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Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 7/19/16

|Includes: ENB, GS, OHI, PAA, United States Steel Corporation (X)

This topic was last updated here: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 7/13/16 - South Gent | Seeking Alpha

Fixed coupon exchange traded bonds and preferred stocks have what I call asymmetric interest risk between the owner and the issuer that clearly favors the issuer.

I discuss the asymmetric interest rate risk of exchange traded fixed coupon securities here: Update For Bond And Preferred Stock Basket Strategy As Of 9/10/15 - South Gent | Seeking Alpha

I discussed the interest rate risk and other material topics here: Update On Bond And Equity Preferred Stock Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha (scroll to following titles in the Appendix section: Interest Rate and Lost Opportunity Risks for Fixed Rate Coupon Equity Preferred Stocks; Credit Risks; Volatility Risk for Equity Preferred Stocks)

The following table includes only exchange traded securities. I do not have a table showing my existing $1,000 par value bonds bought in the bond market. I will discuss some of those trades here.

As noted earlier, I am building a bond ladder concentrating on maturities between 2020 to 2025. I will trade these bonds.

I do not have the inclination to discuss all trades $1K par value trades. The issuers are well known, and any bond investor needs to become familiar with the company in order to independently assess credit risks.

Some purchases made prior to the publication of this post will be included in the next update.

Basket as of 7/19/16: 60 securities

The market values for the Canadian cumulative equity preferred stocks is translated by YF into USDs.

Rationale For Bond Trades Discussed Below: Let me emphasize that I resent having to buy BBB- bonds maturing in six to nine years with YTMs slightly over 4%.

The Plains All America 3.65% bond that I sold at 99.52 matures on 6/1/2022 and is now selling above par value. Bond Detail That is almost 6 years from now. The current YTM is hovering in the 3.1% to 3.45% range. The credit risk simply does not justify a long term hold for that kind of yield.

Nonetheless, in a world where negative interest rates created by central banks have become the new normal, sheer desperation for yield is driving investors to make what I would call irrational decisions in the quest for any real inflation adjusted yield. Many of them undoubtedly know that their decisions are far from optimal.

If it is necessary to accept a 3.4% YTM for a BBB- rated bond maturing in six years, then the risk/reward balance has been skewed, with risk considerations being downgraded to an afterthought since the alternative would likely be a negative real rate of return with a higher quality bond.

So, I will sell some of these low yielding bonds that were bought at discounts to par when the price approaches par value.

I will then consider plowing the proceeds back into similarly rated bonds that are still selling at greater than 4% YTMs or junk rated issues that provide greater yields and profit opportunities given their current discounts.

An example of that rotation is the one U.S. Steel bond purchase discussed below. I take on more credit risk with that bond. However, I have one bond producing about the same current income as the 2 Plains America bonds, plus the U.S. Steel bond has an earlier maturity and the potential for a greater profit at maturity.

Another goal for trading is to take profits while at the same time reducing my weighted average duration. I am not buying into the Bond Ghouls' belief that interest rates and inflation will remain abnormally low by historical standards over the next 30+ years.

The disposition of 1/2 of my GSPRD in favor of 150 HSPRD was done based on current yield considerations and the prospect that GSPRD's minimum 4% coupon will still in effect for longer than I previously expected.


1. Sold 2 Plains All America Pipeline 3.65% Senior Unsecured Notes at 99.52 With Commission:

Trade Snapshot:

Profit Snapshot: +$109.3

Item # 2. Bought 2 Plains All American Pipeline L.P. 3.65% Senior Unsecured Note Maturing in 2022 at 93.955: Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 5/20/16 - South Gent | Seeking Alpha

FINRA bond Detail

2. Sold 150 GSPRD at $21.59: As mentioned in my last REIT basket update, I bought 150 shares of the newly issued Hersha Hospitality Trust 6.5% Cumulative Preferred Series D (HT.PD:NYSE) to replace the 150 GSPRA that I sold.

