attacking the currency.  In my opinion, the Australian government is far more responsible than our own and its debt is rated at AAA. That nation does not have the same kind of long term fiscal problems as the U.S. originating from unfunded entitlement programs. So, long term, I have more confidence in the value of the AUD than the USD. Australian government debt to GDP is far lower than the U.S. Australia Government Debt To GDP; United States Government Debt To GDP.

The fund is weighted in "A" or better rated bonds.

Closing Price Last Friday: FAX: 6.66 +0.22 (+3.42%)

Risks: The decline in both the FAX and AUNZ net asset value had the same origin, the double whammy from both interest rate and currency risk coming into play at the same time. There is is also credit risks but the portfolio is heavily weighted in investment grade bonds as noted above.

7. Sold 100 LF at $10.01 ($500 to $1,000 Flyers Basket Strategy)(see Disclaimer):

Snapshot of Trade:

2013 Sold 100 LF at $10.01

Snapshot of Profit:

2013 Sold 100 LF +$199.1

Item # 2 Bought 100 LF at $7.86 (December 19, 2012 Post). I noticed when looking at that post that I have sold now everything purchased and discussed in it except for the exchange traded bond KWN which is still owned in the Roth for its income generation.

When I bought these shares, I had a target price of $10 within 12 months, but failed to sell the shares earlier when that target was reached and did not overlook what I was supposed to do again. I am not married for sure to any stock that produces no income. I am 98% an income investor, allowing myself to buy a few insignificant non-income producing securities in my Lottery Ticket Basket Strategy and in the Flyers Strategy.

Closing Price Last Friday: LF: 9.67 -0.18 (-1.83%)

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I bought some other bond CEFs last week which I am not going to discuss now simply because I am tired of writing this post. I will reference those purchases when I post my next update of the CEF Portfolio in about two or three months.

Last Update: Stocks, Bonds & Politics: Closed End Fund Portfolio as of 5/8/13 

Paired Trade: Sold in a Taxable Account All 459+ Shares of VFICX and in ROTH IRA: Bought 300 MIN at $5.6, 50 GHY at $17.55, 50 SGL at $9.89, 50 GDO at $18.7, 50 ARCC at $16.9/ Sold 50 GJS at $17.14-Roth IRA/EFAV Add at $57.46

Addendum: Added Monday 6/10/13

Based on the price action on Monday, I decided to add a comment to this post published last Saturday. Bond CEFs continue to drift down more with several declining over 2% in value. Treasury prices are continuing to decline and that places pressure on the entire bond complex.

This is the price of TLT: 112.62 -0.54 (-0.48%), the 20+ year treasury ETF, as of about 2:10 C.S.T.
Here are a few more:

TIP: 114.67 -0.77 (-0.67%)
LQD: 116.13 -0.46 (-0.39%)

When dealing with this kind of downdraft, whose length and severity can not be determined until it ends, I will slice and dice my orders into very small pieces and spread them out over time. I bought just few minutes ago 50 shares of a bond CEF that is currently down almost 3.42%. My limit order was placed at about 10 cents below the market price earlier today, when the decline was about 3% and the market just flew through that order to the downside as the CEF made a new 52 week low.

I have a few other small orders that have not been filled even further below the market price.

If the carnage continues tomorrow, I will take a look and maybe buy 50 shares of something else. The one bought a few minutes ago just went over a 10% yield.

I am making selections based in part on historic average discounts to net asset value over the past 1, 3 and 5 years. That information can be found using the "pricing history" after entering the symbol at CEFConnect I generally will want to have a larger discount than the 1 and 3 average. The 5 year average is less important since it includes the period after the Lehman failure when discounts went sky high.


Big Picture Synopsis

Stocks:

Stable Vix Pattern (Bullish)

Vix Asset Allocation Model Explained Simply

Use of the VIX as a Timing Model

Short Term: Hoping for at least a 10% correction

Intermediate and Long Term: Bullish

The hoped for correction in stocks does not appear to be on the horizon. Instead, a possible melt up is possible as institutional investors rotate out of bonds into equities. 

Bonds (Durations Greater That 2 Years):

Short Term: Slightly Bearish 

Intermediate Term:  Slightly Bearish (Treasuries Bearish) 

Long Term: Extremely Bearish

I am now making for purposes of clarity a distinction between treasuries notes and bonds and most corporate bonds, and my outlook applies only for bonds with durations greater than two years. As noted in earlier comments, I anticipate that ZIRP will continue to keep short rates abnormally low, providing negative real rates of return.

