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Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As 6/3/16

|Includes: AFSI, ARGO, BC, CBL, CLGX, FRFHF, Goldman Sachs Group Inc. (GS), M, VCIT

My next update will be the CEF basket. The exchange traded bond and preferred stock basket is seeing more activity than the other baskets combined, and that is without including my heavy activity in $1,000 par value bond purchases.


This topic was last updated here: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 5/26/2016 - South Gent | Seeking Alpha

I completed a bond ladder consisting of TIPs maturing between 1/1/19 and 12/31/25 with one bond purchased outside of that range. The ladder consists of several bond maturities throughout that period. I did buy two bonds maturing at different times in 2021:

I will only be discussing the first purchase in this blog, and that post was published earlier: The Mechanics Of Purchasing A TIP In The Secondary Market - South Gent | Seeking Alpha As noted in that post, I will need greater than currently anticipated annual average inflation rates for these buys to work out better than purchases of nominal treasuries maturing at the same time. I did not pay a commission to either Fidelity or to Vanguard.

The WSJ has a list of outstanding TIPs here. Looking at that list, I avoided any with a coupon less than .375%.

All of the transactions discussed below were completed before the government released the April 2016 jobs report. Employment Situation Summary; Bloomberg

IMO, that report increased the odds of a recession within 12 months and lowered the chances of a FED rate increase this year. Based on the employment report, JPM's recession forecast model now has a 36% chance of a recession starting in 12 months, up from 34% the prior week. My assessment was lower at 10%-15% prior to the employment report, but I increased the odds more to 20%-25% based on that ugly employment report.

The odds of stagflation within two years also rose IMO. Consequently, I started to make some minor adjustments to this basket based on this new information that will be discussed in the next update.

Another portfolio adjustment was to dial back my regional bank exposure some.

Rationale For Transactions Discussed Below: I inherited a few bond and preferred stock positions from my mother's estate last week. I have already sold most of the securities owned in that account due to excessive duplications with my existing holdings. The proceeds have not yet been deployed to any decree.

A list of those inherited positions are shown below.

I kept a few bond and preferred stock positions. I elected to sell pare 50 shares from my existing AGIIL and AFSS in anticipation of receiving more shares.

Snapshots of Closing Prices as of 5/26:

All of the foregoing were purchased earlier this year as part of my management of estate assets:

This preferred stock received a stepped up cost basis:

There were two individual bonds owned that received a stepped up cost basis that I decided to keep:

CoreLogic 7.55% Senior Unsecured Bond Maturing in 2028 (very thinly traded due in large part to a prior issuer voluntary redemption offer)

FINRA Bond Detail

Moody's Rating B1 (06/03/2015)
Standard & Poor's Rating B+ (09/08/2010)

I now own 4 of those bonds that are currently CoreLogic (NYSE:CLGX) obligations. This lot bond lot was probably bought around the time that I added 1 bond to my personal account:

Bought 1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 at 84.95 (2/22/12 Post); Item # 3 Bought 1 7.55% CoreLogic Senior Bond Maturing 4/1/2028 at 94.975 (4/29/11 Post) Those two bonds have a current yield of 8.32% based on my total constant cost of $1,815.25.

I have not traded this individual bond, but have a long history with the Trust Certificate PJS whose underlying security is this CLGX bond, buying it as low as $7.2 (10/10/2008 Post).

I realized $2,291.52 trading small PJS lots with this probably being the last round trip transaction: Item 4. Sold 50 PJS at $27.11 (6/8/15):Update For Bond And Equity Preferred Stock Basket Strategy As Of 7/31/15 - South Gent | Seeking Alpha-Bought PJS In Roth IRA: An Exchange Traded Bond With A 7.55% Coupon On A $25 Par Value - South Gent | Seeking Alpha

CLGX Analyst Estimates | CoreLogic, Inc.

Brunswick 7.375% Senior Unsecured Bond Maturing in 2023 (another thinly traded bond):

FINRA Bond Detail

Moody's Rating Ba2 (06/23/2015)
Standard & Poor's Rating BB+ (05/19/2014)

This brings me up to 3 Brunswick 2023 bonds, all bought at approximately the same time. I discussed my 1 bond purchase here: Item # Bought 1 Brunswick 7.375% Senior Bond Maturing 9/1/2023 at 94.2 (4/4/11 Post). My current yield is about 7.83% based on my cost.

BC Analyst Estimates | Brunswick Corporation

I manage family accounts, so there will be duplicative positions everywhere.