Item # 1. Bought 150 HTPRD at $25.2: Update For Equity REIT Basket Strategy As Of 7/15/16 - South Gent | Seeking Alpha

I pick up about 2.45% per annum in current yield with the HTPRD.

Trade Snapshot: Schwab Taxable Account

Profit Snapshot: +$47.14

This pare reduces my position to 150 shares including 50 shares held in my Schwab account. The following snapshot shows the price on 7/12:

I also own 50 shares in a Roth IRA and 50 shares in my IB taxable trading account. Item # 3 Added 50 GSPRD at $19.95: Update For Exchange Traded Bond And Preferred Stock Basket As Of 12/31/15 - South Gent | Seeking Alpha

Prior GSPRD round trip trades and links to prior discussions can be found in the Appendix section below.

Total GSPRD Trading Profits: +$686.65

3. Sold 2 Enbridge 3.5% Senior Unsecured Bonds Maturing on 8/04/2024 at 97.58 :

Trade Snapshot:

Profit Snapshot: +$67.81

Item #2 Bought 2 Enbridge 3.5% Senior Unsecured Bonds Maturing on 6/10/2024 at 93.658 Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 5/10/16 - South Gent | Seeking Alpha

FINRA Bond Detail

I still own 2 Enbridge senior unsecured bonds maturing in 2023; 400 shares of ENBPRP and 100 shares of ENBPRF.

Item # 1 Bought 300 ENBPRP:CA at C$12.39: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 2/29/16 - South Gent | Seeking Alpha

Item # 2: Added 100 ENBPRP at C$14.54: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 7/13/16 - South Gent | Seeking Alpha

Item # 3. BOUGHT BACK 100 ENBPRF at C$13.45: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 6/17/16 - South Gent | Seeking Alpha

2. Bought 2 Enbridge 4% Senior Unsecured Bonds Maturing in 2023: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 6/17/16 - South Gent | Seeking Alpha

4. Bought 1 U.S. Steel 7.375% Senior Unsecured Bond Maturing on 4/1/2020 at 95 ($95.25 with commission):

United States Steel Corp (NYSE:X) Key Developments at Reuters

U.S. Steel SEC Filings

10-K (risk factors discussed starting at page 43)

Trade Snapshot:

2020 FINRA Bond Details

As shown at the FINRA site, the price of this bond went into a tailspin starting in May 2015, when the price was at 106+. It is a waterfall price pattern that bottomed just short of 40. The price closed today at 97.37.

Moody's Rating Caa1 (05/02/2016)
Standard & Poor's Rating B (01/29/2016)
Fitch Rating B- (05/05/2016)

U.S. Steel's senior unsecured debt has recently been downgraded and a newly issued senior secured bond was rated deep into junk a B3 by Moody's and BB by Fitch.

Fitch Rates U.S. Steel's $980MM Sr. Secured Notes 'BB/RR2'; Downgrades Sr. Unsecured Notes to B- from B+

Moody's downgrades U.S. Steel's CFR to B3; assigns B1 rating to senior secured note offering; outlook negative ("In addition, Moody's assigned a B1 rating to U.S. Steel's proposed debt offering of senior secured notes due 2021 and a (NYSE:P) Caa1 to the company's senior unsecured shelf.')

Last May, United States Steel Corporation sold $980M of 8.375% senior secured notes due 2021. Shortly thereafter, the company announced a tender offer for up to $500M in three unsecured debt issues maturing in 2018, 2020 and 2021. The one maturing in 2020 is the one that I bought. The tender results were as follows:

U. S. Steel Announces Early Tender Date Results Of Debt Tender Offers

For an owner of the 2020 bond, which matures before the new senior secured bond, it is a positive that so much of the 2018 bond was retired and a big dent was made in the outstanding principal amount of the 2020 as well.

Most of the debt matures after the 2020 bond.