I have changed my intermediate outlook for corporate bonds to slightly bearish from bearish for most corporate bonds based on recent inflation reports and a decline in inflation expectations. I remain bearish on the "risk free" treasuries with durations greater than two years since I expect better quality bonds to decline more in price during the ongoing rate normalization process. The potential loss for the 10 year treasury bought today with a 2.16% yield would easily exceed 20% with a normalized rate of 4.5% (approximate duration 9.034 years x. 2.34 hypothetical increase in interest rates= approximate loss of 21.14%)

The BLS reported that April CPI declined .4% and up only 1.1% over the past 12 months ending in April 2013. Consumer Price Index Summary The personal consumption price index was up only .7% over the past twelve months. News Release: Personal Income and Outlays For inflation expectations, I am relying on the inflation forecasts embodied in the pricing of 5, 7 and 10 year TIPs when evaluating the risks of intermediate term bonds. As noted in my last post, inflation expectations over those time periods have been declining in recent months.

All of the foregoing support for now a correction in intermediate term bond prices caused by rate normalization only. The Difficult Path to Interest Rate Normalization Once that correction occurs mostly over the near term, bond prices would stabilize with no change in the inflation outlook. Consequently, the short and intermediate term outlook are roughly the same based on the foregoing.

I will generally calculate the inflation forecasts embodied in the 5 to 30 year TIPs once a week using the data provided by the treasury department.

Daily Treasury Real Yield Curve Rates (TIPs)
Daily Treasury Yield Curve Rates (Nominal)

Last Friday, the average inflation forecast per year embodied in the 5 year TIP was 1.89%.

Bonds continued their selloff last Friday:

ZROZ: $98.50 -$2.59 (-2.56%) : PIMCO 25+ Yr STRIPS
TLT: 113.16 -2.06 (-1.79%) : iShares Barclays 20+ Year Treasury
BABS: $59.22 -$0.82 (-1.37%) : SPDR Nuveen Barclays Build America
TIP: $115.44 -$0.68 (-0.59%) : iShares Barclays TIPS Bond Fund
LQD: $116.59 -$0.46 (-0.39%) : iShares iBoxx $ Investment Grade Corporate
IEF: $104.88 -$0.82 (-0.82%) : iShares 7-10 Year Treasury

See Last Week's Post: Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization

Again, when rates are this low for quality paper, it does not take much of a decline in price to wipe out an entire year's worth of interest payments, a fact that is not lost on bond investors and may even trigger a stampede out of bonds causing a precipitous decline in prices.

Recent Economic Reports:

The BLS reported that the economy added 175,000 jobs in May, slightly more than the consensus estimate.  There was a 12,000 downward revision for the prior two month. Professional and business services added 57,000 jobs and b6 589,000 over the past year. Employment Situation Summary Job growth in the healthcare sector has averaged 24,000 per month over the past year. I would anticipate that sector to be a source of job growth. Federal government employment declined by 14,000. The U-6 number declined to 13.8%, down from 14.4% at the start of the year. Table A-15. Alternative measures of labor underutilization The unemployment rate ticked up slightly due to more people entering the labor force (420,000 based on the household survey) looking for jobs. The household survey showed a 319,000 gain in jobs. 

The ISM Manufacturing index for May was reported at 49%, the first month of contraction since November 2012. The new order component declined 3.5% to 48.8 from 52.3. Exports declined by 3%, consistent with a slowdown in Europe and in Asia.

Historical Chart for the ISM Manufacturing: PMI Composite Index

The May ISM Services index was reported at 53.7%, up from 53.1% in April, marking the 41st consecutive month of expansion. The business activity index was at 56.5%. The new orders component rose to 56 from 54.5, but employment ticked down to 50.1 from 52.

Historical Chart for the ISM Non-manufacturing: Business Activity Index

Historical Chart for the ISM Non-manufacturing: NMI Composite Index

Historical Chart for the ISM Non-manufacturing: New Orders Index

Historical Chart for the ISM Non-manufacturing: Employment Index

Historical Chart for the ISM Non-manufacturing: Backlog of Orders Index

Labor productivity rose .05% in the 2013 first quarter and .9% Y-O-Y. First Quarter 2013, Revised Non-farm unit labor costs fell fell 4.3% in the first quarter, as hourly compensation fell 3.8% with the .05% increase in productivity. Hourly compensation did rise 2% over the past four quarters but the decline in the last quarter was the largest since the BLS started to compile statistics in 1947.

ADP reported that private employers added an estimated 135,000 jobs in May, lower than the consensus estimate of 165,000. ADP also revised the April number down from 119,000 to 113,000. The service sector provided all of the new jobs with manufacturing shedding 3,000 jobs during the month.

In the Beige Book released last week, eleven out of the 12 FED Districts reported modest to moderate growth for the period between early April to late May, with the Dallas FED reporting strong growth in its district. FRB: Beige Book - June 5, 2013

For the first time in 16 years,  U.S. crude oil production exceeded imports over the 7 day period ending May 31. eia.gov/petroleum/supply/weekly/pdf/table1.pdf

The Federal Reserve released its "Z.1" flow of funds last week. This report contains an estimate of household net worth. federalreserve.gov.pdf At the end of the 2013 first quarter, the FED estimated that household net worth increased about $3 trillion, since 12/31/2012, to approximately $70.3 trillion. Household debt declined .6% in the first quarter with mortgage debt shrinking by 2.3%.