The MACY's bond purchase was in furtherance of an investment grade bond ladder, currently under construction, that focuses on bonds maturing between 1/1/20 and 12/31/2025.

CBLPRD was eliminated in a Roth IRA due to risk mitigation based on new developments.

I also continued to build up my Canadian reset preferred stock allocation by purchasing the security discussed in Item # 1 below, though I did sell one today that resets at a spread to the 3 month Canadian T Bill which will be discussed in the next update.


Several of the Canadian reset preferred stocks were under some downward pressure today.


1. Bought 100 FFHPRG at C$15.55:

Trade Snapshot (C$1 Commission):

Click to Enlarge:

Security Description: The Fairfax Financial Holdings Ltd. Series G Preferred Stock (FFH.PR.G:TOR) is a Canadian "reset" equity preferred stock. Every five years, this security resets its coupon at a 2.56% spread to the five year Canadian government bond. Par value is C$25:

Dividends are cumulative.

There is an option to convert into another preferred stock that pays a spread to the three month Canadian treasury bill which option is exercisable once every five years as provided in the prospectus.

The Series G reset last September at an annual rate of just 3.318% or C$.207375 per share. Fairfax Announces Reset Dividend Rate on Its Series G Preferred Shares This coupon rate will continue through 9/30/2020 whereupon it will reset again unless Fairfax then elects to redeem at par value.

Based on the current coupon, the dividend yield is about 5.33%.

Fairfax Announces Quarterly Dividend on Series C, D, E, F, G, H, I, J, K and M Preferred Shares and Quarterly Dividend Rate for Series D, F, H and J Shares

To receive a higher coupon, I will need the Canadian five year treasury bond to be higher than .758% on the 2020 reset data.

A 4% five year yield on the 2020 reset date would give me a 6.56% coupon and an effective current yield of 10.55% or almost twice as much as the current dividend yield.

Historical 5 Year Canadian Treasury Bond Yields Prior to the Near Depression:

Selected Government of Canada Benchmark Bond Yields - 5 year

Based on third party information, Fairfax preferred stocks are rated at Pfd-3 by DBRS as of 4/1/16: CIBC

2. Sold 50 of AFSS at $25.4-Roth IRA: As noted above, I just inherited 100 AFSS shares.

Quote: AmTrust Financial Services Inc. 7.25% Subordinated Notes (AFSS:NYSE)

Last Discussed: Item # 5. Bought 50 AFSS at $24.24: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 3/11/16 - South Gent | Seeking Alpha

I still own that 50 share lot. I also bought a 50 share lot in the IB account last March at $24.55 which I had forgotten about until recently:

I currently own 200 AFSS shares.

Trade Snapshot-Roth IRA Account:

Profit Snapshot:

Item # 1. Bought 50 AFSS at $24.75-Roth IRA: Update On Bond And Preferred Stock Basket Strategy As Of 9/29/15 - South Gent | Seeking Alpha

Security Description: AFSS is an Exchange Traded junior bond issued by insurance company AmTrust Financial Services (NASDAQ:AFSI) This bond is senior to AFSI's common and equity preferred stocks in the capital structure, but is junior to all existing and future senior debt.

Interest is paid quarterly at the fixed coupon rate of 7.25%. Par value is $25.

AFSI has reserved to itself the right to redeem this junior bond at par value plus accrued interest on 6/18/2020 "or on any interest payment date thereafter". If the issuer does not exercise its right to redeem early, the bond matures on 6/15/2055.


AFSI Analyst Estimates | AmTrust Financial Services, Inc

SEC Filed Earnings Press Release Q/E 3/31/16

10-Q Q/E 3/31/16

2015 10-K (risk discussion starts at page 36)

3. Added 50 GYB at $19.99:

Trade Snapshot ($1 Commission):

I have a long history with this Exchange Traded bond.

I recently pared my position in GSPRD by 100 shares and part of those proceeds have been allocated to GYB. Item # 3. Sold 100 of 400 GSPRD at $21 Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 5/20/16 - South Gent | Seeking Alpha

GSPRD is an equity preferred floater-with no stated maturity-issued by the Goldman Sachs Group Inc. (NYSE:GS).

As such, it will be junior in priority to all bonds and senior only to common stock. This equity preferred stock will pay non-cumulative and qualified dividends at the higher of 4% or .67% above the 3 month LIBOR rate on a $25 par value. Prospectus Dividends are paid quarterly. The 4% coupon is likely to be the applicable rate for several years due to the Fed's Jihad Against the Saving Class.

The minimum coupon provides a measure of protection in a low inflation environment whereas the float provision addresses the onset of problematic inflation and a Fed tightening cycle.