I took this snapshot of the debt as of 3/31/16 which does not reflect the bonds retired as a result of the buyback:

Sourced: Page 15 10-Q

All of the 2017 senior note was redeemed in early June: SEC Filing

One U.S. Steel bond has more current yield at 95 than the 2 Enbridge bonds discussed in #3 above. I do take on more credit risk based on the respective credit ratings. I also shorten the maturity

2015 4th Quarter Earnings SEC Filed Press Release Earnings Presentation

Cost of US Steel Default Protection Rises, Co. Bonds Slide in Trading After 4Q Miss -

2016 1st Quarter Earnings: SEC Filed Press Release

"Despite challenging conditions, we generated positive operating cash flow of $113 million for the quarter ended March 31, 2016. As of March 31, 2016, U. S. Steel had $705 million of cash and $2.3 billion of total liquidity."

"If market conditions, which include spot prices, customer demand, import volumes, supply chain inventories, rig counts and energy prices, remain at their current levels, we would expect 2016 adjusted EBITDA to be near $400 million."

The GAAP results were horrible but not as bad as the previous quarter.

First Quarter Earnings Slide Presentation

I have traded a senior unsecured 2022 U.S. Steel bond in the past but sold out of that position:


Item # 2 Sold 2 U.S. Steel 2022 Bonds at 103.5 (12/12/12 Post)-Item # 1 Bought 1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 at 94 6/29/12 Post) and Item # 1 Bought 1 U.S. Steel 7.5% Senior Bond Maturing in 2022 at 98.95 (9/10/12 Post)

2022 Prospectus

I also profitably flipped a one bond lot bought in the Roth IRA.

The U.S. Steel 2022 bond closed at 91.47 today and at a 9.48+% YTM: Finra Bond Details

If I am going gamble on U.S. Steel surviving, I prefer taking that gamble now with the 2020 rather than the 2022.

That one was sold for over 106.

I am trying to restrain myself from buying junk bonds in my Roth IRA accounts. I currently own just 1, a senior secured Sears bond maturing in 2018 that I have not been able to sell. 2018 Sears Senior Lien Bond; Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 2018 at 90.50-Roth IRA (5/12/12 Post);Final Prospectus (junior to bank credit facility). If I owned two, I would have had several opportunities to sell profitably and did manage to exit a 3 bond position held in a Fidelity taxable account Item # 1 SOLD 3 Sears 6.625% Senior Secured Bonds Maturing in 2018 at 95.002 (9/21/12 Post)-Bought 1 Sears Holding 6.625% Senior Secured Bond Maturing 10/15/2018 at 83.25 and ADDED 2 Sears Holding Senior Secured 6.625% Bonds Maturing 10/15/2018 at $89.75

5. Bought in Roth IRA 2 Omega Healthcare 4.375% Senior Unsecured Bonds Maturing on 8/1/2023 at 100.995 (101.195 with commission):

By buying this bond in the Roth IRA, I turn the 4.375% coupon that would otherwise be taxable as ordinary income into an investment grade tax free bond.

Trade Snapshot:

YTM: 4.173%

Current Yield at Total Cost of 101.195= 4.32%

The current yield is higher than the YTM due to the premium price.

The general idea will be to capture the current yield and to exit the position with net proceeds in excess of 101.195 per bond.

2023 Finra Bond Details

Moody's Rating Baa3 (07/01/2016)
Standard & Poor's Rating BBB- (06/30/2016)
Fitch Rating BBB- (06/30/2016)

This brings me up to 300 common shares and 4 senior unsecured bonds with $1,000 par values.

I last discussed buying an OHI bond here: Item # 2. Bought 2 Omega Healthcare 4.5% Senior Unsecured Bonds Maturing on 1/15/2025:Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 6/24/16 - South Gent | Seeking Alpha

I last discussed a common stock purchase here: Item # 2. Added 50 OHI at $32.5 Roth IRA: Update For Equity REIT Basket Strategy As Of 11/16/15 - South Gent | Seeking Alpha

My first purchase of OHI's common was discussed in this 2013 post: Item # 2 Bought: 100 OHI at $29.85 (12/23/13 Post). I have not yet sold any shares. At the new $.6 quarterly rate, the yield is about 8% at a $29.85 all-in price.

OHI has rallied after the dividend raise announcement and closed today at $34.62, up $.62.