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Intel (own):

FBR Capital Markets raised Intel to outperform and increased its price target to $28 from $23. The report is summarized in a Barrons' article.

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Gross June 2013 Newsletter:

In his June newsletter,  PIMCO | Investment Outlook - ​Wounded Heart, Bill Gross makes a convincing case why the FED's monetary policies are now doing more harm than good.

I am willing to overlook another few months of QE for two reasons.

First, one positive long term secular force supporting U.S. growth is the increase in disposable household income resulting initially from mortgage refinancing at abnormally low interest rates and consequently providing more disposal income to spend and/or to save to support a long term recovery. A large segment of households need a continued recovery in home prices in order to refinance since their loans are not owned by Fannie or Freddie and consequently do not qualify for refinancing under the HARP program. Disposable income will then be augmented over time by increases in wage income and income from savings once the FED ends ZIRP.

Second, new home construction is still on life support and the U.S. economy needs this important sector to improve.

However, I also recognize that the positive returns from QE are rapidly diminishing and are probably outweighed now by the negative impacts which are now and have been substantial drags on the economy.

Gross identifies several of the negative consequences.

I view the most important one to be the impact on spending arising from lower interest income from savings. I highlighted that issue in several 2011 posts including this one: Item # 1 The Real Cost of The Federal Reserve's Jihad against the Saver Class I referenced a study that estimated that the FED's abnormal monetary policies were reducing U.S. GDP by about 1.75% per year. Another summary of this study can be found in The Big Picture blog. While the impact can be debated, the overall negative impact on spending from reduced income can not be seriously questioned as being substantial.

There is for example over 1 trillion dollars sitting in money market accounts, owned by individuals and non-profits, earning nothing due to ZIRP. Households and Nonprofit Organizations; Money Market Mutual Fund Shares; Asset

The average five year CD rate for banks and thrifts is less than .8%, 5-Year CD: National Rate of Banks and Thrifts. The 1 year CD rate average for national banks is .1%. 1-Year CD: National Rate of Banks  (see Certificates of Deposit -St. Louis Fed for more information on the impact of the FED's Jihad Against the Saving Class)

The Federal Reserve publishes the components of the money supply.  Savings deposits as of 5/20/13 were at $6.803 trillion dollars. Small denomination time deposits (less than $100,000) totaled $580+ billion. Institutional money funds total $1.739 trillion. Federal Reserve Statistical Release H.6 - May 30, 2013

In 2011, corporations were sitting on nearly $5 trillion in cash (more now). Why Are Corporations Holding So Much Cash?

In short, there is a ton of money laying around earning nothing. Individual Americans have a proven tendency to spend their income. Unfortunately, the leaders of many American corporations would prefer to hoard cash rather than to invest it in productive enterprises.  Possibly they need massive cuts in their pay which has gone way beyond ridiculous for hired help prone to mistakes and modest at best achievements.

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This post will be primarily devoted to describing what I characterize as a pared trade. A pare trade is basically keeping my overall allocation relatively unchanged but switching from one security to one or more other securities. The rational will generally be one or more of the following: (1) better income potential; (2) an assessment of relative valuation, particularly applicable for functionally equivalent securities; and/or (3) a determination about possible capital appreciation potential.

The first part of the trade was to sell my entire position of the Vanguard bond mutual fund VGICX held in a taxable account. The yield on that fund after tax was below 2%. I am paring that sell, just in my mind, with the purchase of several high yielding closed end bond funds and one BDC in the ROTH IRA, where their dividend payments become tax free. Closed end bond funds have been smashed during the recent bond correction. Some of my reasons underlying this pared trade are also discussed in recent comments to this SA article. Yields It would not be surprising to see the bond CEFs continue sliding in price as interest rates continue their path toward normalization.


1. First Part of the Paired Trade: Sold All 459+ Shares of VFICX in a Taxable Account (See Disclaimer):

Snapshot of History: I have held this security for a few years and received a decent return taking into account the conservative nature of this fund. I previously sold 100 shares for a profit, as shown in this detailed history which took two snapshots two display. All of the dividends were reinvested to buy more shares. I also received several short and long term capital gain distributions in addition to the monthly income dividends. Since inception in 2009, those capital gain distributions totaled $310.94.

Transaction History 12/30/2010 to 5/31/2013

Transaction History: 11/04/2009 to 11/30/2010

Snapshot of Profit:

2013 VFICX 459+ Shares +$145.93

Security Description: VFICX is an intermediate term bond mutual fund that owns investment grade bonds.

The Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX) had an average duration of 5.3 years as of 4/30/13 and an SEC yield of 2.15% as of 6/3/13. It simply made no sense for me to keep that fund in a taxable account where taxes eat into the meagre yield.

Closing Price on Day of Sale (6/4/13): VFICX: $10.05 -0.02 (-0.20%)

The average duration of the ETF LQD, an intermediate investment grade corporate bond fund, was 7.69 years as of 6/3/13.

The intermediate investment grade bond ETF from Vanguard ((VCIT) has an average duration of 7.5 years as of 4/30/13, with a SEC yield of 2.7% as of 6/3/13.

MIN, the investment grade intermediate bond CEF discussed in the next section, has an effective duration of 3.84 years.

Friday's Close: VFICX: $10.01 -0.04 (-0.40%)

Given the low yield of this fund, it will not take much of a decline to wipe out a year's worth of dividend payments.

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The following discussion is a list of income producing securities bought in the ROTH IRA rather than continuing to hold VFICX in a taxable account. I am not using the funds raised in the VFICX transaction to buy securities in the ROTH IRA where I have plenty of cash earning zero.  Instead, I am substituting similar and/or higher yielding securities in an IRA in the approximate amount of the VFICX proceeds realized from the sale in a taxable account.

I am going to give a detailed discussion of bond CEF MIN since this was my first purchase. I recently sold profitably 1000 shares of MMT, another bond CEF from the same sponsor. Sold 300 of the Bond CEF MMT at $7.57-ROTH IRA (4/30/13 Post); Sold 300 of the BOND CEF MMT at $7.09 (2/29/13 Post);  Sold 300+of the Bond CEF MMT at $6.83 (1/19/2012 Post).

I am not going to discuss the other purchases much, since those securities have been discussed on many occasions. I will just update the pertinent data and reference earlier discussions.

Total Cost of Five Purchases (MIN, GDO, ARCC, GHY, SGL) = $4,867
Total Proceeds from VFICX= $4,616.21

Please note that I have not increased my exposure to bonds but simply reached for additional yield that becomes even more advantageous by buying the higher yielding securities in the ROTH IRA and selling the lower yielding bond fund held in a taxable account.

If the funds used to pay for those five purchases had remained parked in the Vanguard Prime Money Market fund, and earned for an entire year the current rate of .01%, I would earn a grand total of almost $.49. Thank you Uncle Ben. I am more than just a tad underwhelmed.

2. Bought 300 MIN at $5.6-Roth IRA (see Disclaimer):

Snapshot of Trades: This snapshot includes the first securities purchase in the ROTH IRA as part of the pared trade:

Part of Pared Trade: 50 ARCC @ $16.9, 50 GDO @18.7, 300 MIN @5.6 

The MFS Intermediate Income Trust (MIN) is a leveraged closed end fund that owns investment grade corporate bonds. The fund pays monthly dividends at the current rate of $.04274 per share. MFS Announces Closed-End Fund Distributions At a total cost of $5.6, the dividend yield at that rate would be approximately 9.16%.

As of 4/30/13, the sponsor claimed that the average duration of MIN was 4.41 years and the effective duration was at 3.84 years.


MIN Data Date of Purchase (6/3/13)
Closing Net Asset Value Per Share: $5.97
Closing Market Price: $5.65
Discount: -5.36%
Discount at $5.6 Purchase Price= -6.2%

MIN DATA Date After Purchase (6/4/13):
Closing Net Asset Value Per share: $5.97
Closing Market Price: $5.67
Discount: -5.03

Last SEC Filed Shareholder Report for period ending 1/31/13: MFS INTERMEDIATE INCOME TRUST N-Q

Sponsor's Webpage: MFS Intermediate Income Trust

I took the following snapshot of MIN's top ten holdings and credit quality information, both as of 4/30/13:

AS of 4/30/13: Sponsor's Webpage

MIN Page at  CEFConnect

Morningstar has a negative view of this CEF, giving it a 1 star rating at the time of my purchase and 2 stars now. MIN MFS Intermediate Income The rating was based on a combination of factors, including the a "nothing special" performance, its premium pricing to net asset value and a large return of capital component supporting the dividend. Morningstar notes that this fund was selling at an average premium to net asset value of 4.69% for the prior six months. That issue was no longer applicable when I purchased shares since the shares had fallen to a discount to net asset value as noted above.

One huge negative for me is that the managers of this fund have somehow lost money buying investment grade corporate bonds with a strong tailwind at their back. I view that as just pathetic.