GSPRD is junior in priority to the trust preferred security that is the underlying bond in GYB. More important IMO, GYB has a maturity date.

I will drag and drop here my recent discussion of GYB: Item # 1. Added 50 GYB at $20.21 Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 1/28/16 - South Gent | Seeking Alpha

GYB is a Synthetic Floater in the Trust Certificate form of ownership, a category of Exchange Traded Bonds.

GYB makes quarterly interest payments at the greater of 3.25% or .85% above the three month Libor rate on a $25 par value. As with other exchange traded synthetic floaters, there is a maximum coupon of 8.25%: Prospectus Interest payments are made quarterly.

SEC Filings for GYB

The underlying bond owned by the trust is a trust preferred issue from Goldman Sachs Capital I maturing on 2/15/2034 with a 6.345% fixed rate coupon. That is a $1K par value bond that is traded in the bond market:

In effect, the underlying security is a junior bond from GS. The coupon rate of the underlying bond will not be received by the owners of GYB unless the swap agreement terminates.

It is the swap agreement with a brokerage company that creates the rate paid by this security. The trustee receives the interest payments from Goldman Sachs for the 6.345% fixed coupon securities owned by it and then swaps that amount with the brokerage firm for the amount due the owners of GYB. Last Distribution Report

The owners of GYB will be entitled to receive $25 per trust certificate on 2/15/2034, assuming GS survives of course. If GS goes bankrupt, I would expect this security to be worthless.

The 3 month LIBOR rate is currently close to .66%. Chart: 3 Month London Interbank Offered Rate (LIBOR)

I would anticipate the 3 month Libor rate to increase when the Fed raises the federal funds rate. I would expect a slightly greater increase in the 3 month Libor rate.

This short term rate would have to rise above 2.4% during the relevant computation period to trigger an increase in the 3.25% minimum coupon (2.4% + .85% spread still equals the 3.25% minimum).

Based on current Federal Reserve monetary policy, a reasonable forecast would be a continuation of the minimum 3.25% for at least another 2 more years. By buying GYB at a discount to par value, I am able to juice the yield some.

The current yield based on the 3.25% minimum coupon is about 4.06% based on a total cost of $19.99 per share.

Comparison with GSPRD Priced at $21:

1. I lose about .762% in current yield with a GYB purchase at $19.99 due to the lower minimum coupon partially offset by the lower price;

2. I pick up a maturity date where I will receive the $25 par value provided GS has survived to pay it.

3. I have a better spread with GYB at .85% compared to .67% for GSPRD.

4. With GYB's lower coupon and the higher spread, the float will be activated as the higher rate when the 3 month Libor goes over 2.4% during the relevant computation period, compared to 3.33% for GSPRD.

At a 3% 3 month Libor rate, GSPRD's coupon is still at 4% while GYB's coupon would be raised to 3.85% or an effective yield of 4.81% which would be higher than the GSPRD yield for shares bought at $21. I call that line the crossover or break-even point.

Given the lower price and the better float over the 3 month Libor rate, GYB's yield would remain ahead of GSPRD after the float activation (until its maximum rate is hit) and the differential will expand in favor of GYB as the Libor rises further beyond the break-even point.

E.G. 5% 3 Month Libor

GYB 5.85% Coupon/Current Yield at $19.99 All-In Cost= 8.57%

GSPRD 5.67% Coupon/Current Yield at $21 All-In Cost= 6.75%

5. I pick up some risks that are unique to synthetic floaters that are not present in a plain vanilla equity preferred stock. The underlying bond owned by the GYB Grantor Trust does have a make whole provision and does not contain an out for a capital treatment event (a really complex topic discussed in depth in previous posts)

Prior GYB Trading Gains: $1,382.72

Snapshots of my GYB trading gains can be found in my Gateway Post for and in Item # 3 Tiptoed Back into the Exchange Traded Synthetic Floater GYB (2/21/15 Post)

I have included some links to prior round trip transactions in the Appendix.

I am at my limit with 200 shares now.

GS Analyst Estimates | Goldman Sachs Group, Inc.

4. Sold 50 AGIIL at $26.69:

Quote: Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (AGIIL:NASDAQ) - MarketWatch

Most Recent Discussion: Item # 5. Bought 50 AGIIL at $24.6 Update For Exchange Traded Bonds And Preferred Stock Basket Strategy As Of 1/22/16 - South Gent | Seeking Alpha

Trade Snapshot:

Profit Snapshot:

Item # 2 BOUGHT 50 AGIIL at $24.86-Roth IRA: Update On Bond And Preferred Stock Basket Strategy As Of 9/29/15 - South Gent | Seeking Alpha

Security Description: The Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (AGIIL) is a senior Exchange Traded bond issued by the Argo Group US, the U.S. subsidiary of Argo Group International Holdings Ltd. (NASDAQ:AGII). The note is guaranteed as provided in the prospectus by the parent company.