The total return for the much lower yielding Vanguard REIT ETF (NYSEARCA:VNQ) is 16.19% YTD through today. OHI's total return YTD is -.1%.

Rating by Morningstar: OHI ★★

Investors do not like the nursing home exposure and many probably remember the 2000 debacle when OHI crashed and burned after the federal government changed its Medicare reimbursement rules and nursing home operators went bankrupt en masse. The problem started with a gradual phase-in starting on 7/1/1998 of " a per diem Medicare PPS for skilled nursing facilities. . .The PPS rates were set to decrease average payments for the majority of facilities, with total savings in 1999 estimated ex-ante by the Congressional Budget Office at $1.2 billion; instead, expenditures were cut by $3.4 billion in 1999, more than double the intended amount.". Effects of Medicare Payment Changes on Nursing Home Staffing and Deficiencies The government later denied that it had anything to do with the SNF operator bankruptcies. Some of the chains that filed for bankruptcy in 2000 included Sun Health Care, Genesis, Vencor, Mariner, and IHS. Skilled Nursing Home Facilities The Challenges of the 21st Century | ABI; June 23, 2000: Genesis Health Ventures Files for Bankruptcy - (Genesis is currently a major tenant of OHI 2015 Annual Report at page 34; Seeking Alpha; but OHI had its largest exposure by far in 1999 to Sun Health Care, see page 9 1999 Annual Report)

As I mentioned in a recent comment, I am now too heavy in OHI securities, mindful of the past, and will trim my exposure before year-end.



GSPRD Links:

Item # 5 Sold 100 GSPRD at $23.71-Roth IRA (April 2013)(contains snapshot of gain=$219.25)-Item # 4 Bought 100 GSPRD at $21.38 (February 2013);

Item # 6 Sold 100 GSPRD @ $23.89 (4/23/13 Post)(snapshot of realized gain $257.24)-Bought 100 GSPRD at $21.18 January 2013;

Item # 6 Sold 50 GSPRD at $20.03 July 2012 (snapshot of profit $42.47)-Item # 1 Bought Back GSPRD at $18.9 July 2012;

Item #2 Sold 50 GSPRD at $20.47 (March 2012)(snapshot of gain=$79.48)-Item # 1 Bought 50 GSPRD at $18.6 (September 2011 Post);

Item # 1 Sold 50 GSPRD @ $22.72 (April 2011)(profit snapshot=$41.07)-Item # 2 Bought 50 GSPRD at $21.58 (January 2011)

As shown in that history, nothing much would have been gained, other than the 4% minimum coupon, by holding those previously purchased shares until now.

Examples of Exchange Traded Bond and Equity Preferred Stock Categories:

Senior Unsecured Baby Bonds:

Kennedy-Wilson Holdings Inc. 7.75% Senior Notes due 2042 (KWN:NYSE

Banc of California Inc. 7.5% Senior Notes due 2020 (BOCA:NYSE)

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

TravelCenters of America LLC 8% Senior Notes (TANP)

TravelCenters of America LLC 8% Senior Notes 12/15/29 (TANO)

THL Credit Inc. 6.75% Notes 12/30/22 (TCRZ:NYSE)

Prospect Capital Corp. 6.25% Notes 2024 (PBB:NYSE)

Junior Baby Bonds:

AmTrust Financial Services Inc. 7.25% Subordinated Notes due 2055 (AFSS:NYSE)

National General Holdings Corp. 7.625% Subordinated Notes (NGHCZ:NASDAQ)

Global Indemnity PLC 7.75% Subordinated Notes Due 2045 (NASDAQ:GBLIZ)

First Mortgage Bonds:

Entergy Mississippi Inc. 6.20% Series First Mortgage Bonds due 2040 (EFM)

Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 Stock Price Today (ELB:NYSE) - MarketWatch

Trust Certificate-Junior Bond

Structured Products Corp. 8.205% Credit-Enhanced CorTS (KTN:NYSE)