The Annual report for the period ending October 31, 2012 shows that the fund still had a loss carryforward of $35,709,870 after using part of that loss carryforward to offset recent long term capital gains. MFS INTERMEDIATE INCOME TRUST at page 38 The loss carryforward was $47,508,883 as of 10/31/10: MFS INTERMEDIATE INCOME TRUST at page 39 Lastly, the loss carryforward was at $67,223,261 as of 10/31/10; $61,879,081 as of 10/31/07; and $35,028,896 as of 10/31/03. The two portfolio managers have been managing the fund since March 2002 and May 2004 respectively.

I left a comment to a SA article discussing my negative view of the loss carryforward number for an intermediate investment grade bond fund and illustrating how the loss carryforward increased the return of capital component of MIN's dividend for the 2012 fiscal year. MIN Update - Seeking Alpha

The loss carryforward will shield long term capital gains from taxation, which in turn will increase the dividend's return of capital component since this fund actually needs a substantial amount of capital gains each year to support the dividend. Some investors like a return of capital, but I am not one of them.

I did not explore how the manager's of the fund lost money investing in an asset class that has done well for a long time. I suspect that the main reason was bad trading, selling bonds at inopportune moments, and possibly more than a few less than optimal selections. Anyone interested in exploring how those managers accomplished that result can dig through the historical shareholder reports at the SEC. MIN's SEC Filings The end result already tells the story for me, without the need for exploring the particulars.

So, if I am so negative about the competence of MIN"s managers, why buy the fund? I am generally comfortable with the investment grade bond portfolio and the relatively short duration. More importantly, the recent decline juices the dividend yield and may provide me hopefully with a short term trading opportunity.

In May 2013, there was a huge selloff in bond CEFs and the shares of MIN declined from $6.51 on 4/29 to my purchase price of $5.6 on 6/4, a 13.98% decline based on price and 13.32% adjusted for the one monthly dividend ($.043 per share) paid during that time period.  MIN Historical Prices

During the same period, the ETF LQD, which owns investment grade corporate bonds and has a longer duration at 7.69 years as of 6/3/13, declined 3.99% in price (calculation made by using the $117.06 price at the time the MIN order was filled and after an adjustment for a $.361 dividend). The Vanguard mutual fund VFICX fell less than 2%.

I view MIN to be nothing more than a short term trade. Most likely, I would sell that shares at $6 or higher. A return to $6 from $5.6 price would be less than a 50% retracement from the $6.51 price on 4/29/13. MIN Interactive Chart

The return of capital adjustment to the cost basis is not relevant in a IRA, but the inability to earn the dividend is still relevant irrespective of whether MIN is bought in an IRA or a taxable account.

My goal is simply to collect several monthly dividends and then hopefully sell the shares at over $6 before the end of this year. If the shares fall below a 10% discount to net asset value, I will simply change my reinvestment option from cash to reinvestment and thereafter become an involuntary long term holder. I will not be buying more shares in the open market based on my negative opinions about this fund and its managers.

Friday's close: MIN: $5.63 -0.04 (-0.71%)

3. ADDED 50 GDO at $18.7-Roth IRA (see Disclaimer): The snapshot of this trade can be found in Item #2 above.

For readers of this blog, the Western Asset Global Corp Defined Opportunity Fund (GDO) needs no introduction. After selling out of my position, which went over a $10,000 exposure at one time, I have started buying shares back and now I have already started to average down.

I last eliminated my position in the ROTH IRA back in February 2013: Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38 Incidentally, I later sold GSPRD in that pared trade:  Sold 100 GSPRD at $23.71-Roth IRA (4/2/13 Post).

This last 50 share purchase in the ROTH IRA was an average down from a March 2013 buy which now brings my position up to 150 shares in the Roth IRA. Bought Back GDO at $19.95-Roth IRA

Data on Date of Purchase (Tuesday 6/4/13)
Closing Net Asset Value Per Share: $20.6
Closing Market Price: $18.71
Discount: -9.17%

Data from Previous Friday (5/31/13)
Closing Net Asset Value Per Share: $20.66
Closing Market Price: $19.1
Discount: -7.55%

GDO Page at Morningstar (recently upgraded to 4 stars, possibly based just on the price decline; three year average discount -4.55%)

GDO page at CEFConnect The "pricing history" page shows the recent expansion in the discount to net asset value.

The link to the sponsor's site for GDO will not work. Instead, the link will take you to the main Legg Mason page where you will need to click a box titled "closed end funds" and then scroll to GDO.