AGILL will make quarterly interest payments at 6.5% on a $25 par value. The issuer has the option to redeem at par value on or after 9/15/17.

Unless redeemed early, the bond matures on 9/15/42. Final Prospectus Supplement The optional redemption date reserved to this issuer always creates asymmetric interest risk that disfavors the bond's owner.

The bond is rated BBB- by S & P. Page 6 2015 Annual Report

AM Best Rating=BBB

This bond was sold to the public at $25 back in September 2012. The bond traded mostly between $25 to $26 until May 2013, whereupon it slid rapidly to $21 as interest rates started to spike up. AGIIL Interactive Chart The price only stabilized at close to $21 after interest rates started to go back down, starting in January 2014.

Prior Round Trip Trades: During the interest rate spike in 2013, I managed to buy this senior bond at $20.02, which highlights the interest rate risk issue. Item # 6 Bought 50 AGIIL at $20.2 (December 2013 Post).

I sold that lot at $24.21: Item # 2 Sold 50 AGIIL at $24.21-Roth IRA (6/28/14 Post)(profit snapshot=$186.48 plus two quarterly interest payments totaling $40.62; total return 22.33% in about 6 months)

I bought in October 2013 another 50 share lot at a higher price.

Item # 3 Bought: 50 AGIIL at $21.11 (10/13/13 Post).

Interest rates continued to rise after that October 2013 purchase which precipitated the decline from $21.11 to $20.2. I am highlighting this 2013 history to illustrate the interest rate risk inherent in long term bonds.

I sold the lot bought in October 2013 at $24.48: Item # 2 Sold: 50 AGIIL at $24.48 (6/7/14 Post)(profit snapshot=$152.58; total return of $193.2 or 18.17$ in about 7 months).

Total Trading Gains With Last Round Trip: +$415.53

Closing Price 6/2/16: AGIIL: $26.34 +0.04 (+0.15%)

AGII Analyst Estimates | Argo Group International Holdings

5. Bought 2 MACY'S 2.875% Senior Unsecured Bond Maturing on 2/15/2023 at 92.959 All In (i.e.-commission included in price):

Trade Snapshot:

FINRA Bond Detail

YTM: 4.086%

Current Yield: 3.09%

Moody's Rating Baa2 (05/19/2016)
Standard & Poor's Rating BBB+ (12/04/2013)
Fitch Rating BBB (04/15/2016)

Final Prospectus Supplement (11/2012; also includes 4.3% senior unsecured due in 2043)

SEC Filings

Most Recent Bond Offering Prospectuses:

Final Prospectus Supplement: $500M 3.45% Due 2021 (12/2015)

Final Prospectus Supplement: $550M 4.5% Due 2034 (11/2014)

PROSPECTUS SUPPLEMENT: $500M 3.625% Due 2024 (5/2014)

Final Prospectus Supplement: $400M 4.375% Due 2023 (9/2013)

I also own 1 Macy's bond maturing in 2030: Bought 1 Macy's Bond Maturing in 2030 @ 99.5 (January 2011 Post).

I am not presently concerned about being paid the principal amount at maturity. The recent earnings reports have been less than desirable: Macy's, Inc. Reports First Quarter Earnings Per Share of 37 Cents (40 Cents as Adjusted)

M Analyst Estimates | Macy's Inc

6. Sold 50 CBLPRD at $24.5 ROTH IRA:

Loss Snapshot: -$1.53

Item # 1. Bought 50 CBLPRD at $24.25-ROTH IRA Update For EQUITY REIT Basket Strategy As Of 1/29/16 - South Gent | Seeking Alpha

I mentioned in a recent comment that I would likely sell this preferred stock as a precautionary measure given recent developments and the preservation of capital focus in my ROTH IRAs.

I received one quarterly dividend payment, so I had a positive total return.

I summarized the new development in that prior comment as follows:

The WSJ reported that unnamed sources claimed that CBL was under investigation for accounting fraud by the FBI and SEC. CBL & Associates Falls After Report of FBI, SEC Fraud Probes - Bloomberg

I do not question that unnamed sources have made that claim to the WSJ. Those sources may include disgruntled former employees (or their attorneys) and/or banks who have been contacted in connection with CBL's borrowings.