Trust Certificate-Synthetic Floaters with Minimum Guarantees

Corporate Asset Backed Corp. CABCO Series 2004-101 Trust Goldman Sachs Capital I Floating Rate Certficates (GYB:NYSE)

Corporate Asset Backed Corp. CABCO Series 2004-102 Trust SBC Communication Inc Floting Rate Certificates (GYC:NYSE)

Fixed Coupon Equity Preferred Stock: Non-Cumulative

IBERIABANK Corp. 6.625% Series B Preferred Stock (IBKCP:NASDAQ)

TCF Financial Corp. 6.45% Preferred Stock (TCB.PC:NYSE)

National General Holdings Corp. 7.5% Preferred Stock Series A (NGHCP:NASDAQ)

JPMorgan Chase & Co. 6.15% Preferred Series BB (JPM.PH:NYSE)

Fixed Coupon Equity Preferred Stock: Cumulative

Digital Realty Trust Inc. 6.35% Cumulative Preferred Series I (DLR.PI:NYSE)

Bluerock Residential Growth REIT Inc. 8.25% Series A Preferred Stock (BRG.PA:NYSE)

Floating Rate Equity Preferred Stock with Minimum Guarantees: Non-Cumulative

Goldman Sachs Group Series D Preferred Stock (GS.PD:NYSE)

Morgan Stanley Non-Cumulative Preferred Series A (MS.PA:NYSE)

Bank of America Corp Floating Rate Series 1 Preferred Stock Price (BML.PG:NYSE)

Fixed to Floating Rate Equity Preferred Stock: Non-Cumulative

Goldman Sachs Group Series J Fixed-to-Floating Rate Preferred Stock Price Today (GS.PJ:NYSE)

ETFs That Own Exchange Traded Bonds and Equity Preferred Stocks:

iShares U.S. Preferred Stock ETF (NYSEARCA:PFF)(own and can buy in my Fidelity accounts commission free)

PowerShares Preferred Portfolio ETF (NYSEARCA:PGX)(do not currently own and can buy in my Schwab account commission free)

PowerShares Variable Rate Preferred Portfolio ETF (NYSEARCA:VRP)(do own and can buy in my Schwab account commission free)

Market Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF)(do own and will buy in my IB account only)

Canadian Preferred Stocks: Fixed to Floating Resets Tied to the 5 Year Canadian Government Bond

TransCanada Corp. Cumulative Preferred Series 9 Stock (TRP.PR.E:TOR)

Fortis Inc. Cumulative Preferred Series M (FTS.PR.M:TOR)

Enbridge Inc. 4% Preferred Series P (ENB.PR.P:TOR)

Pembina Pipeline Corp. Cumulative Preferred Series 7 Stock (PPL.PR.G:TOR)

Pembina Pipeline Corp. Cumulative Preferred A Series (PPL.PR.C:TOR)

Emera Inc. Cumulative Preferred Series C (EMA.PR.C:TOR)

Fairfax Financial Holdings Ltd. Series G Preferred Stock (FFH.PR.G:TOR)

Enbridge Inc. Cumulative Preferred Series F (ENB.PR.F:TOR)

Atlantic Power Series 2 Preferred Stock (AZP.PR.B:TOR)

Capital Power Corp. Series 1 Preferred Stock (CPX.PR.A:TOR)

Canadian Floating Rate Preferred Stocks-Coupon Tied to the 3 Month Canadian T Bill:

TransCanada Corp. Cumulative Preferred Series 4 (TRP.PR.H:TOR)

Fairfax Financial Holdings Cumulative Preferred Series F Floating Rate Stock (FFH.PR.F:TOR)

Emera Inc. Cumulative Reset Preferred Series B Floating Rate Stock (EMA.PR.B:TOR)

Fortis Cumulative Preferred Series I (FTS.PR.I:TOR)


I have discussed the foregoing categories in several vintage posts.

Synthetic Floaters

Exchange Traded Bonds: New Gateway Post

Advantages and Disadvantages of REIT Cumulative Equity Preferred Stocks

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Trust Certificates: New Gateway Post

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