Individual Investor - Closed-End Funds Details

Under the "portfolio characteristics" tab, the fund provides details about country weighting, credit quality and important metrics like duration. The fund claims that the effective duration was 4.2 years as of 3/31/13, and the fund had then 257 holdings. The fund had a 63.51% currency exposure to the USD; 22.09% to the Euro and 12.25% to the British Pound as of 3/31/13. So there is currency risk associated with those foreign bond holdings which requires some monitoring of the exchange rates for at least the Euro and British Pound:

EUR/USD Currency Conversion Chart

GBP/USD Currency Conversion Chart

The credit quality is weighted in investment grade bonds, but the fund does maintain a significant exposure to junk rated bonds (as of 3/31/13, BB at 14.57%; B at 12.23%; CCC at 3.85%)

I mentioned in an earlier post that GDO recently cut its monthly dividend to $.115 per share from $.12. Western Asset Global Corporate Defined Opportunity Fund Inc. (“GDO”) Sets New Rate and Announces Distributions for the Months of June, July and August 2013 I expect that this CEF will make an effort to avoid a return of capital distribution, which is one reason for the recent cuts, and the other reason is the fund's relatively short duration. The managers also need to keep in mind that the fund is scheduled to liquidate in 2024 which means that higher yielding, longer term bonds need to be kept to a minimum.

None of the 2012 dividends were classified as return of capital by the fund: leggmason.com/PDF

At the new reduced monthly rate, the dividend yield at a total cost of $18.7 would be about 7.38%.

Needless to say, I have been an active trader in this security. Some of my trades are linked below:

Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010;  Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Sold 100 GDO at $18.72 January 2012; Sold 200 GDO at $19.18 June 2012; Sold Remaining GDO in Taxable Account at $19.69 July 2012; Sold 100 GDO at $20.79 December 2012; Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38; Bought 100 GDO at $19.8 April 2013

Friday's Close:  GDO: $18.88 -0.10 (-0.53%)

4. Bought 50 ARCC at $16.9-ROTH IRA (see Disclaimer): Ares Capital is a business development corporation.

Profile at Reuters

Key Developments

I do not expect much, if any, capital appreciation when buying a BDC due to the rich compensation paid to a BDC's managers (see pages 40-42 10-q), the hefty dividends paid to the common shareholders that deplete the firm's capital cushion, the constant flow of capital raises which are frequently dilutive to existing shareholders, and the risky loans made by BDCs to private companies. The sole reason to buy any BDC is for its income generation. The goal is to sell the stock for any profit after collecting several dividend payments.

BDCs are likely to decline more than a major market average during recessions, stock bear markets and corrections in bull markets. In a recent SA comment, I noted that the BDC PSEC declined about 35% between 5/2/2011 and 8/8/11 when the S & P 500 declined almost 18%. During that same period, ARCC declined from $17.36 to $13.07. Adding back a $.35 per share dividend to the $13.07 price, the adjusted decline was 22.69%.

I also recently bought 70 shares in a regular IRA. Item # 2 Bought 70 ARCC at $17.24-REGULAR IRA The last 50 share purchase brought me up to 120 shares in the IRAs.

I sold 50 ARCC shares in taxable account: Item # 1 Sold 50 ARCC at $18.02 (5/6/13 Post) I calculated in that post that the total return for those shares was 29.38%. I still own 50 shares bought in a taxable account: Bought: 50 of the BDC ARCC at $16.17

For tax reasons, it makes more sense to own BDCs in the IRA since most of the dividends paid by them will not be classified as qualified dividends. However, given their risks, a frequently discussed subject in this blog, I will trade them frequently in an IRA for whatever profit is achievable after collecting a year or two of dividends. I am simply hoping for a 10% annualized gain with the dividend providing most of that return.

As of 3/31/13, the net asset value per share was $15.98, up from $15.47 as of 3/31/12 but down from $16.04 on 12/31/12. The company had as of 3/31/13 investments in 151 companies with a weighted average yield of its loans and other income producing investments at 11%. Ares Capital Corporation Declares Second Quarter 2013 Dividend of $0.38 Per Share and Announces March 31, 2013 Financial Results

Based on the current regular $.38 per share quarterly dividend, the yield at a total cost of $16.9 is approximately 8.99%. Ares did pay a $.05 special dividend last December. ARCC :: Investor Resources :: Dividends

A list of the investments can be found starting at page 4 of the recently filed SEC Form 10-Q. (see also ARCC :: Portfolio)

As previously noted, Ares priced a large public offering of common stock during April, selling 19.148M shares at $17.43 (see page 59-Form 10-Q)

Friday's Close:  ARCC: $16.93 -0.01 (-0.06%)

5. Added 50 GHY at $17.55 in the Roth IRA (see Disclaimer): This is the 4th security bought in the pared trade. The Prudential Global Short Duration High Yield Fund (GHY) is a new closed end fund that invests in short term junk bonds globally.

As of 4/30/2013, the U.S. had approximately a 56.1% weighting. Foreign currency exposure can by itself result in net asset value per share going down or up, adding both potential risks and benefits (gains and losses) resulting from owning foreign bonds. The currency risk is just another layer of risk.

Since my last purchase in the Roth IRA, made on 4/24/13, the fund has paid one monthly dividend of $.125 per share. GHY Historical Prices The net asset value per share was $19.07 on 4/24/13 and $19.06 on 5/24/2013, indicating that the share price decline was not due to any material change in the net asset value per share. Instead, the discount to net asset value has been expanding along with all other CEF bond funds that I monitor.