"CBL & Associates Properties, Inc. Addresses Baseless Allegations in Media Coverage"

I do not question CBL's statement that it has not been contacted by the FBI or the SEC. The investigation would normally focus on third party documents first, and then there would be a raid at CBL's headquarters when and if those documents confirm possible or probable malfeasance.

I would also note that the mere existence of an investigation is alleged. Perhaps, the FBI and SEC has contacted former employees to discuss allegations made by them. That does not necessarily mean that a formal investigation has been initiated by one or both of those agencies.

I would also expect an inquirty to take place when former employees, who may have some documents, make an allegation even when the allegations lack merit when held up to the light of day and are motivated by spite or hoped for monetary gains through whistle blower lawsuits.

In any event, I will consider selling the remainder 50 CBLPRD held in an IRA because it is in an IRA and there are certainly cases supporting the cliche "where there is smoke, there is fire" and where one cockroach is found, a cockroach hotel may be waiting for discovery.

7: VCIT: I also picked up a starter position in the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) that can be bought commission free in my Vanguard accounts.

The weighted average maturity was 7.5 years as of 4/30/16. The average duration was then 6.5 years. Vanguard VCIT

This fund complements what I have been doing in recent individual corporate bond purchases.



A. Categories of Preferred Stocks and Exchange Traded Bonds (excludes principal protected senior unsecured notes that have all been redeemed)

I have snapshots of net trading gains for the following exchange traded bonds and preferred stock categories. The net trading gains were in small lots.

Trust Certificates: New Gateway Post= $28,971.16

Advantages and Disadvantages of Equity Preferred Floating Rate Securities= +$13,817.5

Baby Bonds - South Gent | Seeking Alpha= +$7,536.01

REIT Cumulative Equity Preferred Stocks= +$6,496.18

Aegon Hybrids: Gateway Post= +$4,512.81

TRUST PREFERRED SECURITIES - South Gent | Seeking Alpha= $4,122.09

ING Hybrids = $2,117.96

Non-REIT Fixed Coupon Equity Preferred Stocks = $2,337.47 (snapshots now at the end of REIT Cumulative Equity Preferred Stocks Post linked above)

Synthetic Floater transactions are included in the Trust Certificate category.

Exchange Traded Bonds: New Gateway Post

ING Hybrids: Links in one Post

Trust Preferred Securities: Links in One Post

Baby Bonds - South Gent | Seeking Alpha


B. Prior Round-TRIP GYB Transactions:

My next to last sell trade was a 150 GYB lot, and I used the proceeds to buy 100 DPG: Swap Trade Roth IRA: Sold 100 of 150 GYB at $18.03 & Bought 100 DPG at $17.31 (12/12/12 Post). Those GYB shares were bought at $17.2. The swap trade worked. After reinvesting the quarterly dividends paid by the CEF DPG, which were significantly higher than GYB's interest yield, I sold 113+ DPG shares held in the Roth IRA for a total return of $662.61 or 38.15%: Item # 8 Sold 113+ DPG at $21.19-Roth IRA (8/19/14 Post)

I have flipped this security so many times that it is just one big blur to the OG. I never have had much exposure to it, mostly 50 to 150 shares at any given time.

Bought 100 GYB at 10.95 /Will Hold Synthetic Floaters In Retirement Account; Added another 100 GYB in Regular IRA at $11 (April 2009 Post); Sold 50 GYB at $15 (September 2009); Sold 100 GYB at 18.09; Bought 70 GYB at 18.49 in Regular IRA (March 2010); Added 30 GYB in IRA at 17.97; Sold: 100 GYB @ 19.9 (October 2010); Bought 50 GYB @19.07 (October 2010); Bought 50 GYB at 18.63 in the Roth IRA; Sold 100 GYB at 19.7 in Roth IRA (May 2011); Bought 50 GYB at 16.95 in Roth IRA (August 2011); Added 50 of the Synthetic Floater GYB at $15.56 Sold 100 GYB at $17.07 (January 2012); Bought Back 100 of GYB at 17.2-Roth IRA (March 2012); Added 50 of the Synthetic Floater GYB at $16.5-Roth IRA (May 2012 Post)

The sell last transaction was 100 shares at $19.75: Sold Roth IRA: 100 GYB at $19.75 (5/10/14 Post):

As with other synthetic floaters with minimum coupons, trading has been the best alternative since all of them have been stuck on their minimum coupons since I started to trade them back in 2009. And, the minimum coupons are low, though the current yields will be higher due to their discounts to par value.

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members