Historical NAV per share and discount/premium information can be found under the "pricing history" tab at CEFConnect.

The fund recently declared a $.125 per share dividend for June, July and August: Prudential Short Duration High Yield Fund, Inc. and Prudential Global Short Duration High Yield Fund, Inc. Declare Distributions for June, July, and August 2013 The June ex dividend date is shown as 6/18/13.

Snapshot of Trade: 

2013 Roth IRA Added 50 GHY at $17.55

Unfortunately, I started to buy this new CEF shortly before the bond CEF space underwent one of its periodic downdrafts.

This last purchase was an average down and brings me up to 100 shares in the Roth IRA. Item # 3  Bought 50 of the Bond CEF GHY at $18.77-Roth IRA I changed my dividend option to reinvestment from payment in cash after completing this last purchase. I noted in that post that the net asset value was $19.

Data From Day Prior To Purchase:
Closing Net Asset Value Per Share= $18.86
Closing Market Price= $17.73
Discount= -5.99%

Data From Day of Purchase:
Closing Net Asset Value Per Share: $18.74
Closing Market Price: $17.4
Discount: -7.15%

The closing net asset value per share last Friday was  $18.76.

GHY Page at CEFConnect

Holdings - Prudential Investments

The sponsor states that the duration was 2.7 years as of 4/30/13. Fund Facts (near bottom of page)

SEC Filed Semi-Annual Report for the Period Ending 1/31/13: Prudential Global Short Duration High Yield Fund, Inc.

Friday's Close: GHY: $18.02 +0.05 (+0.28%)

6. Sold 50 GJS at $17.14-Roth IRA (see Disclaimer): The Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2006-2 for Goldman Sachs Group (GJS) is one of the many esoteric securities that I will buy in the retirement accounts. GJS is a Synthetic Floater in the Trust Certificate legal form of ownership that pays a .9% float over the 3 month treasury bill on a $25 par value, up to a maximum coupon of 7.5%. www.sec.gov The underlying security in this complex Exchange Traded Bond is an unsecured senior bond issued by Goldman Sachs that matures in 2033. My last foray into this security was a 50 share purchase at $13.77 last December.  

Snapshot of Transaction History: This snapshot reveals why I decided to harvest the profit:

GJS Transaction History

For as long as the FED continues ZIRP, a .9% spread over the three month T Bill is almost a .9% spread over zero or just call it .9% on a $25 par value. In other words, the yield is currently not much even when computed on a total cost per share that is deeply discounted from the $25 par value. The security does have two advantages when bought at my last price of $13.77. One is a profit built into the difference between the $25 par value at maturity and the purchase price. The other is that the deep discount would juice the yield when rates return to normal levels, which would be in the 4% to 4.5% range for the 3 month T Bill.

3-Month Treasury Constant Maturity Rate - St. Louis Fed

We are years away from that normal range, unless something totally unexpected happens with inflation that causes the FED to spike increases in the federal funds rate, viewed now as a very low possibility event within the next four to five years.

Snapshot of Trade:

Snapshot of Profit:

2013 Roth IRA GJS 50 Shares +$154.48

Bought Roth IRA:  50 GJS at $13.77 (12/19/12 Post)

I have not had the same success with GJS compared to the synthetic floaters GYB and PYT that have minimum coupons and a 2034 GS Capital TP as their underlying security.

Bought 100 GJS at $12.25 June 2009- SOLD GJS at 13.06 August 2009

Bought 100 GJS AT $13 October 2009-Sold 100 GJS at 15.6 in the Roth IRA November 2009

Bought: 50 GJS at 14.6 August 2010- Sold 50 GJS @ 16.20 October 2010

Added 50 of the Synthetic Floater GJS at 13.25-Roth IRA-December 2011-Sold 100 GJS at $14.9 and Bought Back 100 of GYB at 17.2-Roth IRA March 2012

Bought 100 GJS at $10.5 April 2009

I no longer view any of the synthetic floaters as worthy of purchase at their current prices and my outlook for short term interest rates over the next three to five years.

This last profit brings my total for Trust Certificates up to $25,644.11 (see snapshots at Stocks, Bonds & Politics: Trust Certificates: New Gateway Post)

Rationale: At the moment, the profit realized from this security is more important than its income generating potential five or so years into the future.  The last 12 months of income is close to $12.  I can earn far more with another investment now than that $12 or so paid by GJS to me over the past year. The future inflation protection is not worth the low current income, reasonably projected to last several more years, given the profit built into the sales price.

7. Added 50 SGL at $9.89 Roth IRA (see Disclaimer): This is the last purchase made as part of the pared trade. I have at least managed to increase the "tax free" income generated by securities owned in the ROTH IRA, but that is not hard to do when the Vanguard Prime Money Market Fund (the source of funds for those purchases) has a current 30 day yield of .01%. Taxable Money Market Funds - V

I am becoming weary writing this post. I thought before the week started that I would be doing nothing, and have already bought by Thursday 10 securities. The decline in bond CEFs in May triggered most of the buying.

The Strategic Global Income Fund is an unleveraged world bond fund.

Snapshot of Trade:

My recent foray into SGL was ill-timed. Any foray into bond CEFs would have been far removed from  optimal when made before around May 10. This last add brings me up to 150 shares in the ROTH IRA and I also recently bought 200 shares in a taxable account.

Item # 2  Bought Back 100 SGL at $10.57-Roth IRA; Item # 5 Bought 200 SGL at $10.56 (order date 5/7/13)(net asset value per share at $11.5)(one monthly dividend paid since that purchase)

I have nothing much to add to those recent prior discussions except to say the price is lower and the discount to net asset value has expanded to over 10% based on the closing data from the day prior to my purchase: SGL Interactive Chart $11.33 close on 1/23/13)

Data From 6/5/13:
Closing Net Asset Value Per Share $11.09
Closing Market Price= $9.96
Discount: -10.19

Date from Day of Purchase 6/6/13
Closing Net Asset Value Per Share: $11.09
Closing Market Price Per Share: $9.9
Discount: 10.73%

A 10.73% discount to net asset value per share  is a steep discount for a bond CEF.

This CEF has suffered a sharp decline in net asset value per share since my 5/7/13 purchase, when the NAV per share was $11.5. After adjusting for one monthly dividend, the decline between 5/7 and 6/5 was significant at 3.06%. The adjusted share price decline was slightly steeper at -5.04%.  Part of the recent net asset value decline may be currency related, given the recent strength of the USD until May 28 when the Dollar Index close at 84.1. I noted on June 6 that the Dollar Index had accelerated its slide from that high and was down over 1% at 81.54 when I placed the SGL order. DXY Index Chart A lower price indicates dollar weakness against a basket of currencies weighted in the EURO. (more information about U.S. Dollar Index: ICE_USDX_Brochure.pdf.

The one year average discount was 5.7%; the 3 year average discount was 5.59%; and the five year average discount, which includes the ridiculous discounts from the 2008 time period, was 8.16%, all computed by CEFConnect as of 6/5/13. This fund traded at over 30% discounts to its net asset value for brief periods during 2008

SGL Page at Morningstar (raised to 4 stars after the recent swoon in price)

SGL page at CEFConnect

Friday's Close: SGL: $9.86 -0.04 (-0.40%)

8. Bought 5 shares of EFAV at $57.46 (New Teaching Strategy for the Young Investor)(see Disclaimer): This is a teaching strategy attempting to mimic what I would be doing as a novice investor with limited funds to invest. The expense ratio of this fund is .2%, and the fund currently owns 184 stocks.

iShares MSCI EAFE Minimum Volatility Index Fund (EFAV): Overview - iShares

EFAV can be bought commission free at Fidelity. The decline since my original 15 share purchase was sufficient to trigger an automatic add last Wednesday.

In this particular strategy, I am not thinking at all after selecting the initial commission free ETFs to buy, but simply following a long term investment strategy that has several trading rules attached to it including buying small lots on dips. Bought  15 Shares EFAV at $61.6 So, if the young investor was working 80 hours a week (close to my work work week in the late 1970s and early 1980s) or otherwise had little time to devote to stocks, it could be determined fairly easily that the market was tanking and consequently a purchase of a 5 or 10 shares of a commission free ETF may be appropriate as part of a long term strategy. This ETF had declined by about 6.72% since my initial purchase.  Most brokerage firms will allow the investor to set a price for an email alert which would be another way to handle buying 5 or 10 shares after 5+% declines. A 20% decline would trigger a bigger buy, with the largest buys coming during the catastrophic phase of a long term bear market (greater than a 45% decline)

Snapshot of Commission Free Purchase:

Friday's Close: EFAV: $58.18 +0.46 (+0.80%)

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I will discuss some of the trades made last week in the next weekly post. This one is long enough. Mostly, I have been concentrating my attention on bond CEFs and BDCs that are being sucked once again into a black hole. I will trade this kind of event, buying in increments and spacing the purchases out over several days.

Even if I am correct that the 10 year will rise to a 3.5% yield by this time next year, that kind of normalization in interest rates can not justify the kind of selloff recently experienced by bond CEFs. As noted in the introduction section and in the prior weekly post, inflation is declining according to the government's CPI and PCE price indexes, both highlighting a potential deflation threat near term rather than problematic inflation  anywhere on the horizon. (see Doug Short's discussion at Two Measures of Inflation)